Is France less distorted than we think?

When you think about market distortions through regulation and taxation in a developed economy, you think first about France. It is the prime example of how excessive government intervention can lead to disincentives for production and to major misallocations of resources across firms and sectors. This all accepted wisdom, except nobody actually measured the misallocation part.

Flora Bellone and Jérémy Mallen-Pisano do this using the Chang-Tai Hsieh and Peter Klenow methodology which consists of using a model of firms heterogeneous in their use of capital, labor and technology. Taking this to data, distortions in the use of factors at the firm or the sector level translate into lower aggregate total factor productivity. Hsieh and Klenow showed that there were massive distortions in China and India relative to the USA. Bellone and Mallen-Pisano show that for France, there are no more distortions that in the United States. Thus, there are no misallocations across firms or sectors, but it remains that there can still be a uniform misallocation across the entire economy, say, because of distortions on the labor market applying equally to all firms.

Ethnic ghettos and unemployment

Both in Europe and the United States, minorities face significantly higher unemployment rates. In addition, they live in places that are farther from work than others, or at least their commuting options make it more difficult to get to work. Are the two linked? Obviously, if you do not live where the jobs are, unemployment gets more prevalent. But one could also move, and this may be more difficult for minorities, for various reasons. But before going there, one needs to determine how much of the unemployment rate is due to this spatial mismatch.

Laurent Gobillon, Peter Rupert and Etienne Wasmer pick up on a previous paper of the latter two, which I discussed here. In this spatial search-and-matching model, commuting time acts as a friction, but can only explain a fraction of the unemployment rate gap between "majorities" and "minorities". So other factors are clearly at play. The fact that minorities are de facto confined to particular areas certainly plays a role here.

Department size and research productivity

This is a bit late for the current job market for Economics PhDs, but say you have to choose among several job offers (lucky you). The departments are are all of equal prestige and working conditions, salary, and geographic environment are all comparable. The only difference is the size of the faculty. What offer should you take if you care about your future research output?

Clément Bosquet and Pierre-Philippe Combes say you should go for the uniformly good, more field diverse, and larger department. At least this applies to French academic economists. Even more interesting, they observe that department characteristics are as important as researcher characteristics. The initial placement of a researcher thus matters a lot for her future, and this may explain why there are so few success stories after an initially poor placement, at least in Economics. Of course, the academic market in France is very different from any other country, so I am not sure the results can generalize, but this is a start.

Why is it so difficult to find a job in France?

For anybody thinking about labor market policy, France is a basket case of how you should not give in to the pressure from the street and rigidify the labor market to almost everyone's disadvantage. With such extreme job protections, do then labor market status transitions look markedly different from other countries?

Jean-Olivier Hairault, Thomas Le Barbanchon and Thepthida Sopraseuth use administrative and labor market survey data to build time series for job separation and job finding rates. While their analysis is somewhat limited by the fact that they cannot capture a third state, "not in the labor force," the results are strong enough to conclude that contrarily to, say, the US the job finding rate is the major driver in changes to the unemployment rate. In other words, employment protection is effective and the job separation rate fluctuates little with economic activity. However, hiring fluctuates a lot, and given the high average unemployment rate, it is a clear indication that employers are scared to hire workers they could not get rid of if necessary. This is a clear indictment of excessive employment protection.

Are smart meters worth it?

Smart meters that allow you to monitor and manage electricity consumption are all the rage now. Power companies push them to consumers as the best deal that has ever been offered. And it looks enticing, as it promised more flexibility and the possibility of applying peak pricing in areas where this is not yet current. But is there really that much to gain? After all, these meters are not inexpensive technology.

Thomas-Olivier Léautier helps us here. He estimates how the responses of French households would be once they have smart meters and they can adjust their consumption to market prices. The outcome is humbling: the yearly savings would amount to 1-4€, which is likely less than forgetting to close a window one day in winter and much less than the 25 &euro/year cost of a smart meter. I see two reasons for this result. First, most households consume little energy. Second, their consumption pattern is not that flexible.

But would this result extend to other countries? North American households use a lot more electricity than French households due harsher climates and more carelessness about energy consumption. A smart meter there may in particular make people more aware of their power consumption and how one can reduce it to save money. This is much like a car that shows current gas consumption entices the driver to use less fuel. And this effect may make it worth it.

Tax credits for economic development do not work

Every government, from the most local to the national one, touts its success in attracting business and creating jobs through well targeted tax credits. The latter obviously come at a cost, but that is supposed to be well-compensated by new tax revenue from increased income in the particular jurisdiction. Or so these public officials think.

Luc Behaghel, Adrien Lorenceau and Simon Quantin study the French tax credit initiatives that were supposed to bring more economic activity in some rather deserted rural areas. These tax credits were implemented in various ways across time and firms, which allows to estimate their impact. And no way which way you look at the data, there is nothing to be found. That is pretty bad. In they had found an impact, one could have discussed whether it was large enough to generate increased public revenue to fund the tax credits. But there is none of that. Pure waste.

Spouses and unemployment duration

When unemployed, some people search more intensely for a new job than others. That will of course depend on their personal circumstances. The urgency of getting some income is obviously more pressing when there is little alternative income, and one such alternative is the spouse.

Stefania Marcassa studies French couples where one spouse works and the other is unemployed. It turns out unemployed men search longer for a job if their spouse earns less, while it is reversed for unemployed women. That turns out to be consistent, in a standard labor search model, with a breadwinner stigma for men. French men do not seems to be able to bear the thought of having a successful wife while being unemployed, while women see no hurry to work if their husband is doing well. Clearly, the sexist ones here are the men.

About fertility declines in wars

A typical war has a large impact on demographics. People die, mostly men. Fewer people are born, because men a missing, both because they are on the battlefield or, as mentioned, dead. At the end of the war, fertility shoots up to catch up for "missed opportunities", and we get baby booms. Well that is the conventional wisdom, and it is not necessarily right. For example, there is some evidence, discussed here before, that the baby boom after World War II was not about the men returning home and catching up on baby making. And one could also challenge the idea that fertility drops during the war because of the absence of men.

Guillaume Vandenbroucke does this for World War I in France. he draws a model of fertility choice where couples factor in that the potential father may die in war. Of course, this reduces fertility, but the question is how much. To get an answer, the model is carefully calibrated to pre-war fertility, mortality and income figures. Then 97% of the drop in fertility is explained by expectations. Of course, this assumes that the French correctly predicted the probability of death. Given that this war lasted much longer than expected and introduced killing technologies of never-seen-before efficacy, I doubt this is a correct assessment of the expectations at the time.

European credit ratings: a case of self-fulfilling expectations

Europe is a mess, and one has to wonder why. First, there is no reason that the credit difficulties of Greece should have any consequences on the Euro. I doubt the US Federal Reserve would feel compelled to do anything if a state were to default on its debt, and nobody would claim it should. Why should it be different in Europe? Because politics want it.

To make things worse, the credit rating agencies generate self-fulfilling expectations. These are of a different kind of those that make that Greece will have to default. Witness yesterday's announcement by Moody's while threatening a downgrade of French debt: "Elevated borrowing costs persisting for an extended period would amplify the fiscal challenges the French government faces amid a deteriorating growth outlook, with negative credit implications." In other words, high credit costs would lead to a downgrade and this would lead to even higher credit costs, etc. The rating is not about the intrinsic risk of default (what rating agencies are supposed to measure) but about the expectation of where the rating should, as signaled by the cost of credit. And this after Standard and Poor's downgraded the same debt "by error." The rating agencies are clearly not helping at this point.

Family firms are like public employers

Family-owned businesses have good reputation with the public, for reasons that have never been clear to me. Indeed, it is even good marketing to mention that a firm is family-owned. Why? The products are not likely to be better. I suppose such firms are possibly smaller and younger, thus the likelihood of a product to be discontinued is higher. I guess such firms have stronger ties with the community, in case this matters.

Andrea Bassanini, Eve Caroli, Antoine Rebérioux and Thomas Breda find that there is an important distinction between family-owned business and other privately-owned ones. Looking at France, they observe that they pay there workers less, which does not seem like a big advantage in the public eye. However, families tend to offer more job security. This mirrors the public sector that in the end offers the same value as private enterprises, trading off job security and pay. So after all, family-owned are more involved in the community by providing more insurance to workers through job security, like so often the French government does by pursing rather Keynesian policies. I wonder whether this would apply to other countries where the public sector is not necessarily leading with such policies.

Economic education and opinions about free markets

Public opinion about economic policy in France and the United States are very contrasted. In France, free markets are viewed very suspiciously and government intervention is required left and right. In the US, it is about the opposite, the government should stay out of any business and no tax can be justified. I find it very frustrating to talk to people (not economists) from both countries as they seem conditioned to believe steadfastly in their view. In the case of France, I was nice shocked to hear an elected politician claim that social security could easily be fixed by taking the money that "lies" in the banks.

Radu Vranceanu and Jerome Barthelemy try to relate beliefs in economic paradigms and economic education. Through a survey, they asked French Internet users about their knowledge of basic economic principles, their views on pro-market reforms, along with various demographic and education indicators. The survey was linked from a business school's website, so answers come from a population likely to be more interested than average in economic issue, and probably more likely to be open to pro-business reforms than the average French citizen. Still, it is clear that economic literacy is a god predictor of open-mindedness towards free markets. I bet it is just the opposite in the US.

Another French experiment with work hours going bad

The French have a special knack in messing with labor markets. The last spectacular failure was the law that limited almost everyone's workweek to 35 hours in the hope this would spread the total hours to more people, lead to more employment and solve a chronic unemployment problem. Well, it did not and lead to loss of productivity and ridiculed controls. And I doubt many economists were surprised. With the election of Sarkozy, this law was quickly scraped and an equally ridiculous law from the other end of the spectrum was introduced.

Pierre Cahuc and Stéphane Carcillo discuss the French policy of making overtime work tax exempt. One can really question what Sarkozy had in mind with this policy, as the adverse consequences are all too obvious. First what is overtime is easily manipulated, and suddenly many regular hours became overtime hours. Second, if the intend was to increase the total hours of work, it was bound to fail if most of the overtime is coming from workalcoholics who would work no matter what the wage is. This is why you need to tax them instead of subsidizing them. And Cahuc and Carcillo find that indeed total hours hardly changed. So what all this amounted to is a generous lump-sum subsidy to highly-skilled workalcoholics. Great.

Why Greece will never make it: self-fulfilling expectations about social security

Mediterranean countries have many things in common, one of them is an early retirement age. You certainly read about the uproar when the Germans learned that they had to bail out the Greeks who enjoy retirement many years earlier. Now there is much pressure on Greece to lower and delay pensions, but there is tremendous resistance from the street. The same is happening right now in France as well. Yet, initiative to delay retirement in Northern Europe or North America, where retirement age is already higher, do not generate much discussion.

Ryo Arawatari and Tetsuo Ono may have an explanation for this dichotomy: self-fulfilling expectations. The story is very intuitive. If you expect pensions to be generous, there is no point in accumulating savings for retirement, and you do not invest in education either. And once you are low skill, you will vote for generous pensions. The opposite happens with expectations of small pensions. And once you are in such an equilibrium, it is very very difficult to get out of it: people want generous pensions, and the newcomers know this and thus expect this not to change, and make the appropriate (non)investments. To change this, you need to massively lower expectations during a whole generation or more. No Greek government can have that much staying power. And neither does the French one.

About the persistence of gender roles

We live in a society where traditionally the role of the wife was to take care of the house and the children. Now that we have schools, daycare and better domestic technologies, wifes do not need to spend that much time at home and can participate in the labor market. By the principle of substitutability, when women work more on the market, men should participate more in household work, especially if the woman is the bread winner.

Sayyid Salman Rizavi and Catherine Sofer look at time use data in France. And while male household work responds to the female labor supply, it is nearly not enough to overcome century old persistence in gender roles. And yet, I would have thought that France would be, with Scandinavia, the first place where this would happen. Indeed, female labor market participation is especially high, French women are notoriously independent and yet they still manage to have more children than other Europeans. Somehow, they are really efficient, yet they still get burdened with most of the household work. There is no hope if even French women cannot make it.

The debt that would not disappear

There are sometimes papers you just cannot put down only because they are so well crafted, even though your are not really interested in their topic. I just read one of those, by François Velde.

The French government is still honoring an annuity dating back from 1738, yielding annually €1.20 to be distributed to 58 people. That seems to be a very inconsequential amount, but this particular debt, which survived several kings and political regimes, just does not die. I do not want to reveal too much about the story here, as Velde does a remarkable job at trying to understand where this annuity comes from, how it survived various challenges and how its current amount was established. Along the way, we learn a lot about politics and economics through almost three centuries of French history. A true page turner.

Policy inertia through educational elites

Some economists speak sometimes a language that is even difficult to comprehend by other economists. This happens in particular when they draw from other social sciences. An expert in this is Gilles Saint-Paul, whose major research agenda is to understand why France has chosen not to adhere to free market principles despite repeated evidence it could do better with less government intervention.

In his latest piece, he suggests that there is very strong institutional inertia that is fed by the institution itself. I see two major points in his discourse. The first is that there is an educational elite that is biased in some way and makes it thus impossible for the general public to really understand what is going on, "learn the parameters of the model." And in France this elite is anti free market. The second is that because policy choices are consistently made with a government intervention bias, people never have the opportunity to learn how good free markets actually are.

Saint-Paul certainly has a point with cultural elites being very influential in France. Where else can philosophers become TV stars? It is also true that this elite lives in some sort of utopia where the world can be perfected by intervention (and unlimited budgets). This borders sometimes on the naïveté elementary school kids display when they feel they solved the Darfur problem by writing a letter to the President (my kid did). It is also true that the French are repeatedly shown the problems of free capitalism, like in the US. And the exact reverse happens in the US, where free markets are taught and thought to be perfect, and any government intervention is evil.

Not that free markets or government control are perfect, but, as so often, there is a middle ground. And with Sarkozy, the French are getting more of a taste of free markets. And on the other side of the pond, Obama is putting options on the table that should alleviate some of the ill effects of free markets. Maybe we are now seeing this inertia crumbling.

Explaining high unemployment and low mobility in Europe

There is an endless stream of papers trying to understand why, on average, unemployment rates are higher in Europe than in North America. I have reported here about several of the recent ones, and there seems no shortage of new explanations. In fact, if one were to build a model with all those explanations, one would probably be left to explain why after all the unemployment rate is not even higher in Europe...

So what is the latest explanation? Peter Rupert and Etienne Wasmer pick up the ball where several left it: high unemployment is due to low mobility: Europeans are much more attached to their region and are less willing to move for a new job. This begs the question as to why. This calls for a model that explains both unemployment and mobility, based on some friction that differentiates North America from Europe (and does not involve taste shocks, the catch-all for the unexplained). Rupert and Wasmer argue that differences in unemployment insurance benefits and taxes are not sufficient to explain the differential, one needs also to factor in commuting costs. While commuting time is a little shorter in, say, France, fuel costs are much higher, which explains the shorter commute and the lower mobility.

Calibrating this labor search model, Rupert and Wasmer find that indeed they can explain both the unemployment rate and mobility differentials. But I have a feeling this is not the end of the story. If the cost of commuting is so high, why not move closer to the job? European housing markets are much less liquid than in the US. Why? It seems the economic force discussed here should make them more liquid.

Monaco set to expand

Monaco has a tiny territory and is bursting. To expand, it seems to have nowhere to go but the sea, à la the Netherlands. And this seems exactly to be the plan: filling up parts of the Mediterranean sea on the shores of Monaco at a cost of €5 billion, to deliver 275,000 square meters of land. This is about US$ 3,000 a square foot. Monaco can do better than that.

The area around Monaco is quite hilly, so I suspect the water is not shallow. This makes it particularly difficult to fill. Also, there may be environmental issues with marine life. I think it would be much simpler to simply expand into existing land, i. e., buy it from neighboring France. And France should be happy to sell.

France should be able to get a good price for it. And it is not losing much. Monaco is a tax tax haven, but not for French nationals. Indeed, after France embargoed Monaco in 1963 because of tax cheats, Monaco had to give in and let France tax its citizens living in Monaco. So no tax revenue loss for France, a apart from the non-French residents that would fall out of its jurisdiction.