Getting the Sack Really Would Help French Workers
Protesting French students need an economics lesson, says Diana Furchtgott-Roth.
March 19, 2006
by Diana Furchtgott-Roth
The Sunday Times, March 19, 2006 ---
Last week thousands of students rioted in France to protest about regulations that would allow employers to sack workers under 26 in their first two years of employment without giving a reason. What they don’t seem to realise is that additional labour market flexibility would actually help young people, who now have an unemployment rate of 22%, to get a job. Employers who can sack easily will also be quick to hire.
The goal of advanced economies should not be economic equality but job mobility. A job is not just a job but the start of a career. This requires more flexible labour markets so that employers are encouraged to hire more workers. Job mobility is a more practical political goal than economic equality, but without the populist flavour.
But the theme of recent articles in Britain and elsewhere is that economic inequality has increased and that this trend needs to be reversed.
Although everyone wants the poor to prosper, is a goal of economic equality the best way of achieving this? Do we really need economic equality for economic advancement? Or does an economy with economic inequality produce more opportunities?
Britain’s GDP has outperformed its European competitors since 1997, with millions more jobs and a decline in unemployment from 7.2% to the 4.8% range (with a slight recent uptick to 5%). Over the past year 222,000 jobs have been created and GDP is almost 2% higher than it was a year ago.
Measured economic inequality comes from comparing incomes at the top of the scale with those at the bottom. When the economy grows, there are more opportunities at the top of the income scale. Businesses expand, bankers in the City get bigger bonuses and bright British designers hit the jackpot on the runways in Milan.
All well and good, but what about the people at the other end? It would be unreasonable to expect that entry-level wages would rise at the same rate as wages at the top of the income distribution. If they did, school leavers would be priced out of a job and teenagers would have no hope at all of earning extra money in the school holidays. Entry-level wages need to stay low to provide jobs for low-skilled and young workers.
It is natural that earnings become more broadly dispersed when countries grow and so economic inequality increases. We cannot take economic equality as a measure of wellbeing. If people preferred economic equality, Cuba would find itself with floods of immigrants. Instead, Cubans and others risk their lives to get to the United States, one of the most economically unequal countries in the world.
Measures to reduce inequality can slow economic performance and reduce growth. Eliminating low-wage jobs through unemployment benefits, one popular remedy for inequality, discourages low-wage workers from taking jobs. This is happening in France, Germany and Italy with disastrous economic and social consequences. Aggregate unemployment rates are close to 10%, with those among the young and ethnic minorities even higher. About half the unemployed have been out of work for more than a year. Raising minimum wages has a similar effect.
As unemployment rates rise, skills deteriorate and workers become disaffected. Economic inequality pales as a social problem compared with one where 5% of the workforce has been out of work for more than a year without any chance of getting a job. The French riots were in places where unemployment is about 25% and lack of opportunity is the norm.
Raising taxes is the other supposed cure for economic inequality. But these days workers and businesses are all mobile. France has seen its entrepreneurs leave for Switzerland and Belgium to escape the wealth tax, and businesses can just set up shop in low-tax Ireland or cheap India.
In contrast, the way to economic progress is better education to improve the supply of workers, and more flexible labour markets to improve the demand for workers. Increased skills are instrumental in moving upwards.
More jobs than ever require some advanced levels of skill, especially computer skills. As the nature of work changes, workers need continually to improve their skills to be able to qualify for the next promotion or to move to a competing firm.
Workers with more education tend to have lower unemployment rates. Rather than aiming for economic equality, politicians could concentrate on school choice, to raise the quality of schools. In that way, all families would have the same choices as those who live in the better parts of town. Choice in education would have the same effects as choice in restaurants — the bad ones would eventually go under.
How can employers be persuaded to hire more workers? Firms are more likely to hire when they have low levels of required benefits and are permitted to sack workers with no consequences. That is why the French riots are so counter-productive. Britain has managed to avoid some of the rules that Brussels has imposed on the rest of the European Union, such as limits on working hours, but the noose is closing fast.
Much income mobility is due simply to getting older. School leavers and university graduates take their first jobs and work their way up. It is unusual to meet a recent graduate with house, pension plan and car, but many 40-year-olds have all three. Once retired, 25 years later, that 40-year-old could have accumulated an additional car, substantial pension savings and a country cottage.
Economic inequality is a fact of life for successful economies such as Britain’s. As workers leave the lower rungs of the career ladder, others will surely take their place. Attempting to get rid of inequality by increasing minimum wages and benefits or raising taxes would only send Britain down the path of its stagnant European competitors. Rather than riot, French students should take note.
Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, was a Senior Fellow at Hudson Institute from 2005 to 2011.