Monday 29 July 2013

How microeconomic reform helps the young find jobs

There's quite a bit of revisionism going on at the moment. In potted format the logic is that deregulation of finance helped, led towards, or even caused, the GFC, hence deregulation in general (or liberalisation, structural reform, microeconomic reform, 'economic rationalism', Rogernomics, call it what you will) is a bad thing, too. Given that microeconomic reform always had its sceptics or outright opponents even pre-GFC, people making this argument have got the wind in their sails. There's some risk that this is becoming the latest conventional wisdom.

I think this line of argument is deeply wrong, and jeopardises many well-deserved successes for microeconomic reform.

Putting finance to one side for a moment, the reality is that in many markets deregulation has produced more flexible, efficient and equitable outcomes than previously, and it is becoming increasingly clear that the economies that took the liberalisation route is the 1980s and 1990s are making a better fist of coping with the post-GFC world than the ones that didn't.

Here's one particularly good, though socially tragic, example of what I mean.

In an earlier post about how the OECD has come up with a very good way of presenting data on unemployment rates in the OECD area, I mentioned in passing the unusually high rate of youth unemployment in France (with its fossilised labour market policies) and how it compared badly with the US's 'sack at will' regime, and in another I noted how France's largely unreformed labour market compared badly with Germany's, which has had a dose of microeconomic reform (adding to the efficiency of a market that was already doing pretty well).

Now four researchers - two French, two German - have just published a discussion paper, "Youth Unemployment in Old Europe: The Polar Cases of France and Germany" (available here) which shows, first, the poor youth unemployment and inactivity outcomes for France and the much better ones for Germany, and second, goes on to analyse why the two large Eurozone economies have behaved so differently.

The relatively poor French outcomes came despite France being hit relatively lightly by the GFC: as this graph from the paper shows, the immediate post-GFC hit to French GDP was significantly less than the hit to Germany's (though Germany subsequently has recovered faster and more strongly).

Here's the NEET (not in employment, education or training) rate for 20-24 year olds for the same group of countries: the French rate has generally been high, and in the past few years has been rising, while Germany's has fallen substantially.

Why these patterns? It's down to the microeconomics of labour market institutions and policies.
Germany has a respected, effective apprenticeship system that efficiently matches employers' needs and education provided. In France, apprenticeships are somewhat sneered at (I'm  paraphrasing here, but that's the gist) and the link with business isn't there: "in particular [French] SMEs are reluctant to hire apprentices"(p12).

A national minimum wage in France shuts out many low-skill young workers: "A large number of young people in France are not sufficiently qualified to be as productive as the minimum wage requires them to be" (p13). Germany has more flexible, locally negotiated minimum wage rates, with the predictable result that "The vast majority of skilled younger workers still have good prospects of entering open-ended contracts in Germany" (p13).

The French labour market is also highly segmented, with an 'insider' group (my description) of "employees in permanent contracts, protected by many rules, often leading to contentious litigation, and not effectively protecting employees while at the same time resulting in very uncertain outcomes for employers" (pp14-15), and everybody else on, at best, short-term contracts. Germany's no paragon, either, but it doesn't have anything like the rigidity of the French system, which again hits the young and inexperienced particularly hard.

It doesn't help that the French network of local placement offices is nigh on useless (much like large swathes of the rest of the French bureaucracy), though to be fair there probably isn't a lot they could achieve, even if they got their act together, when faced with all the other institutional rigidities of the French labour market. And finally the demographics don't help, either, with modest increases in the size of French youth cohorts in coming years (Germany doesn't have the same issue).

The bottom line is that "The situation in France is very alarming and the future prospects of French youths are increasingly dire. This is a socially explosive situation and politicians must act now to avert a lost generation" (p21). The authors are unambiguous about the reason for this social tragedy: "The roots of the problem are located in the structural design of national labor markets and education systems. Hence, Europe’s youth unemployment disease has to be cured with structural reforms" (p25, their emphasis), and they've got a bunch of reform proposals lined up (see the Table, p22), recognising that you can't readily 'cut and paste' things that have taken decades to embed, like the German apprenticeship system, from one country to another.

There are over 5.5 million young people unemployed in the European Union. For them, liberalisation and deregulation isn't the problem: it's the answer.

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