An American Lesson For France
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A Closing View
An American lesson for France Yann Duchesne
The French economy is much stronger than people think. France should aim to create jobs, not to protect them.
wo comforting but destructive myths are alive in some parts of
T
Europe, particularly France. The first is that average US workers have a lower standard of living than workers in Europe, the second that US companies lift their profits by laying off workers. These myths are comforting because they justify the Europeans’ continuing resistance to market forces. They are destructive because that resistance is causing financial capital to flee Europe and seek richer rewards on the other side of the Atlantic. US companies create jobs by using this capital to finance growth in capacity and, hence, in sales. But France’s high minimum wage, generous mandatory social benefits, and obstacles to eliminating redundant jobs have made French industry loath to hire, though the country’s unemployment rate is almost three times that of the United States. To help redress this unfortunate state of affairs, the French government has shortsightedly cut the work week, depriving healthy, expanding companies of the effort of an eager workforce. In a sad irony, the US model, which is officially indifferent to the problem of joblessness, creates not only bigger revenues and profits but also more jobs than the European model, which misguidedly accepts slow growth as the price of job security. Yann Duchesne is a director in McKinsey’s Paris office. This article is based on an article published in Le Monde. Copyright © 2000 McKinsey & Company. All rights reserved. This article can be found on our Web site at www.mckinseyquarterly.com/countrie/amle00.asp.
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In truth, the French dilemma rests on an even deeper irony. Fundamentally, the much-maligned, much-protected French economy is one of the hardiest in the world. That is at least partly the result of those job protection rules, which for a long time have given French companies no choice but to invest in technology as a substitute for expensive and entrenched labor. This commitment to technology had the happy effect of boosting productivity, and a productive economy, as the US example has proved, doesn’t need to protect jobs; it generates them. By contrast, the crutches that French regulations require the economy to lean on have had the perverse effect of making it walk more slowly. If France were to develop ambitions appropriate to its stature, it could become the European locomotive of growth, employment, and rewards for savers. There is a route into virtuous circles of this kind: a world-class increase in capital productivity. But from 1990 to 1997, the French economy, in competitive terms, actually lost ground. In those years, the sales of the 100 top US corporations grew at an average annual rate of 9 percent and their net profits by an average of 13.1 percent. Over the same period, the sales of the top 100 European corporations grew by just 5.6 percent a year and their net profits by 8.3 percent. This difference has led to an imbalance in the distribution of profits of the Fortune 500 largest global companies. Although one-third of them are located in Europe and one-third in the United States, the US third captures 54 percent of the total profits, the European third only 35 percent. There are also surprising differences in the factors of production. US companies, which account for 41 percent of total employment by the top global 500, are very good at creating jobs but have a relatively small (27 percent) share of total assets. The European companies, by contrast, are capital heavy (44 percent of total assets) but weak in employment ( just 37 percent). US businesses are thus both more profitable and better at creating jobs. Thanks to higher profitability and better growth prospects, they also have higher market capitalizations. Two basic elements explain the capital productivity gap between the United States and Europe: the size of their respective domestic markets and the number of hours people work. The nations of Europe are overcoming the first obstacle; with economic and monetary union and the introduction of the euro, the real domestic market for French companies is, increasingly, Europe itself. This new market will let French businesses generate sufficient economies of scale to compete on an equal footing with their US counterparts. Will France show the same adaptability in dealing with the problem of working hours? Capital is more productive in the United States; that is to say, it creates
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more wealth and more jobs because, on average, people work more.1 But the restrictive labor policies—such as reductions in the working week and the encouragement of early retirement—that French and other European employers have voluntarily adopted, and may therefore reverse, have had the opposite effect: the resulting labor markets are needlessly rigid, causing an imbalance between supply and demand. Analysis of the labor participation rate, or activity rate (the proportion of the workingage population that is employed), demonstrates the counterproductive impact of such policies. At 67 percent, France has one of the lowest activity rates among the member countries of the Organisation for Economic Cooperation and Development, as well as one of the highest unemployment rates (the proportion of the working population seeking jobs). The United States, by contrast, has a very high activity rate (77 percent). Often, the larger the supply of employable people, the more likely it is that excessive numbers of them will be looking for work. In fact, the US unemployment rate is at its lowest level in decades. Even if the average number of hours worked in France were to grow, businesses could accommodate people who wanted to work fewer hours a week by permitting those men and women to work more weeks a year or to retire at a later age. What can France do to promote the creation of jobs? The answer is no great secret: the country needs a much more flexible labor market, faster deregulation of industry to stimulate entrepreneurship and growth, and fewer government workers. Does this sound a little like the United States? It should, because the United States is the model that France should unashamedly follow. In view of the constraints imposed on French companies, it is amazing that they have been as successful as they are. Think how much more they could achieve in a regulatory environment more like the US one. A lower minimum wage, for example, would encourage companies to create and fill positions requiring lower skills. Isn’t it better to get people into the workforce than to pay them unemployment benefits? Moreover, the liberalization of the French telecommunications industry has spurred tremendous competition and innovation, particularly in the mobile area. Yet France has resisted opening its electricity industry to competition, at great cost to consumers. The country’s monopoly utility, Électricité de France, is only now trying to sell competitively priced power and expertise outside the country. Retailing too is 1
Longer hours on the job mean that assets can be used more efficiently. At its simplest, a worker operating a machine 40 hours a week is likely to produce more than the same person working just 35 hours. See Raj Agrawal, Stephen Finley, Sean Greene, Kathryn Huang, Aly Jeddy, William W. Lewis, and Markus Petry, “Capital productivity: Why the US leads and why it matters,” The McKinsey Quarterly, 1996 Number 3, pp. 38–55; and Bernhard Brinker, Heino Fassbender, François Glémet, William W. Lewis, Vincent Palmade, and Michael T. Sautter, “Germany and France: Confronting the costs of social policies,” The McKinsey Quarterly, 1997 Number 2, pp. 180–94.
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ripe for deregulation. Why not allow shops to open on Sunday? The longer hours and extra business would surely bring about more hiring. France’s politicians, from the Left and the Right alike, know that more labor flexibility, further deregulation, and a smaller state are necessary—and will tell you so in private. But for every Air France that is privatized, the government tightens its control over another corner of the economy. Such backsliding bespeaks not only a clear lack of political courage but also — and even more depressing to the business community— a whole country’s unwillingness to recognize its native strengths and to change.
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A Closing View
An American lesson for France Yann Duchesne
The French economy is much stronger than people think. France should aim to create jobs, not to protect them.
wo comforting but destructive myths are alive in some parts of
T
Europe, particularly France. The first is that average US workers have a lower standard of living than workers in Europe, the second that US companies lift their profits by laying off workers. These myths are comforting because they justify the Europeans’ continuing resistance to market forces. They are destructive because that resistance is causing financial capital to flee Europe and seek richer rewards on the other side of the Atlantic. US companies create jobs by using this capital to finance growth in capacity and, hence, in sales. But France’s high minimum wage, generous mandatory social benefits, and obstacles to eliminating redundant jobs have made French industry loath to hire, though the country’s unemployment rate is almost three times that of the United States. To help redress this unfortunate state of affairs, the French government has shortsightedly cut the work week, depriving healthy, expanding companies of the effort of an eager workforce. In a sad irony, the US model, which is officially indifferent to the problem of joblessness, creates not only bigger revenues and profits but also more jobs than the European model, which misguidedly accepts slow growth as the price of job security. Yann Duchesne is a director in McKinsey’s Paris office. This article is based on an article published in Le Monde. Copyright © 2000 McKinsey & Company. All rights reserved. This article can be found on our Web site at www.mckinseyquarterly.com/countrie/amle00.asp.
25336-PR(106-112)CV france v4
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In truth, the French dilemma rests on an even deeper irony. Fundamentally, the much-maligned, much-protected French economy is one of the hardiest in the world. That is at least partly the result of those job protection rules, which for a long time have given French companies no choice but to invest in technology as a substitute for expensive and entrenched labor. This commitment to technology had the happy effect of boosting productivity, and a productive economy, as the US example has proved, doesn’t need to protect jobs; it generates them. By contrast, the crutches that French regulations require the economy to lean on have had the perverse effect of making it walk more slowly. If France were to develop ambitions appropriate to its stature, it could become the European locomotive of growth, employment, and rewards for savers. There is a route into virtuous circles of this kind: a world-class increase in capital productivity. But from 1990 to 1997, the French economy, in competitive terms, actually lost ground. In those years, the sales of the 100 top US corporations grew at an average annual rate of 9 percent and their net profits by an average of 13.1 percent. Over the same period, the sales of the top 100 European corporations grew by just 5.6 percent a year and their net profits by 8.3 percent. This difference has led to an imbalance in the distribution of profits of the Fortune 500 largest global companies. Although one-third of them are located in Europe and one-third in the United States, the US third captures 54 percent of the total profits, the European third only 35 percent. There are also surprising differences in the factors of production. US companies, which account for 41 percent of total employment by the top global 500, are very good at creating jobs but have a relatively small (27 percent) share of total assets. The European companies, by contrast, are capital heavy (44 percent of total assets) but weak in employment ( just 37 percent). US businesses are thus both more profitable and better at creating jobs. Thanks to higher profitability and better growth prospects, they also have higher market capitalizations. Two basic elements explain the capital productivity gap between the United States and Europe: the size of their respective domestic markets and the number of hours people work. The nations of Europe are overcoming the first obstacle; with economic and monetary union and the introduction of the euro, the real domestic market for French companies is, increasingly, Europe itself. This new market will let French businesses generate sufficient economies of scale to compete on an equal footing with their US counterparts. Will France show the same adaptability in dealing with the problem of working hours? Capital is more productive in the United States; that is to say, it creates
107
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more wealth and more jobs because, on average, people work more.1 But the restrictive labor policies—such as reductions in the working week and the encouragement of early retirement—that French and other European employers have voluntarily adopted, and may therefore reverse, have had the opposite effect: the resulting labor markets are needlessly rigid, causing an imbalance between supply and demand. Analysis of the labor participation rate, or activity rate (the proportion of the workingage population that is employed), demonstrates the counterproductive impact of such policies. At 67 percent, France has one of the lowest activity rates among the member countries of the Organisation for Economic Cooperation and Development, as well as one of the highest unemployment rates (the proportion of the working population seeking jobs). The United States, by contrast, has a very high activity rate (77 percent). Often, the larger the supply of employable people, the more likely it is that excessive numbers of them will be looking for work. In fact, the US unemployment rate is at its lowest level in decades. Even if the average number of hours worked in France were to grow, businesses could accommodate people who wanted to work fewer hours a week by permitting those men and women to work more weeks a year or to retire at a later age. What can France do to promote the creation of jobs? The answer is no great secret: the country needs a much more flexible labor market, faster deregulation of industry to stimulate entrepreneurship and growth, and fewer government workers. Does this sound a little like the United States? It should, because the United States is the model that France should unashamedly follow. In view of the constraints imposed on French companies, it is amazing that they have been as successful as they are. Think how much more they could achieve in a regulatory environment more like the US one. A lower minimum wage, for example, would encourage companies to create and fill positions requiring lower skills. Isn’t it better to get people into the workforce than to pay them unemployment benefits? Moreover, the liberalization of the French telecommunications industry has spurred tremendous competition and innovation, particularly in the mobile area. Yet France has resisted opening its electricity industry to competition, at great cost to consumers. The country’s monopoly utility, Électricité de France, is only now trying to sell competitively priced power and expertise outside the country. Retailing too is 1
Longer hours on the job mean that assets can be used more efficiently. At its simplest, a worker operating a machine 40 hours a week is likely to produce more than the same person working just 35 hours. See Raj Agrawal, Stephen Finley, Sean Greene, Kathryn Huang, Aly Jeddy, William W. Lewis, and Markus Petry, “Capital productivity: Why the US leads and why it matters,” The McKinsey Quarterly, 1996 Number 3, pp. 38–55; and Bernhard Brinker, Heino Fassbender, François Glémet, William W. Lewis, Vincent Palmade, and Michael T. Sautter, “Germany and France: Confronting the costs of social policies,” The McKinsey Quarterly, 1997 Number 2, pp. 180–94.
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ripe for deregulation. Why not allow shops to open on Sunday? The longer hours and extra business would surely bring about more hiring. France’s politicians, from the Left and the Right alike, know that more labor flexibility, further deregulation, and a smaller state are necessary—and will tell you so in private. But for every Air France that is privatized, the government tightens its control over another corner of the economy. Such backsliding bespeaks not only a clear lack of political courage but also — and even more depressing to the business community— a whole country’s unwillingness to recognize its native strengths and to change.
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