Imagine that you are the human resources (HR) manager of a firm in the United States. Suppose that the demand for your firm’s product has declined, so you need to lay off some workers. You will be obliged to provide two weeks’ notice to them. In many cases, that will be the end of your firm’s obligations, although workers may sometimes be entitled to additional severance payments as part of their employment contracts. In the United States, employment contracts are largely a private matter between a firm and its workers. A firm cannot fire a worker for a discriminatory reason, but otherwise the government stays out of the contractual agreements among workers and firms. According to the Department of Labor, “In general, if the reason for termination is not because of discrimination on these bases, or because of the employee’s protected status as a whistleblower, or because they were involved in a complaint filed under one of the laws enforced by the Department of Labor (see Whistleblower and Non-Retaliation Protections), then the termination is subject only to any private contract between the employer and employee or a labor contract between the employer and those covered by the labor contract.” [***“Termination,” US Department of Labor, accessed June 30, 2011,http://www.dol.gov/dol/topic/termination/index.htm.***]
In other countries, matters are not so simple. Imagine now that you are the HR manager of a firm in Portugal. Your product demand has fallen off, and you want to reduce output. In contrast to the United States, you may not be able to simply lay off workers. In Portugal, and in many other countries, there are numerous laws that make it costly to dismiss workers.
If you want to design a public policy to reduce the unemployment rate, it is tempting to make it harder to fire workers. If it is difficult to fire people, then fewer individuals will move from employment into unemployment. As we discussed earlier, though, spells of unemployment are sometimes necessary if workers are to move from less productive jobs to more productive ones. An increase in firing costs makes the labor market less flexible, so the economy will adjust less effectively to changes in workers’ productivities.
There is also a more subtle unintended consequence of firing costs. If it is harder to fire workers, then firms become more reluctant to hire workers. Neither firms nor workers know the true value of a match in advance. When you take a part-time job, your productivity at that job and job satisfaction cannot be known ahead of time. Suppose there was a law that stated that once you accept a job you must stay with that employer for five years. You would certainly become very careful about deciding to accept a job offer. Exactly the same applies to firms. If the cost of laying off a worker is very high, then the firm will simply not hire the worker. A policy designed to promote employment can actively discourage it.
The French government, as we saw at the beginning of the chapter, made an attempt to introduce labor market reforms based on exactly this reasoning and tried to make the argument that we have just outlined to the protesters in the streets. If there were more flexibility in the firm’s employment decision, they argued, firms would become more willing to hire young workers. This would help to reduce youth unemployment. The following New York Times article tells what happened next. [***Elaine Sciolino, “Chirac Will Rescind Labor Law That Caused Wide French Riots,” New York Times, April 11, 2006, accessed June 30, 2011,http://www.nytimes.com/2006/04/11/world/europe/11france.html?_r=1.***]
President Jacques Chirac crumbled under pressure from students, unions, business executives and even some of his own party leaders on Monday, announcing that he would rescind a disputed youth labor law intended to make hiring more flexible. The retreat was a humiliating political defeat for both Mr. Chirac and his political protégé, Prime Minister Dominique de Villepin […]
It also laid bare the deep popular resistance to liberalizing France’s rigid labor market, and makes any new economic reform politically impossible before a new government is in place, and perhaps not even then.
“Dead and buried,” is how Jean-Claude Mailly, leader of the leftist union Force Ouvrière, described the fate of the labor law. “The goal has been achieved.”
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The new law was intended to give employers a simpler way of hiring workers under 26 on a trial basis without immediately exposing companies to the cumbersome and costly benefits that make hiring and firing such a daunting enterprise. Opposition to the law reflects the deep-rooted fear among the French of losing their labor and social protection in a globalized world.
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In its initial form, the law allowed employers to fire new employees within two years without cause. In the face of mounting pressure, Mr. Chirac watered it down so that employers could subject new employees to only a yearlong trial period, and then would have to offer a reason for any dismissal. Students and unions, bolstered by support from the opposition Socialists and even some business leaders, had vowed to continue their street protests until the law was rescinded.
The Socialists were quick to proclaim victory on Monday. “This is an unquestionable retreat,” Francois Hollande, the leader of the Socialist Party, told reporters. “It is a grand success for the young and an impressive victory for the unity of the unions.”
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