French economy

Are the French really that lazy?

February 22, 2013: 11:16 AM ET

A U.S. manufacturing executive ignited a firestorm after calling the French economy uncompetitive due to its unproductive labor force. He has a point.

By Cyrus Sanati

francois-hollande

French president Francois Hollande

FORTUNE -- The explosive reaction in France to a letter penned by a little-known U.S. tire executive, which questioned the productivity of French workers, has quickly gone from comical to troubling. Instead of opening a discussion in the country as to the possible merits of the executive's views, blind nationalism overtook rational thought, creating an international incident.

While the words used by Titan (TWI) chief executive Maurice "the Grizz" Taylor in his letter to a French official were clearly inflammatory, they contained an uncomfortable and inconvenient truth that France's manufacturing base, indeed, its economy as a whole, has become dangerously uncompetitive. The country needs to quickly make some tough labor reforms if it ever intends on getting back on solid economic ground.

Newspapers in France had a field day on Thursday bashing the "ugly American" who dared insult the economic integrity of "the great French Republic." France's industry minister, Arnaud Montebourg, said that Taylor's letter, in which he colorfully spells out to French officials why he would not return to the negotiating table to acquire a troubled tire plant in northern France, as "ridiculous," and that it displayed a "perfect ignorance" of the French economy.

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Mickael Wamen, the trade union representative of the Goodyear (GT) tire plant at the center of Taylor's missive, said that he "belongs more in an insane asylum than at the head of a multinational corporation." Thierry Lepaon, the incoming head of the CGT union for France noted, "It's not the response of a minister that is necessary, but of the president of the Republic, who must demand respect for the citizens of his country."

In his letter, Taylor noted that he was not "stupid" enough to reenter negotiations to acquire the Goodyear plant in Amiens, as requested by Montebourg, because he believed that the plant's workforce, led by the CGT union, was intransigent and didn't work hard enough. He went on to say that France risked losing its industrial base if it fails to shake up its labor market. He noted that Michelin, the largest tire maker in France and one of its national champion companies, would probably move all of its production out of the country within five years due to the hostile labor environment.

Taylor doesn't have a crystal ball, nor does he have knowledge of the future plans of a rival that is 20 times his company's size, but he does have a point -- France has a problem when it comes to productivity, especially in its manufacturing sector. The weak European economy has decreased demand for French industrial products in a big way and its companies are being held hostage to unions that command great power with the government.

For example, Peugeot Citroën, France's largest carmaker, just reported its biggest yearly loss ever earlier this month, shredding some 5 billion euros ($6.74 billion) in 2012. Car sales in Europe and France in 2012 were down 9% and 14%, respectively, from the previous year. Peugeot tried to close plants and lay off workers to adjust production levels to meet market demand, but its unions successfully stalled the implementation of the management's austerity plan by taking the car company to court. Peugeot was allowed to cut production, but it was not allowed to lay off any of its workers until the court gave it "permission."

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Peugeot's story is far from unique. Indeed, Goodyear, the owner of the tire plant at the center of the Taylor drama, put the Amiens plant on the block because it was having a hard time selling its premium tires to the depressed French market. Taylor looked into buying the plant, but the union insisted that he guarantee all of the workers' jobs for at least seven years. Taylor was shocked.

"Titan is the one with the money and the talent to produce tires," he said. "What does the crazy union have?"

The "crazy" unions had French law on their side. Even though Goodyear decided to close the plant it was obligated to keep all of its workers employed. So after it cut the plant's capacity by 90%, it still had to pay all of its workers their full salaries and benefits. That probably explains why they were only working three hours a day when Taylor visited the plant late last year. It is also probably explains why they felt they had the power to dictate terms to Taylor as if they were in the driver's seat.

Indeed, France has one of the most protective labor laws in the industrialized world. It ranks near the top of the OECD's employment protection index, which measures how easy it is for employers in rich nations to hire and fire workers. France had a score that was more than three times higher than that of the U.S., which was at the very bottom of the list thanks to its business-friendly labor laws. France also outranked its industrial rival Germany, as well as economic basket cases Greece and Italy.

France also beat out most industrial nations when it comes to public support for labor market programs; that is, how involved the government is in helping to train and support workers who are unemployed. It spent a whopping 2.6% of its GDP on labor market programs in 2010, according to the latest data available from the OECD. Germany, known for its generous social safety net, spent 2.3% of its GDP on labor programs, while the U.S. spent just 0.9%.

But the difficulty in hiring and firing workers is just one defect of the French labor system. Small businesses are particularly hurt by the 35-hour law, which forces employers to pay their hourly workers overtime if they work more than 35 hours a week. As a result, the French work fewer hours than just about anybody in the OECD. In fact, the average French employee worked just 1,476 hours in 2011, according to the latest data available from the OECD and the French labor department. In contrast, workers in the U.S. rocked 1,704 hours per year, 21% more than their counterparts in France.

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But working a lot more doesn't necessarily mean that Americans are more productive than their French counterparts. One way to gauge productivity is to take a nation's GDP and divide it by the total number of hours its citizens slaved away that year. In 2011, the GDP for each hour worked was $57 in France and $60 in the U.S. Therefore, it appears that while the French work less, they seem to be producing just as much as their U.S. counterparts, on a relative basis. But this snapshot doesn't really show the big problem with the French labor market. Labor productivity, as defined as GDP per hour worked, in the U.S. from 2001 to 2011 grew twice as fast as it did in France. That means the U.S. will most likely widen its lead over France in the years to come unless it makes some big changes to its labor laws.

There is a more targeted productivity metric that paints a bad picture for France: unit labor costs (ULC), specifically the ULC of the manufacturing industry. ULC measures the average cost of labor per unit of output. It is calculated as the ratio of total labor costs relative to real economic output. From 2005 to the first quarter of 2011, the ULC in the U.S. manufacturing industry was flat, while it rose 8% in France. That means that French manufacturing workers have become less efficient relative to their American counterparts -- a trend which shows no sign of abating.

It is pretty clear at this point that doing business in France is not only getting more difficult, it is also getting less efficient and more expensive. France's new Socialist President, Francois Hollande, is under extreme pressure to "fix" the French economy, but he will need help from his party to make it happen. Jean-Marc Ayrault, France's prime minister, came under fire from his fellow Socialists when he told Le Parisien newspaper in October that the 35-hour work week has "caused difficulties" for small businesses. He quickly recanted the statement as other Socialist party members blasted him.

Failing to overhaul the 35-hour work week would be a missed opportunity, but France could still help its ailing economy and boost its productivity by passing much needed labor reform, which would give employers the ability to hire and fire workers more easily than they can today. There is a bill in the French parliament that would make it easier for companies to shutter plants and lay off workers during tough times. It is unclear how the Socialists will be able to support the bill given how close they are to the unions. Hollande and Ayrault should work together to convince the unions that without this reform then there may not be any jobs left worth saving.

That is what Taylor said he was trying to convey in his letter. Speaking with Le Figaro newspaper, Taylor said it was not his intention to insult France or the French people with his letter; he simply wanted to express his frustration with the unions.

"I love France. I like French women. I have not forgotten that LaFayette has saved us," Taylor said.  "But the French need to understand: Their lifestyle will disappear if they do not change their habits."

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