Brian Fallow: Is 35-hour working week the key?

COMMENT

In the late 1990s, faced with stubbornly high unemployment, France adopted the 35-hour working week in the hope of regulating more jobs into existence.

Has it worked? Up to a point, it would seem.

Studies by the Ministry of Finance, the Ministry of Labour and independent economic think tank OFCE all say it created around 350,000 jobs, a little less than expected, says Gilbert Cette, an economist at the Bank of France and author of a report on the reduction of the hours of work for the Council of Economic Analysis. Not everyone is convinced, however.

Thomas Chaudron, vice-president of the Centre des Jeunes Dirigeants d'Entreprises, a body for young managers and entrepreneurs, says there is a big debate about whether it created any more jobs.

It was introduced, at least for larger firms, in a time of strong economic growth. So what was the counterfactual? How many jobs would have been created anyway?

When the Left was in power between 1981 and 1986 it had the idea of reducing the working week from 40 to 35 hours, but it had only got to 39 hours when it lost power. When it returned to office in 1997 the idea was to finish the process.

Germany, in the meantime, had gone some of the way down the same path. Some industrial sectors had by negotiation adopted the 35-hour week in the 1990s so that by the end of the decade the average contractual working week was 37.5 hours.

When the Right returned to power in France in 2002 it decided it was impossible to return to a 39-hour week. It contented itself with increasing the amount of overtime that can be worked, to 180 hours a year with a maximum of 48 hours worked in any week, and gave smaller firms longer to make the transition.

Cette says part of the motivation for the reduction in working hours was to boost collective bargaining. One reason the French labour market is so heavily regulated is that collective bargaining is weak. Unions are noisy, numerous and political but their membership is small. In the private sector union membership is only around 5 per cent.

"So what we have tried to do in this process is to increase collective bargaining and reduce regulation. Firms were given the opportunity not to apply certain provisions of the regulations if that was agreed collectively."

For white-collar workers, for example, working time may be calculated by days rather than hours.

But that has its downside too. One manager said the people who reported to him took on average 18 days in lieu a year, on top of public holidays and five weeks annual leave (a statutory requirement). "Sometimes it seems the person I want is never here," he said. "And they are not interchangeable parts."

However, the option of 1600 hours a year instead of 35 hours a week provides valuable flexibility for large firms with an element of variability in their workload. Within limits fewer hours can be worked in some weeks and more in others, without incurring penal overtime rates.

Chaudron, who is 30, established a company six years ago which makes office partitions. It employs 20 people and turns over more than €5 million ($9.7 million) a year.

"In my company people work the same number of hours each day as before but get more days off. That is what most companies did," he said.

Arithmetically the reduction from 39 to 35 hours would increase hourly wage costs by 11.4 per cent, all else equal.

How has that been funded? Partly by productivity gains. People work harder or smarter or there is a better match between the hours worked and the hours needed. Partly by wage moderation, income gains foregone.

Partly by Government subsidy through lower social-security levies worth about €11 billion a year, though they will tail off after five years. And partly because the reduction is more apparent than real, if for example rest breaks are counted more accurately. Crucially, says Cette, unit labour costs have not increased faster in France than in the euro zone as a whole.

France remains attractive as a destination for foreign investment. In 2002 it was the second largest destination for foreign direct investment in the world, after China. Last year it was fourth, ahead of Britain and Germany.

"That reflects competitive unit labour costs, good infrastructure, highly skilled people and - despite our image - fewer working days lost to strikes than in Germany, Italy or even the United Kingdom," Cette said. Hourly productivity in France compares favourably even with the United States, basically because employment has been concentrated among the most productive people.

Chaudron said: "The unions are saying that most of those hired today are part-timers or casuals. Full-time new jobs are no longer the rule."

Because of barriers to firing, as an employer he prefers to hire someone from a temp agency first, to try them out. "Because if they are not good you are stuck with them."

As for the wide wedge between what it costs to employ someone and his or her take-home pay, Chaudron says: "Our position is that it is fair enough to fund unemployment benefits by a charge on companies. There is a real link there. But there is not for health. Anyone can get sick, not just workers. But the system was established after World War II and people are very attached to it."

Cette says that, while the short-term employment gains from the reduction in the working week are not negligible, he belongs to the school of thought that long term it will have no effect at all.

If the reduction does not change firms' unit production costs, he argues, it will not change the long-term equilibrium rate of unemployment. It might speed up a cyclical reduction in unemployment by anticipating a reduction in hours that would occur spontaneously anyway.

If, on the other hand, it increases firms' unit production costs it will be counter-productive, increasing the long-term equilibrium unemployment rate, and the favourable cyclical effects will be smaller.

* Brian Fallow visited France last month as a guest of the French Government.


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