Euroland: The Insider Disease edit

It seems that politicians have short memories. Almost exactly thirteen years ago, a freshly elected cabinet tried to change the rules setting the French minimum wage so that young and low skilled workers could be hired at a discount wage. Soon dubbed "minimum wage for youths", it sent thousands of college and high school students in the street and was quickly withdrawn by the then Prime minister Edouard Balladur. A remake of this bad movie is currently shot in Paris: the french prime minister Dominique de Villepin is confronted with a new generation of students rejecting a law introducing a more flexible labour contract with a two-year trial period for young workers. The endgame is likely to be the same as in 1993, in my view.

-->In both cases, the economics of these reforms look sound: that the French minimum wage is an entry barrier for low skilled workers is a well documented fact; that companies are unwilling to hire young workers with no experience on a permanent basis is obvious. The best evidence is that a majority of young workers (even graduates) start their working life with a series of internships, not always paid, followed by another series of short term job contracts, before, if they are lucky, getting a permanent job or opting for the civil service. In this regard, PM Villepin is right when saying that the flexible labour contract he is trying to enforce would improve the situation of young workers: a flexible job contract is certainly better than an umpteenth internship or three-month job contract. Twelve years ago, the same could have been said: better to get a job at a discount than no job at all. So what is going wrong?

The popular explanation is that the so called French "social model" is so deeply entrenched in the genes of people living in France (French or immigrants), that no reform is possible, even when it would make people better off. This is wrong and contemptuous, I think. Everywhere in the world, workers want guarantees for their jobs. When labour protection has become excessive and unaffordable, as it is in France, labour market institutions must be reformed. Many European countries have done their homework, from the UK to Sweden or Denmark, in very different fashions: for instance, jobs are more protected in the UK than in Denmark, but unemployment benefits are much higher in the latter, where the motto is "protect workers, not jobs". In continental countries where reforms took place, they were the results of negotiations, not confrontations.

The fundamental reason why attempts to reform the labour market in France are failing is what several economists, from Pr Gilles Saint-Paul from the University of Toulouse to Pr. Olivier Blanchard from the MIT have named the "insider disease". In short, the French labour market is a two tiered market with, on the one hand highly protected workers (civil servants and holders of permanent contracts, mostly in large companies) and on the other one, highly flexible jobs (internships, short term contracts, temporary jobs) for new entrants, immigrants and, more generally, unskilled workers. The reason why college and high school students are demonstrating, sometimes violently, is obvious: they strongly resent this situation as unfair: why would they accept reforms while nobody is questioning the privileges of the insiders?

Unfortunately, the insider disease is not a French peculiarity. In 2005, 50% of the new hires between 15 and 29 years in Italy were hired on a temporary basis. The underlying reason is the same as in France: laying off permanent workers is so difficult and costly that companies have a strong preference for temporary jobs, even if it is at the expense of productivity (training new hires is a sunk cost). In Spain, the success of temporary jobs is one of the reasons for the spectacular decline of unemployment, from 20% of the labour force to less 10% today. However, further progress is not warranted, if the insider-worker model is not questioned.

Piecemeal reforms that do not question the status of insiders are doomed to fail in my view, because they are opposed by both insiders, who fear that they may be the next on the list, and outsiders who consider them as discriminatory and continue to dream of becoming themselves insiders. In the French case, the solution is to reform the generic labour contract itself and make it more flexible. In this regard, the new job contract launched last year, with a two-year trial period too, but restricted to small companies was a step in the right direction. Extending it to all companies would have been a much better idea than trying to design a labour contract for youths, I believe. We will probably have to wait until next year elections to see real progress on the labour market reform front, I am afraid.