Why has French employment (for some workers) done so well?
Paul Krugman has an interesting column which focuses on some too often ignored facts about labor markets, here is one excerpt:
France’s prime-age employment rate overtook America’s early in the Bush administration; at this point the gap in employment rates is bigger than it was in the late 1990s, this time in France’s favor.
There is of course more to the column than that. In terms of the bigger picture, I read Krugman as trying to argue this shows more interventionism doesn’t have to be bad. A closer look at the French labor market experience, however, suggests a somewhat different perspective. Here are a few points:
1. In France the influence of less regulated short-term jobs has been rising in importance. For instance “the share of STJ [short-term jobs] in total inflows from unemployment to employment is around 69 per cent,” circa 2010, see p. 7 (pdf). Changes in temporary jobs have driven the French employment picture since 2000 (p.8). That is the French version of The Great Reset and it does not bode well. Very few French think their children will be able to enjoy the same standard of living as they have.
2. The International Labour Organisation — not exactly The Heritage Foundation — writes about France: “The extensive recourse to short term jobs (STJ) is a striking feature of labour markets with stringent employment protection.” (p.20)
3. Favorable French employment results are also due to labor supply effects. For some classes of French workers, especially at the lower end, the return to working has remained high relative to alternative opportunities. Card, Kramarz and Lemieux (pdf) noted this as early as the mid-1990s and also cited a 1992 paper to this effect (see p.870). The United States in contrast has a larger share of jobs which pay quite a bit less than the median wage and not everyone wishes to take those jobs. The evidence here supports some of the “relative wage” theories, where your willingness to work is determined by broader social norms for what a job should go for, rather than just the absolute wage. It is also possible that lower-earning Americans have a weaker work ethic than do the French.
4. To the extent the supply side is the binding constraint, some labor market rigidities won’t hurt employment very much.
5. Even after some massive aggregate demand shocks to both countries, which the USA clearly had a superior response to, the supply side forces still play a positive role in French labor market outcomes. That is against the tenor of other opinions Krugman has expressed about employment being solely demand-driven these days. The supply side of labor markets never ceases to matter, even if it does not always matter in the way that conservative economists are claiming.
6. Within France, there is still plenty of evidence (pdf) that interventions such as the minimum wage bring classic negative effects on employment, even if this is overwhelmed by other factors in some cross-national comparisons.
7. The French system has a much poorer record of employment for the young and for the old, so focusing on prime age workers, while valuable, also doesn’t show the whole picture. For instance French seniors participate in the labor force at 42.5% compared to 72.6% for Sweden, a huge gap. And that artificial removal from so many of the elderly from the labor force in part props up real wages for the prime-age workers. It isn’t as good a deal as it looks if you focus on the prime age workers only.
8. French youth unemployment is quite bad, and contrary to what Krugman seems to suggest it is not mainly because the French are all getting so well-educated. Degree holders are getting stuck too and that is part of the French “Great Reset.”
9. A major ongoing problem for the French labor market is that net public sector job creation hasn’t been there since 2000. That is unlikely to change moving forward and will probably get worse, given French fiscal constraints. This is not something to blame on “austerity,” the French really are close to their fiscal limits.
10. The large number of protected jobs in France has come at a significant growth and efficiency cost: “Until the 1990s, France was among Europe’s leading economies in per capita GDP. By 2010, however, the country had dropped to 11th out of the EU-15.”
11. Here is an interesting comparison between Spanish and French labor market responses to the downturn, although the housing bubble in Spain should play a more prominent role in the argument. You really can read French policy as determined to protect good jobs for prime age workers, at all costs if need be.
For general background, here is a broader Nickell JEP 1997 piece on European vs. U.S. labor markets. If anything, Krugman’s basic observation has been correct for longer than he is letting on.