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Philippe Askenazy (Paris School of Economics) www.jourdan.ens.fr/~askenazy/laborpolicy.htm
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1950’s and 60’s
After WWII
US : GI come back … while women work

Massive investments on tertiary education
Europe : reconstruction.
E.g. French GDP per capita = 40% US GDP

Focus on secondary school and/or vocational training
 Agricultural modernization…
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Growing imbalances
US: A productivity slowdown since 1965
US: An surge of inflation (>4%) since 1965 (why ?)
Global: floating currency regime in 1973
UK: 10% inflation in 1971
Europe : some tensions on the labor market (why ?)
 Improving the matching “technology”: e.g. creation of the ANPE in 1967
 preretirement. E.g. “Garantie de ressourcelicenciement” in 1972

Reduction of working time
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Economic knowledge on the labor market in
1974: Keynesians versus monetarists
PHILLIPS, A.W. 1958. “The Relationship between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-
1957.” Economica 25 (November): 283-99.
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Economic knowledge on the labor market in
1974: Keynesians versus monetarists
PHELPS, EDMUND. 1967. “Phillips Curves, Expectations of Inflation, and Optimal Unemployment over Time.” Economica 34 (August): 254-
81.
FRIEDMAN, MILTON. 1968. “The Role of Monetary Policy.” American
Economic Review 68 (March): 1-17.
Friedman quotes Abraham Lincoln’s assertion: “you can fool all of the people some of the time, you can fool some of the people all of the time, but you can’t fool all of the people all of the time”
Phillips = you can fool all of the people all of the time
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Economic knowledge on the labor market in
1974: Keynesians versus monetarists
=> No room for monetary policy
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1975: the NAIRU = a synthesis
MODIGLIANI, FRANCO, AND LUCAS PAPADEMOS. 1975. “Targets for
Monetary Policy in the Coming Year.”
Brookings Papers on
Economic Activity , no. 1:141-63.
WS-PS
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1975: the NAIRU
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A macro-economic shock
First Oil shock. The Arab Light reached in January
1974 9$ from 2.3$ in October.

Inflation
But in most countries confidence in the growth potential:
In January and still in June 1974, most of national administrations AND the international institutions expected steady growth for France, Italy, Germany...
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Chirac: Stop and Go
1974: France a new conservative power
A young President: Giscard d’Estaing (1974-1981)
A young Prime Minister: Jacques Chirac (1974-76)
High inflation, high expected growth
 increase of the interest rate, of taxes on firms and households
 late 1974: a dramatic drop of manufacturing production (-12% ~ US drop)
But interpreted as just cyclical!

Expensive policy in 1975. Public deficit -2.7%
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197476 Chirac: a defensive labor policy…
Two ideas
Slowing the firing process
Supporting the revenue of the workforce
Administrative control of job separations
Short-time working
+ Dramatic reduction of immigration flows
“Allocation spéciale d’attente”
Huge increases of the minimum wage +14% in 2 years

High inflation but growth recovery in 1976 +5%
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… also in the UK, Germany, etc
Budget deficits in most OECD countries
UK : Regeneration of British Industry Act: massive nationalization of heavy industries => slow the unemployment rise
Germany: support to the apprenticeship system
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And unemployment rise. “Euro zone”
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US
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1976-1979 UK: IMF intervention
Labour government (James Callaghan)
“Social contract” with Unions
+ IMF intervention

Decline of the inflation
 1978: “ Winter of discontent”

Thatcher
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1976-1981 Barre: dramatic political errors
The “best French economist”: Prime Minister and Minister of Finance
Macro priorities : public deficits and monetary stability
A micro labor policy : manual jobs
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1976-1981 Barre: macro policy

Wages moderation

Balanced public budget in France
 Very low public debt in % of GDP…
70
60
50
40
30
20
10
0
France Canada Allemagne Japon Etats-Unis UK Italie
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1976-1981 Barre: macro policy
Achieved through rises of taxes and social contributions on labor in % of GDP…
18,00%
17,00%
16,00%
15,00%
14,00%
13,00%
12,00%
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72
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73
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74
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75
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76
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77
19
78
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79
19
80
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1976-1981 Barre: a costly labor market policy
Preserve manual jobs :
Subsidies to “old” “male” industries (iron, steel, shipyard…) ~ UK policy
Release manual jobs :
Attempt to reverse immigration flows
Preretirement: “Garantie de ressource”
Reduction of maximal working time
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1976-1981 Barre: a costly labor market policy
Stigmatization of Youths : inadaptability, refuse manual jobs, etc

No education effort but

Specific labor policy: the plans for youths
 internships, subsidies

Inefficient and job insecurity. Why ?

1.5 millions unemploymed in 1981 (0.65 youths) + two digits inflation
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1976-1981 Barre: a costly labor market policy
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1979: US = a new Paradigm
Second Oil shock
FED President: Paul Volcker
Sacrifice ratio versus Rules and discretion
Kydland, Finn E., and Edward C. Prescott. “Rules Rather than Discretion: The Inconsistency of Optimal Plans”, Journal of Political Economy (June 1977), pp. 473 —91.
Lucas, Jr., Robert E. “Econometric Policy Evaluation: A
Critique,” Carnegie-Rochester Conference Series on Public
Policy (vol. 1, 1975), pp. 19 —46.
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