Hollande Backs French Labor Deal Allowing Cuts to Wages

French business leaders and three unions reached an accord that economists say marks the beginning of President Francois Hollande’s effort to revamp the jobs market while falling short of a labor revolution.

The agreement, reached after 10 p.m. in Paris on Jan. 11, gives companies the right to reduce working time and salaries when demand slows while also extending medical and unemployment benefits and increasing taxes on short-term contracts. Labor Minister Michel Sapin yesterday hailed the result as “historic,” even as two national unions refused to back it.

Hollande called for the talks in an effort to stem a 19-month-long increase in jobless claims and improve the competitiveness of an economy that has barely grown in more than a year. The negotiations were aimed at rendering the French labor market, best known for its 35-hour workweek, more flexible while still ensuring some job security.

“The agreement is a step in the right direction, not a revolution,” said Pierre-Olivier Beffy, chief economist at Exane BNP Paribas in London. “Companies are gaining a fair amount of flexibility in downturns and that will be welcomed.”

After pushing through a 20 billion-euro ($26 billion) payroll tax credit for businesses last year, the labor negotiations are the second significant plank of Hollande’s plan to improve French competitiveness in the wake of the euro area sovereign debt crisis.

“We hope this agreement will be ratified by parliament as soon as possible,” Laurence Parisot, head of the Medef business lobby, said in an e-mailed statement. “It contains measures that will change the life of companies.”

Job Security

The FO and the CGT unions said the pact will encourage the use of short-term contracts that leave workers without job security.

“In this agreement, flexibility is for today, job security is for tomorrow,” Jean-Claude Mailly, head of the FO union, said yesterday on France 3 television. “There are some things in there that are really not acceptable.”

Employers have increasingly used short-term contracts in recent years, leading to a two-tier labor market.

Of the 21 million work contracts signed each year, only 3 million are permanent and offer employees powerful legal and financial tools when faced with the loss of their jobs.

Fourteen million of the contracts are for less than a month, according to Louis Gallois, former head of Airbus SAS parent European Aeronautic Defence and Space Co., who was asked by Hollande to write a report on French competitiveness.

The accord is a partial attempt to narrow the difference between short-term and permanent contracts in France.

Rare Compromise

The agreement marks an unusual conciliation in labor discussions in France, Michel Martinez, an economist at Societe Generale in Paris, said today.

“French social partners surprised on the upside,” he said. “Such a compromise is rare in France and this merits praise. While this is a step in the right direction, further reform is required to boost the French economy’s competitiveness.”

The European Commission, the International Monetary Fund have called on France to do more to bolster its competitiveness as Germany did almost a decade ago and countries like Spain have begun to do more recently. The Commission is scheduled to give a fresh assessment of French economic policy on Feb. 22.

The Hollande government is under pressure to revamp Europe’s second-largest economy as a worsening climate has resulted in thousands of job cuts at companies from carmaker PSA Peugeot Citroen and Air France-KLM to drugmaker Sanofi.

Not Germany

Sapin said on BFM television that he intends to stick closely to the agreement when preparing a law for the National Assembly to consider and dismissed concern that the absence of two unions would cause trouble for the government.

“Those two unions were there at the beginning of the talks and they stayed until the end, they made a significant contribution,” Sapin said. “The agreement shows that yes, we can reform ourselves without conflict. You’ll see that this will change the image of France abroad.”

The French Opposition said the accord is far short of the attempt by Germany’s last Social Democrat leader, Gerhard Schroeder, to make his country’s labor market more competitive. Schroeder stood up to his own party and gambled his political career a decade ago, cutting welfare and rolling back safeguards for workers, an economic bet that paid off.

“Let’s not exaggerate,” French opposition lawmaker Jean-Francois Cope said on Europe 1 radio. “This introduces flexibility on one side and security on the other. But it’s very far from what Germany did. It is good news, but stay calm, there’s a lot more to do.”

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