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Saturday, September 1, 2012

Full Employment in a Republic: Hollande’s France

Facing an unemployment rate of 10% in his state, with youth particularly hard-hit (23% for those under the age of 25), Francois Hollande of the state of France announced in August 2012 a new initiative for the legislature to pay most of the salaries of tens of thousands of young people hired in 2013. Young Europeans have  been hard-hit by the laborious labor laws that make it difficult for companies to let people go. Some E.U. states, including France, have proposed modest tax breaks for companies that hire people just entering the workforce, but no one is under the impression that such proposals will redress the underlying structural problem.

 Hollande, a Socialist, of the E.U. state of France.            The Telegraph

Fundamentally, there is no guarantee that a competitive market will come to an equilibrium at full employment. Accordingly, government has a legitimate role in picking up the slack, such that ideally any able-bodied adult who wants to work can have a job. In the state of France, the plan being proposed by Hollande in August 2012 would have companies that hire a person between 16 and 25 for at least a year pay as little as 25 percent of the person’s salary (for up to three years). In this way, the state hoped to create 100,000 new jobs in 2013 and 50,000 in 2014.

While managements would doubtless see this as a bargain, the question is whether other jobs would be put at risk given the 25 percent of the salary being paid by the companies. A clever manager might try to increase the proportion of the employees for whom the company must pay only 25 percent. Increasing the proportion would mean letting some non-subsidized employees go. The cost structure assumed could be a basis of sustainable competitive advantage if competitors do not also have such an arrangement. In other words, do government-subsidized jobs in the private sector add much in the way of the total employment of a company (and thus of the economy as a whole)?

One might also consider the matter of France’s deficit. Under E.U. law, it cannot exceed 3.5% of the state’s total economic output. Hollande’s strategy going into office was to offset the additional spending with a tax increase on the rich, yet even in anticipation of this some rich French were relocating to Belgium, a state with lower income taxes on the rich. California, which at the time also had an unemployment rate of just over 10 percent and a youth rate of 23 percent, also suffered from a budget deficit and a proposal by Brown to increase taxes. Unlike France, however, California faced no federal law limiting the deficit. In this respect, the E.U. was already a more consolidated federal system than was the U.S.

In short, the problem of individuals undercutting a policy for the whole is evident. A company’s manager seeking to take undue advantage of subsidized labor is like the rich person who seeks to avoid paying higher taxes by going to another state. To be more effective, government policy needs to figure out how to minimize such opportunism that is at the expense of the whole. Thomas Jefferson and John Adams both assumed that a virtuous citizenry is required for a republic to work. In the cases both of France and California, reaching full employment and achieving fiscal balance in the government may well come down to whether the respective citizenry does not try to exploit the requisite government policies.

It could even be said that a society or civil contract that is disvalued in the face of widespread opportunism deserves to fail.  Managers use “corporate citizenship” as window-dressing, yet without any sense of obligation to anything beyond the company. Doubtless there are rich people whose motivation to minimize even taxes they can pay dwarfs any sense of staying put and riding out the storm with everyone else (i.e., we are all in it together). If we are not all “in it,” then there is no We, as in We the People.


Sylvie Corbet and Sarah DiLorenzo, “French Government Offers to Pay Most of Young Hires’ Salaries,” The Huffington Post, August 28, 2012. http://www.huffingtonpost.com/2012/08/29/french-salaries-young-hires_n_1839663.html?utm_hp_ref=business