Labor market policies: historical and comparative perspectives

1. 2 Labor market policies:historical and comparative perspectives Philippe Askenazy (Paris School of Economics) www.jourdan.ens.fr/~askenazy/laborpolicy.htm

2. 1950’s and 60’s • After WWII • US: GI come back … while women work • Massive investments on tertiary education • Europe: reconstruction. • E.g. French GDP per capita = 40% US GDP • Focus on secondary school and/or vocational training • Agricultural modernization…

3. Growing imbalances • US: A productivity slowdown since 1965 • US: An surge of inflation (>4%) since 1965 (why ?) • Global: floating currency regime in 1973 • UK: 10% inflation in 1971 • Europe : some tensions on the labor market (why ?) • Improving the matching “technology”: e.g. creation of the ANPE in 1967 • pre-retirement. E.g. “Garantie de ressource-licenciement” in 1972 • Reduction of working time

4. Economic knowledge on the labor market in 1974: Keynesians versus monetarists PHILLIPS, A.W. 1958. “The Relationship between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957.” Economica 25 (November): 283-99.

5. Economic knowledge on the labor market in 1974: Keynesians versus monetarists PHELPS, EDMUND. 1967. “Phillips Curves, Expectations of Inflation, and Optimal Unemployment over Time.” Economica 34 (August): 254-81. FRIEDMAN, MILTON. 1968. “The Role of Monetary Policy.” American Economic Review 68 (March): 1-17. Friedman quotes Abraham Lincoln’s assertion: “you can fool all of the people some of the time, you can fool some of the people all of the time, but you can’t fool all of the people all of the time” Phillips = you can fool all of the people all of the time

6. Economic knowledge on the labor market in 1974: Keynesians versus monetarists => No room for monetary policy

7. 1975: the NAIRU = a synthesis MODIGLIANI, FRANCO, AND LUCAS PAPADEMOS. 1975. “Targets for Monetary Policy in the Coming Year.” Brookings Papers on Economic Activity, no. 1:141-63. WS-PS

8. 1975: the NAIRU

9. A macro-economic shock • First Oil shock. The Arab Light reached in January 1974 9$ from 2.3$ in October. • Inflation • But in most countries confidence in the growth potential: • In January and still in June 1974, most of national administrations AND the international institutions expected steady growth for France, Italy, Germany...

10. Chirac: Stop and Go 1974: France a new conservative power A young President: Giscard d’Estaing (1974-1981) A young Prime Minister: Jacques Chirac (1974-76) • High inflation, high expected growth • increase of the interest rate, of taxes on firms and households • late 1974: a dramatic drop of manufacturing production (-12% ~ US drop) But interpreted as just cyclical! • Expensive policy in 1975. Public deficit -2.7%

11. 1974-76 Chirac: a defensive labor policy… Two ideas Slowing the firing process Supporting the revenue of the workforce • Administrative control of job separations • Short-time working • + Dramatic reduction of immigration flows • “Allocation spéciale d’attente” • Huge increases of the minimum wage +14% in 2 years • High inflation but growth recovery in 1976 +5%

12. … also in the UK, Germany, etc Budget deficits in most OECD countries UK : Regeneration of British Industry Act: massive nationalization of heavy industries => slow the unemployment rise Germany: support to the apprenticeship system

13. And unemployment rise. “Euro zone”

14. US

15. 1976-1979 UK: IMF intervention • Labour government (James Callaghan) • “Social contract” with Unions • + IMF intervention • Decline of the inflation • 1978: “ Winter of discontent” • Thatcher

16. 1976-1981 Barre: dramatic political errors The “best French economist”: Prime Minister and Minister of Finance Macro priorities: public deficits and monetary stability A micro labor policy: manual jobs

17. 1976-1981 Barre: macro policy • Wages moderation • Balanced public budget in France • Very low public debt in % of GDP…

18. 1976-1981 Barre: macro policy Achieved through rises of taxes and social contributions on labor in % of GDP…

19. 1976-1981 Barre: a costly labor market policy Preserve manual jobs: Subsidies to “old” “male” industries (iron, steel, shipyard…) ~ UK policy Release manual jobs: Attempt to reverse immigration flows Pre-retirement: “Garantie de ressource” Reduction of maximal working time

20. 1976-1981 Barre: a costly labor market policy • Stigmatization of Youths: inadaptability, refuse manual jobs, etc • No education effort but • Specific labor policy: the plans for youths • internships, subsidies • Inefficient and job insecurity. Why ? • 1.5 millions unemploymed in 1981 (0.65 youths) + two digits inflation

21. 1976-1981 Barre: a costly labor market policy

22. 1979: US = a new Paradigm Second Oil shock FED President: Paul Volcker Sacrifice ratio versus Rules and 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.