The recent fiasco in France holds many lessons for democracies everywhere.
France has this strange combination of a thriving corporate industry and high unemployment especially amongst youth. The culprits here are France’s rigid labour laws which make it almost impossible to dismiss or layoff employees. Companies therefore prefer not to hire. If they have to, they use temporary workers. Since older employees can’t be fired easily, unemployment hits the youth. Much of the unemployment is among the children of immigrants which ultimately was the cause of rioting in France a few months ago. People with no jobs are more likely to riot – they have time on their hands and nothing to lose.
The government in France, with the best of intentions, decided to fix some of these problems to regenerate employment amongst youth. But they could not suddenly change labour laws across the working population. If layoffs were permitted across the board, sure, growing companies would start hiring young people, but there would also be a lot of older workers laid off and out of jobs. So the government decided to make it easier to fire only young workers in the first two years after they join.
Big mistake. Within days, massive student and youth protests were organized across the country. Colleges shut down because all the students were in the streets protesting against what they were calling a law unfairly targeting young people! The government first said it was willing to negotiate the time period – make it 18 months instead of 2 years. In the end, Jacques Chirac just withdrew the bill, in effect dashing the Presidential hopes of his trusted luitenant Dominique de Villepin who was the author of the bill. So were all students against the new bill? No. Last week they were interviewing a law student from the Sorbonne on BBC. The student was being asked about the law and the protests. She was against the protests and for the law. She didn’t like the fact that the colleges had been shut for the past 4 weeks and who knows what would happen to her final exams. But more importantly, she thought that the new bill would generate employment for the youth! She also said that none of the economics and law students of her university were in the protest marches.
I think the new bill would have worked. Not that the French government didn’t deserve the shellacking it got. They have nobody to blame but themselves for making France into an insular, inflexible place to do business. But really, this bill didn’t have a chance. Why? For two reasons:
1. The rationale for the new law is not easy to explain. It is not obvious that making it easier to fire young workers will result in higher employment among the same workers. I can imagine myself trying to explain that to a 3rd year medieval history student. Even if I knew French, I don’t think I could. On the other hand, the opposition can easily spin it the other way portraying it as an evil law designed to protect older workers or even designed to keep immigrant youth from keeping good jobs. Here I don’t just mean the Opposition in Parliament. Every change has opposition to it simply because someone is going to get hurt by the change.
2. The opposition to the law had Street Power. The people who were in favour of the new law like the Sorbonne law student and her friends, did not.
Cut to India. Labour flexibility, for decades, has been the one reform that no politician wants to touch. It is hard to believe that if you are the owner or manager of a company, your company can make losses, go bust and lose its entire net worth, but you can’t restructure your workforce. Capital treads softly where labour is inflexible. There was a time when there was talk of an Exit Policy for sick companies. A very unfortunate choice of name, if you ask me. The opposition (trade unions) quickly positioned the Exit in Exit Policy to be the exit of employees. ‘Hire and fire’ was another colorful phrase they used. The government had to bury the whole thing.
But its now resurfacing. You hear snatches of statements made by the PM and FM about the need for labour flexibility. Although they’ve picked a better name this time, I don’t like the government’s odds of passing any substantive legislation on this matter. Why? because of the same reasons that the French government failed.
How do you explain the rationale of labour flexibility to Mr. Godbole who is a teller in a bank? Mr. Godbole, we plan to make it easier to fire people such as yourself because this will encourage capital investment which will generate more jobs. I can just see Mr. Godbole’s eyes glazing over. Before he gets angry. Even Mr. Godbole can understand that making it easier to fire him is not good for his pension. Self interest is a great motivator. When it comes down to Godbole’s job security vs. more employment in the country, Godbole knows which side of his toast is buttered. And finally, Godbole is part of a union. He has Street Power. His union can call a strike, do a dharna and if it comes down to it, burn a few buses. The stakes are very high. And a burning bus is an arresting sight on TV.
The challenge of sound economic policy making is that often doing the right thing benefits a silent majority, but hurts a vocal minority. In some cases the vocal minority can make their voice heard. In others they can take their campaign funding elsewhere. You need money to run elections. You need votes to win them.
I do think that one of the most important reforms that the Indian economy can benefit from is bringing labour flexibility. This is the best time to do it when economic growth is strong. But I won’t be holding my breath waiting for it. Not while the govenment depends upon the support of CPI(M).