France's ridiculously old-fashioned labour market is killing its economy
On its own that might not be hugely worrying, but the release was just another bit of data to add to an increasingly bleak picture surrounding the French economy.
Earlier this month, Markit's Purchasing Managers Index showed that the country has slipped into contraction in February, with the company's chief economist calling the country the "weakest link" in Europe right now.
While the whole eurozone struggles for growth and inflation, France is suffering the most.
But what exactly is driving the sclerosis in the French economy? Put simply, it's the ridiculously outdated and inflexible employment market that dominates the country, and is contributing to its inability to sustain both inflation and economic growth.
At least that's according to economists from HSBC. In a note by Chantana Sam and Karen Ward, the bank calls France "Europe's labour laggard" and argues that much of France's economic struggle is down to its "entrenched" "opposition to labour market reforms." Here's what HSBC has to say (emphasis ours):
Over the past few years, France has consistently lagged behind its eurozone peers in terms of job creation and so the unemployment rate in France, at 10.2%, is still not on a convincing downward path. The labour market is weighing on competitiveness and consumption, and helps to explain why the French economy is underperforming.
The French economy is therefore stuck in a rut. Firms are too fearful of weak demand to take on more staff and workers are worried about job prospects, both of which are restraining demand. In the absence of a strong global recovery, something has to happen domestically to resolve this impasse.
And here's a chart to show just that:
So France can't create enough jobs, and that's weighing on economic growth, but there are other obstacles that stand in the way of job creation and growth stimulation. HSBC argues there are three key impediments:
- Labour costs in France are extremely high.
- The market is hugely inflexible.
- Problems with the skill levels of French workers are massive.
The cost of labour.
As HSBC puts it: "In our view, the lack of reform in the labour market goes some way in explaining the underperformance. The most obvious problem is the high level of labour costs, which can be further broken down to the following factors." Those factors are high levels of taxation, a lack of incentive to work, and weak pay growth.
Here are the charts:
As the chart above shows, one of the big reasons why France's labour market is lagging is that, simply put, for many unemployed people there's no real incentive to work in a low paid job. Tax burdens on French workers are some of the highest of anywhere in the OECD, approaching 50% for the average worker.
Coupled with the fact that unemployment benefits in the country are higher than the vast majority of world, it makes for an environment where many potential workers see being unemployed as a far more attractive option. That clearly isn't conducive to strong growth. Add to this, the fact that wages in France are unresponsive to changes in unemployment, and it creates a job market where costs are simply too high. Here's HSBC once again:
Putting this all together, the high cost of labour is significantly hampering the competitiveness of the French economy. Indeed, unlike several other countries, France has not significantly curbed the growth in its unit labour costs since 2008, which has led to a loss of competitiveness compared to many of its main trading competitors.
A rigid labour market
A further major issue that faces France's stumbling economy is the huge rigidity of the employment market. French employees enjoy huge amounts of protection of their jobs. For instance, the processes in place to fire French employees are some of the most complicated on earth, making it very difficult for companies to turn over underperforming employees.
On top of this, while most European countries have seen employment protection restrictions lessen in recent years, protections in France have actually increased since the turn of the century, driven in part by high levels of advocacy by workers. Right now, for example, French air traffic workers are striking against plans to relax the 35-hour work week. Workers in that sector have had 43 strike days in seven years, according to the Daily Telegraph.
HSBC has the chart to prove just how high employment protection is in France:
Mismatched skills
While high costs and high rigidity are big drivers of France's sclerotic labour market, a big mismatch in skills is also partly to blame. Essentially, despite there being large numbers of vacancies, there simply aren't the people with the skills to do the jobs. Here's a recent survey from INSEE, as cited by HSBC:
"These mismatches reflect a lack of mobility of workers and the unemployed but also the lack of employability of a significant part of the labour force, due to an inefficient training system and a large proportion of young people who have no qualifications. The latest PISA results have underlined that inequalities linked to socio-economic background in France are among the highest in all of the OECD," HSBC notes.
So there we have it, France's job market is being crushed by high costs, rigidity, and mismatched levels of skills.
Now it isn't like the French government hasn't realised this, and president Hollande has made attempts to address the French job problem. Earlier this year he announced a €2 billion package to stimulate the job market, and is currently preparing to submit the so-called El Khomri law, aimed at increasing flexibility with regards to jobs.
But opposition is massive. Earlier in March rail workers went on strike in protest of the proposed law, and opposition has been so fierce that president Hollande has been forced to tone down some of the strongest proposals.
French citizens don't want their government to fight the labour market battle France is currently engaged in, and until the country can do something about the employment crisis, the country will struggle to keep up with the rest of the world. Here's HSBC one last time:
It is difficult to envisage a significant pick up in job creation in the coming months. Employment should continue to rise in 2016 but too slowly to lead to a significant drop in the unemployment rate. As a consequence, we believe the French recovery should continue to lag that of other countries in the eurozone.
The bank predicts that French growth will be just 1% in 2016.