Friday, March 17, 2006

French First Employment Contract and Econ 101

I'm having a hard time finding sympathy for the protesting French students. Sure, receiving the pink slip is usually an unhappy experience (though the last day of a tedious and backbreaking summer job usually feels like Christmas). Hamstringing employers into retaining unnecessary labor with an eye towards avoiding instant unemployment, however, is a horrible way to respond.

Let's put this in terms of a simple, imaginary small business, shall we?

Meet Jack. Jack, a recent college graduate and ever the budding young businessman, decides to open a donut shop. He owns shop space and has all the necessary equipment and ingredients needed for the tasty treats, and his last step is to hire some workers. Jack is rather new to the business, so he figures he needs three workers besides himself: a cashier to run the register and deal with typical customer issues, a person to mix the ingredients together and someone to cook and glaze the donuts.

Soon enough, Jack’s donut business is booming, doing well enough that he decides to take a chance and extend his business hours. Since his employees are already working a full 40-hour schedule, and Jack is pulling almost double that himself trying to keep everything running smoothly, he knows he will need more workers. So Jack hires three more workers and a manager to take some of the load off of him.

After a few weeks of extended hours, however, Jack notices that customers tend to drop off during the middle of the second shift, at times leaving his employees with little to do. In order to maximize profits, Jack decides to cut one of the workers from the second shift, of course choosing the least productive employee of the bunch.

To me, and to a lot of businessmen out there, Jack’s decision to lay off a worker shows good business sense. Keeping the extra worker around wasn’t worth the amount of labor that worker provided, and thus Jack trimmed the fat.

Now, let us return to reality. French university students and young workers have been protesting the passage of the First Employment Contract (Contrat Premiere Embauche), which allows businesses to hire workers below the age of twenty-six under the terms of a temporary contract, mandating that employers have the right to fire any such worker without prior notice. For normal, non-CPE labor, the law apparently mandates one 1 to 3 months notice before the end of actual employment. (BBC)

The French Government is in a bind. Average unemployment is 9.6%, with unemployment among 18 to 25-year-olds greater than 20%. (BBC) Job growth has also been poor. The Government needs to do something to ease unemployment, but decades of strong labor protection have turned public opinion against sweeping (or, in this case, marginal) changes to the system. The CPE was designed to boost job growth among businesses that require little formal training, jobs that 18 to 26-year-olds tend to inhabit.

Back to Jack. In the story above, Jack was operating under the auspices of at-will employment, meaning he could hire and fire at any time, for any reason. He could add or subtract workers depending on his situation, and could react quickly to market or labor forces. Under the pre-CPE system, however, Jack wouldn’t be able to make those decisions at will. The national labor laws would potentially require Jack to retain the extra employee for months beyond Jack’s decision to fire him, costing Jack profits on buying unnecessary labor, not to mention taxes and other fees imposed by French government. With the potential for problems resulting from unneeded labor, Jack might never have hired the second shift in the first place, deciding that the opportunity costs might not make expansion worth his while.

Much is the same among the businesses in France. Government protections on labor stymied job growth, as many businesses don’t want to be saddled with the costs of employing unnecessary labor. By protesting the CPE the students are working against their own interests, ensuring a sluggish labor market and a continued dearth of jobs for their age set.

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