French President Emmanuel Macron’s efforts to loosen the country’s labor code are innovative and welcome. They might help attract more investment. But if France truly wants to reconcile the interests of companies and workers, it also needs a different kind of reform -- one focused on protecting people, not jobs.

Macron’s plan increases legal penalties for “wrongful” dismissals, while curbing the ability of courts to grant workers even greater compensation. This is the right approach; the problem with France’s severance payments is not their formal level, but the protracted (often yearslong) court process that follows many dismissals and eventually yields random outcomes. The plan also gives companies more power to negotiate hours and pay; it aims at easing the bureaucratic pain for multinationals as well as firms with fewer than 50 employees.

Yet none of these useful reforms addresses a fundamental problem: The cost of unemployment benefits doesn’t accrue to the companies that actually do the firing. Instead, it falls on those that keep their employees and therefore make contributions to the social security fund. This is upside down and creates incentives to game the rules -- for example, by using short-term contracts and making resignations look like dismissals. It also necessitates a regulatory system that relies too much on judges to assess companies’ decisions, creates huge burdens and leaves less legally savvy workers at a disadvantage.

One simple change could radically improve the incentives: In exchange for more flexibility, require companies to also pay a penalty for dismissing workers, with the money going to the social security system or government budget and not to the employee. This need not be an additional tax on businesses: The money could be earmarked to reduce the social security contributions of employers who keep their workers on.

Of course, firing a 30-year-old software engineer in Paris who will find a job the next day is very different than firing a 50-year-old with few skills in a depressed job market. So the payment could be calculated by looking at how much the fired employee costs the unemployment insurance fund. This has a twofold advantage: It applies a larger penalty for dismissing people who will have a harder time finding a job, and it encourages companies to invest in on-the-job training that enriches human capital and limits the length of time that employees might be out of work.

Such a system would balance the interests of employees, whose sense of identity and social connection depends on their work, and those of their employers, who want to be able to adapt their human resource management to economic and technological imperatives. On average, employees would not lose job security. Those on fixed-term contracts would have a more stable job. Those on permanent contracts who nonetheless lost their job would have a better chance of finding a new one.

Combining the “dismisser pays” principle with more freedom would address various economic ills, such as long-term unemployment and poor matching of employees and jobs when employees who are looking for new challenges, or who don’t get along with their coworkers, or whose functions have simply become redundant, stay in the same job. It would also ease the burden on public finances and unemployment insurance, by reducing companies’ incentives to disguise resignations as terminations and to use short-term contracts that shift the cost of downtime to the social security system.

The transition couldn’t happen overnight. It’s important to make sure that workers currently in a good position -- in France, those with permanent jobs -- do not lose out as a result of reform. Drawing lessons from experiments in the area of taxing pollution, one could grant “grandfathered rights” to workers’ existing contracts. They would remain under the old law concerning dismissals, whereas all the new contracts would fall under the new law. This is exactly what Matteo Renzi did in Italy in 2014.

To be sure, the public might not embrace such a reform. For many French people, the idea that a business might pay to fire employees is still taboo, because it seems to endorse a behavior -- firing employees -- that they consider immoral. This is reinforced by the phenomenon of the identifiable victim: Job losses make headlines because the people have faces and experience tragedies -- very real ones, because the labor market might never allow them to get similar jobs. By contrast, no one who is unemployed or employed on a fixed-term contract can identify with a job that has never been created. A lack of job creation is by its very nature invisible.

There are two responses to this ambivalence. First, today it is the companies that do not fire workers that pay most of the social cost, while those doing the firing bear only a small fraction of it, namely the severance pay. Second, a similar taboo existed 20 or 30 years ago with regard to environmental taxation, or the introduction of markets for tradable emission rights. Economists who supported it heard the same refrain: “Paying to pollute would be immoral!” But was it more moral not to pay when one polluted? In the end, environmental taxation became acceptable and is now commonplace.

For the sake of both companies and workers, one must hope that the public will also learn to accept the right to dismiss employees. In a system with the right incentives, it could make everyone better off.


By Jean Tirole

Jean Tirole, winner of the 2014 Nobel Prize in economics, is chairman of the Toulouse School of Economics and of the Institute for Advanced Study in Toulouse. -- Ed.


(Bloomberg)