The book taking France by storm. Économie du Bien Commun – a review.

During my free time in August I read the book that has taken the French political and economic landscape by storm (no, it’s not  “Capital” by Thomas Piketty). Nobel Prize winning economist, Jean Tirole, has written a book entitled “Économie du Bien Commun” (or “economy for the common good”). The book is written in plain language and attempts to reach a large audience, including readers with very little knowledge of economics. It’s easy to read and through 17 chapters and over 600 pages, Tirole tackles pretty much every issue currently faced by the French economy, from climate change and the European Union challenges to the digital economy.

The most relevant part of the book for me is Tirole’s sharp view of the French labour market. National security and unemployment will be the two key themes of next year’s French Presidential election in May. The former has understandably emerged because of the sizeable terrorist attacks the country has been facing for a couple of years. Unemployment, however, has been a structural issue for 40 years.

Tirole pulls no punches, arguing that France’s historically high unemployment rate is not the result of adverse impacts of the global market economy – a common and handy explanation given by French politicians – but rather a choice that society has made to put in place a very rigid labour market. Conscious that the numbers of unemployed kept rising, the French government decided to create flexible fixed-term contracts (contrats à durée déterminée or CDD) and numerous subsidised jobs instead of adding some degree of flexibility to the ultra-rigid permanent contracts (contrats à durée indéterminée or CDI) and lowering the heavy burden of social security contributions on employees. The numbers are self-evident: in 2013, 85% of jobs created were fixed-term contracts. In addition, 77% of total employment terminations relate to fixed-term contracts.

In reality, a fixed-term contract does not satisfy either employees or employers. Employees are being offered little job protection. Employers are not inclined to renew a fixed-term contract because under French law it is automatically converted into a permanent contract. Therefore, Tirole recommends introducing more flexibility in permanent contracts in order to incentivise French companies to employ more employees on permanent contracts and hence promote “better jobs” over precarious and fixed-term contracts.

Tirole also challenges the current situation in France in which a company laying off an employee must pay termination compensation to the employee but does not bear directly the (rather elevated) cost of unemployment benefits the individual will receive while unemployed and which is funded by the social system. Currently, unemployment benefits are funded through employees’ and employers’ contributions (and also the bond market). Hence, when a company decides to lay off an employee, it is both detrimental to the employee (financially, psychologically, socially) and the social system. Tirole therefore introduces the same concept as “polluter pays” with job lay-offs by making a company not only pay the employee’s termination compensation but also contribute to the cost of unemployment benefits paid by the social system to the individual whilst unemployed. He adds that the measure would be tax neutral for companies as a whole because the penalty would be offset by bonuses for other companies (through reduced social security contributions).

Finally, Tirole acknowledges that it is not an economist’s duty to determine whether people should work 35, 18 or 45 hours per week. Nevertheless, he also fiercely sweeps aside the argument that the reduction of working time will create more jobs (describing it as a “false solution” that has no theoretical nor empirical backing). There is no doubt that opponents to one of the main French labour unions contemplating a weekly working time of 32 hours (from 35) will quote Tirole.

I am hoping that the 2014 Nobel Prize winner’s authority on economics may provide food for thought to the French Presidential candidates. In the past, Thomas Piketty served as advisor to the Socialist Party candidate Ségolène Royal during the 2007 French Presidential campaign. His idea of a simplified tax system was interesting and much needed. However, Mrs Royal lost her Presidential bid against Nicolas Sarkozy and since then no simplification of the tax system has been implemented. Let’s hope that Jean Tirole’s common sense with regards to the labour market wins the ears of the next French President. This may be beneficial for the common good.