Labour markets in Europe. Thirty-five hours of misery

Europe wakes up to the folly of excessive labour-market regulation

IT WAS a moment of triumph for France's Socialist Party. Four years ago, the government of Lionel Jospin, taking advantage of a spurt of French economic growth, brought in their long-promised 35-hour week. The idea was to reward France's highly productive workers by awarding them shorter hours, but with the same high pay. The Socialist government also promised that, because the measure would share out the available work, it would create more jobs, cutting France's persistently high unemployment. Thus could the European social model be made consistent with a new economic dynamism.

Today the triumph is tarnished. The French economy, like other big euro-area economies, has performed badly in the past few years, and unemployment has remained high. French businessmen, hopeful at first that the 35-hour week might help push through other productivity-enhancing changes, now complain that it has added extra rigidities and raised costs. The 35-hour week's main sponsor, Martine Aubry, has lost credibility even within the Socialist Party. In his Bastille day message this week, President Jacques Chirac put the emphasis on getting the economy growing again, not on protecting the social model. His finance minister, Nicolas Sarkozy, makes few bones about wanting to move away from the 35-hour week.

Symbolically significant as it became in its own terms, the 35-hour week was also part of a wider European approach to sclerotic labour markets that can now be seen to have comprehensively failed. In many countries besides France, the cure for high unemployment has been sought in the encouragement of shorter working hours. Another common response to growing insecurity about jobs has been to increase job protection and make it harder to fire people. And a widespread reaction to growing global competition that has lowered pay at the bottom end of the market has been to entrench high minimum wages.

As many pointed out at the time, these measures made little sense. The notion that there is a fixed amount of work to be shared out, so that shorter hours for all must mean more jobs, is widely derided by economists as the “lump of labour” fallacy. Making it harder to fire people serves mainly to discourage hiring them in the first place. And high minimum wages translate not into better-paid workers but into more people without jobs. These observations are no longer just matters of theory: the recent experience of France, Germany and other continental European countries shows that they apply in practice too. As the OECD's recent Employment Outlook noted, the empirical evidence points to a clear correlation between high levels of job protection and high levels of unemployment.

Belatedly, Europe's governments are realising this, and coming round to the need to free up their labour markets, not tie them down in even more red tape. Indeed, they have begun to grasp that excessive regulation of labour markets, far from being a sensible response to slower growth, is actually a significant cause of it. Deregulating labour markets need not mean sacrificing all the protections of Europe's social model: countries such as Denmark, Finland and the Netherlands have shown that generous welfare systems and a strong safety net can be preserved even while allowing market forces to play more freely in the demand and supply of labour.

That does not mean that trade unions and other vested interests will be happy. They are already fighting to keep job-protection measures, since these benefit those already in work at the expense of those looking for work. But workers themselves are now accepting the case for change. In France, a majority even say they would junk the 35-hour week if it enabled them to earn more. The drumbeat for reform in Europe grows ever louder. Wise governments will heed it.

Editorial feature which notes that Europe is waking up to the folly of excessive labour-market regulation.

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