1. Labor market policies 1 of 20 3 Labor market policies: historical and comparative perspectives Philippe Askenazy (Paris School of Economics) www.jourdan.ens.fr/~askenazy/laborpolicy.htm

2. Labor market policies 2 of 20 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. Labor market policies 3 of 20 1981-83: dramatic unemployment rise despite new policy Unemployment rate (ILO/OECD) 19811983 US7.69.6 France7.08.0 Germany4.57.8 Italy7.99.4 Japan2.32.7 Sweden2.83.9 1979: Thatcher1981: Reagan

4. Labor market policies 4 of 20 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. Labor market policies 5 of 20 US: Volcker + Reagan

6. Labor market policies 6 of 20 UK ≠ US Unemployment did not decline during the 1980’s Why? Thatcher’s policy = a rapid transition from manufacturing to financial activities

7. Labor market policies 7 of 20 UK Components of the UK “industrial” policy: -

8. Labor market policies 8 of 20 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. Labor market policies 9 of 20 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. Labor market policies 10 of 20 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. Labor market policies 11 of 20 Unemployment raised but inflation dropped. “Euro zone”

12. Labor market policies 12 of 20 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. Labor market policies 13 of 20 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. Labor market policies 14 of 20 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. Labor market policies 15 of 20 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. Labor market policies 16 of 20 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. Labor market policies 17 of 20 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. Labor market policies 18 of 20 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. Labor market policies 19 of 20 Low inflation but unemployment still high. “Euro zone”

20. Labor market policies 20 of 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 One exception: the RMI “Revenu minimum d’insertion”  poor efficiency for labor market. Why ? Growth but very cautious policy: stabilization or rationalization of current tools, freezing of privatization

21. Labor market policies 21 of 20 Minimum income support for family in some European countries (PPP euros per month, 2007) Couple withone child Alone withone child

22. Labor market policies 22 of 20 “Euro zone”: 1987-1990 a new Phillips curve?

23. Labor market policies 23 of 20 1988-1990  Decline of short and long-term unemployment in Europe  End of stagflation: low persistent inflation rate  End of the hysteresis phenomenon?