By Mark John and Nicholas Vinocur
PARIS (Reuters) - The French parliament passed a landmark reform of the country's labor code on Tuesday, part of President Francois Hollande's efforts to convince European partners he is determined to revamp the euro zone's second largest economy.
Negotiated with employers and three trade unions in January, the law makes it easier for firms to make layoffs or reduce pay and working hours in economic downturns but raises the cost of employing staff on widely-used very short-term contracts.
Few expect an instant improvement in the competitiveness of French exporters who have seen sales undercut by cheaper foreign rivals over the past two decades, but many companies say the measures will help them better manage costs.
The reform passed through the upper house with 168 votes for and 3 against. Left-wing lawmakers had sought to stall the legislation and backed street protests by trade unions opposed to the accord, including the hardline CGT.
"This is one of those moments in which a great step forward has been made," said Labour Minister Michel Sapin.
Hollande is struggling to fulfill his promise to reverse the rise in unemployment, now at 10.6 percent, by the end of the year. March jobless claims hit an all-time record 3.225 million.
Labour reform, along with public spending cuts and steps to plug a funding shortfall in France's pension system, are among measures the European Commission is seeking from Paris in return for granting it two more years this month to bring its public deficit down to below 3 percent of national output.
Yet Hollande is having to tread cautiously to avoid unrest, with a widely-watched survey released by the Pew Institute on Tuesday showing the French increasingly disillusioned by the European Union and its leaders' handling of the debt crisis.
His Socialist government launched consultations with unions and employers on pension reform on Monday, aiming to introduce a new law by the end of the year. Officials rule out raising the legal minimum retirement age beyond 62 but are looking to extend the length of time employees must pay contributions to secure a full pension beyond the current 41.5 years.
The new labour law will allow companies to negotiate with trade unions to reduce salaries and introduce shorter working hours for a limited period during an economic downturn - similar to Germany's "Kurzarbeit" rules that have helped its companies preserve margins and retain skills even in tough times.
It also makes it easier for companies with over 50 employees to proceed with redundancies. In certain cases they will be able to give staff the choice of moving to a job elsewhere in the organization or being made redundant.
35-HOUR WEEK STANDS
Eric Lorin, chief executive of auto equipment maker Walor in northern France, said the reform would allow him to negotiate an umbrella accord with unions to cut working hours in his 100-head plant rather than having to negotiate with each employee.
"From my point of view this is a big help in terms of social dialogue. It will simplify the negotiating process," Lorin told Reuters by telephone.
The reforms do not touch the controversial 35-hour work week introduced by the last Socialist government in 2000, nor a national minimum wage of 9.40 euros ($12.20) an hour - an obligation that German employers do not face.
French employment laws have led to a two-tier labour market in which those with permanent contracts enjoy one of the highest levels of job protection in the Western world, while those on cheaper temporary contracts have no job security.
A consequence is that eight out 10 new job contracts signed in France are now temporary, often for as little as one month. Unions argue this does not allow proper training and means those workers struggle to get on the first rungs of the housing ladder because banks will not give them mortgages and landlords often demand to see a permanent employment contract for rentals.
Polls consistently show a majority of French are reluctant to jettison completely their cherished model of a strong welfare safety net in favor of the more precarious "Anglo-Saxon" hire-and-fire model prevalent in Britain and the United States.
Yet the same surveys show an awareness that reforms are needed. An Ipsos poll this month showed nearly two-thirds of the French would support a pension reform more drastic than that envisaged by Hollande, notably with a higher retirement age.
($1 = 0.7703 euros)
(Additional reporting by Emile Picy; editing by Paul Taylor)