Econ 101: When the Job Market Isnt Free
French labor laws make it very difficult to fire people, which reduces the incentive to hire and increases the incentive to substitute machines for people. While the unemployment rate in the United States is less than 5 percent, in France it is nearly 10 percent. The new law allows persons under the age of 26 to be hired for a two-year trial period. During that period, employers can terminate the contract without having to offer an explanation. After the first month, employers have to give two weeks notice for severance and after six months, the employer has to give a one-month notice. After the two-year period, the standard prohibitions against firing apply.
The new law, while requiring substantial notice to fire a young person, does lower substantially the risk to the employer from hiring someone under the age of 26. Employers do not have good information on the skills and productivity of potential employees, and thus are reluctant to hire someone whom they might get stuck with for decades. This change in the cost of hiring the wrong person will reduce unemployment among the 18 to 25 population the very group that is leading the protest over the law.
The market process is based upon voluntary exchange. I cannot force you to work for me, and you cannot force me to hire you. The only way to get both of us to agree to work together is for me to pay you what you could have received in the next best use of your time. I also cannot pay you more than the value of what you add to my production, or I will go out of business. If, after hiring you, the company produces $100 per day more in sales to customers, I cant pay you $120 per day. In that case I will lose $20 per day and eventually go bankrupt.
The problem in France is that if I think you are going to produce $120 per day and find out that you only produce $100 per day, firing restrictions dictate that I might get stuck with you as a worker for 40 years. Or I might have to pay a substantial sum in order to fire you. Thus, I will be very careful about whom I hire. This is especially true about hiring a young person with little prior work experience, which is why the new legislation will be effective in providing employment for French youth.
If you think employers are able to exploit workers, forcing workers to accept whatever wage the employer wants to pay and casting workers aside on a whim, then you would think that the new law would be bad for you. Government should act as a countervailing force to employers. French youth must have this misguided belief that producers control the economy, when the reality is that consumers control the economy.
The amount consumers are willing to pay for the added product you produce determines how much your employer can pay you. And it makes no sense for a producer to fire anyone who is producing an amount that covers the cost of his salary, since the producer would always profit from that worker. Imagine if you wanted to start a used CD store but could never fire anyone. Wouldnt you be reluctant to hire anyone, especially a young person with no work experience? The new law gives employers the chance to try out workers and the workers the chance to show employers how productive they can be. It is too bad that the people who will benefit most from the law are applying pressure against it.
Dr. Gary L. Wolfram is the George Munson Professor of political economy at Hillsdale College in Hillsdale, Mich. He also serves as an adviser to the Business & Media Institute.