A controversial new labor law has led to a general strike, but it may be what's needed to pry open the job market for chronically unemployed young people
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The Mar. 28 general strike in France over a controversial new labor law has once again focused attention on the nation's rigid employment laws and their effect on the French economy. The new law, known as the First Job Contract (the Contrat Premiere Embauche, or CPE), is much loathed by the many students and labor unions that have noisily demonstrated against it.
The CPE would essentially give employers powers currently unheard of in France -- the ability to fire, at will and with no financial consideration, new hires under the age of 26 during their first two years on the job.
"This contract could have a role in making it easier to adjust the labor force as needed," says Standard & Poor's economist Jean-Michel Six. "It might especially prove helpful for small and midsize businesses, where many owners are extremely reluctant to hire new workers."
GROWTH SHORTFALL. Despite the possibility that the CPE might alleviate France's chronically high youth unemployment rate, it has generated considerable opposition. Union members and civil servants view the measure as the first step in eliminating the protective employment mechanisms that currently prevail in the French labor force. University students, although often more privileged than other groups of young people, see the law as an immediate threat as they move into their first jobs.
Yet French Prime Minister Dominique De Villepin, who circumvented traditional political processes to bring the law into effect, maintains that it will induce small and midsize enterprises (SMEs) to take a chance on hiring more young people -- especially from among the thousands of alienated young immigrants and first-generation French who rioted for weeks last fall in the suburbs of Paris and elsewhere.
Even with a triple-A credit rating from Standard & Poor's, France has displayed disappointing economic growth over the past three years, with gross domestic product expansion averaging only 1.5% annually, or just slightly more than the average for the euro zone (the 12 countries that share the euro as their common currency). One of the big factors involved in that lackluster performance has been the low rate of labor participation. With only 70% of the working-age population actually at work, boosting the French economy without putting more of its citizens in jobs will be difficult.
IDLE YOUTH. Employment among the middle-age cohort of the French labor force remains high because it's virtually impossible to fire civil servants, while those in the private sector have protections almost as strong. But because of those strenuous job-protection measures, employers are simply reluctant to hire anyone in the first place, and the unemployment rate among the young is, by U.S. standards, stratospheric.
Under-25 Unemployment Rates (%)
Nation
Rate
France
22
EU-25 Average
18.2
EU-15 Average
17
U.K.
13.4
U.S.
10
Source: Eurostat
When employers have more leeway to adjust the size of their labor force, the government hopes that SMEs might come closer to achieving the level of job creation that they do in the U.S. and Britain. Looser employment practices could also benefit specific sectors of the French economy, notably tourism and retailing.
"France is one of the world's leading tourist destinations, yet job generation has been slow in this sector because employers are reluctant to hire," says S&P economist Six. Job growth has been low in tourism despite regulations allowing some seasonal hiring.
THINKING SMALLER. In the retail trade, store operators have gotten a little relief from rigid employment practices. Some employers, for instance, aren't required to pay the equivalent of social security taxes for new full-time hires for two years. But more flexibility from the CPE could bring added relief to a sector already subject to other strict regulations about labor practices and limitations on the hours of their operations.
The CPE wasn't aimed primarily at large corporations but at smaller businesses as a way to alleviate youth unemployment by inducing more hiring. As a result, large corporations haven't been very involved in its implementation. The Mouvement des Entreprises de France (MEDEF), a major national association of large businesses, has essentially taken a hands-off attitude toward the CPE, although officially it backs the law.
Ultimately, large companies believe that the CPE will have little effect on them because many MEDEF members use standard fixed-duration contracts for much of their hiring. These allow workers to be hired for up to two and one-half years, at which point the employee can either be dismissed, or the contract renewed for a like period. After that the employee can again be dismissed or offered an unlimited contract. Large companies thus have a degree of flexibility that smaller French businesses have lacked, though none of them has flexibility on the order of U.S. employers.
"THE WRONG KIDS." Ironically, the students involved in the most recent demonstrations against the CPE are the ones least likely to be affected by it. That's because university students in France are often nearly 26 by the time they complete their studies. Relatively few would thus fall under the law's purview. Similarly, many of the trade unionists and civil servants protesting the CPE are also unlikely to ever be affected by it because they already have extremely strong job protection.
Indeed, the French youth who might benefit the most from the CPE, the immigrant and first-generation youth that burned the suburbs of Paris last year, are rarely seen or heard from in the fevered demonstrations about CPE. "To a certain extent," notes Six, "It's the wrong kids marching in the street."
McNatt is a senior features editor for Standard & Poor's Securities Services
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