Labor market policies: historical and comparative perspectives

1. 3 Labor market policies:historical and comparative perspectives Philippe Askenazy (Paris School of Economics) www.jourdan.ens.fr/~askenazy/laborpolicy.htm

2. 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

3. 1981-83: dramatic unemployment rise despite new policy • 1979: Thatcher 1981: Reagan Unemployment rate (ILO/OECD) 1981 1983 US 7.6 9.6 France 7.0 8.0 Germany 4.5 7.8 Italy 7.9 9.4 Japan 2.3 2.7 Sweden 2.8 3.9

4. 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 Rather than Discretion: The Inconsistency of Optimal Plans”, Journal of Political Economy (June 1977), pp. 473—91. Lucas, Jr., Robert E. “Econometric Policy Evaluation: A Critique,” Carnegie-Rochester Conference Series on Public Policy (vol. 1, 1975), pp. 19—46.

5. US: Volcker + Reagan

6. UK ≠ US Unemployment did not decline during the 1980’s Why? Thatcher’s policy = a rapid transition from manufacturing to financial activities

7. UK Components of the UK “industrial” policy: - - - - - -

8. France: 1981-1983, a leftist policy Mitterrand: President Mauroy: Prime Minister Socialists + communists But a center-left government for economic affairs Delors: Minister of Economics and Finance Fabius: Ministry of Budget Rocard: Ministry of Planning • Very optimistic expectations: why? • A “new” macro-policy • A “new” micro-policy

9. France: 1981-1983 macro-policy • Idea 1: control the banking system through nationalization • Idea 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

10. 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

11. Unemployment raised but inflation dropped . “Euro zone”

12. 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

13. 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

14. 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

15. 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 - -

16. 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…

17. 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

18. France: 1986-1988, Youth policy and territories • 1986: Social tax cuts for the employment of young workers • So 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

19. Low inflation but unemployment still high. “Euro zone”

20. France 1988-1990: Center-left • Mitterrand reelected • Rocard PM with a “gouvernement d’ouverture” • Encouraging expectations… and realizations • International growth. Why ? • In France GDP growth ~ 4% yearly 1988-1990 • Growth but very cautious policy: stabilization or rationalization of current tools, freezing of privatization One exception: the RMI “Revenu minimum d’insertion” • poor efficiency for labor market. Why ?

21. Minimum income support for family in some European countries (PPP euros per month, 2007) Couple with one child Alone with one child

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

23. 1988-1990 • Decline of short and long-term unemployment in Europe • End of stagflation: low persistent inflation rate • End of the hysteresis phenomenon?