When did France become a non-employment society?

As of 2015, the general stereotype that the French are somewhat lazy and work little is well established worldwide. Indeed, on this site, I have repeatedly commented on the “non-employment society”, the 35 hour week, etc. For some economists, this is the natural result of regulations and of the very high tax rate on labor which prevails in the country. For others, it is at least in part due to French preferences for working less (although why a preference should be embodied in a regulation remains a mystery to me).

While I do believe that taxes have an important effect, I also always thought that if you deregulate the labor market and reduce taxes down to reasonable levels, the French would still work substantially less than Americans.

So here is a little quiz that may help shed light on this question: what is the average number of hours worked per employed in France in 1950, and in the US?

The answer can be gotten off the shelf from the Penn World Table, and it comes as a big surprise: in 1950, a French employee was working 2158 hours per year, and his american counterpart was working 1900 hours per year on average! Furthermore, the employment/population ratio in the U.S. was 40 %, while it was equal to 46 % in France. The non-employment society, then, if anything, was the US, not France.

In 2011, the French was working 1475 hours a year, and his American counterpart 1700 hours. The French employment/population ratio was down to 41 %, the American one had gone up to 45 %. And this cannot be due to differences in female participation rates, they are virtually identical between the two countries at close to 69 % in 2011.

As a result, French society was providing 1000 hours of work per person in 1950, and it is down to 600. In the US, there were 760 hours of work per person in 1950, and in 2011 it is slightly up to 771.

When did French workers start working less in a given year than American ones? You cannot make this up: In 1982, 1 year after the first socialist/communist coalition came into power.

Therefore, there is no inherent French preference for working less. Rather, skilled politicians managed to put together coalitions of people who increasingly lived off (and therefore supported) a zero sum redistributive game. As a response to that, the population gradually learned to refrain from wealth creation. Perhaps it may become a second nature after a while, but let us not be too pessimistic.

Euro Blackmail

The Greek election results are the perfect answer to the IMF’s, ECB’s and European Commission’s pledge to defend the eurozone at any cost, and their repeated claims that they are willing to exchange any asset against euros in order to reignite the anemic economies of the area and prevent another sovereign debt crisis. So, in effect, the Greeks are saying : you want to buy junk ? Here it is ! Where is the money ? It would be foolish of them to continue their painful austerity policies when they can instead get their deficits financed by using one of the facilities offered by the ECB under the “save the euro” motto. Conditionality is supposed to apply, but the ECB has given every hint that it would yield to blackmail, so why should the Greeks refrain from it ?

The relative lack of reaction of the euro/dollar exchange rate baffles me. Markets do not seem to understand the significance of the Greek election results.

The most favorable scenario would be Greece being kicked out of the Eurozone, defaulting on its debt, and starting over again at a depreciated exchange rate, with a balanced government budget (although Syriza would be unlikely to run a balanced budget) and a depreciated currency that would allow export demand to make up for the fall in domestic spending. Hopefully, after a couple of years of recovery and virtuous fiscal policies, Greece could borrow again on international markets, and even repay its original creditors a little bit. But the episode would set up a precedent, and bring about the possibility of renewed attacks on the sovereign debt of other euro area countries, under the belief that such attacks would lead to their exit from the currency area. This would be 2010-2011 all over again.

At the opposite of the spectrum, the troïka may yield to blackmail as Syriza reverts to primary deficits following a string of demagogical policy measures. The ECB will pose as responsible while running a Ponzi game, purchasing all the debt issued by the Greeks. The Greeks will do just fine, like a teenager, because they will be spending the taxpayer money from other European countries, through the mutualization scheme implicit in the ECB debt purchases. Things will eventually turn nasty as the electorate in other countries – Portugal, Spain, Italy, France – will conclude that blackmail works better than austerity and vote for their own populist parties. The ECB will find itself compelled to issue more money, and it will have lost any credibility regarding its ability to control the price level. Inflation will pick up and the euro will continue to fall. German consumers and pensioners will then increasingly favor a German exit, as it would occur at an appreciated exchange rate, thus improving solvency and purchasing power.

Finally, an intermediate scenario is that the troïka refuses to continue to purchase Greek debt unless the government goes ahead with austerity. This will be a casus belli, likely to trigger immediate default as the Greek government will revert to primary deficits. Since it will then be unable to borrow, it will want to exit the euro area so as to be able to monetize its own deficits.

I suppose the euro establishment believes that Syriza will turn out as  Lula or Menem style leftists, that is, they will renege on their most demagogical campaign promises and continue to pursue austerity.  They forget that Lula and Menem did not have a foreign entity with a wide open cheque book for them.

There is no such thing as bad publicity

One of the big frustrations of my life was not to be cited in those books that regularly come out in France and complain about economists being stupid, ignorant, or evil lackeys of capitalism. This always gave me a sense of failure. For this reason, I am happy to learn that I am one of the “architects of the ongoing disaster”. It gives me a sense of power, at least for fifteen minutes. You can read it here and have fun.

Do we need a macroeconomic imbalance procedure?

This statement was made at the European Parliament, Brussels, Dec 10 2014.

0. Introduction

The macroeconomic imbalance procedure is a device for monitoring the EU member states’  economic situation, in order to detect imbalances pertaining to the external sector, competitiveness, asset prices, and the financial situation of the private sector. When the procedure is fully in place, “excessive macroeconomic imbalances” are supposed to be detected and a correction mechanism is supposed to be enforced.

The plan assumes that there is an objective way of detecting an imbalance, that sustainability of such imbalances can be assessed, that it is socially desirable for a supranational entity like the European Commission to impose corrective measures upon member states, and finally that those corrective measures are enforceable.

I believe there is no firm basis in economic analysis or in the record of the European Union to justify such a procedure. I will now explain my reasons for this belief.


  1. We do not know what an imbalance is

The notion of an imbalance is not properly defined, and, if it were, it would be unclear why one should fight it as such. An economy can be “balanced” and yet pursue highly inefficient policies; or it could appear as “imbalanced” while any intervention to correct the imbalance would be harmful.

Consider the example of trade deficits. Against which benchmark should we evaluate whether the trade deficit is problematic? In a world with free capital movements, trade imbalances and their counterpart capital flows should not come as a surprise. Trade deficits occur whenever national savings fall short of investment, and this may be for perfectly good reasons, like a surge in investment opportunities, transitory  needs for public or private consumption, or a change in the age structure of the population. This is not only a corollary of the existence of a single market for goods and financial assets, but one of its benefits.

Similarly, a country may seem to lose competitiveness, without this being a problem per se. Competitiveness will fall if the domestic price level goes up relative to the rest of the world (that is, the real exchange rate appreciates). This may be just due to the allocative response of prices within the country to a shift in the composition of aggregate demand; for example, the surge in public spending following German reunification had to be matched by  a real appreciation in order for productive resources to be reallocated away from exports and toward the domestic economy. Another example occurs when a poorer country is catching up with the rest of the world in productivity terms. In such a situation, the relative price of non traded goods (such as haircuts) has to go up. If the country is in a monetary union, it will experience more inflation than its neighbors. This necessary adjustment in relative prices may be wrongly interpreted as an imbalance in competitiveness.

Putting these two examples together, a country growing fast because it is catching up will be observed to run a trade deficit — because its residents borrow against future higher incomes so as to smooth consumption — and to simultaneously experience a real exchange rate appreciation, i.e. “loss of competitiveness”, and yet it will be at an economic optimum.

As a third example, it is quite difficult to distinguish an asset bubble from an appreciation of the fundamental value of the asset. In the case of the Spanish housing market bubble, for example, real interest rates were low, while potential economic growth appeared to be high, and the demand for housing was boosted by immigration. It was perfectly possible to interpret the appreciation of house prices as entirely due to fundamental factors.

This does not mean that worrisome imbalances do not arise, but it does mean that detecting them  may be beyond the expertise of either the EU or national institutions. The macroeconomic imbalance procedure may therefore lead to a large number of type I and type II errors (subjecting a sound economy to corrective measures, and ignoring unsustainable developments).


  1. We do not know whether an imbalance is “unsustainable”.

One central argument in favor of preventive and corrective procedures is that the imbalance may be “unsustainable”, and the procedure may avoid future catastrophies.  For  example, we could imagine that protracted trade deficits in some Eurozone countries might lead to a speculative attack against the euro, or to a critical mass of private defaults that may lead to a wave of contagion.  But this overlooks the fact that markets provide self-correcting mechanisms; a country that accumulates trade deficits is depleting its foreign assets, which eventually makes its residents poorer in financial terms. Accordingly, they will cut on consumption which will work toward restoring equilibrium. The opposite occurs if a country accumulates trade surpluses.  In recent years, the Spanish trade deficit has been reduced drastically, while Japan has moved from a surplus situation to a deficit one. These episodes illustrate the strength of the self-correcting mechanisms.


  1. Some perceived imbalances are consequences of legitimate choices by sovereign governments

A “macroeconomic imbalance” will often be the market response to decisions made by sovereign governments. We can refer again to the German reunification example. In such situations, an injunction by the European Commission or Council to correct the macroeconomic imbalance may amount to a confiscation of sovereignty away from an elected constituency in favor of a supranational non-elected entity.

More fundamentally, to establish the legitimacy of a macroeconomic imbalance procedure, one has to prove that such imbalances exert “externalities”  upon the rest of the Eurozone. The effect on interest rates, asset prices, etc, is no proof of such externalities; any action by a market participant affects market prices, and it does not follow that such action is inefficient nor that “corrective” measures would improve welfare.


  1. The process may add to economic uncertainty due to ambiguities in enforcement

The record of the European Commission in enforcing its own rules is not encouraging. Unlike national governments, the EC does not have a police force that it can use for the purpose, say, of seizing property as a penalty for noncompliance. To be sure, the EC may reduce transfers to net recipients of CAP or structural funds, but it can hardly impose financial sanctions on net contributors to the Union’s budget.

When sanctions are due, national governments may opportunistically collude to block imposing them,  as was the case back in the 2000s under the Stability Pact  when France and Germany violated it.  The EC itself may postpone action, thus behaving in a discretionary way, because it is considering only the immediate consequences of its measures, irrespective of the need to apply rules. For example, during its current excess deficit procedure, France is facing (in my view) considerable leniency on the EC side, because the EC fears that an obvious tough stance vis à vis France could scare markets, raise sovereign spreads, and reignite the Eurozone fiscal crisis.

Because of those shortcomings, the existence of a euro area macroeconomic imbalance procedure may fuel policy uncertainty rather than reduce it, as market participants will be uncertain, in each instance, about the likelihood of sanctions and their nature.


Some unpleasant fiscal arithmetics

One frequently hears in France that our tax system should be more progressive, because it is supposedlynot progressive enough. Indeed many proposals and actual policy measures go in this direction, like payroll tax cuts on low-wage earners, capping some family benefits, the 75 % tax on high wage earners, or introducing progressivity in an additional tax invented a few decades ago and called CSG. Yet as long as a serious effort is not made to reduce the size and scope of the government, these reforms are bound to crash, for a very simple reason: The highest the average tax rate, the smaller the scope for progressivity. The reason is simple: in such a situation, cutting taxes on the poor can only be matched by near confiscatory taxation on the rich. These people will likely exit the country (as did Gerard Depardieu and Mathieu Valbuena), or severely reduce their labor supply (as many medical doctors do). The economy will suffer large distortions and in the long run will probably end up on the wrong side of the Laffer curve for the tax receipts coming from the rich. Suppose the government wants the bottom 20 % of the distribution to pay no taxes, the next 60 % to pay an average tax rate, and the top 20 % to make up for the rest. With an average tax rate of 40 %, the top 20 % need to pay an amount equal to 12 % of aggregate income, i.e. an average tax rate of 60 %. But when the average tax rate is 50 % (as in France, although the long-term figure should be even higher), the middle class pays 0.6*50 = 30 % of national income, and we need the top 20 % to pay an average tax rate of 100 %. If we now remember that we cannot have such jumps in the tax schedule and that there will be large distortions, we see that the scope for progressivity is quite small. When the government confiscates 50 % of more of national income, pretending to implement a highly progressive tax schedule is simply a lie. Everybody has to contribute a big deal. This is why each time money was really needed, governments resorted to broad-based measures like the introduction of CSG, raises in payroll taxes, VAT, or corporate taxation (without mentioning the clearly regressive gasoline tax which has the merit of having a broad and inelastic tax  base). How about making the expenditure side more redistributive, for example by capping pensions, excluding people above a certain income level from access to public hospitals, privatizing theatres, operas and museums, and introducing tuition fees in higher education? After a while people will integrate those restrictions in their economic calculations and they will likely result in huge economic distortions as the implicit marginal tax rate associated with losing those benefits is very high.

New working paper

How Darwinian Should an Economy Be?

This paper studies aggregate dynamics in a cobweb model where learning takes place through a selection mechanism, by which more successful firms are replicated at a higher rate. The structure of the model allows to characterize analytically the aggregate dynamics, and to compute the effect on welfare of alternative levels of selectivity. A central aspect is that greater selectivity, while bringing the distribution of firm types closer to the optimal one at a given date, tends to make the economy less stable at the aggregate level. As in Nelson and Winter (1982), firms differ in their labor/capital ratio. They do not choose it optimally, rather it is a characteristic of a firm. The distribution of firms evolves over time in a way that favors the most profitable firm types. Selection may be inadequate because firms are being selected on the basis of incorrect market signals. Selection itself may reinforce such mispricing, thus generating instability. I compare economies that differ in the volatility and persistence of their productivity shocks, as well as the elasticity of labor supply. The key findings are as follows. First, a trade-off arises since greater selection allows to better track shocks and limits mutational drift in firm types; on the other hand, selection may strengthen cobweb oscillatory dynamics. Second, there seems to be a value in maintaining a diverse “ecology of firms”, in order to cope with future shocks. These observations explain the key results. Optimal selectivity is larger, the less “cobweb unstable” the economy, i.e. the more elastic the labor supply. Second, optimal selectivity is larger, the more persistent the aggregate productivity shocks. Finally, optimal selectivity is larger, the lower the variance of productivity innovations. The model can be extended to allow for firm entry and trend productivity growth, and a selection process with memory. Empirical evidence suggests that, in accordance to the model, countries with less regulated product markets exhibit lower aggregate inertia.

Download here

New working paper

Can Active Labor Market Policy Be Counter-Productive?

Excerpt from the introduction:

This paper studies the effect of active labor market policies (ALMP) in a Mortensen-Pissarides style matching model. ALMPs are modelled as a subsidy to job search, and it is assumed that search activity is observed. A key feature of the model is that workers differ in their productivity, and that search takes place along an extensive margin. The model is used to study the effect of ALMP on the equilibrium, on aggregate welfare, and, equally importantly, on the distribution of welfare across worker types (productivity levels) and current labor market status (employed vs. unemployed).
It is shown that in addition to the usual job search externality, there is a “quality” externality. As search is not directed, an additional job seeker affects the average quality of the pool of unemployed, in addition to the job finding rate. As a result, the usual “Hosios” conditions for an efficient outcome — that the bargaining share of workers match their elasticity in the matching function — are no longer valid. For an efficient outcome, the decentralized equilbrium conditions must match the optimal ones for both the job creation margin of firms and the job search decision of workers, and these two conditions cannot be matched with a single instrument. It is shown, paradoxically, that to replicate the optimum one must select a worker share in bargaining which is larger than their elasticity in the matching function, and at the same time one must impose a tax on job search activity.
Clearly, this prediction does not validate the view that ALMPs are a desirable policy tool. The reason is that they raise workers’ outside option in bargaining, thus contributing to wage pressure, while at the same time reducing the average quality of job seekers. The optimal policy outlined above delivers an improved quality of job seeker, due to the search tax, while the bargaining share in excess of the Hosios level compensates for the implied reduction in the workers’ outside option.

Despite their negative effects on aggregate welfare, we can characterize a coalition in favor of ALMPs. These are favored by the least productive job seekers (or “short-term” unemployed”) and the least productive workers. The former gain directly from the subsidy, and the latter gain from an enhanced outside option in bargaining. On the other hand, more productive workers and job seekers lose from it. They are harmed due to the fall in the job finding rate, which reflects in particular the deterioration in average job seeker quality. Finally, the workers who do not search (or “long term unemployed”) only benefit if they are sufficiently close to the extensive margin of searching, that is, sufficiently productive. The least productive long-term unemployed are too far from the extensive margin of job search to benefit from the policy, and suffer from the financial burden of the search subsidy. Consequently, they oppose the policy. Note however that this analysis would be changed if ALMP were explicitly targeted at the least productive unemployed workers. Here, instead, by monitoring job search irrespective of productivity, the policy is implicity targeted at those workers whose productivity level is immediately below the critical search threshold.

Dowload it from here.