Is Europe Hiding Its Productivity?

The Wall Street Journal has an interesting piece today on how France Telecom is trying to set up its workers in their own business as a way of getting around restrictions on layoffs. The story itself is interesting -- it�s an innovative initiative that would seem to produce win/win outcomes. But the discussion also raises another serious question about excess labor in France and other countries with restrictive laws on layoffs.

The article implies that much of France Telecom�s 120,000 workforce has been made unnecessary due to the rapid changes in technology over the last 15 years. In the United States, the old-line telephone companies have all had massive layoffs. In France, and most other European countries, employment protection laws prevent such large-scale dismissals so companies must retain workers even if they don�t need their labor.

This could be one of the factors explaining the difference between European and U.S. productivity growth over the last decade. (Prior to 1996, European productivity growth had been faster.) However, if there are many companies like France Telecom, who are forced to keep excess workers on their payrolls, then this implies a hidden productivity dividend that will be experienced when these workers retire. Since companies have many workers who contribute almost nothing to output, when these workers retiree, output will stay constant even as labor hours fall � implying an increase in productivity.

If the situation described at France Telecom characterizes the situation at many large firms, then France and other European countries will be seeing a productivity boom in the near future. This boom will make their national retirement systems more financially sound (higher productivity growth will translate into higher wage growth, which in turns translates into more tax revenue) and should help to reduce concerns about looming labor shortages.

--Dean Baker

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