Sunday, May 13, 2012

Vive La 49 ?

A recent article in Business Week highlights one inefficient byproduct of over-reaching French labor legislation.  The article reports that, in France, there are 2.4 times more companies with 49 employees than with 50 employees.  The article convincingly contends that there is a reason for this apparent statistical anomaly, namely, regulation.  Under French labor law, any company that employs 50 or more individuals is suddenly subject to certain onerous requirements.  Such companies must create three different "worker councils," inaugurate profit sharing, and submit proposed "restructuring" plans to the worker councils if the company plans to lay off employees for economic reasons.  (See this treatise for additional details of this regulation.)  (It is not clear whether employees of covered firms must also share losses with the a covered firm's owners.)  As Business Week reports, French entrepreneurs often seek to avoid such requirements by dividing what would otherwise be a single company of more than 50 employees into several companies with 49 or fewer employees, thereby avoiding altogether the onerous regulations explained above. 

It should go without saying that this artificial restructuring of economic activity to avoid regulation reduces the economic welfare of the French people, other things being equal.  For one thing, entrepreneurs must incur the real costs of organizing and incorporating more than one business entity.  These same entrepreneurs must also manage several nominally separate concerns, in some cases hiring additional and economically redundant managers to do so.  Such entrepreneurs must also forgo whatever economies of scale they might otherwise realize by expanding a single firm beyond 50 employees.  Finally, some entrepreneurs might forgo the benefits of vertical integration by dividing input suppliers and downstream customers into separate firms even if the combination of such entities would reduce the cost of economic activity.  Simply put, predictable efforts to avoid regulations applicable to firms with greater than 49 employees divert economic resources from productive to less productive uses thereby reducing economic welfare.

The sort of conscious regulatory avoidance just described does not exhaust the negative impact of the distinction between 49 and 50 person firms.  To the extent that the labor regulations just described increase the cost of economic activity, firms with 49 or fewer employees will, other things being equal, incur lower production costs and thus possess a competitive advantage vis a vis larger firms. 

Of course, the mere fact that firms will incur costs to avoid regulation does not necessarily counsel repeal of such regulations.  Such regulations might themselves increase welfare, by eliminating inefficient externalities or combating other sources of market failure such as monopoly.  Moreover, larger firms may pose a greater risk of the type of harm that the regulation seeks to combat and/or be better able to absorb the cost of such regulations.  In these circumstances, limiting such regulations to a subset of a nation's firms --- particularly its larger firms --- may constitute an optimal regulatory strategy.  If so, the costs of regulatory avoidance detailed above may be the unavoidable and incidental price of regulations that, on balance, create wealth.

Still, the labor regulations in question do not seem to combat any externalities or other market failure and thus themselves distort the allocation of resources and reduce welfare.  As a result, the costs of regulatory avoidance detailed above simply compound the inefficiencies resulting from the regulation itself and thus, along with many other anti-growth policies, help account for France's sluggish growth and high unemployment.  Indeed, some estimate that, by 2050, France's GDP, now 6th in the world and ahead of the United Kingdom's, will rank 11th,  behind that of Mexico and the United Kingdom.  Regulatory policies have consequences, and the consequences of the policies imposed by France are negative.