How To Think About France

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by: Scott Sumner

About once a year Paul Krugman does a post discussing the difference between the US and French economies. Here is Krugman in 2011:

So, here are some [2008] ratios of France to the United States:

GDP per capita: 0.731

GDP per hour worked: 0.988

Employment as a share of population: 0.837

Hours per worker: 0.884

So French workers are roughly as productive as US workers. But fewer Frenchmen and women are working, and when they work, they work fewer hours.

Why are fewer Frenchmen working? As I’ve pointed out, during prime working years they’re as likely to work as Americans. But fewer young people work (in part because of more generous college aid); and, mainly, the French retire earlier. The latter is arguably the result of misguided policies: Mitterand made early retirement alarmingly attractive. But it’s not a problem of weak productivity or mass unemployment.

And why do the French work shorter hours? Probably for the most part because of government policies mandating vacation time.

The bottom line is that France is a society with the same level of technology and productivity as the US, but one that has made different choices about retirement and leisure. Vive la difference!

I’m an academic like Krugman, and not surprisingly I also prefer more leisure time to more GDP. But one “difference” Krugman does not mention is unemployment, which has generally been higher in France than the US over the past 30 years, often by a wide margin (and hence it’s not just the euro problem.)

A few months ago Krugman noticed that France isn’t just poorer than the US, it’s also growing more slowly. That made him slightly less optimistic about France (as compared to the Ostry et al paper he discusses in this post):

Once you delve into this low labor input, it starts to look like the result of some very specific policies rather than redistribution in general: a pension system that encourages early retirement, regulations that give the French shorter hours and much more vacation time than we get.

Overall, I am still mostly persuaded by the Ostry et al work, but I think we need to acknowledge that it’s not quite as slam-dunky as liberals might like.

And now he has a new post emphasizing the fact that France actually has a higher employment rate than the US among prime age workers (25 to 54.) He seems to think that undercuts supply–side position that Europe is depressed due to high taxes and benefits:

The truth is that European-style welfare states have proved more resilient, more successful at job creation, than is allowed for in America’s prevailing economic philosophy.

I mostly agree with Krugman on the facts, but I see them as strongly confirming the Prescott/Mulligan view of the world. Perhaps there’s a framing affect problem here, as Prescott once compared France to Depression-era America, mostly on the basis of the very low level of hours worked. But let’s get past that misleading analogy, and think about what the supply-side model actual predicts. Keep in mind that France has a wide range of policies that reduce aggregate supply:

1. High taxes and benefits, which create high MTRs.

2. High minimum wages and restrictions on firing workers.

What should we expect from these “bad” supply-side policies? I’d say we should expect less work effort at almost every single margin. Earlier retirements, more students staying longer in college, longer vacations, and a higher unemployment rate. And that’s exactly what we see. We might also expect lower productivity. After all, those high tax rates should discourage capital formation, which would result in lower productivity. And yet the figures Krugman cites suggest that productivity is only 1.2% lower than in the US. That doesn’t seem so bad.

But here’s what Krugman misses. His other argument, that prime age employment in France is pretty high, strongly suggests that the productivity numbers are distorted by composition bias. Think about the people who are not employed in France, but who would be employed in America. The rate of employment among French immigrants from North Africa is presumably lower than among Latino immigrants in the US (which seems like the most comparable ethnic group.) The young in France are less like to work, as are the elderly. Given that French employment is much more heavily concentrated in prime age workers, I’d expect higher hourly productivity in France. I wonder how productivity varies controlling for age and ethnicity?

That’s not to say the supply-side model explains everything. I’m not sure why the rate of employment for prime age workers is lower in the US than France, but I’d guess it reflects the fact that the French model does have some advantages over the US model. Just off the top of my head I could imagine these might include a better K-12 system, less incarceration for drug “crimes,” fewer people on disability, etc.

But overall France conforms to the predictions of supply-side economics. The French are smart enough and efficient enough to spread the cost of not working far more effectively than did the US in the 1930s. The psychic pain of being unemployed is much less if you are a young person in school, or someone who retires early, or are spending the month of August in Provence. But their regime is not cost-free. They do have much higher unemployment, and that does impose psychic costs. Liberals constantly remind us (correctly) that unemployment is a devastating problem. And their per capita GDP is only 73% of US levels (in 2008, surely even less today.) And that percentage is gradually declining. Migrants from China and India tend to prefer the US model. So while I think France has a lot of good qualities such as top-notch infrastructure, and indeed arguably has close to the highest quality of life in the world, there is always room for improvement. And the labor market is one area where France falls short, just as the supply-side model predicts. Even modest reforms (say along German lines, not American lines) would deliver important gains. Instead, Germany is moving in France’s direction.

And finally, I don’t think it makes much sense to compare a medium size homogenous country like France to a large heterogeneous country like the US. Krugman has another post pointing out that the European welfare state model doesn’t work as well in Italy. His post is entitled “What’s the Matter with Italy?” and ends with the following:

I’m not going to answer this; truly, I don’t know. But it’s important.

He’s addressing the terrible Italian productivity numbers since 2000. I also don’t know why Italy has declined so sharply in recent years. But there is one thing we do know about Italy, the low level of per capita GDP (compared to France) is almost entirely due to an absolutely horrendous performance in southern Italy, where roughly 1/3 of all Italians live. And there is a lot of circumstantial evidence that at least part of the difference between southern and northern Italy is cultural. Not “cultural” in the sense that some people use the term (a code word for lazy.) After all, southern Italians do quite well in America. Rather cultural in the sense that everyone’s hobbled by a culture of corruption than no single Sicilian or Neapolitan is in a position to change.

So I don’t believe you can think about France vs. the US without also thinking about southern Italy. That’s part of the rich mosaic that is the Welfare States of Europe (the WSE), just as South Dakota Indian reservations, and McAllen Texas, and rural Mississippi are part of the United States of America (USA), the world’s richest big economy. It would probably make more sense to compare France to an above average region of the US, such as New England or the mid-Atlantic states. In that case the problem with the French labor market model would be easier to see. The problem is not that the French model has “failed,” as some conservatives suggest. The problem is that France has not achieved Swiss or New Hampshire levels of success, despite having the human capital and cultural traditions needed to do so. They should aim even higher.

HT: Edward

PS. In 2012 the World Bank has French GDP/person (PPP) at 71.1% of US levels. In 2013 the IMF has French GDP per capita at 67.4%, while the CIA has 67.6%. I suppose you could argue the drop since 2008 is cyclical, except no one is predicting French GDP/person to rise faster than US GDP/person over the next few years. It looks permanent to me.

As a point of comparison, African American households make 65.3% of the US average, and Hispanics make 76.5% of the average. Is that comparison misleading? That’s an understatement; it’s utterly and completely misleading. Apples and oranges. I simply provide the data for all the fools who think income data tells us something useful about issues like economic inequality.

PPS. I just noticed that Tyler Cowen has an excellent post on this topic.