Abstract
The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF, and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.
Werner Schule
Over the past decade, France’s economic growth has on average outperformed that of the euro area. Significant reforms have been implemented, though progress in labor and services markets has been slow. Consequently, labor utilization remains unsatisfactory and unemployment high. Looking forward, the key policy question is how to increase trend growth and secure fiscal consolidation in the face of the impending demographic shock. Recent IMF research has focused on this challenge.
The recovery in French trend growth in the 1990s resulted mostly from capital deepening and an increase in structural employment, as has been pointed out by Nadal de Simone (2003). Total factor productivity growth, however, declined from an average of 2 percent per year during the 1980s to 1.2 percent during the 1990s Everaert and Nadal de Simone, (2003). Capital deepening was due to investment in new technologies. With the notable exception of computers and software, however, labor-saving investment decelerated sharply during the 1990s (Estevão and Levy, 2000).
Despite a gradual decline in the nonaccelerating inflation rate of unemployment, the French economy was nearing its potential at the beginning of this decade (Ubide-Querol, 2000). However, given the high degree of synchronization between the French cycle and that of the rest of the world (Nadal de Simone, 2002), GDP growth was affected by the global downturn in 2001–02. Furthermore, inflation persisted due to idiosyncratic factors and higher-than-expected labor costs following introduction of the 35-hour work week (Weisfeld, 2002; Nadal de Simone, forthcoming). In stark contrast to Germany, the subsequent recovery in France was entirely driven by domestic demand, including private consumption. While French consumption closely tracks households’ disposable income, financial wealth effects are smaller than in the United States, and housing wealth does not seem to have a measurable impact (Schule, 2004). Limited wealth effects may explain why France did not experience a significant decline in the private household savings rate.
On the external side, France’s trade balance moved into deficit in 2004, after net trade contributed negatively to GDP growth for the third year in a row. This happened against a backdrop of booming world trade, sluggish demand within the euro area, and continued appreciation of the euro. Allard (forthcoming) looks at the divergent export performances of France, Germany, the United Kingdom, and Italy and finds that French export weakness relates to regional and product specialization, relative cyclical positions, and price and cost competitiveness.
France’s strong employment performance in the second half of the 1990s can be partly explained by labor market policies. Estevão (2003) finds that direct subsidies for job creation are the most effective labor market policies to raise employment rates, while expenditures on training programs seem to be largely ineffective. The effectiveness of employment subsidies in the 1990s was associated with overall wage moderation (Detragiache and Estevão, 2002a). This moderation of wages could be explained both by a change in the preferences of union members toward favoring employment policies, and by weaker overall union bargaining power. However, the reasons for the change in wage bargaining behavior are hard to pin down (Estevão, 2001; Estevão and Nargis, 2002).
“Despite the liberalization of France’s financial sector since the mid-1980s, state intervention remains widespread and often creates distortions.”
Looking forward, there is uncertainty as to whether wage moderation can be sustained. At the same time, employment subsidies have become an increasing burden on the budget (Mahfouz, 2000), and the focus of employment policies is shifting to labor market structures. Young and unskilled workers are those most affected by current labor market institutions, including employment protection legislation, high minimum wages, and unemployment benefits. Giuliano (2004) finds that high unemployment in France is not driven by mobility-induced search. Increasing training, with costs shared between employer and employees, may thus be a valid avenue to improve the employment experience of low-skilled workers. Zhou (forthcoming) analyzes the consequences of employment protection legislation on unemployment in France. Calibrating a search matching model with hiring and firing restrictions, she argues that a partial reform that facilitates the use of fixed-term contracts—but keeps the stringent permanent job security provision unchanged—is more likely to raise unemployment. A single contract with low firing costs would be a more effective way to lower unemployment.
Labor, product, and services market reforms have mutually reinforcing benefits. Despite the liberalization of France’s financial sector since the mid-1980s, state intervention remains widespread and often creates distortions. For instance, the sluggish adjustment of interest rates on consumer credits and administered saving schemes has hampered the pass-through of monetary policy. Allard and Fonteyne (2004) estimate that about 3¼ percentage points of consumption growth has been temporarily forgone during the European Central Bank’s recent easing cycle. Schule (forthcoming) measures the macro-economic effects of increasing competition in labor, product, and services markets. Simulations using the IMF’s global economic model show that the long-run effects on the level of GDP are large, up to 15 percent. Comprehensive reforms across all markets ensure a more equal distribution of the gains, measured in consumption units, while coordinating structural reforms among the large euro-area countries allows monetary accommodation. As a result, transitory adjustment costs are significantly lower.
Finally, it is worth mentioning that the “fiscal dividend” from strong employment growth has been negligible because of an expansion of social programs and public sector jobs for youth, along with the growing fiscal costs of reductions in social security (Detragiache and Estevão, 2002b). Mahfouz (2000) recommends that efforts to alleviate the tax burden target supply and focus on well-identified distortions that result in disincentives to work. Within the boundaries of the Stability and Growth Pact, more emphasis should also be placed on spending rules, which do not require discretionary measures to offset cyclical fluctuations in revenues, allowing automatic stabilizers to work (Di Bella, 2002; Daban and others, 2003).
References
Allard, Celine, forthcoming, “Has France Lost Competitiveness?” in IMF Country Report (Washington: International Monetary Fund).
Allard, Celine, and Wim Fonteyne, 2004, “Public Intervention in Financial Markets: Obstacles to Monetary Transmission?” in France: Selected Issues, IMF Country Report No. 04/346 (Washington: International Monetary Fund).
Daban, Theresa, Enrica Detragiache, Gabriel di Bella, Gian Maria Milesi-Ferreti, and Steven Symansky, 2003, Rules-Based Fiscal Policy in France, Germany, Italy and Spain, IMF Occasional Paper No. 225 (Washington: International Monetary Fund).
Detragiache, Enrica, and Marcello Estevão, 2002a, “Wage Moderation and Long-Run Unemployment in France,” in France: Selected Issues, IMF Country Report No. 02/249 (Washington: International Monetary Fund).
Detragiache, Enrica, and Marcello Estevão, 2002b, “The Fiscal Effects of Job-Rich Growth in France,” in France: Selected Issues, IMF Country Report No. 02/249 (Washington: International Monetary Fund).
Di Bella, Gabriel, 2002, “Automatic Fiscal Stabilizers in France,” IMF Working Paper 02/199.
Estevão, Marcello, 2001, France: Selected Issues — Labor Market Developments and Wage Moderation in France in the 1990s, IMF Country Report No. 01/198 (Washington: International Monetary Fund).
Estevão, Marcello, 2003, “Employment and Wage Effects of Active Labor Market Policies,” in France: Selected Issues, IMF Country Report No. 03/335 (Washington: International Monetary Fund).
Estevão, Marcello, and Joaquim Levy, 2000, “The New Economy in France: Developments and Prospects,” in France: Selected Issues, IMF Country Report No. 00/148 (Washington: International Monetary Fund).
Estevão, Marcello, and Joaquim Levy, and Nigar Nargis, 2002, “Wage Moderation in France,” IMF Working Paper 02/151.
Everaert, Luc, and Francisco Nadal de Simone, 2003, “Capital Operating Time and Total Factor Productivity in France,” IMF Working Paper 03/128.
Giuliano, Paola, 2004, “Unemployment, Wage Growth, and Job Mobility of Young Workers in France and West Germany,” in France: Selected Issues, IMF Country Report No. 04/346 (Washington: International Monetary Fund).
Mahfouz, Selma, 2000, “The French Tax System – Recent Developments and Key Issues,” in France: Selected Issues, IMF Country Report No. 00/148 (Washington: International Monetary Fund).
Nadal de Simone, Francisco, 2002, “Common and Idiosyncratic Components of the French Business Cycle,” in France: Selected Issues, IMF Country Report No. 02/249 (Washington: International Monetary Fund).
Nadal de Simone, Francisco, 2003, “Potential Growth of the French Economy,” in France: Selected Issues, IMF Country Report No. 03/335 (Washington: International Monetary Fund).
Nadal de Simone, Francisco, forthcoming, “Recent French Inflation Behavior: Is it Any Different from the Euro Area?” in IMF Country Report (Washington: International Monetary Fund).
Schule, Werner, 2004, “Household Consumption in France,” in France: Selected Issues, IMF Country Report No. 04/346 (Washington: International Monetary Fund).
Schule, Werner, forthcoming, “Estimating the Macroeconomic Effects of Higher Competition in Labor and Product Markets,” IMF Country Report (Washington: International Monetary Fund).
Ubide-Querol, Angel, 2000, “Measures of Slack in the French Economy,” in France: Selected Issues, IMF Country Report No. 00/148 (Washington: International Monetary Fund).
Weisfeld, Hans, 2002, “Explaining Inflation With the Help of the New Keynesian Phillips Curve,” in France: Selected Issues, IMF Country Report No. 02/249 (Washington: International Monetary Fund).
Zhou, Jianping, forthcoming, “Employment Protection and Unemployment in France,” in IMF Country Report (Washington: International Monetary Fund).
IMF Country Reports are available at www.imf.org. Selected Issues consist of self-contained analytical chapters addressing specific topics in depth. They are of interest to both policymakers and researchers.