Arnold Kling  

Economic Dynamism

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Edmund Phelps writes,


An informal cross-country analysis of those economies that I have conducted with Gylfi Zoega examined three measures of economic performance: the employment rate (relative to the working-age population), the unemployment rate (relative to labor force), and labor productivity – the first two of these measures being observable proxies for job satisfaction, personal development for work, etc. Taking one institution at a time, we found that university education improves all three measures of economic performance: employment, unemployment and productivity too. Another institution, the “red tape” impeding innovators, as measured by the OECD index of barriers to entrepreneurs, is bad for all three elements of performance. Finally, legislation providing a high level of job protection is bad for productivity but does not have a clear effect on either employment rate or unemployment rate.

His focus is on Europe, and why some economies are less dynamic than others. He mentions the phenomenon of corporatism.

The fundamental corporatist idea was to retain the private income, private wealth and private ownership of firms that was so central to capitalism (and found in avant-garde examples of market socialism too) but to remove the brain of capitalism – to curtail and to modify the mechanism of experiments and discoveries undertaken by unorganized entrepreneurs and financiers on which capitalism relied upon for its direction(s) – and to replace it with a selection mechanism governing investment and innovation that would require a consensus of key social groups. The main allocative decisions, such as the start-up of a firm or its close, is to have the approval of the designated groups constituting the society. Corporatism sought to interpose the interests of the whole society in a range of decisions affecting the directions taken in the business sector.


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COMMENTS (3 to date)
liberty writes:

>Finally, legislation providing a high level of job protection is bad for productivity but does not have a clear effect on either employment rate or unemployment rate.

I think this depends on what kind of job protection. I found the same with unions - they can (as in Sweden) mean low unemployment - but job protection as in France with youths, may lead to high unemployment.

In Sweden, though, unemployment is low but those not looking for work at all is high, and incomes are very low - they have traded wages for security. Advancement as we know it in the US is very slow and wages stagnate over a lifetime. Unions succeed in winning contracts but they bargain away wages in order to land these long term bids. They bargain for a minimum level and standard level (80% of jobs in Sweden are unionized and I think 95% of jobs subject to an informal union-based minimum wage) but they give up the chance for long term growth in wages for employees that a free market provides.

I guess in France it leads to unemployment because you don't have the bargaining power that you have in Sweden which can tade off wages for employment and instead you have a minimum wage; so that when a company must decide whether to hire at the minimum and be stuck with the worker for the long-term (due to job protection) or to avoid the hire - they will avoid the hire. In Sweden they can make big sweeping union-based hires, with worker and employer protections, and overall keep wages down by trading off the skilled worker wages against the unskilled.

Roger M writes:

I'm curious about how much of an effect immigration has on the differences in unemployment between Sweden and France. I know France has been fairly liberal with immigration.

liberty writes:

Sweden loosened up its immigration in the past few years too. Immigration doesn't cost jobs, it adds to productivity.

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