Labor, Inflation, Aggregate Demand, and French Reforms

Low unemployment rates in the US, UK, and Japan have not fueled much wage pressure, and this is vexing
policymakers. 
They are unable to normalize monetary policy because
inflation remains subdued, and it is difficult to envision a sustained and
durable increase in price pressures without higher wages.  

There may not have been any other time in the
post-WWII era that major central banks were encouraging higher wages.
  
Companies in the US, Europe, and Japan
have enjoyed a bounty of good earnings growth, and collectively are sitting on
record levels of cash.   Meanwhile, income and wealth disparities
have emerged as a potent political force in the US and Europe.  

Former US Treasury Secretary Summers has taken
up our call to strengthen the one institution whose raise d’etre is to boost employee wages:  trade
unions.
  Summers’ recent op-ed pieces put the economic security of the
middle class as the central issue in US politics today.  Summers argues
that the most important factor reconciling the strong corporate earnings growth
and low wage growth lies in the disparity of bargaining power between employers
and employees.  

On the one hand,
Summers recognized that technology and trade allow employers greater opportunity to replace workers with the machines, lower cost of domestic labor, such as in
the gig economy, or foreign workers.
  At the same time, Summers
recognizes that leverage of the employees has been
reduced
for numerous reasons, including diminished savings.  To his
credit, Summers also recognizes that years of M&A activity and consumers increasingly have to purchase from
monopolies or oligopolies.  

Summers see that trade unions help “even
out the bargaining power between employers and employees.”  

Their success means higher wages, better conditions, and more protections for
mistreatment.  There is a political implication too from which Summers
does not shy away.  Employee associations (unions) provide important
support for programs like Social Security and Medicare, which benefit non-union
members as well.  

Only about 6.5% of American private sector
workers are unionized.
It was near 20% in the late 1970s.  To be sure,
Summers recognizes the that unions cannot go back to being what they were
before, but at the same time, he argues that now is “surely not the moment for policy tilted further to
strengthening the hand of large employers.”

That is arguably the condition in the US. 
France is different.  Labor reform, which has gradually made its way
across Europe, from Germany, Spain, to even Italy, largely skipped
France.  It is not that previous governments did not try.  They tried
to some extent to institute labor reforms
but met formidable social opposition.  

Macron was
swept
into office.
  He
heralds from the business wing of the Socialist Party.  The center-right
candidate Fillon had campaigned on being the French version of Thatcher, but in
victory, Macron is pursuing a similar
neo-liberal agenda.    Although his support has been nearly halved since he was elected five
months ago, he is pursuing an aggressive labor reform program that was unveiled last week.   


The French labor code is near 3500 pages long
according to reports.
  Macron’s reforms are composed of three dozen
measures in five separate decrees.   Parliament, in which Macron
enjoys a solid majority, abdicated its authority to the President, allowing him
to enact the labor reforms by decree.  The Cabinet will be consulted and
give its approval next week.    

Although many think that France is heavily
unionized, it is simply not true. 
Only about one in 20 private sector
workers are unionized.  About one in seven civil servants belong to a
union.   Still, the rigidities in France are palpable.  France
does a particularly poor job integrating younger and older workers into the
labor market.  One in five young people are unemployed, and older workers (65+) are under represented in the
French workforce.  

Some of the reforms that Macron wants to institute seem a reasonable way to rationalize
the labor market. 
It makes sense to increase local flexibility and to
reduce red tape.  However, Macron and employers are over-reaching. 
Some of the reforms shift power too dramatically to employers, disarming
employees.  If successful, the neoliberal policies will reproduce the same
conditions elsewhere where they have been
implemented
.   The disparity
of wealth and income, with political implications,
that Summers recognized in the US.  

Macron’s reforms impact an independent
judiciary. 
The reforms call for limits on penalties for
wrongful dismissals.  The reforms call on judges to only take into account
a company’s situation in France and ignore their global operations and
profitability when ruling on layoff
policies.  This is rightfully part
of the jurisprudence process and contextual.  It is not about aiding small
businesses, for whom the various mandated worker committees are
burdensome.  The purpose is to boost the French global businesses in their
global competition on the back of workers.  

France has two
large
unions. 
The largest French union, CFDT, said it was
disappointed with Macron’s labor reforms.  It too sees some necessary
measures and also overreaches
Union officials did not like the level at which dismissal awards in France’s
labor courts will be capped and sees the reforms as giving too much power to
small businesses.   The second largest
unions, CGT, headed by presidential contender Melenchen is more aggressive.
 
They will take to the streets on September 12.

The labor reforms will like be adopted largely as
proposed.
  The risk is that it is not the panacea that it is being advertised.  Greater flexibility of
the labor market under a neoliberal regime means
downward pressure on wages, and labor costs more broadly.  French EU
harmonized inflation in August stood at 1.0%.  France does not need lower
inflation.  It needs stronger aggregate demand.  

Disclaimer

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