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3Labor market policies:historical and comparative

perspectives

Philippe Askenazy (Paris School of Economics)

www.jourdan.ens.fr/~askenazy/laborpolicy.htm

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Outline

1980-1985

- US = new macroeconomic policy

- UK = new “industrial” policy

- France: inefficient policies ?

1986 : new unemployment theories

- France: from stock market crash to growth recovery

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1981-83: dramatic unemployment rise despite new policy

Unemployment rate (ILO/OECD)1981 1983

US 7.6 9.6France 7.0 8.0Germany 4.5 7.8Italy 7.9 9.4Japan 2.3 2.7Sweden 2.8 3.9

1979: Thatcher 1981: Reagan

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Why ? 1979: US = a new macroeconomic Paradigm

Second Oil shock

FED President: Paul Volcker

Rules versus discretion

Kydland, Finn E., and Edward C. Prescott. “Rules Ratherthan Discretion: The Inconsistency of Optimal Plans”, Journalof Political Economy (June 1977), pp. 473—91.

Lucas, Jr., Robert E. “Econometric Policy Evaluation: A Critique,” Carnegie-Rochester Conference Series on PublicPolicy (vol. 1, 1975), pp. 19—46.

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US: Volcker + Reagan

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UK ≠ US

Unemployment did not decline during the 1980’s

Why? Thatcher’s policy = a rapid transition from manufacturing to financial activities

0,05

0,1

0,15

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0,25

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Financial services

manufacturing

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UK

Components of the UK “industrial” policy:

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France: 1981-1983, a leftist policy

Mitterrand: PresidentMauroy: Prime MinisterSocialists + communists

But a center-left government for economic affairsDelors: Minister of Economics and FinanceFabius: Ministry of BudgetRocard: Ministry of Planning

Very optimistic expectations: why?

A “new” macro-policy A “new” micro-policy

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France: 1981-1983 macro-policy

Idea 1: control the banking system through nationalizationIdea 2: economic outlook => boost consumption

Eg. Minimal pensions +50%

State benefits in real terms + 12% Minimum wage in real terms + 10% + 160,000 civil servants

Problem: again the expectations were too optimistic!

huge trade imbalance huge deficit devaluation… unsustainable policy

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France: 1983-1986 “macro-policy”

Fabius Prime Minister in 1983

Le “tournant de la rigueur”

stabilization of public spending break of the indexation of wages on prices

drop of inflation atone demand

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Unemployment raised but inflation dropped . “Euro zone”

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1981-1986 “micro-policy”: Sharing labor

5 years to reach the 35-hour workweek ≠ Dutch Wassenaar agreements

First (and last!) step in 1982: 39-hour + 5 weeks of vacations ex-post evaluations (in the 2000’s!): no job creation hourly productivity gains

Retirement age: 60 down from 65 no impact because already 60 in practice

BUT Pre-retirements 700,000 in 1984+ Low-paid jobs in non-market activities ~ 500,000 significantly reduced unemployment rate and smoothed the industrial policy

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1981-1986 modernization of France? Industrial policy and education

Nationalization of giant manufacturers eg. Usinor-Sacilor (steal)…Followed by massive downsizing - 250,000 jobs in manufacturing profits recovery

Liberalization of financial and stock markets (too late ?)=> Foreign stockholders + bank/insurance expansion

Free radios, private TV channel=> Entertainment industry

Effort on secondary education including vocational degree => In one decade: democratization with rapid expansion of the share of youths with the Bac

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New unemployment theories: Hysteresis and euro-sclerosis

Blanchard O. L. Summers, 1986, “Hysteresis and the European Unemployment Problem”, NBER Macroecnomics Annual, vol. 1.

Targeted policies on long-term unemployed

design of labor policies to avoid long-run consequences

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Micro labor economics 1981-1986

Birth of “modern” labor market economics

Lindbeck-Snower, Layard-Nickell: insiders/outsiders

Shapiro-Stiglitz: efficiency wage/ shirkers

Pissarides: job flows, matching function

new prescriptions for labor policies

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France 1986-1988, Chirac the liberal…

France in 1986 ~ UK in 1979

Economic environment: the oil counter shock… and the October, 20 1987 stock market crash

Idea 1: reducing the weight of the State and a society of stockholders

Income tax cuts including the “Impôt sur les grandes fortunes”

Privatization for about 2% of GDP

But stock market crash…

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France 1986-1988, Chirac the liberal…

Idea 2: plummeting the rigidities of labor market

Favor part-time jobs, short-term contracts temporary jobs

France is currently the third market for temp agencies among OECD ~ 2 to 3% of the workforce

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France: 1986-1988, Youth policy and territories

1986: Social tax cuts for the employment of young workersSo massive windfall effects that they were removed in 1987… except for on-the-job education…… extended to tertiary education

substitution between age groups+ expansion of social treatment of unemployment reduction of youth unemployment but stagnation of unemployment rate

“la reconversion” (again ~ Thatcher policy)i.e. support to zones hurt by de-industrialization through improving workers’ mobility, and specific social tax cuts poor efficiency

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Low inflation but unemployment still high. “Euro zone”

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France 1988-1990: Center-left

Mitterrand reelectedRocard PM with a “gouvernement d’ouverture”

Encouraging expectations… and realizations International growth. Why ?

In France GDP growth ~ 4% yearly 1988-1990

One exception: the RMI “Revenu minimum d’insertion”

poor efficiency for labor market. Why ?

Growth but very cautious policy: stabilization or rationalization of current tools, freezing of privatization

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Minimum income support for family in some European countries (PPP euros per month, 2007)

Couple with

one childAlone with

one child

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“Euro zone”: 1987-1990 a new Phillips curve?

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1988-1990

Decline of short and long-term unemployment in Europe End of stagflation: low persistent inflation rate

End of the hysteresis phenomenon?