CPE: should a bad reform be held? edit

March 30, 2006

There is no clear economic evidence that the partial reform of dismissal laws, such as the CPE recently passed in France, can have any significant impact on employment and unemployment rates. From that respect, such a reform should not have been submitted to parliament in the first place. However, if the reform is reversed in the coming weeks, there is a significant risk for a long awaited and more ambitious reform of employment protection to be neutralized for several years. The CPE must be held, not because this is the best reform ever to improve employment and unemployment performances, but rather because if it is reversed the opposition to any more ambitious reform will be durably reinforced.

-->Strict employment protection tends to reduce employment rates of young people and women, and increase the duration of unemployment in OECD countries. Fixed term contracts do not really help solve these problems. Nor does it help cut unemployment when permanent contracts are heavily protected. Spain experienced this in the 1990's (with 35% of temporary jobs and over 20% of unemployment in 1995 for instance). The potentially negative impact of employment protection on employment rates could even be reinforced by a high and pervasive minimum wage. With one of the stricter set of dismissal laws in the OECD and one of the highest minimum wage that concerns 15% of employees, France is clearly in that case. Based on that, one should welcome reform like the CPE - or equally the CNE - that addresses employment protection of indefinite contracts.

Unfortunately, there are several reasons to think that the employment and unemployment impact of these reforms will be small. The main reason is that the CNE and the CPE are only partial reforms that could even reinforce the dualism of the French labour market, which could also worsen the welfare of unemployed people. Workers holding a CNE or CPE will only become «insiders» if firms deem it valuable to keep them after two years. Otherwise, they will remain outsiders with even less security than fixed term contract holders. But why, really, would this happen?

Suppose that firms substitute the new flexible contracts to part of the former contracts, and suppose they also create new jobs because they enjoy lower firing costs under the new provisions. Then the net impact in terms of job creations will be less than the gross impact (hiring) because of (i) substitution effects with former contracts and (ii) more layoff due to the fact that new contracts are more flexible. But this is not all. These contracts benefit from less protection only during the first two years. This will probably over-stimulate layoffs compared to a situation where employment protection would have been less for unlimited duration. In many cases firms will not continue jobs after two years because they want to keep the option of layoff at will in the future. They will prefer re-employ someone else on the same type of contract instead. On top of that, if workers at the margin of labour market participation deem their welfare is being negatively affected by the perspective of being employed with such unstable contracts, they might decide not work or look for a job anymore. This would further reduce the employment effects of the reform. As a consequence, gross job entries can be numerous, while net job creations will be only limited due to more layoffs, less employment duration and less labour market participation. With Pierre Cahuc we have simulated these effects based on a model that reproduces the recent labour market performances in France. And we find that even if this kind of contract were implemented in the whole private sector, it would only create a total of 70 000 additional jobs after a few years.

Although only partial, one must acknowledge that the CPE, like the CNE, is a complete change of perspective on employment protection in France, and that it addresses for the first time the question of employment flexibility not from the perspective of social policies but from the perspective of employment policies. It is also a big change in the government employment strategy that has so far mainly relied on low wage jobs subsidies. From that perspective, if these contracts survive the current upheavals and prove to have a positive impact on employment, they could trigger a series of additional reforms. Further reform would then more widely address the dualism of the French labour market, notably the protection of indefinite term contracts after two years of tenure.

Actually, the CNE was not really opposed by unions. Even though the decision was unilaterally made by the prime minister during the summer 2005, unions have very low stakes in small firms (where they represent a mere 3-4% of employees). However, the current opposition to the CPE is much more powerful. First, the CPE is - rightly - perceived as a potential strengthening of the dualism in the labour market targeted at a weak group of workers. Young people are often outsiders, alternating fixed term jobs and unemployment spells, without sufficient long-term perspectives. The CPE appears like a measure that would worsen - not improve - this situation. Second, like the CNE, the CPE was not negotiated at all with the social partner. It was suddenly announced as an amendment of a larger project law on employment promotion and discrimination prevention. Workers' unions also probably want to demonstrate they can influence the reform process at the macro level in a context where they have been continuously losing ground at the firm level over the last decade. Third, the CPE, like the CNE, have not been announced as an experiment, but outright as a definitive change in the law (although an evaluation process was announced).

However, if circumstances have certainly not helped pass the CPE, unions have not proved ready to negotiate on employment protection in the first place. It is true that reactions to the Cahuc-Kramarz and Camdessus proposal of a unique contract were pretty much positive. But at the same time workers' and employers' unions have been unable to achieve, even after months of discussions in 2004, the slightest agreement on the reform of heavy procedure for large layoffs. Collective agreement failed and the government had to use the law, which forced unions to compromise. In that respect, the government might as well have considered that the poor quality of social dialogue in France - including their low density in the private sector of unions, their multiplicity and divisions - would have not allowed for a consensual reform of dismissal regulations. In that case, is the Spanish syndrome the only way for reforming the labour market in France?

Spain, which is also a champion of employment protection, reduced severance payments for a large proportion of workers in 1997. This reform was difficult to support given the importance of job security for the core of long-term workers in the absence of revenue security outside employment. Social dialogue was only used at key stages of the process. Some stages of the reform were imposed by successive governments with a strong majority in parliament in order to break the potential opposition of workers organizations to further core reforms. The very first step was actually implemented in 1984 when fixed term contract were extended, and which led to the situation where a third of jobs in the economy became temporary. Then, only after the failure of the 1994 reform to restrict the use of temporary contracts did unions agree to talk about the protection of indefinite term contracts. Indeed, at that time less than 50% of workers help this type of contract. The others were either unemployed or in temporary jobs. As such, successive governments had created some political support by implementing a sort of "divide and conquer" strategy in the long term.

One the one hand, if no other reform is implemented in the future, the CPE, along with the CNE, could lead to a similar situation in France where unemployment and unsecured employment exceed the share of protected employment. This is why there will need for further reform very soon to avoid a Spanish syndrome which will end up being very costly for the society. A comprehensive reform of employment protection should instead achieve further flexibility without welfare loss due to excessive employment instability. On the other hand, if the CPE is reversed now, any further reform could be blocked anyway because the French social partners hold very distant positions on employment protection, and unions would be reinforced in their current position. There is little hope now that the CPE could be simply traded off for a larger discussion over the protection of indefinite term contracts. Now that everybody stands on one's ground, do we have any chance to open a debate on what is the best form of labour market security? Even if the CPE is held, the harm is done.