WHAT IS NOT SAID IS MORE IMPORTANT THAN WHAT IS SAID





We know, thanks to Freud (sorry not an Economist) that what matter is what you don’t say. The authors’ view is perfectly correct but is somewhat cursory.



Yes, at last we start to see the first consistent and structural reforms of E. Macron, this labor-code reform is good and welcome. For the first time in France, we start to consider the entrepreneur (a French word) as an important actor in the economic and social dialogue, since he is the one who hires or fires, therefore it would be good to take into account his (masked) opinion. Why is he so reluctant to hire in a world where Marxist (socialist) ideology is so pregnant? (Le Monde is a good example of this anti-capitalism ideology). The intellectuals/Economists/Professors are mostly leftist in France and most of them are anti entrepreneurs.



The four goals of the labor code reform are modest but for the first time, the Government is attacking the unemployment problem in the face instead of creating useless programs for state employment for the young (contrats jeunes, contrats d’avenir, contrats aidés, contrats de génération, etc.) or the stupid 35 hours imposed in 2000 on all firm by the inept Mme Delors, Mr. Strauss-Khan and Jospin, all socialists.



The negotiating method with unions used by the PM, E. Philippe and Mme Pénicaud (Social Minister) is shrewd. They presented a very preliminary draft to trade unions, and they agreed to incorporate some of their suggestions/critics. The PM said that this labor reform is different from the Government first draft because of the iteration with trade unions. Previous Government imposed the reforms which failed because of the opposition of the street. In addition, the PM said clearly that the project of law will not be changed except at the margin and will be sent directly to the Parliament who will likely adopt it quickly (ordonnances), because the President’s party (LREM) has a majority in the Parliament. So far, so good.



We now understand better the way of working of the President Macron, no big bang, cautious and limited structural reforms done in order. In a country where reforms are accepted as far as they don’t impact vested interests and where no structural reforms were done since 1980 by the left and the right, these reforms (even limited) started by Macron must be endorsed by the French without hesitation. As far as we know, the right did not attempt to make any serious structural reforms when they were running the show, so they do not have much to say today.



What is missing in the authors’ (excellent) article?

1) The labor-market reforms are not sufficient: 35 hours are still into effect, the recourse to negotiation with enterprise instead of sectors is blurred, the role of trade unions is still too large mainly for firms above 50 employees and nothing has been done to reduce the dual labor market between a big cast of civil servants (22% of the labor population) which cannot be fired whatever they do (or don’t do) and the private sector employees who can be fired. The authors (who are civil servants) are very silent on this basic issue. Nevertheless, we think that the benefits of the reform will be higher than its costs in terms of net employment because the French labor market is structurally rigid and this is not by an artificial increase in demand that the structural unemployment problem will be solved.



2) This reform should be linked to a strong training program in favor of unemployed people, which is not the case in France. Of course the authors mention quickly that there will be a job-training program. Well, but it will be good to be a little bit more specific (which is not the main strength of E. Macron who, as a good politician, likes ambiguity). France’s high education relies on two pillars “les grandes écoles” (élite schools) and universities. Students from the “grandes écoles” have no problem finding immediately a well-paid job, it is not the case with students from universities which are overcrowded and with no selection to enter. Too many students, few jobs at the end. The difference between France and Germany is not in the labor-market protections but in training, Germany (like Switzerland) has a dynamic training model at the high school level within factories, the result is that these high school students who don’t go to universities have a job in a factory where they have been part-time trained. This on-the-job training is the best way to train young people to a job where there is a market demand, whereas the French universities have no practical training at all, nor any link with enterprises. Therefore France must start to train young (and unemployed) on-the-job training with an effective demand, this can be done only by enterprises. Therefore at the high school level, there can be a split between theoretical classes at school and practical training in a factory. It will be a strong factor to reduce young unemployment in France (22% of the labor force). E. Macron is contemplating a strong training program for unemployed people, it remains to be seen if this training program will be made by professors (useless) or within enterprises who know what the market demand is, this is the key to success of this program.



3) The third reform consists in reducing tax on enterprises (CIT and principally social tax (“prélèvements obligatoires"), tax based on the salary, which have the effect of reducing the profitability of the firms and to raise the cost of employing a worker, this tax on labor affects most of the people with limited instruction. The tax reforms mentioned in the article are targeted mainly to households; the problem seems to be more acute for enterprises. The General government (GG) revenue (all revenue of the central government, plus local governments and SS) account for about 54% of GDP (against 45% in Germany and 32% in the US, source: WEO/IMF). No significant job creation is possible in France without a reduction of the tax/revenue ratio. This ratio cannot be reduced without a cut in the public expenditure ratio (57% of GDP in France). Here E. Macron (and the IMF which has the same projection as Mr. Macron or the reverse) are making, in my view, a strategic mistake because they want to stick to a 3% fiscal deficit this year to please Madame Merkel and to be credible at the European level. But since E. Macron does not want to reduce too much the expenditure ratio, he projects a reduction of two points of the expenditure ratio for the period 2017 - 2022, whereas it should have been reduced at least by four points over the period. The revenue ratio will remain constant at 53% of GDP over the period (2017-2022) whereas it should have been reduced by at least three points. (for graphic see http://jpdumas007.blogspot.fr/2017/04/pourquoi-la-projection-du-fmi-pour-la.html).



We consider that a combination of labor-market reforms, plus a strong on the job training program in favor of unemployed and a significant reduction of the tax on enterprises will contribute to boost France’s economic growth which is projected by the Macron program at only 1.3% per year over the next five years (whereas it could reach as high as 1.9%) and reduce the unemployment rate at the same level as the US, the UK, and Germany. Yes, a reduction in public expenditure and tax with a fiscal deficit higher than 3% of GDP in 2017 and 2018 will contribute to boost growth and employment in a country which cannot raise more its expenditure ratio. This is the mix of structural and macroeconomic policy proposed. This is missing in the article.