CNE / CPE : too much or not enough? edit

April 2, 2006

It is almost commonplace to say that France is one the OECD countries where employment protection laws are the stricter. Restrictions to both the recourse of temporary contracts and the possibility of layoffs for permanent contracts are the result of over 30 years of continuous regulation imposed by successive governments, either right of left wing. From that respect, the two new contracts (CNE and CPE) recently proposed by the government are genuine breakthroughs. By suspending employment protection laws they solve in a quite radical way the problem of a far too rigid doctrine on dismissal. However, by doing it only for the two years of the contracts, they only introduce a mild change in the actual flexibility of employment while they bear the risk to comfort the inefficient and unfair dualism of the labour market.

-->Employment is not only heavily regulated, but is so by using law. Collective agreements can only top up existing rights in favor of employees. Prior to 1973 the French law was only concerned with the possibility of abuse of right in case of layoff, with only a small risk of layoff to be latter deemed illegal. The law of 1973, created a new obligation for the employer to motivate the layoff, the right for the judge to evaluate it «reality» and «seriousness», for most people, the right of a minimum of six months of wages in case of layoffs judged unfair. Subsequently, French governments have consistently reinforced laws on employment protection, either for indefinite or fixed term contracts: in 1989, 1993 and 2002 three laws further restricted the use of economic reasons for layoffs and created new obligations and long procedures; in 1986 an administrative authorization was even introduced in case of layoffs for economic reasons (this was abolished in 1993); in 1990 a law restricted the use of fixed term contract, with a new maximum duration (18 months) including one (unique) possible renewal of the contract, and a list of 11 cases where recourse is legal; in 1992 an tax on layoff was created to «protect» workers aged 50 plus, etc. The full fledged regulation adds up to more than 300 pages.

As a result, even though severance payments paid in case of layoff are very low in France - and probably for that very reason - going to court can is frequent and be very lucrative. Up to 25% of layoffs are now contested before court and the latter give reason to employees in 75% of the cases. To avoid going to court firm often agree paying higher severance payments than what is strictly due by law. On top of that advance notices often last three months. All in all, being an employer in France has become a risky business: a recent study by Kramarz and Michaud (2004) evaluated that among firms with 50 employees and more the average cost of layoffs comes up a full year of median wage. In case of large layoffs the cost goes up to 100 000 euros per head with long (often up to 9 or 12 months in large firms) and uncertain procedures, costly placement and training obligations and so on.

The first motivation of these laws was to prevent the massive layoffs that took place in the early 1970's for the first time since the post-war period. Has this help improve labour market performance in any way? Unemployment steadily rose to reach 10% in 1983 and has consistently moved around 10% ever since. Employment creations have never been enough to provide enough opportunities for all, especially the young generations. The proportion of temporary jobs and the length of unemployment spells have increased to unprecedented levels and hurt the weakest in the first place: fixed terms contracts now make up 70% of hiring and unemployment spells last in average 13 months. As Pierre Cahuc and Francis Kramarz say in their report, employment protection in France is not only inefficient but also unfair.

Building on this, the «New Hiring Contract» (CNE, for firms with 20 employees and less) and the «First Hiring Contract» (CPE, for people aged 25 and less and firms with more than 20 employees) take an absolutely radical step up in reforming employment protection laws, something never seen before in 30 years and not to be compared to previous «new contracts» which were merely strongly subsidized fixed-term contracts. The CNE and the CPE are indeed indefinite term contracts that temporarily suspend almost the whole set of employment protection laws for the first two years of the contract. As a consequence, employers can layoff without having to provide motivation (while they ought to pay severance payment close to those of fixed term contracts). The layoff procedure is simple (one letter) and fast (from two weeks to one of advance notice). There is little risk that such layoff be judged «unfair» dismissal, although the laws that protect against unlawful dismissal would still apply (pregnant women, employees representatives, discrimination and abuse of right).

So, permanent job creations should be bolstered, and for that reason young people and low qualified workers - those excluded form indefinite duration employment - as well as employers should welcome this reform. On the contrary, both groups have mildly welcomed the CNE and the young have strongly rejected the CPE. When one looks at the facts, and only at the laws, this enigma is quite easy to puzzle out. From the employers' point of view, the explanation comes from the fact that the CNE and the CPE are not radical enough. They only bring moderate improvements in employment flexibility. Indeed, the suspension of dismissal laws only last the first two years whereas indefinite term contracts only become really difficult and costly to terminate after this two-year period. On top of that, employers have often recourse - in an abusive way - to fixed term contracts up to the 18 months to test employees or when business is uncertain. Contracts. Thus, the reform should not help reduce the dualism of the labour market and firms should use the new contracts as proxies of fixed-term contracts. For that very reason, unions and students deem the reform far too radical in a sense, for they only consider the unprecedented precariousness of employment under these new terms, rejecting the idea that this measure could also trigger a virtuous circle of jobs creations and thus help job entries. They might be right in a sense, in that more frequent layoff and increased employment instability can balance the positive impact of more numerous jobs on welfare. The CNE, which was not targeted at disadvantaged workers, has not suffered from the same level of resistance. What unions and student would probably refuse to admit though - and form that respect they act in a very conservative way - is that a bolder reform of indefinite term contracts could strongly increase job opportunities. This could in turn more that offset the disadvantages of increased job instability and spread employment flexibility in a more equal manner across the labour market. Indeed, were firm not incited to layoff before two years in order to keep the option of flexibility, the impact of such a reform on job creations would probably more than offset and limit a possible negative impact on job durations.