Mon Apr 3rd, 2006 at 07:26:47 PM EST
I initially posted this article by Robert Samuelson, WaPo about a week ago in the debate section, under "Actual facts about the French labor market." That debate seemed to have run its course, but as I now think about this article in the context of the data from the OECD 2006 Factbook that Jerome brought to our attention, the article takes on new meaning for me.
The dilemma of advanced democracies, including the United States, is that they've made more promises than they can keep. Their political commitments outstrip the economy's capacity to deliver.
A major problem of course in the US is the ageing of the baby boomers, and the forecasted impact of their retirement and health spending on the government budget. But what the Factbook charts have shown us is that many other countries, including France, have a much more challenging demographic situation than the US.
Ratio of the population aged 65 and over to the labour force
This chart shows that while the US ratio of people over 65 to the labor force in 2020 will be 30%, four countries will have ratios over 50%, France being one of those four. A 50% ratio means that, for each elderly person, there will be only two persons in the labour force.
Though the graph above focuses on the year 2020, perhaps France may be impacted sooner. In the story and discussion OECD 2006 Data on employment, EU, France, US, we saw some differences between France, the EU15, and the USA on labor participation rates by age group that might cause this earlier impact.
Employment By Age Group
The overall employment for people 25 to 54 years of age:
o E15 77.6%
o France 79.3%
o USA 79.0%
The overall employment for people 55 to 64 years of age:
o EU15 42.3%
o France 40.6%
o USA 59.9%
The overall employment for people 15 to 24 years of age:
o EU15 38.8%
o France 26.4%
o USA 53.9%
The difficulty for France, and the EU15 generally, is that the labor participation rates drop sharply from about 79% for the 25-54 age group to about 41% for the 55 to 64 age group. To make the point more clearly (but oversimplify to a degree), let's say that at 54, almost 79% of potential workers are working, and at 65 0% are working--a drop of 79 percentage points. But since the average participation rate of the 55--64 group is 41%, that means you have a 38 point drop due to retirement before the age of 65--with the remaining 41 points occuring at age 65. (This is a simplification, because you should really have the numbers for each age year to do this calculation correctly. And some of the drop may not be literally intended retirement.) But hopefully the point is made roughly, that half of the retirement occurs between the ages of 55 and 64.
An additional problem for France is that on the front end of the age groups, the 15-24 year olds, France's admirable policy of free higher end education plus other factors leads to only a 26% participation rate, versus 39% for the EU15 and 54% for the US. Refer to the Factbook for graphs showing all OECD countries for each of these three age groups.
So while the initial chart on demographics seems to indicate that the problem arises in 2020, for France, those 65 in 2020, are obviously 55 year old in 2010. Isn't the implication that the higher rates of early retirement in France (and the EU15) mean that less tax revenue will result, and the retirement impact on the state budget actually starts to take effect in 2010?
And Samuelson additionally points out other factors limiting tax revenues, such as:
· In 2003 French workers spent an average of 1,431 hours on the job, the third-lowest among 26 advanced countries. Italy (1,591 hours) was 11 percent higher; the United States (1,822 hours), 27 percent; and South Korea (2,390 hours, the highest), 67 percent.
One potential way out of the dilemna would be a higher rate of growth in GDP, and the resulting higher tax revenues that could result. But according to the OECD data, France has ranked close to the bottom in growth over the 1991-2004 timeframe:
Real GDP growth
Average annual growth in percentage, 1991-2004
France seems to be averaging about 2.0% over this time frame, with growth in 2005 being lower still, at 1.4%
. As Samuelson further characterizes the situation:
Its (France's) needs are plain: to assimilate a large and restless Muslim population of immigrants and their children, to pay for the rising health and pension costs of an aging society and to compete in the world economy. But its economy is lackluster. From 2001 to 2005, annual growth averaged only 1.6 percent. By accident and design, the French have discouraged work.
Taxing and borrowing would seem to offer limited opportunities to address the problem. France's deficit has been troublesome from 2002-2004, being over the 3% EU guideline in each year, and under pressure from the EU to pull back within the guideline--a goal that was barely achieved in 2005, with the defecit just under at 2.9%. Due to slow GDP growth in this time period, that equates to an increase in debt as a % of GDP over this timeframe. France is below the OECD average on this factor, but above the median
. While some might view increased taxes as a vehicle, France is well above the OECD average at 44%
. Per Samuelson on taxes
Average taxes are already about 50 percent of national income; effective marginal rates (the rates on additional income) can hit 60 percent. How much higher could these go without crushing work incentives?
Maybe it's best just to use Samuelson's closing paragraph, and open up for discussion.
All this bodes ill for Europe, because other countries share France's situation. Governments seem incapable of reconciling political commitments and economic realities. The street protesters are given to much make-believe -- the illusion that if they march long enough and burn enough cars, they can prevent unwanted change. The concessions that governments make to the future are usually small and slow. France is raising full eligibility for retirement benefits from 40 to 42 years of contributions; the change occurs between now and 2020. This suggests a messy process of grudging accommodations that neither placate public opinion nor improve economic vitality. Europe, which is insecure and unconfident now, will probably become more so.