Charles Wheelan, Ph.D. The Naked Economist

France and the United States have two distinct "flavors" of capitalism. The U.S. has the more "Wild West" version. Our economy is relatively unregulated compared to a place like France. We promise our citizens fewer benefits than the French. We offer our workers and firms less protection. Our government meddles less in how businesses operate and our overall tax burden is significantly lower.

The French have the more coddling flavor of capitalism. Citizens receive more benefits from the state, such as guaranteed health care. Workers have far more expansive benefits: Longer maternity leave and vacations, higher minimum pay, and the government has capped the workweek at 35 hours. Perhaps most significant, French workers have extraordinary job protection. Once hired, they're hard to get rid of.

The Good News -- and the Bad

Which brings me back to Wal-Mart and the French riots. Rarely have the strengths and weaknesses of these two flavors of capitalism been on such stark display.

Last month on the U.S. side of the Atlantic, Wal-Mart sponsored a series of academic papers evaluating how its business practices affect the broader economy. The results were not surprising, but the scale of the numbers was.

The good news: Wal-Mart does not merely save consumers money. It's also responsible for pushing down consumer prices in America by 3.1 percent. The bad news: Much of the savings comes from paying employees as little as possible. Wal-Mart alone is responsible for driving down American wages by 2.2 percent.

On the net, that's still good for consumers. Since Wal-Mart has driven down prices more than wages, real disposable income -- the purchasing power of what's in the average person's wallet -- is up .9 percent. Still, that doesn't leave Wal-Mart looking warm and fuzzy.

Wal-Mart and McJobs 

It gets worse. One of the truly surprising findings from the academic papers is that each Wal-Mart employee is associated with nearly $900 a year in added state spending on Medicaid. It's not clear what's more pathetic -- that many Wal-Mart employees don't get health insurance or that they earn so little that they are eligible for Medicaid, a government program designed to serve the indigent.

In short, Wal-Mart is built on what the French (and plenty of Americans) have labeled derisively as "McJobs," skimpy versions of the real thing. Couldn't Wal-Mart, the largest private sector employer in the world's richest economy, afford to do a little better by its workers? Shouldn't the government require it?

Before we shame Wal-Mart, let's remember what we recently saw on the other side of the Atlantic  where angry French youths took to the streets setting fire to perfectly good Peugeots and Citroens. The protests obviously had much to do with France's poor job of integrating generations of immigrants into French society, but they were also rooted in pocketbook issues. The French unemployment rate lingers around 10 percent -- roughly twice the American rate. In the epicenter of the rioting -- the suburban ghettos of government housing projects -- the unemployment rate is 30 percent or higher.

The French have effectively banned McJobs by requiring employers to be more generous. The unfortunate result is not middle class comfort for all. Often, it's no jobs.

Companies That Can't Fire Don't Hire 

The reason has to do with an economic concept called "marginal product of labor", which is a fancy way of saying that firms will not voluntarily pay you more than you're worth. If Wal-Mart believes that you add $5.15 an hour to the bottom line by stocking shelves, and you demand $8, the manager will politely point to the exit. If you don't have any skills that are worth more than $5.15 an hour to some other employer, you won't use that exit. You'll take what Wal-Mart is offering. McJobs tend to pay workers what they're worth, which, sad though it may be, is not always a living wage.

The French alternative -- admittedly oversimplified -- is to require that firms pay low-skilled workers more, whether their productivity justifies it or not. If an employee adds $5.15 an hour worth of value to a firm, the government might require the firm to pay him $10. As you can imagine, firms are not keen on paying someone $10 an hour for $5.15 worth of work, not even in France. The best business decision in that case is to hire no one at all.

French policies compound the problem by making it hard to get rid of workers once they're hired. The result, to stick with the retailing theme of the column, is like a department store that doesn't allow returns. True, no merchandise will come back. But consumers will be much more cautious about what they buy in the first place. Overall sales may well be lower.

So it is with employees. Firms that can't fire don't hire.

That is the nettlesome trade-off: The French flavor of capitalism is really bad at creating jobs, leading to high unemployment and a sense of alienation among those on the outside of the job market looking in. The U.S. flavor is better at creating jobs, albeit without guaranteeing that those who get them will earn enough to support themselves, let alone a family.

Uncle Sam Makes Up the Difference

So what do we do if we aspire to put people to work and provide a living wage? Economists actually have an answer for that. The key is to use government money to supplement the incomes of full-time, low-wage workers. In the U.S., that is exactly what the Earned Income Tax Credit (EITC) does, and it's arguably one of the most significant innovations in social policy of the past half century.

The most important thing about the EITC is what it doesn't do. In short, it doesn't make the mistakes that the French have made. The EITC does not raise the cost of labor to the point that employers would prefer nothing at all. Nor does it offer generous benefits to those who are not working, because that diminishes the incentive for them to look for work or to take a job.

Instead, the EITC uses government funds to supplement the McSalaries. The better you want to treat workers, the more government money you have to spend. It's not perfect, and it's not cheap, but it is an elegant way to work around the trade-off between making workers better off and making them too expensive for the labor market.

As for the question posed at the outset, I don't know if France's disaffected youth would be happier working at Wal-Mart. I do know -- based on new academic evidence -- that they would find a lot of really cheap stuff to burn.