Does cheaper labor translate to a better startup ecosystem?

Does cheaper labor translate to a better startup ecosystem?
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The bulk of President Hollande’s economic policy, which was named the “responsibility pact”, consists in helping to lower French labor costs by cutting employers’ contributions to the French Social Security scheme. Lower labor costs are supposed to make the French manufacturing industry (and thus the French economy!) more competitive, and therefore help to curb unemployment and make everything better. But will the policy change anything for entrepreneurs? Can it encourage entrepreneurship and innovation?

Probably not…

It creates an environment that will ultimately discourage entrepreneurship (or make it a lot more difficult for some):

What the French call “Social Security” is a system that provides universal social insurance against ill health, unemployment and old age. Everyone in regular residence in the territory has a right to health care coverage, including the most disadvantaged (submitted to resources). The system is relatively cheap and the health care is (still) one of the best on the planet. It is funded through employees’ and employers’ contributions.

Cutting employers’ contributions could have two effects: that of lowering the quality of care and the “refunds” the insurants get, and that of spurring them to subscribe to an additional private insurance, which by the way could ultimately make labor costs more expensive since it will become a necessity for employers to offer the best private coverage packages to lure in the talents they need! Ultimately this starve-the-beast policy aims at replacing the public system with a private one, likely to be significantly more expensive.

The French Social Security is an amazing cushion against risk. You can risk your job and create a business without losing your coverage or you can do it while unemployed because you receive unemployment benefits. No accident or disease can make you bankrupt if you’re on your own. Obama’s Affordable Care and Patient Protection Act (dubbed “Obamacare”) aims precisely at creating such an environment and spurring the economy by removing one of the obstacles to business creation and self-employment. In people’s minds there’s nothing more American than creating a business and yet, before Obamacare, health care was a gigantic obstacle to business creation, especially for the middle-aged or those unlucky to have a “pre-existing condition” like diabetes—and they are numerous: one in three Americans will have diabetes by 2050 if the current trend continues.

What if Facebook hadn’t been started for want of health insurance? No one but President Obama said it better: “The commitments we make to each other through Medicare and Medicaid and Social Security, these things do not sap our initiative, they strengthen us. They do not make us a nation of takers ; they free us to take the risks that make this country great”.

It sounds a hell of a lot more inspiring than “let’s lower labor costs to become more competitive”, doesn’t it?

Furthermore, lower labor costs just feed the rent-seekers and impede innovation

The very idea that lower labor costs can make an economy more competitive is a moot point. Price competitiveness depends as much on productivity (which is high in France), real estate prices and the cost of capital. But mostly competitiveness should be more about product quality, sales force, the lure of our brands and especially our ability to implement what Clayton Christensen calls empowering innovations, the only ones which create jobs.

Lower labor costs may be perceived as a short-term relief by French companies but they could impede innovation. They increase a company’s efficiency, but as economist and venture capitalist William Janeway put it: “efficiency is a dangerously overrated concept” and “the enemy of innovation at the systemic level”. It also “cripples a government’s effort to offset contraction in private sector”.

High labor costs encourage innovation. For long Germany was extremely competitive in spite of (because of?) its high labor costs. Low labor costs will obviously discourage investment. What’s the point in acquiring sophisticated expensive labor-saving equipment if labor is cheap? What’s the point in acquiring expensive 3D printers (they are getting cheaper, I’ll grant you that)?

Janeway believes both “Schumpeterian waste” (at the entrepreneur’s level) and “Keynesian waste” (at the government’s level) should be bolstered by the state. In addition to funding research, the state should serve as an early customer of innovative products not yet ready for commercial competition (much as the US Defense Department did in the early years of the digital revolution) or deploy open platforms on which entrepreneurs and investors can “dance”.

Once again, the government’s short-sighted approach to helping the economy relies on an outdated vision of the economy where the “economy” equates with the “manufacturing industry” and business with the rent-seeking corporations whose sole purpose is to squeeze their costs to be more efficient. Entrepreneurship and empowering innovation aren’t part of that picture…

photo via flickr

5 Responses

  1. Avatar
    Âne aux Nîmes

    The policy of socialism remains to buy votes from miseducated and public servants with the money of those who will never vote for socialism…

  2. Avatar
    Chris

    Thanks to Ayn Rand for that illuminating comment above. However, this article actually suggests that the problem with M. Hollande’s government is that they’re too neo-liberal in their economic outlook.

    • Avatar
      Schtroumpf

      I am afraid that the article suggests that the “government” does not take the time to have any thought, before chatting (as acting has not begun after 2 years)…

  3. Avatar
    Jorge
  4. Avatar
    William

    The French social system provides high-value healthcare, good daycare, and good primary and secondary schools, but the rest of the system is a massive waste of money and discourages entrepreneurship.

    The French State sucks in 55% of the GDP, while France has some of the rudest, and most unproductive State workers of any country. Anyone who has attempted to set up a company in France will know that the system does everything possible to make this difficult, if not impossible.

    Having lived in France for a decade and seeing the constant decline of French competitiveness and its near complete lack of new, competitive businesses, I can understand why young, aspiring French entrepreneurs in their 30’s invariable go to other countries like Switzerland, the United States, and Australia to set up their new companies: France makes it ridiculously difficult to start a new business for no good reason. No new companies have been created in France that have been listed on the CAC 40 since the CAC 40 was created in 1986. Something is clearly wrong.

    The French model sucks capital from labor, making the accrual of capital from those who lack capital but are willing to work nearly impossible. For innovators who are young and lack capital, this makes it very difficult to accrue the minimum amount of capital needed for even small investments by entrepreneurs, since some capital is needed for every investment, even on relatively inexpensive things such as servers.

    The timing of payments to French State organs is also a farce, since payments to useless State entities such as URSSAF are based on earnings in the year n-2, rather than the first year of earnings of a startup. If the entrepreneur made a decent living in the year n-2, it is assumed that the entrepreneur also will make a decent living from his brand new startup, in complete disregard of the fact that nearly all startups earn little during the first year of their existence.

    Moreover, France distributes more capital from labor to those on pensions than in any other country in the EU, despite the fact that retirees are one of the most wealthy segments of the French population.

    Its labor code also makes it overly expensive to hire even basic back-office staff such as secretaries or office managers. If they are incompetent or lazy, they cannot be fired without paying a massive penalty. With the internet, it is possible to simply avoid the French labor market altogether and hire people in other countries. This is what I have done to avoid the problem of the French labor market, although this benefits workers of other countries rather than those in France, which I would have preferred to use.

    The underlying problem, I think, is that the French system discourages labor. The French worked more hours per year (around 2100 hours in the 1960’s per year versus 1700 hours per year for Americans) until the year 1980, which is approximately the same point in time when France ceased to generate a relevant number of new and innovative businesses.

    Today, on average, the French work only 1400 hours per year, whereas Americans still work approximately 1700 hours per year and workers in East Asia work around 2500 per year (see http://www.businessinsider.com/average-annual-hours-worked-for-americans-vs-the-rest-of-the-world-2013-8). The French’s dislike of work is rational, since excess revenues earned will simply be taken by the State and redistributed. But the declining competitiveness of France goes hand-in-hand with its abject failure to provide incentives to work. No society which has become lazy will succeed in the long run.

    France needs to cut at least 1/3 of its public workforce, to diminish taxes on new businesses and ensure that they are based on current earnings, to fix its ridiculous labor code which makes it impossible for younger workers to find jobs and for lazy, abusive and unproductive workers to be fired (and therefore prevents hiring new workers), and to have the courage to accept that its system of governance has failed and needs to be rebuilt from the ground up.

    The French are too proud, however, like the citizens of all formerly great country in decline, and they refuse to accept that their system has failed in an abject manner. Today’s French lack the courage to make radical changes, and they will probably require a massive economic decline to jolt them into action, which has not happened yet.

    Although American of origin, I became French since it allows me to avoid French bureaucratic hassles while working here. I will quite gladly give up my French citizenship when I leave, however.

    We can expect for France to becoming increasingly irrelevant over the next century unless something changes radically.

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