Economics IA: Insiders and Outsiders Essay

* Economics commentary number: SL 1* Title of extract: Insider and outsiders* Source of extract: The Economist (UK issue)* Date of extract: October 28th-November 3rd 2006* Word count: 749* Date the commentary was written: January 19, 2007* Section of the syllabus to which the commentary relates: Section 3* Candidate name: Alexander Cameron Ward* Candidate number: 000719-041* Key Words: Unemployment, Structural Unemployment, Technological Unemployment, Continental Social Model, Real Wage Unemployment.France matters and its problems cannot be ignored. France is the world’s sixth-biggest economy, boosted by the evermore powerful multinational-firms of the CAC 40 (French stock market index). The nation is a declared nuclear power and responsible for centuries of economic, philosophical, and technological innovation.However, in the last decade France has entered what some may call an era of declinism.

Its economy has lost ground: unemployment has reached 10%, the public debt amounts to 66% of GDP (Gross Domestic Product: Value of a country’s total output of goods and services before depreciation) and whilst the rest of the world is consuming the French have seen their purchasing power diminish (France’s rank regarding its GDP per capita has slipped from 7th to 17th over the past 25 years). The French have lost confidence in their government and the government has lost power over them: violence in the banlieues (minority inhabited city suburbs) along with constant and massive unorganized strikes (only 7% of the French employees are members of a worker’s union) has created a situation of social unrest and has cost millions to the economy.We are going to see how badly social and economic reform is needed to get France back on its feet by analyzing the devastating effect of an over-protected job market on employment.First of all, here are the definitions to the key notions:* Unemployment is defined by the number of adult workers who are not employed and who are seeking a job.* Structural unemployment refers to unemployment resulting from fundamental changes in the economy.* Technological unemployment is the result of technological changes reducing the direct demand for labour.

* Real Wage Unemployment has many aspects but is generally caused by government imposed restrictions such as minimum wage for example that are imposed above equilibrium and therefore employers are not willing to offer jobs.* The Continental Social Model is the social model in use in France. It has strict employment regulations and a large amount of directive in industry. Nevertheless, the labour market has proven to be inflexible and slow to react to globalization. However, generous insurance-based unemployment benefits and a well funded welfare state have resulted in a commendable reduction in poverty and the provision of high quality health care.After the 30 years of post World War Two prosperity, more commonly known as the trente glorieuses, France emerged as one of the world’s leading industrial powers.

In those days its prosperity depended essentially on the exploitation of its steel and coal resources. Since then the demand for these products has drastically diminished resulting in heavy structural unemployment:The less qualified workforce is also victim of another kind of unemployment: technological unemployment. As the example of Pfizer pharmaceutical factories in the Loire demonstrates, French factories have turned towards mechanization, substituting ordinary labour by capital (machines). However, mechanization is commonplace to all developed countries, so why should its effects on unemployment be stronger in France then in the United States for example? (The unemployment rate in the United States at 5, 1% is half that of the unemployment rate in France) The explanation lies not in the French worker’s productivity which is higher than that of an American worker, but is in the substantial cost of employing workers in France.The lack of flexibility resulting from the over-protected job market and the heavy social charges imposed on employers are major contributors to the high level of unemployment in France. The social-security contributions for an employee can cost the employer the equivalent of half that employee’s salary.

Furthermore, once employees are hired for a full-time job, to dismiss them, even for legitimate reasons, can sometimes be more expensive then keeping them. It is therefore clear that employing someone is a big risk and can lead to the employer developing negative criteria when considering applicants (racial, age and sex discrimination) in other words: negative externalities.To counter the heavy unemployment and general instability in France, the French government is going to have to revise their social model, turning away from the continental model and going towards a more flexible and liberal model like the Danish one: Flexicurity. The Flexicurity social model enables a more flexible job market whilst insuring that those who lose their jobs are still properly protected and can therefore count on employment benefits.

Unfortunately, in a country where even the slightest reform is welcomed by mass protest it seems that such a transformation will not be accomplished over night.

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