France’s growth potential

One way to think of growth potential is simply as the sum of changes in the availability of labour, working hours and labour productivity. The first two factors depend on the size of the working age population and the employment rate (ratio of employed to the working age population). This ratio in turn depends on the participation rate, the labour force as a share of the working age population, and to the structural unemployment rate. In an environment marked by an aging population, the share of the working age population in France – as for its main trading partners – is bound to enter a decline in the years ahead (Chart 1). This factor alone is capable of reducing potential growth by nearly 0.5 points a year over the next decade. Besides, France is characterised by a relatively disappointing performance in terms of labour productivity gains which is certainly not the case concerning the level of productivity) (see Chart 2).

To offset the consequences of an aging population, it is possible to influence both productivity trends and labour mobilisation (higher participation rate, lower structural employment)[1][2].

To offset the consequences of an aging population, it is possible to influence both productivity trends and labour mobilisation (higher participation rate, lower structural employment)[1][2].

In a previous editorial, we used recent research results to show that institutions and the intensity of competition played a key role in the propensity to innovate[3].  
Using a more direct approach, productivity gains are clearly linked to investment, especially investment in new technologies[4] and R&D efforts. Seen in this light, there is nothing surprising about the relatively low level of trend productivity gains in France. Investment in new technologies has been rather limited as a share of total investment (Chart 3), while corporate R&D spending is significantly lower than in Germany and the United States (Chart 4).  

To offset the depressive impact of an aging population on the availability of labour, labour mobilisation can also be brought into play. There is potential in terms of both the number of hours worked, which is particularly low in France (Chart 5), and the participation rate. This brings us to the problem of improving job market efficiency (strengthening incentives to hire and “to make work pay”)[5].

Although the participation rates in the 25-55 age group is perfectly comparable between France and the other main OECD countries, the same cannot be said for the extremities of the distribution pyramid of the working age population (15-25 and over 55 age groups). (Charts 6 and 7)  

A 4-point increase in the participation rate in France over the next 20 years, which would only bring the current level in line with Germany (73.8%), and would still fall short of the UK and the US (nearly 75.5%), would almost totally offset the impact of the decline in the working age population.

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[1] See Ph d’Arvisenet: “Financial market and flexibility of the labour market”, Conjoncture, a BNPParibas monthly publication, February 2003; “Competition and the job market”, Societal, Q1 2006
[2] See our editorial: “Potential growth rate, productivity gains and innovation” EcoWeek, a BNPParibas weekly publication, 25 May 2007; “Purchasing power and reform of the services market”, Societal, Q2 2007
[3] It is known that the remarkable acceleration of productivity gains in the United States as of the mid 1990s is due to the share of activities generating high-tech equipment, but also to the intensity of high-tech applications in the rest of the economy. For more on this subject, see Ph. d’Arvisenet: “What’s left of the new economy?”, Conjoncture, a BNPParibas monthly publication, May 2001
[4]See our editorial: “Challenging agenda for the  new president”, EcoWeek, a BNPParibas weekly publication, 11 May 2001

3 Responses to "France’s growth potential"

  1. Guest   December 11, 2007 at 9:38 am

    Is there a way to see these charts in a readable format?

  2. Jozo   December 11, 2007 at 12:49 pm

    Yes, as shown before, the participation rates in France in the age group 25-55 are on par with other countries. A would’t consider high labour force participation rates in age group 15-25 a good thing, shouldn’t people in this age bracket study? Maybe answer to youth unemployment (17%) is Finnish solution instead of the American one?(As I found in media.education.gouv.fr/file/83/6/4836.pdf there was 2.3 milion students in the university type schools in France school year 2005/06. As I found at http://www.insee.fr/en/ffc/pop_age2.htm the total population in the age bracket 18-25 is 6.3 milion which on rough estimate gives rate of 36%. More precise numbers found at http://www.insee.fr/en/ffc/chifcle_fiche.asp?ref_id=NATTEF07116&tab_id=146are confirming this initial hypotesis.)

  3. Guest   December 12, 2007 at 1:07 pm

    The thing with France is that there is nothing obviously out of balance with France’s supply side indicators if I’m not mistaken: Labor productivity, TFP, Unit labor costs are all very much in line with the Eurozone average and do not show signs of dramatic deterioration as is the case for Italy and Spain. Note also that the European Commission’s current potential growth estimate which by construction takes into account all labor supply issues such as participation rates, aging, unemployment etc, is higher for France than for Germany and has been so for the past decade. Indeed, the Commission itself points to meagre investment activity as explanation for slow growth but that enters the damand side of the equation. Am I missing something? What is more wrong in France than somewhere else?http://ec.europa.eu/economy_finance/publications/european_economy/2007/economic_forecast_autumn2007.pdf