I read so often on Catholic blogs and elsewhere about the superiority of the American economic model. In this view, the European economy is squashed by a big government socialist regulated nanny state behemoth, crushing freedom and initiative, and dooming the citizens of Europe to perpetual backwardness! I want to address this point directly, appealing simply to economics. And I will take France as the comparator, as it is a large European economy, not as economically successful as some its smaller neighbors, and because it occupies a special place in the hearts of the American right. This will be narrowly on economic outcomes, and will not reiterate points I have made before on the lower poverty, higher equality, as well as better social outcomes (health and education) in European countries.
First thing first. Bobby Kennedy’s point notwithstanding, the simplest measure of of welfare is GDP per capita (gross domestic product divided by total population). And if you look at the numbers, you will see that the GDP per capita of France is only three-quarters that of the United States (all figures I quote will come from the OECD, and will be averaged over a decade to get rid of cyclical variation). So there is something wrong with France, right? It’s those nasty socialists, isn’t it? Well, not quite. Let’s go further and break down GDP per capita by its subcomponents. For a start let Y connote GDP and POP the total population. Then GDP per capita (Y/POP) can be broken down as follows:
Y/POP = (Y/H) * (H/L) * (L/POP)
What this does is break income per capita into three distinct terms. First, Y/H is real output divided by hours worked, or productivity per hour. H/L is hours worked per employee, or average hours. And L/POP is the ratio of employment to population. When one of these ratios changes, living standards move. This is a simple but powerful tool.
Now let’s look at the numbers. First, productivity per hour worked in France is pretty much par with the United States. There are no appreciable differences. The difference derives from he other two factors. And indeed, average hours worked (H/L) are quite a bit lower in the France, almost 10 percent lower. But is this a bad thing? Hardly. This represents a social choice whereby French people are willing to give up some extra income in return for more time off. In fact, I would call this a pro-family social choice.
The final piece of the puzzle is the employment rate, the ratio of employment to population. That is far lower in France, standing at about 84 percent of the US rate; and this is a big explanation behind the difference in GDP per capita (it’s not demographics either, as the numbers are similar when we look at working age rather than total population). But even this is misleading. About 80 percent of French prime-age adults (age 25-54) are employed, which again is similar to the United States. The big differences are for the young and the old: among French 15-24 year olds, only 25 percent are employed, compared to 54 percent of Americans of the same age. And the same pattern emerges among the old, as only 41 percent of those aged 55-64 are employed in France, against 62 percent in the United States.
What’s going on here? Well, much of the difference in youth employment boils down to the fact that more French than Americans of that age are in full-time education. Of those aged 15-19, 92 percent are in school in France, opposed to 84 percent in the United States. For 20-24 year olds, the rates are 45 percent and 35 percent respectively. For the young, this is most, but not all, of the story. A big problem in France is that regulations make it difficult to fire workers, which has the effect of creating a dual labor market of protected insiders and frustrated outsiders. Much of the tension among the North African immigrant community, with a large number of unskilled younger people, relates to this problem, and France would do well to deal with it.
What about the old? As in many European countries, the French government used inducements to early retirement to keep down the headline unemployment rate. (This is why I prefer employment-population measures to unemployment, as it picks up on labor force inactivity manifested through a low participation rate). In France, the government lowered the retirement age to 60, and workers were entitled to full pensions. In other countries, such as the Nordics, the exit route came through the disability insurance program. This is indeed one of Europe’s key challenges today: to bring older workers back into the labor force, especially when they might not have the requisite skills.
At the conclusion of this exercise, we have a very specific problem relating to the prevalence of early retirement. This is not insurmountable, and it is a far cry from the broad anti-European rhetoric bandied about. Let’s put one theory to bed: large welfare states, paid for by high taxes, do not necessarily lead to lower living standards. Productivity, as we haev seen, is unaffected. And indeed, some of the most successful countries in Europe today are the Nordic countries, countries with the highest taxes and the highest employment rates. Any lingering difference is due to a choice to work less hours.
The Danish model is an interesting case: if a worker becomes unemployed, he/she gets unemployment benefit at around 90 percent of the last wage. But this is a short-term payment, and to qualify for benefits, the unemployed must sign up for education or training programs. Also, Denmark does not have the French employment protection rules, meaning that it is pretty easy to get fired in Denmark. Think of it this way: instead of protecting jobs, the system protects people while they search for a new job. You can have a dynamic economy coupled with strong social protection. A lot more consistent and sensible than ad hoc stimulus packages….
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