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.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

2 thoughts on “The French Unrest and the Labour Market

  1. I don’t think high minimum wage is why it is difficult to create jobs in France. I believe it is more due the fact once you make a employment contract is it very expensive (and time consuming) to break it (i.e. layoff people). Small businesses are very reluctant to hire anybody because of this.

  2. I commented on Cheney when you plugged him on AFOE. You are invited to take up the argument.

    Essentially Cheney proposes creating an underclass along the lines of the U.S. model. Currently the French unemployment rate is twice as high as the poverty rate. In the U.S. the opposite relationship obtains: poverty is twice as high as unemployment. Note, though, that that figure applies to the population as a whole. Among black Americans both unemployment and poverty are much higher.

    The last fourty years have produced a steady deterioration in the social status of black Americans: successful family formation has become the exception rather than the norm.
    Among the causes:
    a) “affirmative action” – blacks are put out to pasture on a virtual educational reservation where they don´t need to compete on equal terms. It works brilliantly: the black leadership fights tooth and nail over the right to be oppressed and disadvantaged by means of Potemkinesque standards.
    b) “penal Keynesianism” – the U.S. is a global leader in incarceration. Allegedly there has been a successful war on crime. What that means is that lots of people (primarily blacks) have been locked up. In due course the number of criminal acts dropped sharply. The quantitative dimension of this societal change is nothing short of breathtaking: if authorities in the U.S. had locked away as many putative criminals per one thousand criminal acts registered by the police during Reagan´s first year in office as they routinely do now, there would have been 1.6 million more people behind bars at that time than there actually were.

    Sarkozy has indicated that he intends to fashion his strategy for dealing with the aftermath of the French riots along the lines of the model provided by the response of American society to the unrest of the 1960s and 1970s. There are no signs that the outcome would be any different from that in the U.S., however. Overall unemployment would fall, since prison inhabitants are not counted among the unemployed. Law and order would be restored. Economic segregation would be maintained – and possibly entrenched further – by means of two mechanisms:
    a) removing incentives where they are needed, i.e., in the educational system (which cannot function without proper assessment of individual merit and achievement),
    b) providing incentives where they are counterproductive and contribute towards the splitup of families. A minimum wage (in conjunction with actual job offers, provided – if necessary – by a government agency entrusted with the task to act as an employer-of-last-resort) differs from welfare payments in that it doesn´t motivate couples and families to break up in order to maximize welfare receipts (a lesson German politicians chose to ignore in the design of the Hartz IV measures – with results that, as predictable as they were, seem to have genuinely surprised the officials in charge of implementing Hartz IV).

    The western world is in the process of creating a historically unique phenomenon: nuclear families that are incentivized to hide from public view and considered to be fair game
    for government bureaucrats who take it upon themselves to interfere with their everyday lives because they are entrusted with the task of distributing alms. In this scenario, the concept of an exchange doesn´t exist: the poor don´t give anything in return – such as their labour at a minimum-wage job or the effort to try to keep up at school – because nothing is demanded and expected of them anymore (apart from compliance with the law, which is enforced in an ever stricter fashion.)

    It is instructive to realize that a sizeable part of the black population in the U.S. has converted to Islam. Whether the spread of Islam will be conducive to stability and prosperity in Western countries is very much an open question. Much less open is the question whether Islam will become an increasingly attractive option for those who are being dealt with as dishonestly
    as African-Americans are.

    Pollsters regularly ask people what values they cherish most. Usually honesty tops the list of answers given. This fact isn´t reflected in economists´ calculus of utility. Thus economists regularly mispredict the impact of measures they propose. Nowhere is this more evident than in the domain of anti-poverty policies. If France really follows the example of the U.S., poor French will end up taking on second jobs that used to be done by immigrants. Labour market (in)flexibility is nothing but a veil that exposes or hides this effect, depending on how the screws are adjusted.

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