Frenchonomics

Dean Baker, economist, has a new blog called Beat the Press that discusses media coverage of economic issues. Here's an entire piece today on French labor law. Well worth the read.

The reporting on the battle over a new law in France, that would make it easier to fire young workers, has been especially weak. The coverage has included numerous assertions that making it easier to fire workers will reduce the unemployment rate. (The story goes that firms will more readily hire new workers, if they know that they can fire them later, if they find it necessary.)

In fact, the evidence on this point is extremely weak. There has been considerable research within the profession trying to demonstrate the link between labor market protections (like restrictions on firing) and higher unemployment, and most of it has come up short. David Howell, John Schmitt, Andrew Glyn, and I have done several papers examining this evidence.

In fact, one result that most economists familiar with the literature would be quick to acknowledge is that there is no clear link between the strength of employment protections and unemployment. Some of the countries with the strongest protections (e.g. Ireland and Austria) enjoy very low unemployment rates. Most of the literature simply finds no relationship between the strength of employment protections and the unemployment rate.

In fairness to the reporters who cover this issue, I put the blame here primarily on the economists. They are very quick to present their views, without pointing out that they are not supported by the evidence. My own view of high European unemployment (also not well-supported by evidence) is that the biggest factor is the European Central Bank’s (ECB) restrictive monetary policy. It is not easy to show a simple link between high interest rates and unemployment (the relationship is somewhat complex – exactly what the true believers about the negative impact of employment protections would say), but no one disputes the fact that if the Fed had followed policies that were as restrictive as the ECB, then the U.S. would have a considerably higher unemployment rate. So, I would say that it would be appropriate to at least get a little agnosticism into these articles.

There is one other point that really should not be in dispute – other things equal, employment protections are GOOD. People value security in their life. They buy insurance for their home, their life, their health, obviously if they can get insurance that they will not be hastily dismissed from their job, this is a good thing. If there are large costs, in the form of higher unemployment or lower productivity, then this insurance may not be worth the cost. But this conclusion depends entirely on the terms of the trade-off, an issue where the evidence is very weak, as noted earlier. In other words, the contempt expressed by many reporters for employment protections belongs on the editorial pages, not news stories. By the way, according to the OECD, the productivity of French workers is 7.0 percent higher than the productivity of U.S. workers.