NCPA - National Center for Policy Analysis

Why France Has So Many 49-Employee Companies

May 14, 2012

Though it makes headlines far less often than its Greek and Italian counterparts, the French economy has been torn asunder by the Great Recession.  Facing record unemployment, French workers also must overcome high levels of competition from low-wage workers in nearby Tunisia, Romania and Hungary, says BusinessWeek.

However, the wage premiums that these workers demand are not the only limit on their job prospects.  Potential employers see in France a quagmire of regulations that threaten stagnation and reduce incentives to hiring, especially when it comes to labor laws.

  • French labor laws are regulated by the 102-year-old Code du Travail, a 3,200-page rule book that dictates everything from job classifications to the ability to fire workers.
  • There are now 2.9 million people out of work in France, almost 10 percent of the workforce.
  • Given that this is the highest unemployment the country has faced in 12 years, French lawmakers should thoroughly consider reforms to labor laws that would entice further hiring of its desperate workforce.

One of the most baffling phenomena in the French economy is the unofficial encouragement for companies to maintain workforces smaller than 50 workers.

  • The country has 2.4 times as many companies with 49 employees as with 50.
  • Once a company has at least 50 employees inside France, management must create three worker councils, introduce profit sharing and submit restructuring plans to the councils if the company decides to fire workers for economic reasons.
  • Business owners respond to this structure by starting new businesses each time they need to expand operations rather than grow a single business beyond 50 workers.

Furthermore, companies that do grow beyond 50 workers face enormous obstacles when they decide to eliminate positions.  The experience of software maker Viveo is illustrative of this fact.

  • The company began the required talks with the workers' council in February 2010 because it wanted to cut about a third of its 180-member staff.
  • Viveo offered employees a voluntary departure plan in June of that year.
  • The workers' council then went to court to block the cuts, a ruling that it won in January 2011 on the grounds that Viveo was forecasting an 18 percent increase in sales, meaning its future didn't depend on the layoffs.

Source: Gregory Viscusi and Mark Deen, "Why France Has So Many 49-Employee Companies," BusinessWeek, May 3, 2012.

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