The business cycle

France: labour reforms not a game changer

The recently introduced labour reforms cannot be dismissed as “small” but, in our view, have not gone deep enough to either landmark a major change in business conditions or to satisfy the electorate’s hopes. The changes, by and large, have reduced the complexity of managing the labour force, but have not reduced the cost of labour, nor have they boosted flexibility in the way small and micro companies had hoped.

We expect the labour code changes to support an ongoing drop in the unemployment rate by a further 2p.p. by the end of 2020, bringing it back to the 2008 low point. This is proving sufficient for keeping wages stable and even rising mildly already. However, French wages are 6.5% above the EU average and the convergence process implies that average wages are likely to continue to fall in relative terms and, eventually, may also drop in absolute levels, in our view.

In this report, we compare the German and Italian labour reforms of the past 20 years with the recent French amendments, to get some perspective on the long-term impact on the economy and on the political outlook. We have also discussed the French changes with 30 companies in France to get a different perspective on this issue, and we present a summary of the feedback we gathered in this report. The labour reforms in Germany corresponded to a rise in potential growth, but did not prevent a decline in Italy. In our view, it should prove neutral for France. That said, both Germany and Italy amended the labour market rules four times – so more changes may be ahead in France too.

In order to boost the attractiveness of France as a place for business and to live, a bolder industrial strategy that puts a lot more emphasis on pushing micro companies to expand would be a more appropriate policy priority in our view, than labour market deregulation, per se. A healthy SME sector plays a subtle role in society: it can contribute to investment and productivity as well as providing a certain flexibility of lifestyle that some cherish. Changes to the SMEs thus influence not just the economy, but election results too.

In the aggregate, the French non-financial corporate sector balance sheet is the best in the Eurozone: it has hoarded over 3x GDP worth of financial assets, well in excess of its equally impressive debt burden. However, there are two problems that are well hidden behind such impressive results. First, we know from the turnover by company size data that the improvements have not trickled down to the micro-small companies. In our view, this process will continue and will curb job creation. Secondly, France has used the benefits of the low borrowing costs to the maximum. It is thus, in our view, vulnerable to a reversal of that trend.