(Bloomberg View) -- President Emmanuel Macron's new government has unveiled its plan to overhaul France's notoriously rigid labor market. It includes useful measures that should help to boost employment, and it's a good first step. Unfortunately, though, it doesn't resolve some deeper-rooted problems, in particular the unduly sharp divide between workers on temporary and permanent contracts -- the underlying cause of France's so-called dual labor market.
For decades, French trade unions have wielded great influence, striking country-wide wage agreements that apply to all companies regardless of local conditions. Compounding that problem, they've also opposed efforts to make permanent contracts more flexible, leading employers to offer less secure, temporary contacts to new hires. The result is both inefficient and unfair.
The government's reform will somewhat narrow the role of the unions, making it easier for companies to negotiate in-house agreements on working conditions and pay -- up to a point. It will also give businesses greater certainty over the cost of dismissing workers. Previously, in cases of unfair dismissal, tribunals have been able to impose very high payments; the government has now capped these amounts. This ought to make employers more willing to hire workers on permanent contracts.
However, the government should have been more ambitious. Employers and unions will continue to set wage rates nationally. This means that for many companies, pay will remain out of line with productivity. Meanwhile, permanent contracts will retain most of their guarantees, so the rigidities of the dual system are likely to persist.
No doubt this was the price of winning the unions' acquiescence to the plan -- at a moment, moreover, when Macron's popularity has slumped. The CFDT and Force Ouvriere unions criticized the reform but ruled out joining street protests organised by the more hard-line CGT for later this month. The fact remains, if efforts at reform stop here, they'll fall short of what France needs.
Macron appears to understand. The government intends to reform the unemployment-benefit system and to cut payroll taxes -- changes that will be equally controversial, and equally vital to encourage high employment. In due course, attention ought to return to contracts and wage-setting.
Reforming France's economy will be a long haul. Macron has only just begun.
--Editors: Ferdinando Giugliano, Clive Crook.
To contact the senior editor responsible for Bloomberg View's editorials: David Shipley at davidshipley@bloomberg.net.
For more columns from Bloomberg View, visit http://www.bloomberg.com/view.
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