Tuesday, March 28, 2006

Bringing the French Unemployment Picture Into Focus

News reports consistently cite the high unemployment rate for young people in France. According to the OECD, in 2002 the unemployment rate for French 20- to- 24-year-olds was 15.5%. This is higher than many other industrialized countries--for example, the same figure for Canada was just 7.2%, less than half of the French statistic.

However, while the difference in the unemployment rate between two adjacent years in the same country can tell you a lot about the state of the economy, the difference in unemployment rates between two countries is harder to interpret because so many factors can differ. To make a meaningful comparison of the labor market in two countries, it helps to look at other variables besides the unemployment rate. For example, the same OECD report also shows that the fraction of all 20- to- 24-year-olds who were unemployed was 8.4% in France, compared to 5.7% in Canada--higher to be sure, but by much less.

How can these two measures of joblessness paint such different pictures? Might it be that labor market conditions in France are not as bad as the unemployment rate suggests? Recall that the unemployment rate is the fraction of the labor force that is unemployed, not the fraction of the population. The unemployment rate is higher in France because a smaller fraction of 20- to- 24-year-olds are in the labor force there. The labor force participation rate for this age group is 54% in France and 79% in Canada.

These rates mean that for every 1000 20 -to- 24-year-olds in France, 540 say they want to work and 84 of them are unemployed, which leads to an unemployment rate of 84/540 or about 15%. For every 1000 20- to- 24-year-olds in Canada, 790 are in the labor force and 57 of them are unemployed, which leads to an unemployment rate of 57/790 or about 7%.

Yet other statistics show more clearly that the labor market opportunities for some young people in France are in fact much worse than in Canada. One useful measure is the duration of unemployment. For each 1000 young people in France, take the 84 who are in the labor force and unemployed. Of these, 34 have been unemployed for more than 6 months. Of the corresponding 57 people who are unemployed in Canada, only 5 have been unemployed for this long. (See Table 2, below.) This tells you that on average, spells of unemployment last much longer in France.

So the two major differences between France and Canada are (1) France has a lower labor force participation rate, and (2) long-term unemployment is much more prevalent in France. There are several explanations for these differences. A recent article in the Financial Times suggested that the main reason for the lower labor force participation rate may be that more twenty-somethings in France attend university. In fact, this can account for only a small part of the difference. The fraction of 20- to- 24-year-olds in education is only five percentage points higher in France--44% compared with 39% in Canada. Most of the 25 percentage point difference in labor force participation rates must therefore arise for some other reason.

A more troubling explanation for both differences is that many young people in France stay out of the labor force because they are discouraged--that is, they have been unemployed for so long that they do not feel that they can find a job, so they stop looking. Or they never bother to look. How many students would try to find a summer job knowing that it could take more than a summer’s worth of searching to find one? If many of the people who are out of the labor force would actually like to work but are so discouraged that they don’t even try, the human cost of France’s labor market rigidities may be even higher than its unemployment rate suggests.

1. Students across France have been protesting a new law that would make it easier for French employers to fire young workers. How might the passage of such a law affect the unemployment rate and the labor force participation rate? Why?

2. France has an unusually high minimum wage. Consider two groups: young people who have completed high school and drop outs who haven’t. Which group would you expect to have more unemployment because of the minimum wage? Would you expect this unemployment to be short-term or long-term?

3. Suppose the poor labor market for French youth encourages French students to stay in school longer than they would otherwise choose to, earning postgraduate degrees. What long-term effect would this have on the French economy?

Paul Romer is currently the STANCO 25 Professor of Economics in the Graduate School of Business at Stanford University and the founder of Aplia.



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