Global Change, labour market and the SectoralStructure of Production

Xavier Ragot

Paris School of Economics, CNRS

II - Latin America Economic Forum, May, 2014

Introduction

Recent European history.

Histories of two big shocks : German reuni�cation and eurozone.

Inertia in price formation : real divergence.

Now (after 2007) helping economies to converge withconstrained �scal tools : Industrial policy

Diagnosis (1/4): Weighted Unit Labor Cost

Source Dustman et al. JEP.The euro exchange rate is only part of the solution.

Diagnosis (2/4): Unit labor cost service sector

Diagnosis (3/4): wage and productivity

Verdugo (2013) on �rm level data.

Diagnosis (4/4): Real Interest rate

In�ation 1 or 2% higher in Spain Italy, France or Germany.

Diverging real interest rate.

E¤ect on the production Sector (1/3)Technology

E¤ect on the production Sector (3/3)Pro�t rate by size

217 big �rms (5000+): 60% of R&D, 50% of exports.

A Summary

Exogenous shock to prices : only nominal interest ratesconverged.

Production sector moves slowly.

Real/Nominal wage rigidities : the labor market is the anchor.

Financial sector (housing) absorbed imbalances.

Market forces magni�ed imbalances.

Policy implications

1 Prices

Fiscal devaluation : CICE, and tax cut on social contribution1.5% of GDPwage moderation : labor market institutions.are key.

2 Industrial policy:

sectoral aid ? (but WTO).R&D, and productivity gains is not the answerSave �rms in the transition : defensiev industrial policy.(Competition policy?)

3 New thinking of State and Markets : di¤erent from Keynesianshort-run view and "structural reform".

4 We need social constructivism : The political economy is key.