Figure 1: Tax revenue as percentage of French, German, British and US GDP, 1965–2013
Source: OECD StatExtract.
Celebrating humanity's flourishing through the spread of capitalism and the rule of law
28 May 2015 Leave a comment
in economic history, politics - USA, public economics, taxation Tags: British economy, France, Germany, growth of government
Figure 1: Tax revenue as percentage of French, German, British and US GDP, 1965–2013
Source: OECD StatExtract.
21 May 2015 Leave a comment
in economic history Tags: British economy, France, Germany
Figure 1: French and German real GDP per capita are as percentage of British GDP per capita (1990 Int. GK$PPP), 1820 – 2010
Source: The Maddison-Project, http://www.ggdc.net/maddison/maddison-project/home.htm 2013 version.
12 May 2015 Leave a comment
in applied price theory, economic growth, economic history, great depression, labour economics, labour supply, macroeconomics, politics - USA, Public Choice, public economics, taxation Tags: Edward Prescott, Euroclerosis, France, Germany, labour supply, Robert Lucas, taxation and labour supply
Figure 1 shows that Americans work the same hours per year pretty much the entire post-war period. By contrast, there is been a long decline in hours worked in Germany and France. The large drop in 1992 was German unification.
Figure 1: annual hours worked per working age American, German and French, 1950 – 2013
Source: OECD StatExtract and The Conference Board Total Economy Database™,January 2014, http://www.conference-board.org/data/economydatabase/
The long decline seemed to tally with the disproportionately sharp rise in the average tax rate on labour income, including social security contributions in France and Germany. When tax rates on labour income, including social security contributions stabilised in about 1980, hours worked stabilised in all countries.
Figure 2: average tax rate on labour income,USA, Germany and France, 1950 – 2013
Source: Source: Cara McDaniel.
Some pander to the great vacation theory of European labour supply. This is the hypothesis of a large increase in the preference for leisure in the European Union member states. That is, mass voluntary unemployment and mass voluntary reductions and labour supply by choice by Europeans. They just decided to work less.
This is not the first outing for the great vacation theory of labour supply. In the late 1970s, Modigliani dismissed the new classical explanation of Lucas and Rapping (1969) of the U.S. great depression in which the 1930s unemployment was voluntary unemployment – the great depression was just a great vacation – with the following remarks:
Sargent (1976) has attempted to remedy this fatal flaw by hypothesizing that the persistent and large fluctuations in unemployment reflect merely corresponding swings in the natural rate itself.
In other words, what happened to the U.S. in the 1930’s was a severe attack of contagious laziness!
I can only say that, despite Sargent’s ingenuity, neither I nor, I expect most others at least of the non-Monetarist persuasion, are quite ready yet. to turn over the field of economic fluctuations to the social psychologist!
As Prescott has pointed out, the USA in the Great Depression and France since the 1970s both had 30% drops in hours worked per adult. That is why Prescott refers to France’s economy as depressed. The reason for the depressed state of the French (and German) economies is taxes, according to Prescott:
Virtually all of the large differences between U.S. labour supply and those of Germany and France are due to differences in tax systems.
Europeans face higher tax rates than Americans, and European tax rates have risen significantly over the past several decades.
Countries with high tax rates devote less time to market work, but more time to home activities, such as cooking and cleaning. The European services sector is much smaller than in the USA.
Time use studies find that lower hours of market work in Europe is entirely offset by higher hours of home production, implying that Europeans do not enjoy more leisure than Americans despite the widespread impression that they do. Europeans did not work less. They worked more on activities that were not taxed.
04 May 2015 Leave a comment
in currency unions, economic growth, economic history, Euro crisis, macroeconomics Tags: Eurosclerosis, France, Germany, Italy, post-war reconstruction
Figure 1: Real GDP per German, Italian and French aged 15-64, converted to 2013 price level with updated 2005 EKS purchasing power parities, 1950-2013
Source: Computed from OECD Stat Extract and The Conference Board, Total Database, January 2014, http://www.conference-board.org/economics
Figure 2: Real GDP per German, Italian and French aged 15-64, converted to 2013 price level with updated 2005 EKS purchasing power parities, 1.9 per cent detrended, 1950-2013
Source: Computed from OECD Stat Extract and The Conference Board, Total Database, January 2014, http://www.conference-board.org/economics
A flat line in figure 2 means real GDP growth of 1.9% per year, which is trend growth. A rising line means growth that is higher than trend rate; a falling line means growth at below the trend rate of 1.9%. 1.9% is the trend rate of growth of the USA in the 20th century. Figure 2 shows that:
28 Apr 2015 Leave a comment
in business cycles, economic growth, Euro crisis, global financial crisis (GFC), great recession, macroeconomics, politics - USA Tags: British economy, Canada, Eurosclerosis, France, Germany, Italy, Japan, recoveries from recessions
UK recovery: stronger than Italy, weaker than US & Canada. http://t.co/C0TEsbzMm3—
Jonathan Portes (@jdportes) April 28, 2015
22 Apr 2015 Leave a comment
in Euro crisis, macroeconomics, population economics Tags: ageing society, European Union, Eurosclerosis, France, Germany, labour demographics
BofA-ML: Working age population projections, a serious problem for Germany http://t.co/eStgQePoVP—
Fabrizio Goria (@FGoria) March 30, 2015
04 Mar 2015 7 Comments
in applied price theory, Austrian economics, entrepreneurship, F.A. Hayek, George Stigler, human capital, industrial organisation, job search and matching, labour economics, law and economics, Ludwig von Mises, politics - New Zealand, survivor principle Tags: Armen Alchian, employment law, employment protection laws, entrepreneurial alertness, France, Israel Kirzner, The fatal conceit, The pretence to knowledge
As discussed yesterday, if the Employment Court had its way, New Zealand case law under the Employment Relations Act regarding redundancies and layoffs would be as job destroying as those in France.

The Employment Court’s war against jobs goes back more than 20 years. To 1991 and G N Hale & Son Ltd v Wellington etc Caretakers etc IUW where the Court held that a redundancy to be justifiable under law it must be ‘unavoidable’, as in redundancies could only arise where the employer’s capacity for business survival was threatened.
The Court of Appeal slapped that down and affirm the right of the employer to manage his business in no uncertain terms:
…this Court must now make it clear that an employer is entitled to make his business more efficient, as for example by automation, abandonment of unprofitable activities, re-organisation or other cost-saving steps, no matter whether or not the business would otherwise go to the wall…
The personal grievance provisions … should not be treated as derogating from the rights of employers to make management decisions genuinely on such grounds. Nor could it be right for the Labour Court to substitute its own opinion as to the wisdom or the expediency of the employer’s decision.
When a dismissal is based on redundancy, it is the good faith of that basis and the fairness of the procedure followed that may fall to be examined on a complaint of unjustifiable dismissal
… the Court and the grievance committees cannot properly be concerned with an examination of the employer’s accounts except in so far as it bears on the true reason for dismissal.
The Employment Court could only inquire as to the genuineness of the employer’s decision and the procedures adopted. The Court could not substitute their views on management decisions. No second-guessing.
In Brake v Grace Team Accounting Ltd, the Employment Court found its way back into second-guessing employer’s decisions about how to manage their business. The figures used by the employer to decide that a redundancy was required were in error. The employer miscalculated.
The Employment Court had previously held in Rittson-Thomas T/A Totara Hills Farm v Hamish Davidson that the statutory test of what a fair and reasonable employer could have done in all the circumstances applies to the substantive reasoning for redundancies. Some enquiry into the employer’s substantive decision is required to establish that a hypothetical fair and reasonable employer could also make the same decision in all of the circumstances.
Subsequently in Brake v Grace Team Accounting Ltd, the Employment Court found that the actions by the employer were “not what a fair and reasonable employer would have done in all the circumstances” and “failed to discharge the burden of showing that the plaintiff’s dismissal for redundancy was justified”.
The Court found that the redundancy was “a genuine, but mistaken, dismissal”, but it still found that the dismissal was substantively unjustified. That is a major new development. Mistaken dismissals that are genuine are unlawful and grounds for compensation under the employment law.
The case was appealed where the issues were whether the correct test had been applied. The Court of Appeal, in a sad day for employers, job creation and the unemployed, found that the Employment Court was within its rights to do what it did and applied the statutory tests correctly:
GTA acted precipitously and did not exercise proper care in its evaluation of its business situation and it made its decision about Ms Brake’s redundancy on a false premise.
So it never turned its mind to what its proper business needs were but rather proceeded to evaluate its options based on incorrect information. We can see no error in the finding by the Employment Court that a fair and reasonable employer would not do this.
The test is now that fair and reasonable employers in New Zealand do not make mistakes. A much greater burden is now laid upon employers to show that not only that redundancies are justified, but they have made careful calculations and no mistakes.
No more seat of your pants entrepreneurship in New Zealand. No more entrepreneurial hunches – the essence of entrepreneurship is acting on hunches and other judgements that are incapable of being articulated to others and about which there is mighty disagreement in many cases. As Lavoie (1991) states:
…most acts of entrepreneurship are not like an isolated individual finding things on beaches; they require efforts of the creative imagination, skillful judgments of future costs and revenue possibilities, and an ability to read the significance of complex social situations.
The essence of entrepreneurship is your hunches are better than the next guy’s and you survive in competition by backing that hunch often to the consternation of the crowd. As Mises explains:
[Economics] also calls entrepreneurs those who are especially eager to profit from adjusting production to the expected changes in conditions, those who have more initiative, more venturesomeness, and a quicker eye than the crowd, the pushing and promoting pioneers of economic improvement…
The entrepreneurial idea that carries on and brings profits is precisely that idea which did not occur to the majority… The prize goes only to those dissenters who do not let themselves be misled by the errors accepted by the multitude
In many cases, those entrepreneurial hunches are sorted, sifted and selected on the basis of trial and error in the marketplace. Central to Hayek’s conception of the meaning of competition is it is a process of trial and error with many errors:
Although the result would, of course, within fairly wide margins be indeterminate, the market would still bring about a set of prices at which each commodity sold just cheap enough to outbid its potential close substitutes — and this in itself is no small thing when we consider the insurmountable difficulties of discovering even such a system of prices by any other method except that of trial and error in the market, with the individual participants gradually learning the relevant circumstances.
Remember Hayek’s conception of competition as a discovery procedure where prices and production emerge through the clash of entrepreneurial judgements and competitive rivalry:
…competition is important only because and insofar as its outcomes are unpredictable and on the whole different from those that anyone would have been able to consciously strive for; and that its salutary effects must manifest themselves by frustrating certain intentions and disappointing certain expectations
Errors are no longer permitted in the New Zealand labour market by the Employment Court. The Court has outlawed error in redundancy decisions.
This is despite the fact that the conception by Kirzner of the market process is that it is an error correction procedure without rival and a central role of entrepreneurial alertness is to correct errors in pricing and production:
It is important to notice the role played in this process of market discovery by pure entrepreneurial profit. Pure profit opportunities emerge continually as errors are made by market participants in a changing world. The inevitably fleeting character of these opportunities arises from the powerful market tendency for entrepreneurs to notice, exploit, and then eliminate these pure price differentials.
The paradox of pure profit opportunities is precisely that they are at the same time both continually emerging and yet continually disappearing. It is this incessant process of the creation and the destruction of opportunities for pure profit that makes up the discovery procedure of the market. It is this process that keeps entrepreneurs reasonably abreast of changes in consumer preferences, in available technologies, and in resource availabilities.
Rothbard made similar arguments about the centrality of discrepancies and error in entrepreneurship:
The capitalist-entrepreneur buys factors or factor services in the present; his product must be sold in the future. He is always on the alert, then, for discrepancies, for areas where he can earn more than the going rate of interest.
In Frank Knight’s conception of profit, there were temporary profits that arise from the correction of error:
In the theory of competition, all adjustments “tend” to be made correctly, through the correction of errors on the basis of experience, and pure profit accordingly tends to be temporary.
The Employment Court misunderstands the market process as a process of error correction. Those errors are identified through entrepreneurial alertness and trial and error. These errors are both of over-optimism and over-pessimism as Kirzner explains:
Errors of over-pessimism are those in which superior opportunities have been overlooked. They manifest themselves in the emergence of more than one price for a product which these resources can create. They generate pure profit opportunities which attract entrepreneurs who, by grasping them, correct these over-pessimistic errors.
The other kind of error, error due to over-optimism, has a different source and plays a different role in the entrepreneurial discovery process. Over-optimistic error occurs when a market participant expects to be able to complete a plan which cannot, in fact, be completed.
A considerable part of entrepreneurial alertness arises from the business opportunities created by sheer ignorance and pure error as Kirzner explains:
What distinguishes discovery (relevant to hitherto unknown profit opportunities) from successful search (relevant to the deliberate production of information which one knew one had lacked) is that the former (unlike the latter) involves that surprise which accompanies the realization that one had overlooked something in fact readily available. (“It was under my very nose!”)
The market process is a selection procedure where the more efficient survive for reasons that may be unknown to the entrepreneurs directly concerned as well as to observers and officious judges. Alchian pointed out the evolutionary struggle for survival in the face of market competition ensured that only the profit maximising firms survived:
The surviving firms may not know why they are successful, but they have survived and will keep surviving until overtaken by a better rival. All business needs to know is a practice is successful.
One method of organising production and supplying to the market will supplant another when it can supply at a lower price (Marshall 1920, Stigler 1958). Gary Becker (1962) argued that firms cannot survive for long in the market with inferior product and production methods regardless of what their motives are. They will not cover their costs.
The more efficient sized firms are the firm sizes that are currently expanding their market shares in the face of competition; the less efficient sized are those firms that are currently losing market share (Stigler 1958; Alchian 1950; Demsetz 1973, 1976). Business vitality and capacity for growth and innovation are only weakly related to cost conditions and often depends on many factors that are subtle and difficult to observe (Stigler 1958, 1987). The Employment Court pretends to know better than the outcome of the competitive struggle in the market for survival.
The Employment Court also believes employers have something akin to academic tenure. In 2010, the Court found that an employee’s redundancy was unjustified because the employer did not offer redeployment and there is no requirement that the right of the redeployment be written into the employment agreement (Wang v Hamilton Multicultural Services Trust). The particulars of this case were quite interesting:
In the case at hand, the Employment Court held that the employer was obliged to look for alternatives to making the employee redundant. Given that he would be able to perform the new finance manager position with some up-skilling, the employer should have offered him the position rather than simply inviting him to apply for it.

The notion that an employee through training can quickly increase their marginal productivity by 50% to fill a more senior role contradicts the modern labour economics of human capital. A 50% salary increase through a bit of training would imply extraordinary annual returns on other forms of on-the-job training and formal education as well as the training at hand in the Employment Court case.

I would very much like to be in the position where I can get a 50% salary increase after a bit of training. As I recall, I required about 5-10 years of on-the-job human capital acquisition before my starting salary as a graduate was 50% higher through promotion and transfers.
In summary, the Employment Court stands apart from the modern labour economics of human capital and job search and matching as well as the modern theory of entrepreneurial alertness, and the market as a discovery procedure and an error correction mechanism. The Employment Court has fallen for both the pretence to knowledge and the fatal conceit.
03 Mar 2015 Leave a comment
in economics of regulation, job search and matching, labour economics, law and economics, organisational economics, politics - New Zealand Tags: employment protection laws, France, The fatal conceit, vexatious litigation
If the Employment Court had its way, New Zealand case law under the Employment Relations Act regarding redundancies and layoffs would be as strict as those in France. As top employment lawyer Peter Cullen explained in the Dominion Post today:
Former Employment Court chief justice Tom Goddard said employees could not be made redundant unless the company would otherwise go to the wall.
The employer appealed.
The Court of Appeal said something quite different. Its view was that if a business could be run more efficiently without a particular position, then it was entitled to disestablish it.
The Court of Appeal made it plain that it would not critically examine the logic behind the employer disestablishing a role. If the reason behind the redundancy was genuine, that was all that really mattered. Of course a fair process and consultation ought to precede any decision, but the outcome nevertheless was that the position could go.
The Employment Court wanted the position to be the same as at that in France where layoffs are permissible only to avoid bankruptcy:
…firms still cannot lay off workers to improve competitiveness when the business is healthy; they can only make economic dismissals to preserve competitiveness when already in financial straits. In France, it ought to be legal to fix small problems before they become big.
This French standard of regulation of layoffs and redundancies, if it had survived on appeal, would have come as a surprise to many, including the OECD who rates New Zealanders having no regulation of layoffs in its Index of Employment Protection.

Source: OECD employment protection index.
But you can’t keep an activist Employment Court down. It’s next tactic was salami tactics. Chipping away at the right of the employer to run its business and decide how large its labour force is. Peter Cullen again with the Employment Court pretending it can second-guess entrepreneurial judgements and arithmetic:
In the case between Grace Team Accounting and employee Judith Brake, the Employment Court found that the decision to make Brake’s position redundant was based upon mistaken arithmetic. The Court of Appeal held that Brake’s redundancy amounted to an unjustified dismissal.
Next cab off the rank was requiring employers to give preference to redundant employees pretty much no matter what. Peter Cullen again:
In the case of Neil Wang and his employer the Hamilton Multicultural Services Trust, the trust encouraged Wang to apply for another role within the organisation.
However, the Employment Court said the trust should have considered whether they should have simply offered Wang the position without having to go through an application process.
The court found that even though the other role was not the same, it required the same skills and minimal retraining and so the trust should have simply given Wang the role.
It is standard in the redundancies and restructurings I’ve been involved with for non-managerial employees to go through internal reassignment panels. Some didn’t make it and were laid off.

It’s common for the managerial vacancies to be advertised externally so that redundant managers must compete with external applicants so that the workplace can renew itself. Quite a few managers don’t make it through this process because of the external competition.

This clear preference for existing employees is a major reregulation of the labour market. Now, every redundant employee can engage in vexatious litigation and squeeze a few thousand dollars extra out of the employer by threatening to go to the Employment Court for a second opinion on the entrepreneurial judgements of the employer. To save managerial time as well is legal fees, it’s cheaper for most employers to pay the redundant employee off with a small settlement.

Anything that makes it more expensive to fire an employee makes it more expensive to hire an employee. This will reduce job creation in New Zealand now that the French standard applies:
…businesses remain obligated to assist laid-off employees in finding other jobs and in retraining them for their new positions – a distinctly French phenomenon. For businesses with more than 1,000 employees, this limbo period before dismissal can last from four to nine months.

31 Jan 2015 Leave a comment
in economics of crime, economics of religion, occupational choice, war and peace Tags: France, Jihadists, war on terror
28 Oct 2014 Leave a comment

20 Oct 2014 Leave a comment
in applied price theory, entrepreneurship, labour economics Tags: France, labour regulation, size contigent regulation

France has 2.4 times as many companies with 49 employees as with 50. Under French labour law, once a company has at least 50 employees, management must create three worker councils, introduce profit sharing, and submit restructuring plans to the councils if the company decides to fire workers for economic reasons. The 3,200 page Code du Travail dictates everything from job classifications to the ability to fire workers.

It is unlawful in France to lay workers off to improve the profitability of the company. Michelin laid 451 workers off in 1999, announced an increased profit 2 months soon after. It was successfully sued for €10 million in the Labour Court on the grounds that economic layoffs are justified to preserve the competitiveness of a firm or of the group to which it belongs, but not in order to improve it.
Participants in the French version of the television show Survivors sued the producers for redundancy pay when they were voted off the show by the tribal council.

When entrepreneurs and managers are confronted with laws that introduces a cost of acquiring a size that is beyond a certain threshold such as 49 employees, some will choose to stay below the threshold and stay at an inefficiently small size. The more talented managers are not running the larger firms because of this barrier to growth.
In Firm Size Distortions and the Productivity Distribution: Evidence from France, Luis Garicano, Claire LeLarge, and John Van Reenen found that the cost of the French labour regulations is approximately equivalent to a 5-10% increase in wages. The main losers from the French regulation from this misallocation of managerial talent are workers (and to a lesser extent large firms) and the main winners are small firms.
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