Monday, July 16, 2007

You're Fired - Here's 35,000 Euros!

The French Paradox is not only about how you can eat lots of fatty food and stay skinny. It is also about how you can have a relatively state-oriented, rigid economy that increases the cost of labor, produces high unemployment and still have a reasonably high standard of living.

I was in France this past week for a couple of days, and a friend there told me a story about how hard it was to fire her babysitter - even after the babysitter had scalded another friend's child, requiring hospitalization. Firing the babysitter for unsatisfactory performance turned out to be almost impossible(!).

So she decided to take another route that was legally easier: she informed the babysitter that she had found a state-supported childcare center for her child. Still, my friend had to go through an elaborate process of sending formal letters (worded just so) to the nanny, waiting a specified number of days, then inviting her to a meeting, the purpose of which was to inform the babysitter that she would be fired, and then waiting a certain number of days before sending a letter informing her that she was in fact fired.

"Why go through all that?" I asked. "Because if you don't you can be sued," my friend replied. She then told me the story of a friend of hers who had to pay a fired employee 35,000 Euros after failing to put the right words in the letter and failing to observe the specified intervals between initial letter, meeting, and firing letter.

She also said that large companies generally find it impossible to fire poor performers workers. Instead they often send them home with pay, sometimes for a couple of years, until they can reach a severance agreement that usually involves a large payment to the slacker.
And yet, despite its problems, France remains one of the world's largest economies, and Paris is vibrant - and one of the world's greatest cities in all dimensions (except for the lack of air conditioning on the metro and suburban trains; the lack of taxis at night and on the weekend; and the lack of service in restaurants-but knowing how hard it is to fire waiters, I am now a little more understanding).

So what gives? How can an economy with such an inefficient labor market survive? In the end I came up with the following hypothesis: very strict education, starting young, and a relatively meritocratic system of advancement to the higher schools and university.

Earlier that day, I had spent time with my friend's 9-year old son, a product of the French school system. I was astounded by his knowledge of everything from the history of space travel to the nuances of the New York subway (and he had never been to New York). And his smarts were not just limited to facts; he had confident, nuanced opinions and theories on why certain things were the way they were.
Admittedly, he was probably above average intelligence given his parents, but still I was rocked by his sophistication compared to nearly all 9 year olds I have met anywhere else.

This is at least partly a result of strict schooling starting very young (some say too strict, and having tasted a little of it myself when I was young, I tend to agree). And the curriculum is accompanied by a never-ending series of national exams that determine where each person is able to go to university and professional school.

So my theory is that by the time they get to the workplace, most French workers have been heavily conditioned from an early age that they must work hard and perform. This means that the number of slackers is relatively small compared to most other countries. And this in turn means that French workers are on average productive enough to make the economy go. The system is bad, but the unusually high quality of the work force makes up for it.

But before the French get too complacent, there is an alternative explanation. The formation of the EU has led to much freer markets for labor, goods, and capital. This undoubtedly has enabled France to realize huge gains from deploying labor and capital more efficiently, and by creating larger markets for its goods.

To be sure, Sarkozy is preparing the country for some fundamental reforms, including a roll back of the astonishing 35-hour work week in France. And without reforms, France will continue to lag its fast-growing competitors in the EU and suffer high unemployment. (Fortunately those unemployed get generous benefits, and have even been known to go on strike to resist efforts to lower them!)

In the mean time, even without the reforms, there is no apparent crisis, thanks to the training and conditioning of the workforce (and probably the formation of the EU). Though problems loom in the long term, France will continue in the short term to survive, and life will be good. And that is the French Paradox.