Is the "big bang" approach to liberalizing labor markets preferable to a strategy of step-by-step reform? France opted for a partial reform approach, but the IMF's Luc Everaert and Jianping Zhou find solid evidence that only comprehensive reform will lower unemployment in the long run. Still, France can build on its success with small enterprise contracts if it is able to convince the public of the benefits of and need for reform.
High unemployment and sluggish job creation have prompted much of Europe to pursue labor market reforms. Will a strategy of partial labor market reform pay off for France? Luc Everaert and Jianping Zhou (both IMF European Department) analyze the pros and cons, and find that partial reforms facilitate job creation in the short run, but are unlikely to reduce unemployment over the longer term.
Still, partial reforms could be a step forward if the political will is there to use them as a springboard for broader reforms.
France, like most industrial countries, protects employees from dismissal through a combination of legal and administrative rules and financial penalties applying to employers.
Some protection is justified to ensure that companies bear some of the cost to society of their individual firing decisions.
Think, for example, of a firm that experiences quarterly peaks in its activity. Such a firm could lay off its workers temporarily every quarter and thus force society to subsidize the firm through unemployment benefits for these workers. Overly strict job protection, however, also has downsides. It increases the potential costs of hiring and so may increase unemployment even though it protects those who have jobs. Indeed, countries with strict employment protection tend to experience relatively high unemployment (see chart).
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To reduce unemployment and stimulate job creation, France, like other European countries, has been discussing how to liberalize labor markets. Traditionally, the French labor market has provided two types of employment: permanent contracts (contrats à durée indéterminée) and fixed-term contracts (contrats à durée déterminée). Employment protection for...