My late friend, the eminent development economist Peter Bauer, liked to complain that while knowledge had increased, mankinds capacity for connected thought seemed to have decreased. François Lamy, Frances new minister of urban affairs, illustrated Bauers point nicely when he visited Amiens recently, a city in whose northern suburbs the week before his visit a small but nasty riot had broken out, causing millions of dollars worth of damage. As in all such French suburbs, the youth unemployment rate there is very high. The minister said that the government would carry out one of Socialist French president François Hollandes election promises—namely to allow certain tax exemptions on companies that hired young workers from suburbs with high unemployment.
Whatever the merits of such a policy, Messrs. Hollande and Lamy clearly hope and expect that it will work. What they dont notice is that this hope and expectation drives a coach and horses through their entire social philosophy.
What in effect such a policy acknowledges is that high payroll taxes on French companies discourages them from taking on new workers. This must be because the cost of their labor is, thanks to the taxes, higher than its economic value. Only by lowering the taxes can their labor be made economically worthwhile for an employer.
Oddly enough, payroll taxes are mostly spent on social welfare, or les acquis as the French call it. Those in the workforce—the majority—benefit from social welfare, while those not in the workforce are kept in a state of permanent unemployability by it. Thus the interests of the employed and unemployed are diametrically opposed, the former, of course, being electorally much the stronger. That is why no government, of the right or the left, dares tamper too much with the system. Once erected, it is difficult to dismantle. But if the unemployed become, by economic force majeure, too numerous, more and uncontrollable riots may be expected.
President Hollande is, of course, a true believer in les acquis, and would remain so even if he realized that long-term unemployment was a natural consequence of it. He has his electorate to think of.