French Unemployment - Some Conjectural Responses to Prof. Romer

1. Students across France have been protesting a new law that would make it easier for French employers to fire young workers. How might the passage of such a law affect the unemployment rate and the labor force participation rate? Why?

ANS: The passage of the law would increase unemployment rate because, as more young people are likely to fired the labor force participation would increase - as previously discouraged workers might fancy a chance of finding a job which was earlier filled by one of their contemporaries. So job search increases --> LFPR increases --> unemployment increases. But this is not a bad thing -- a more dynamic labor market leads to a higher probability of better fits between employer and employee that leads to higher output.

2. France has an unusually high minimum wage. Consider two groups: young people who have completed high school and drop outs who haven’t. Which group would you expect to have more unemployment because of the minimum wage? Would you expect this unemployment to be short-term or long-term?

ANS: A minimum wage results in firms internalizing a productivity threshold, upon crossing which it hires newer people. Arguably, high school completed individuals have "higher" productivity than drop outs. So, a minimum wage might result in the lower quality individuals being "non employable" given the productivity standards that firms have. Of course, I assume rather naively, that wages are equal to the marginal product of their respective labor. In presence of continued minimum wages, one might observe a remarkable divergence in productivity between high school educated and drop outs - given the ex-ante fact of high school educated get employed and learn on the job; while the drop outs end up with dynamic decline in productivity over time.

(3) Suppose the poor labor market for French youth encourages French students to stay in school longer than they would otherwise choose to, earning postgraduate degrees. What long-term effect would this have on the French economy?

ANS: All else equal, the failure to enter into the labor force results in lowered output and lowered per capita income. However, an alternate scenario is that increased post-graduate degrees and students might result in higher levels of innovation and, inevitably, a transition in the economy towards skill-biased production mechanism & less labor intensive. On the whole, a cleavage in the society between the "skilled" and the "unskilled" seems inevitable.