The similar jobless rates for low-skilled, middle-aged men hide very different labour-market dynamics. In America, such a worker was eight times more likely to lose a job as in France; but hirings per worker were six times greater than in France. Thus while a French worker is less likely to be laid off, if he does become unemployed he tends to stay out of work for much longer than in America.

This is exactly what critics of labour-market rigidities would expect. So Messrs Cohen, Lefranc and Saint-Paul try to test whether the cause of France’s lower hiring rate is that more generous jobless benefits and higher minimum wages encourage the unemployed to insist on higher wages before returning to work than Americans demand. (America’s minimum wage is only 35% of average wages, against 60% in France.) They do this by comparing the wages of workers who had recently been unemployed with those who had never experienced unemployment.

If minimum wages and jobless benefits made no difference, one would expect the recently unemployed to be forced to accept lower wages than existing employees, because their skills had rusted while they were idle. But the authors find that the average wage discount between displaced workers and active workers is roughly the same in France and America. From this they conclude that the minimum wage and unemployment benefits are no more important in explaining unemployment in France than in America.

The main reason why hiring rates are so low in France, reckon the economists, lies with the high cost of firing workers. The authors also blame a slowdown in growth, which has exacerbated the negative impact of high firing costs. When growth is strong, the value of an extra worker is higher relative to hiring costs. It is also worthwhile for firms to retrain workers who are pushed aside by new technology, say, when growth is rapid. Thus slower growth has reduced the hiring rate and increased the separation rate.

The virtue of this study is its use of detailed microeconomic data; aggregate jobless figures tend to conceal too much. It is also clear that governments should make it easier for firms to fire workers. But politicians would be wrong to accept the conclusion that minimum wages and unemployment benefits are irrelevant.

For one thing, the authors’ methodology creates a problem. Even if the wage discount between recently unemployed and active workers is the same in France and America, this sample of workers excludes any unemployed who have not found a job, but would be willing to work for less than the minimum wage. This is no small omission, given that around 15% of American workers are paid less than France’s minimum wage. Many of these are young people and older women—the very groups that have high jobless rates in France. Indeed, this is why several countries, including France, allow some, but not enough, young workers to be paid less than the minimum wage (see article).

Think flexible

More important, the wage discount is a poor measure of wage flexibility; it says little about the ability of wages to adjust to lower demand for certain types of labour. When wages are flexible downwards, as in America, more low-skilled jobs exist. This flexibility is lacking in France. Slower growth may have played a part, but growth rates are themselves affected by labour-market efficiency.

Another recent study† has no doubts about the ill effect on jobs of a high minimum wage. It uses the fact that during the 1980s minimum wages rose much faster than inflation in France, but fell in real terms in America. Using data from household surveys, the study compares the effects of these changes on workers earning wages close to the minimum. In both France and America, a 1% rise in the real minimum wage reduces the probability of a young man on such wages being employed by 2-2.5%.

Europeans may prefer their high unemployment and “decent” wages to America’s low unemployment and low pay. That is a valid choice for politicians to make. But to try to argue that high unemployment has nothing to do with wage inflexibility is wishful thinking.

* “French Unemployment: Why France and the USA are alike”, by D. Cohen, A. Lefranc and G. Saint-Paul. Economic Policy 25. October 1997.

† “Minimum Wages and Youth Unemployment in France and the United States”, by J. Abowd, F. Kramarz, T. Lemieux and D. Margolis. NBER working paper 6111.



Setting a minimum wage

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