Unemployment, Fate or Necessity ?

“Unemployment, Fate or Necessity ?” is a 2005 book originally entitled “Le chômage, fatalité ou nécessité ?”, written by the french economists Pierre Cahuc and André Zylberberg. Below is a review of the book.

Every day, in France, 10 000 jobs are destroyed and 10 000 jobs are created.

Between 1970 and 2000, the French economy has destroyed, each year, approximately 15% of its jobs … and created 15,5% more jobs, to ensure a net increase in employment of 0,5% per year.

This “15% law” is still valid for all industrialized countries which, in fact, are alike in terms of job creation and job destruction; every year, about 15% are lost, and 15% are generated.

A well known phenomenon among economists is spillover effect or job spillover. The jobs lost come mainly from the declining sectors, which are offset by the jobs created in the expanding sectors. Interestingly, most of the job reallocations do not occur between different sectors but between industries belonging to the same sector.

For example, in the Nord-Pas-de-Calais, factories specialized in the assembly of traditional textiles have continually reduced their workforce over the past two decades. But since the early 1990s, the assembly of “technical” textiles based on synthetic fibers and used, among others, by the medical staff, in building and in the practice of certain sports, experienced a vigorous and steadily growth. Around Lille, today, a genuine “valley” of technical textiles with more than 150 companies has been established. Some of the jobs destroyed by the traditional textile have been shifted to the technical textiles.

Every workday, while 10 000 jobs are destroyed in France, 30 000 people quit their jobs and 30 000 find job again. In industrialized countries, the labor reallocation is 2-3 times higher than job reallocation. This disparity is mainly due to the voluntary departure of employees: “In France, every working day, 6000 people are resigning and 4000 are retiring.” This often leads entrepreneurs to hire new employees. In fact, a significant portion of labor reallocation results from employees’ free will. See also Abowd, Corbel and Kramarz (1998), “The Entry and Exit of Workers and the Growth of Employment.”

A common belief is that employment reductions are good news for shareholders. But a 1999 study by Henry Farber and Kevin Hallock, “Have Employment Reductions Become Good News for Shareholders? The Effect of Job Loss Announcements on Stock Prices, 1970-97,” denies this common belief. In the words of Cahuc and Zylberberg :

Henry Farber and Kevin Hallock … have listed all the announcements of reductions in force (RIFs) published in the Wall Street Journal by every firm that was ever listed in the Fortune 500 for each of the 28 years from 1970 though 1997 … The number of these announcements totaled 3878 and involved 1176 companies. … in average, the share price is declining as a result of an announcement of RIFs. The share price decline … reaches 0,4% after RIFs … All other studies on the issue lead to the same conclusion … the average drop never exceeds 1%.

Bruno Crepon and Desplatz Rosenn (2001), “Une nouvelle évaluation des effets des allègements de charges sociales sur les bas salaires,” have documented a sample of 90 000 firms. Exemptions from employers’ social security contributions on low wages introduced in 1995 and 1996 have created (or saved) approximately 460 000 jobs in late 1997, mostly unskilled, but also skilled jobs. Perhaps because the reduction of the cost of unskilled labor increases the overall profitability of these companies, which therefore improves their competitiveness. They gain market share and, consequently, hire skilled and unskilled workers.

A misconception of the labor market is that it is a fixed datum. Fundamentally, work cannot be shared in order to increase employment. Reducing working time does not increase employment. Bruno Crepon and Francis Kramarz, “Employed 40 Hours or Not-Employed 39: Lessons from the 1982 Reduction in Workweek France”, investigate the effect of the Law of February 1st, 1982, that consists in lowering the legal workweek from 40 to 39 hours, with a full maintain of the salary. Workers who benefited from the reduction of weekly working hours have lost their jobs more frequently than those whose hours of work were already less than 39 hours in 1981. As a matter of fact, 6,2% of employees working 40 hours in 1981 had lost their jobs in 1982 and 3,2% of those already working 39 hours (or less) in 1981 had lost their jobs in 1982.

A study by Brigitte Dormont, Denis Fougère and Ana Prieto, “The Effect of the Time Profile of Unemployment Insurance Benefits on Exit from Unemployment,” focusing on the french labor market during the late 1980s and the 1990s, indicates that the exit rate from unemployment is accelerating with the approach of the end of the ‘rights’ to unemployment benefits, and that this exit rate from unemployment was considerably higher for individuals with higher earnings. These data strongly suggest that some people are taking advantage of the system by not seeking a job.

The authors believe that the improvement of intellectual abilities and socialization of children from disadvantaged families is perhaps one of the best ways to find a good job. A 2005 study “The effect of overcrowded housing on children’s performance at school” by Dominique Goux and Eric Maurin is enlightening. A 15-year-old adolescent who shares his room with a brother or sister (one in five cases) repeats a school year more often than one who has a single room. The likelihood to share a room is greater for adolescents whose parents have children of the same sex. Adolescents experience a grade repetition more often than their counterparts whose parents have children of different sexes. This finding is of great interest because the ABCT (de Soto, 2009) tells us that the monetary overexpansion will generate bubbles and malinvestment. If house prices go up as a result of the monetary overexpansion, poor families will be harmed by the ever-increasing prices of houses and will have much more difficulties to have the access to a larger dwelling.

Abowd, Corbel & Kramarz (1998). The Entry and Exit of Workers and the Growth of Employment.
Calmsfors, Forslund & Hemström (2002). Does active labour market policy work? Lessons from the Swedish experiences.
Crépon Bruno & Kramarz Francis (2001). Employed 40 Hours or Not-Employed 39 : Lessons from the 1982 Workweek Reduction in France.
Ellwood David (2000). Anti-poverty Policy for Families in the Next Century : from Welfare to Work and Worries.
Farber & Hallock (1999). Have Employment Reductions Become Good News for Shareholders? The Effect of Job Loss Announcements on Stock Prices, 1970-97.
Goux & Maurin (2005). The effect of overcrowded housing on children’s performance at school.
Sianesi Barbara (2005). Differential effects of Swedish active labour market programmes for unemployed adults during the 1990s.

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