Why does France have so many 49-employee companies?

France has 2.4 times as many companies with 49 employees as with 50. Under French labour law, once a company has at least 50 employees, 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. The 3,200 page Code du Travail dictates everything from job classifications to the ability to fire workers.

Worker Productivity: The French Connection

It is unlawful in France to lay workers off to improve the profitability of the company. Michelin laid 451 workers off in 1999, announced an increased profit 2 months soon after. It was successfully sued for €10 million in the Labour Court on the grounds that economic layoffs are justified to preserve the competitiveness of a firm or of the group to which it belongs, but not in order to improve it.

Participants in the French version of the television show Survivors sued the producers for redundancy pay when they were voted off the show by the tribal council.

When entrepreneurs  and managers are confronted with laws that introduces a cost of acquiring a size that is beyond a certain threshold such as 49 employees, some will choose to stay below the threshold and stay at an inefficiently small size. The more talented managers are not running the larger firms because of this barrier to growth.

In Firm Size Distortions and the Productivity Distribution: Evidence from France, Luis Garicano, Claire LeLarge, and John Van Reenen found that the cost of the French labour regulations is approximately equivalent to a 5-10% increase in wages. The main losers from the French regulation from this misallocation of managerial talent are workers (and to a lesser extent large firms) and the main winners are small firms.

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