May 18, 2017

News in Charts: Dissecting France’s productivity performance

by Fathom Consulting

Dissecting France’s productivity performance

Emmanuel Macron has convincingly defeated Marine Le Pen to become President of France. Although we have not passed peak protectionism, we can shift our focus back to worrying about the actual economics – at least in France’s case for now. According to Nobel laureate Paul Krugman: “Productivity isn’t everything, but in the long run it is almost everything.” We concur.


What explains France’s ‘productivity puzzle’, i.e. the country’s outperformance of its peers on the GDP per hour measure, but not the GDP per capita measure, and the divergence between the two gauges of productivity in France?

It is unemployment that links the two measures of productivity together.  France has long struggled with high levels of unemployment. The country’s unemployment rate still exceeds 10%, having flatlined since 2013. In comparison, Germany’s unemployment rate dropped below 4% in late 2016, and the unemployment rate for the euro area as a whole fell almost 3 percentage points to 9.5% in March 2017 from its peak in April 2013.

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In France, about a third of unemployed people have been out of work for more than a year – in line with Germany, but less than in Spain and Italy.  However, with the exception of Italy, labour force participation in France is lower than many of its peers. In 2016, 71% of all 15 to 64-year-olds in France participated in the labour force, compared to 78% in Germany. Instead of being unemployed for a period of time, unemployed workers tended to drop out of the labour force – a reflection of France’s dual labour market.

Firms in France may also be reluctant to hire as many full-time staff as they might have done otherwise due to the substantial frictions in the labour market, dragging unemployment up as a result. Employers are deterred from creating permanent jobs by the potentially considerable costs of shedding them should that become necessary.

Perhaps because these high levels of protection raise the relative price of labour, France has tended to spend more than other countries on fixed capital.  That is, France’s gross fixed capital formation as per cent of GDP exceeds that of all its peers except for Japan. This combined with the country’s lower employment rate has driven the capital stock per person employed in France above those in other countries, boosting output per hour, but not output per capita.

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Ultimately, labour market frictions are key to explaining why France’s productivity exceeds that of other advanced economies when measured by GDP per hour, but not when measured by GDP per capita. Put differently, these frictions impose an absolute cost and reduce welfare, i.e. GDP per capita.

However, there is a structural factor contributing positively to French productivity that stands out – government spending on education. Over the last twenty years or so, the French government has, on average, spent around 5.5% of GDP on education – around one percentage point more than Germany. A highly educated workforce is unequivocally positive for productivity, irrespective of the measure used to calculate it.

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If Mr Macron successfully reduces labour market frictions unemployment would indeed fall, causing the two productivity measures to approach each other. Increasing employment might lower GDP per hour worked as the capital stock per employee falls and because new workers tend to be marginally less productive than existing employees.

However, more importantly, by lifting France’s supply side potential, increasing labour market dynamics (especially if high levels of spending on education continue) should unambiguously raise GDP per capita.


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