Paying French Workers more for less Work is putting France on the Path towards Greece

Posted by PITHOCRATES - December 9th, 2012

Week in Review

France is where President Obama is trying to take the United States.  While the French are trying to figure out a way to save the French from the French (see Insight: Making France work again by Mark John posted 12/9/12012 on Reuters).

Yet the overtime episode is a telling insight into a France struggling with itself: the France whose appetite for work sits uneasily with the France whose priority is to sustain one of highest standards of living in the world…

Its welfare system is among the most generous in the world. A road and rail transport network means its companies are within hours of tens of millions of potential customers. It is a leader in luxury goods and is the world’s top tourist destination.

But somehow that Gallic vigour is being lost.

Unemployment is at 14-year highs as plant closures mount, France’s share of export markets is declining, and the fact that no government in three decades has managed a budget surplus has created a public debt pile almost as big as national output…

And it was the cost of that generous welfare state that has raised the cost of doing business in France so much that less business is done in France.  Less business means fewer jobs, less private income to tax and less corporate income to tax.  Forcing the French to turn to borrowing to sustain that generous welfare state.

By 1980, French economic growth had shrunk to two percent compared to its pre-oil crisis rate of above six percent – a rate which France and most rich states have not seen since.

In the years that followed, governments around the world reacted in their fashion: Britain’s Margaret Thatcher faced down Britain’s unions in a drive to free up labor markets, while Scandinavian leaders sought to free their economies of debt.

In France, governments of left and right chose entrenchment: strong rises in public spending which helped ease the social and employment shocks but which sent national debt soaring from 20 percent of output in 1980 to its current record of 91 percent…

The high productivity of its workers might have compensated for their rising cost. But decisions such as the 1997 cut in the working week from 39 to 35 hours meant many French were also starting to work less.

A 2008 paper on “the Liberation of French growth” by Jacques Attali, ex-adviser to Socialist President Francois Mitterand, calculated that while the French lived 20 years longer than they did in 1936, they worked 15 years less over their lifespan – a shortfall he labeled “35 years of extra inactivity”.

“Even given that each French worker produces five percent more per hour than an American, he produces 35 percent less over his working life,” he found in the 245-page report.

You need two things to generate tax revenue.  A tax rate.  And income to tax.  In other words, you need businesses to grow and hire more people.  But when they reduced the work week down to 35 hours that’s fewer hours worked.  And less income to tax.

One of the ideas behind the reduced work week was to force employers to hire more workers.  For example, if a company had 15 employees working 39 hours per week that’s a total of 585 hours a week to complete the necessary work each week.  When they reduced the work week to 35 hours it now took 16.7 workers (585/35) to complete the 585 hours of required work per week.  As you can’t hire 0.7 of a worker that rounds up to two new workers the state believed owners would hire.  The government believed they’ve reduced the unemployment rate.  But they’ve actually increased the unemployment rate.

The existing workers may be working 4 hours less a week but their employers are still paying them the same.  Which makes workers more costly to employers.  For they’re getting paid the same but are working fewer hours.  Forcing the owner to raise his or her selling price to cover these higher costs.  Or laying off a worker or two so their current revenue can pay for their higher labor costs.

So all of the government’s policies intended to increase the number of high-paying jobs actually decreases the number of high paying jobs.  Encouraging employers to hire part-time workers or temporary workers in lieu of full time workers to escape these higher labor costs.  Reducing the gross amount of income in the economy to tax.  Forcing the government to borrow more to support that generous welfare state.  And it gets worse.

France has an aging population.  So not only are French employees working fewer hours there are fewer workers entering the workforce than leaving it.  And those who are leaving the workforce are collecting pensions.  And consuming health care resources.  With these growing expenditures being paid by fewer workers entering the workforce who are working fewer hours each week.  Forcing the government to borrow even more to support that generous welfare state.  Which is why their total debt now is 91% of GDP.

And it will only get worse if France doesn’t make the country more business friendly.  While at the same time cutting their spending.  As French students took to the streets to protest a proposed increase in the retirement age a year or so ago don’t expect either to happen anytime soon.

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