Italy’s Supply Constraint

The OECD estimates the current potential capacity growth rate of the Italian economy at 1.25% a year. Actually I suspect even this very low number is over-optimistic. Growth since 2002 has been as follows: 2003 – 0.1%: 2004 – 0.9%: 2005 – 0.1%. To be sure forecast growth for this year is somewhat higher, at 1.4%, and optimists are expecting this to be more or less repeated next year. But I suspect this outcome is unlikely simply because the global economy now seems to be slowing (and in particular the ever important US economy),so the strongly advantageous situation of 2006 is unlikely to be repeated, while next year the Italian government has promised to introduce an important package of spending reductions which are bound to negatively affect growth, at least in the short term..

But why is potential growth capacity in Italy so low?
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New OECD Economic Outlook….

…below the fold.

But first an introduction. I’m guestblogging from Amsterdam and my site can be found here. Very much honored to post at the Fistful (I would be, they’ve got visitors), although in all honesty they might be better served by a Francophone blogger.

As it is, they are grossly misunderestimated by the French part of the blogosphere (le sphère au blog?).
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Asia beats Europe in education

From the BBC News site comes this disconcerting news:

Europe is falling behind Asia in terms of education and skills, according to a report by the Organisation for Economic Co-operation and Development (OECD).
It blames France and Germany which are criticised for mediocre education systems and their inherent class bias.

And further on:

“Europeans from difficult socio-economic backgrounds don’t receive the same educational opportunities as children from rich and middle-class families,” the study said.

It seems we are wasting a lot of potential here, not to mention the loss in future competitiveness and possible social unrest.

The Booming Czech Republic

The Czech Republic is booming apparently. Both per-capita GDP and fertility are definitely on an upswing, although surprisingly perhaps, for once I am not going to try and suggest that these are connected:

The Czech republic has joined Slovenia among new member states with higher levels of wealth per capita than old member Portugal, according to European Commission statistics.

This raises interesting questions which I just touch on in this AFEM post here. (Incidentally, you can find a one-page set of economic statistics for the Czech Republic from the OECD here).

What is perhaps most interesting about the Prague Post article is the way they explicitly link the increase in preganancy to a recent reform in maternity provision (due to come into effect in April), and to the fact that the ‘postponement phenomenon‘ often leads to a spike in births as women who have postponed reach the new ‘childbearing age’.

“The Labor and Social Affairs Ministry recently launched its own reforms aimed at encouraging couples to have children. The reforms provide generous benefit packages and require companies to hold the jobs of employees on leave for up to four years, and, as of April, women will begin receiving a state subsidy of 17,500 Kč ($725) for each newborn child — more than double the current amount.”
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The French Unrest and the Labour Market

Morgan Stanley’s Eric Chaney has what I consider to be a very sensitive and perceptive analysis of the economic backdrop to the French urban unrest:

Turning to economic causes, many analysts have pointed to mass youth unemployment as the main cause of the political unrest in low-income suburbs. The numbers are striking: the French unemployment rate reached 21.3% in the 15-24 age bracket in 2004, vs. 13.4% for the OECD as a whole. However, the headline unemployment rate is misleading because, at the same time, the participation rate of the 15-24 age group is particularly low in France: 37.5%, vs. 49.9% in the OECD. Practically, this means that 7.8% of the population aged between 15 and 24 is unemployed in France, vs. 6.5% in the OECD. The difference is not that large. What makes France different from other countries is the very low participation rate of young people, not particularly massive unemployment. In other words, the young in France take fewer jobs than their counterparts in other developed countries……”

“That brings us to a more fundamental point: why is it so difficult to create jobs in France? I have discussed this point in a previous note (“Making France Work”, June 21, 2005). In my view, the causes of the job disease fit reasonably well with the “insider-outsider” model developed by labor economists, provided that it is extended to products and services markets. I will elaborate only on labor market issues, starting with the minimum wage, which I believe is the major hurdle to job creation for young and less skilled workers. However, highly regulated product and services markets, which allow various interest groups to keep markets closed to competition and thus reduce employment opportunities, are another important cause of the job disease……….”

“Originally, the minimum wage was introduced as a protection against excessive employers’ bargaining power (“monopsomy” cases). Over the years, it became a protection against competition from cheap labour. Many studies on French data have shown that a rise in the minimum wage is very negative for employment. Although estimates may differ, they converge qualitatively. For instance, Bernard Salanié (Columbia University) and Guy Laroque (CREST) estimated that a 1% rise in the minimum wage could cost 29,000 jobs (“Une décomposition du non-emploi en France”, Economie et Statistique N331, 2000-1). As a consequence, each minimum wage rise, often seen as a “social measure” in French media, would increase the proportion of people living only on social benefits. This point is particularly important for young and low qualified workers, whose parents are often also unqualified: they suffered twice from the generous increases in the minimum wage in terms of fewer job opportunities for them and their parents and, thus, a lower income for their household.

Older and Older

I think this is no longer news, but the OECD held a press conference yesterday to inform us that we are all living longer, but we still aren’t working longer, and that somehow these two facts don’t fit with our existing pension arrangements. Well perhaps it isn’t exactly news, but it still needs to sink-in somewhere. So I guess this is why yesterday the OECD were drawing everyone’s attention to a new report they have prepared on the basis of 21 separate country reports compiled as part of a thematic review of policies to improve labour market prospects for older workers initiated in 2001. The whole thing will get icing and a cherry at what is being called a High-Level Policy Forum to be held next Tuesday (18 October) at Palais d’Egmont. More details on the reports and the accompanying older workers forum can be found here).

At present, many public policies and workplace practices discourage older people from carrying on working. On average in OECD countries, fewer than 60% of people aged between 50 and 64 have a job, compared with 75% of people in the 25-49 age group (see Chart 1).

Such policies and practices are relics of a bygone age and unsustainable at a time when population ageing is straining public finances and holding back higher living standards. If there is no change in work patterns, the ratio of older inactive persons per worker will almost double in the OECD area over the next decades, from around 38% in 2000 to just over 70% in 2050.

This, in turn, would lead to higher taxes and/or lower benefits, coupled with slower economic growth. On the basis of unchanged patterns, OECD analysis shows, GDP growth per capita in the OECD area could shrink to around 1.7 % per year over the next three decades, about 30% below the average annual rates witnessed between 1970 and 2000.

Incidentally, I think this figure for sustained *per capita* growth of 1.7% across the OECD over the next decades is extraordinarily optimistic. If you strip out some of the large economies where the ageing problems are considerably more moderate – US, UK, France – I juts can’t see how the rest are going to sustain any per capita increase at all. What they will be into is damage containment. Unfortunately, as we can see, they seem to be in no special hurry to get on with even this.

Crisis Looming At The ECB?

A right royal row is brewing at the ECB. Basically the old guard theorists of the ‘one size fits all’ monetary policy are being challenged by more pragmatic observers of day to day realities. For the moments it is the politicians who are making the running (but there are plenty of competent economists in Germany and Italy who are ready to back them up), and yesterday the OECD joined the fray.
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