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Thursday, June 1, 2006

Belt and Braces in the Labor Market

An Iron-Clad Labor Code is a Major Cause of France's Chronic Unemployment

Having moved to a new neighborhood, you go every week to the likeliest-looking supermarket in the vicinity and buy the supplies you need. After a while, finding price, quality, and service reasonably good, you give the supermarket that has thus withstood the trial a standing order for a weekly delivery of a bag of groceries. After a year or so, you come to fancy another store and stop your standing order.

In these ambulance-chasing days of the contingent fee, a plaintiff can find lawyers to prosecute almost any suit, no matter how outrageously frivolous. The supermarket that lost your custom finds lawyers prepared to argue that after a trial period, you entered into a de facto contractual relation with the supermarket, which after a year of blameless service by the plaintiff you terminated unilaterally without good cause. The court is asked to order you to restore your custom to the plaintiff and pay it damages. As some sanity still subsists in the judicial system, the suit is thrown out.

Suppose, however, that your standing order was not for food sold by a supermarket, but for some form of labor service sold by a worker. Instead of an informal understanding that may or may not be construed as a contract, you enter into a formal contract with the worker who undertakes to provide a service in consideration of the wages you undertake to pay him. After a trial period the contract is to run indefinitely unless terminated by either party upon due notice. Up to this point the sale of labor functions very much like the sale of groceries, except that the putative contract under which the groceries were sold is replaced by a contract that exists as an ascertainable fact. Fundamentally, however, the two cases have much in common.

Many if not most people nowadays would retort, with subdued or open indignation, that human labor is not like bags of groceries; in the employment relation human dignity, human destiny, and well-being are at stake. Therefore it is fundamentally immoral to want to apply the principle of freedom of contract to labor without further ado, as if labor were merchandise like any other.

There are weighty arguments backing this indignation. Whether they are accepted or not, they deserve consideration. However, in no way do they go without saying, although public opinion and current political thought treat them as if they did. Not only must they be clearly announced, but their implications must also be spelt out. Probably the most important implication is what could fittingly be called the belt-and-braces principle of the labor market.

Like every exchange, the exchange of labor for money is protected, as it were, by a belt, the contract. Labor, it is argued, must additionally be protected by the braces of justification. In even plainer English, this means that in order to dismiss a worker, an employer cannot simply rely on the contract telling him that he can do so by giving notice that will, so to speak, unbuckle the belt. He must also contrive to unbutton the braces by dealing with a requirement of justification.

Two rival doctrines are applied by legal systems to the requirement of justification. In many legal systems, both coexist in an ad hoc mixture; in others one or the other predominates. The two opposing extremes where one doctrine clearly dominates the other are the Australian and the French labor codes. Since the recent “Work Choice” legislation in Australia, it is broadly speaking up to the worker to show that his dismissal lacks justification. The category of “unfair dismissal” requires proof of a sort. By implication, dismissal that is not shown to be unfair is fair and requires no justification beyond the terms of the contract itself. The employer is “innocent” until proved “guilty.” At least some of Australia’s brilliant economic performance is probably due to the intelligent reforms of its labor market in recent years.

The French doctrine, a source of great pride for the socialist parties, the labor unions, and the intellectual leaders of public opinion, broadly speaking puts the burden on the employer to show that he is justified in dismissing a worker. There is a presumption that all dismissal is unfair unless it is proved to be fair. The employer must prevail, in the first instance, in a labor court where equal numbers of union and employer representatives sit on the bench, and where in 2004 out of over 200,000 cases judged, 65 percent were decided in favor of the worker(s). Judgment took an average of 13 months. One-fifth of cases were appealed, taking on average another 32 months to be decided.

Hiring Deterrent

It does not take a die-hard free-market economist to see how the belt-and-braces job security this doctrine provides for the employee injects a strong dose of risk into the employer’s commitment and how it deters him from hiring. The risk is particularly perverse in its effect when the employer seeks to shed labor for what are termed “economic” reasons, namely, when it no longer pays him to employ the worker(s) in question. Such grounds were generally rejected if the employer was making a profit, since he was patently able to afford to pay the employee’s wages and did not literally need to dismiss him. This kind of jurisprudence was breached last year by a judgment of the highest French court of appeal, which recognized that a dismissal may be justified if the employer is still making money but has good reason to fear that he will make a loss unless he reduces his payroll. It remains to be seen whether this judgment will have much effect on future lower court judgments.

The iron-clad labor code, all of 2,600 pages long, is a major cause of France’s chronic unemployment, whose trend rate has been steadily rising for the last 30 years, in step with the flowering of the welfare state and the steady leftward bias of both center-left and center-right governments. Unemployment has been hovering near 10 percent for years, with unemployment of the under 25s at the staggeringly high rate of 23 percent. It could reasonably be argued that the albeit relative security of employment that the severe job-protection laws provide for 90 percent of the French labor force is paid for by the frustration and insecurity suffered by the 10 percent who are unemployed. It would seem to make good sense for the 10 percent to turn against the 90 percent and clamor for the abolition or at least the relaxation of the belt-and-braces safety enjoyed by the latter in a labor market frozen stiff by counterproductive concern for “social justice.” Yet anyone who expected so rational a reaction would be quite mistaken.

Most of the first quarter of 2006 in France was spent by the government trying to obtain public acceptance of a new law that would have made a breach in the labor code to favor the hiring of young people by making their firing during an initial two-year period easier. The prospective beneficiaries of the law fought against it tooth and nail even more ferociously than the traditional guardians of the belt-and-braces system, the labor unions, the socialists, and most of the media. As he has invariably done during his long political career, President Chirac backed down in the face of the rioting and threats of mayhem, disavowed his prime minister, and effectively scuttled the youth-employment law. The rest of 2006 looks like it will be spent in trying to calm down the young with the derisory palliatives, financed by the taxpayer, that have been hurriedly voted to replace the youth-labor law which provoked the rebellion by France’s habitual rebels.

Once again it has been proved that where the political class is cowardly and the executive gutless, laws can be made by parliament but can be unmade by noisy activists, unruly adolescents, violent pickets, and a press and television that back them. This tiny media-backed minority has time and again learned the lesson that threats of violence always work and victory is to the cheeky. It is a pity that their victory is a defeat for labor-market reform and hence makes unemployment even more stubbornly chronic and incurable.

  • Anthony de Jasay is an influential independent philosopher and economist who has become one of the world’s foremost exponents of classical liberalism.

    Following World War II, de Jasay worked as a freelance journalist in his native Hungary until he was forced into exile. He became a research fellow of Nuffield College, Oxford, and has published in the Economic Journal, the journal of Political Economy, and other scholarly journals. I