The French economy is not reaping the benefits of re-locating service jobs to cheaper countries abroad because of the inflexibility of its own labour markets, a study by McKinsey Global Institute has found.
Although offshoring is a nascent phenomenon in France accounting for 4 per cent of total job losses between 2002-04 it is already causing huge political repercussions. Fear of délocalisation has gripped French voters and was one of the most commonly cited reasons for their rejection of Europe's constitutional treaty in a referendum last month.
However, Diana Farrell, MGI's director, said that French companies could benefit from this “inevitable process” sharpening their competitiveness and bringing net gains to the economy as is currently happening in the US. “France needs to shift the debate from how to stop offshoring to how to manage it. You can take this negative factor and turn it into a positive,” she said.
“France is one of the most productive countries in the world. France is in a position of strength. You have to protect people, not jobs.”
A previous McKinsey study found that for every $1 spent by US companies in India on offshoring services such as software development, call centres and back-office administration the US economy as a whole gained $1.14 to $1.17.
These benefits resulted from cost savings made by US companies being passed on to customers and investors, profits in US-invested offshoring centres being repatriated, and US workers being re-employed in new jobs. US companies also increased their sales of IT products to India.
However, MGI concluded the French economy gained only 86 cents from every €1 invested by French companies in offshoring centres. This was because French companies invested more heavily in North Africa and eastern Europe, where the cost savings were less than in India. Moreover, French companies did not reap as much profit from investing in offshoring centres or from selling related IT products.
The biggest difference with the US resulted from the inflexibility of France's labour market, meaning that unemployed workers found it harder to find new jobs. Only 60 per cent of displaced French workers found a new job within a year. In the US, by contrast, 69 per cent of unemployed workers found a new job within three months. “The US stands out among developed countries because of the vibrancyof its labour market,” Ms Farrell said.
Governments could ease the transition process by retraining workers, providing adequate interim welfare protection, and increasing the flexibility of the labour market. “You could say that the situation is hurtful to France and opt to block offshoring. But the long-term consequences of that choice would be to make French companies woefully uncompetitive. You may withhold the loss of some jobs but with the consequence of losing many more jobs in the future,” she said.
