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Tuesday, April 11, 2006

More Economists Blogging

Maybe I am slow on the uptake, but I just noticed two new economics bloggers, Greg Mankiw, and Paul Romer. Romers last post is about French labour market reform, and has some pretty to the point arguments:

According to the OECD, in 2002 the unemployment rate for French 20- to- 24-year-olds was 15.5%. This is higher than many other industrialized countries--for example, the same figure for Canada was just 7.2%, less than half of the French statistic.

However, while the difference in the unemployment rate between two adjacent years in the same country can tell you a lot about the state of the economy, the difference in unemployment rates between two countries is harder to interpret because so many factors can differ. To make a meaningful comparison of the labor market in two countries, it helps to look at other variables besides the unemployment rate. For example, the same OECD report also shows that the fraction of all 20- to- 24-year-olds who were unemployed was 8.4% in France, compared to 5.7% in Canada--higher to be sure, but by much less.

How can these two measures of joblessness paint such different pictures? Might it be that labor market conditions in France are not as bad as the unemployment rate suggests? Recall that the unemployment rate is the fraction of the labor force that is unemployed, not the fraction of the population. The unemployment rate is higher in France because a smaller fraction of 20- to- 24-year-olds are in the labor force there. The labor force participation rate for this age group is 54% in France and 79% in Canada.

A recent article in the Financial Times suggested that the main reason for the lower labor force participation rate may be that more twenty-somethings in France attend university. In fact, this can account for only a small part of the difference. The fraction of 20- to- 24-year-olds in education is only five percentage points higher in France--44% compared with 39% in Canada. Most of the 25 percentage point difference in labor force participation rates must therefore arise for some other reason.

A more troubling explanation for both differences is that many young people in France stay out of the labor force because they are discouraged--that is, they have been unemployed for so long that they do not feel that they can find a job, so they stop looking. Or they never bother to look.

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