French Startups Face Higher Costs for Workers: Lagging Europe
By Gregory Viscusi
Paris, Aug. 7 (Bloomberg) -- Mathieu Nouzareth and his brother Romain, founders of French online-video startup Cineticvision, are eager to hire more software writers.
Why don't they? Because 23 percent of what each employee costs them goes to the French government in taxes to pay for unemployment, retirement and health care.
Hiring is cheaper for Monte Singman, founder of Redwood City, California-based Zona Inc., also in the online-game business. What he spends on Social Security, unemployment and private health insurance for employees is almost one-third less.
``We'd love to hire more people, that's for sure,'' said Mathieu Nouzareth, 30, who founded Cineticvision in April 2001. ``In France, you have to hire with parsimony.''
Higher payroll costs, legal barriers to laying off workers and complex regulation in France and elsewhere in Europe help explain why Europe's gross domestic product per capita has been stuck at two-thirds of the U.S. level for more than 20 years, economists say.
``The European economies have poor incentives for job- creation because of job-protection laws and wage regulations,'' said Gary Burtless, a Brookings Institution economist who has studied the U.S. and European economic systems.
Decades of liberalizing trade barriers, opening borders and creating for 12 European nations a single currency have brought Europe no nearer to U.S. levels of economic output. In addition to the cost of employing people, Europe is held back by high unemployment benefits and the fewer hours worked by Europeans.
Entrepreneurial Spirit
Each of the 380 million residents of the 15-nation EU produced $25,200 in goods and services last year, while 287 million Americans produced $35,500 apiece, according to the Paris- based Organization for Economic Cooperation and Development.
Europeans thus were producing 69 percent as much as Americans, on average. The figure for France is 68.8 percent. In 1985, Europeans were at 65 percent of the U.S. level, adjusted for purchasing power. The highest ever was 71 percent, in 1991.
Markets reflect the difference. Even now that U.S. corporate scandals are sending stock markets tumbling, the Dow Jones Industrial Average has fallen less this year than Italy's Mib30 index or Germany's DAX.
The transatlantic gap shows up in figures about startups, too: Those that survive the first two years increase their number of employees by 160 percent in the U.S. and by less than 40 percent in France, Germany and Italy, according to the OECD.
While no company is typical, the U.S. entrepreneurs say they operate in a culture that encourages business creation; their French counterparts say the opposite.
Incubators
``Since I was a software engineer, when I considered where to live, all I could think of was the U.S., especially Silicon Valley,'' said Singman, 35, whose father is American and mother is Taiwanese. He emigrated to the U.S. from Taiwan at 22, drawn by the entrepreneurial milieu depicted in Silicon Valley Fever, a 1984 book describing the creation of Apple Computer Inc. and other high-tech companies.
Singman began implementing his idea of maintaining networks that enable thousands of people to play the same game online simultaneously in August 2000.
He got help writing a business plan mainly from venture capitalists, who often offered counsel even if they weren't willing to make an investment. Some let him crib from versions of plans submitted by companies previously pitching for funds.
``A lot of them were surprised when I asked for advice, but were usually happy to help,'' said Singman. He later shelled out $25,000 on a consultant who helped him craft a final plan.
Night School
Other would-be U.S. entrepreneurs can get their businesses off the ground for less money, availing themselves of so-called incubators that provide low-cost office space and access to professionals who advise on how to advertise, raise funds and write a business plan.
On a recent evening, for instance, a group of about 20 new- business starters filled a conference room of San Francisco's Renaissance Entrepreneurship Center and listened to Valerie Camarda, principal of Marketing Sense, outline the basics of promoting products. ``Survey your customers, poll your customers, and capture that information,'' she urged.
Incubators can be found in France too, and the Chamber of Commerce in Paris runs a service that advises people on how to start companies and handles their paperwork. The French government also provides financial aid and advice. What's lacking in France is a U.S.-style network of night schools, Web sites and resource centers for prospective entrepreneurs.
Insurance and Taxes
Nouzareth said he's never heard of night classes on starting your own business. And French entrepreneurs complain that the efforts are splintered among hundreds of different local agencies and it's very difficult to find out what aid you can qualify for.
``It's a French tendency to pass new laws and create new agencies on top of laws and agencies that already exist,'' said Thomas Legrain, president and founder of Coach'Invest, which helps start-ups raise money and find office space.
Payrolls at Cineticvision and Zona show how much more it costs to employ people in France.
About 8 percent of Zona's monthly personnel expenses go to the U.S. government for Social Security, unemployment insurance and Medicare. Costs for employee health-care benefits add another 8 percent.
That leaves the employee with 84 percent of what Zona pays out in wages and employee costs. Workers also have to pay their share of Social Security and Medicare, as well as their own income taxes. Those are withheld from pay checks.
Pay Slips
Zona has 17 full-time staff, mainly engineers who create and maintain computer systems that keep online games running, working in its Redwood City offices. The company also employs four people in South Korea, Japan and Taiwan, as well as two part-time consultants in the U.S.
Singman reckons taxes are a ``necessary evil,'' though not an impediment to hiring: ``Not to hire people because of employee taxes seems extreme to me.''
At Cineticvision, which employs four people including its founders and shares its headquarters with other start-ups near the Louvre museum, about 23 percent of total payroll goes to the government to pay for unemployment insurance, health care taxes and national retirement.
By the time employees' share of payroll taxes is subtracted, they'll end up with about half of Cineticvision's wage bill. The French pay income taxes directly to the government.
All in all, payroll taxes equal 17.5 percent of gross domestic product in France, compared with 6.9 percent in the U.S., according to the OECD's figures for 1999. For the EU, payroll taxes were 12 percent of GDP.
Sat for Hours
In France, employees and employers must pay for state medical insurance, the national unemployment-insurance fund and retirement funds. Pay slips must also list entries for money set aside for company training as well as a ``13th month'' of salary that all French employees must receive.
Both sets of entrepreneurs are working flat out. Mathieu and Romain say they work 70-hour weeks. Singman's U.S. workday can last till 9 p.m. On a recent trip to Asia, his meetings stretched to past midnight.
The Nouzareth brothers handle sales and marketing themselves, and have hired consultancy Cap Gemini SA to help their two software writers.
Mathieu said he decided to seek outside help the first time he tried to figure out a pay slip. ``I sat there for hours and just couldn't figure out all the withholdings,'' he said.
The Nouzareths say they hope they can escape a 1998 law that limits the French working week to 35 hours. Companies with fewer than 20 employees were given until the end of next year to comply. Then in June, French voters overwhelmingly elected a new government that plans to roll back parts of the 35-hour law.
``The best thing the new government could do for small businesses is water down the 35-hour law,'' Nouzareth said. |
