Labor, Inflation, Aggregate Demand, and French Reforms

new maze

Low unemployment rates in the US, UK, and Japan have not fueled much wage pressure, and this is vexing policymakers.  They are unable to normalize monetary policy because inflation remains subdued, and it is difficult to envision a sustained and durable increase in price pressures without higher wages.  

There may not have been any other time in the post-WWII era that major central banks were encouraging higher wages.   Companies in the US, Europe, and Japan have enjoyed a bounty of good earnings growth, and collectively are sitting on record levels of cash.   Meanwhile, income and wealth disparities have emerged as a potent political force in the US and Europe.

Former US Treasury Secretary Summers has taken up our call to strengthen the one institution whose raise d’etre is to boost employee wages:  trade unions.  Summers’ recent op-ed pieces put the economic security of the middle class as the central issue in US politics today.  Summers argues that the most important factor reconciling the strong corporate earnings growth and low wage growth lies in the disparity of bargaining power between employers and employees.

On the one hand, Summers recognized that technology and the trade allow employers greater opportunity to replace workers with the machine, lower cost domestic labor, such as in the gig economy, or foreign workers.  At the same time, Summers recognizes that leverage of the employees has been reduced for numerous reasons, including diminished savings.  To his credit, Summers also recognizes that years of M&A activity and consumers increasingly have to purchase from monopolies or oligopolies.

Summers see that trade unions help “even out the bargaining power between employers and employees.”   Their success means higher wages, better conditions, and more protections for mistreatment.  There is a political implication too from which Summers does not shy away.  Employee associations (unions) provide important support for programs like Social Security and Medicare, which benefit non-union members as well.

Only about 6.5% of American private sector workers are unionized. It was near 20% in the late 1970s.  To be sure, Summers recognizes the that unions cannot go back to being what they were before, but at the same time, he argues that now is “surely not the moment for policy tiled further to strengthening the hand of large employers.”

That is arguably the condition in the US.  France is different.  Labor reform, which has gradually made its way across Europe, from Germany, Spain, to even Italy, largely skipped France.  It is not that previous governments did not try.  They tried to some extent to institute labor reforms but met formidable social opposition.

Macron was swept into office.  He heralds from the business wing of the Socialist Party.  The center-right candidate Fillon had campaigned on being the French version of Thatcher, but in victory, Macron is pursuing a similar neo-liberal agenda.    Although his support has been nearly halved since he was elected five months ago, he is pursuing an aggressive labor reform program that was unveiled last week.

The French labor code is near 3500 pages long according to report.  Macron’s reforms are composed of three dozen measures in five separate decrees.   Parliament, in which Macron enjoys a solid majority, abdicated its authority to the President, allowing he to enact the labor reforms by decree.  The Cabinet will be consulted and give its approval next week.

Although many think that France is heavily unionized, it is simply not true.  Only about one in 20 private sector workers are unionized.  About one in seven civil servants below to a union.   Still, the rigidities in France are palpable.  France does a particularly poor job integrating younger and older workers into the labor market.  One in five young people are unemployed, and older workers (65+) are under represented in the French workforce.

Some of the reforms that Macron wants to institute seem a reasonable way to rationalize the labor market.  It makes sense to increase local flexibility and to reduce red tape.  However, Macron and employers are over-reaching.  Some of the reforms shift power too dramatically to employers, disarming employees.  If successful, the neoliberal policies will reproduce the same conditions elsewhere where they have been implemented.   The disparity of wealth and income, with political implications, that Summers recognized in the US.

Macron’s reforms impact an independent judiciary.  Not only do the reforms call for limits on penalties for wrongful dismissals.  The reforms call on judges to only take into account a company’s situation in France and ignore their global operations and profitability when ruling on layoff policies.  This is rightfully part of the jurisprudence process and contextual.  It is not about aiding small businesses, for whom the various mandated worker committees of burdensome.  The purpose is to boost the French global businesses in their global competition on the back of workers.

France has two large unions.  The largest French union, CFDT, said it was disappointed with Macron’s labor reforms.  It too sees some necessary measures and also overreaches.  Union officials did not like the level at which dismissal awards in France’s labor courts will be capped and sees the reforms as giving too much power to small businesses.   The second largest unions, CGT, headed by presidential contender Melenchen is more aggressive.  They will take to the streets on September 12.

The labor reforms will like to be adopted largely as proposed.  The risk is that it is not the panacea that it is being advertised.  Greater flexibility of the labor market under a neo-liberal regime means downward pressure on wages, and labor costs more broadly.  French EU harmonized inflation in August stood at 1.0%.  France does not need lower inflation.  It needs stronger aggregate demand.