Choking Labor Regulations: French Edition

Below has been a lucid example of what plagues Europe

From Businessweek/Bloomberg, [bold emphasis added] (hat tip Dan Mitchell)

Here’s a curious fact about the French economy: The country has 2.4 times as many companies with 49 employees as with 50. What difference does one employee make? Plenty, according to the French labor code. Once a company has at least 50 employees inside France, management must create three worker councils, introduce profit sharing, and submit restructuring plans to the councils if the company decides to fire workers for economic reasons.

French businesspeople often skirt these restraints by creating new companies rather than expanding existing ones. “I can’t tell you how many times when I was Minister I’d meet an entrepreneur who would tell me about his companies,” Thierry Breton, chief executive officer of consulting firm Atos and Minister of Finance from 2005 to 2007, said at a Paris conference on April 4. “I’d ask, ‘Why companies?’ He’d say, ‘Oh, I have several so that I can keep [the workforce] under 50.’ We have to review our labor code.”

While polls show job creation and the economic crisis are the top issues for voters in the May 5 second-round vote for president, neither President Nicolas Sarkozy nor Socialist challenger François Hollande are focusing on Breton’s concern. Companies say the biggest obstacle to hiring is the 102-year-old Code du Travail, a 3,200-page rule book that dictates everything from job classifications to the ability to fire workers. Many of these rules kick in after a company’s French payroll creeps beyond 49.

Tired of delays in getting orders filled, Pierrick Haan, CEO of Dupont Medical (not to be confused with chemical company DuPont (DD)), decided last year to return production of some wheelchairs and medical equipment to France. The 150-year-old company, based in Frouard in eastern France, created 20 jobs making custom devices at a French plant—and will stop there. Faced with France’s stifling labor code, Haan probably will send any additional production of standard equipment to what he calls “Near France”—Tunisia, Bulgaria, or Romania. “The cost of labor isn’t the main problem, it’s the rigidities,” Haan says. “If you make a mistake in your hiring plans, you can’t correct it.”

There are now 2.9 million people out of work in France, almost 10 percent of the workforce and the most in 12 years. “For the 100 employees we have in France, we have 10 employee representatives, for whom we have to organize weekly meetings even when there is nothing to discuss,” Haan says. “Every time a social security contribution changes, which is frequently, we have to update software and send our HR people for training. We can’t fire anyone without exorbitant costs.

As one would note, the French dilemma has NOT been about expensive labor, but rather severely restrictive labor regulations. The byzantine regulations impedes the entrepreneurs capacity to expand, as well as, to attract additional investments. That’s aside from dealing with compliance costs, taxes and other regulations.

To argue that inflationism (through devaluation) would represent as the required solution, thus, is outrageously daffy.

This for the simple reason inflation does not deal with the disease: suffocating labor regulations. The solution here is labor reforms through liberalization or as aptly pointed out by the article “to overhaul its rigid labor laws”