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True prosperity is the freedom to live and work

YVAN GUILLEMETTE

Special to Globe and Mail Update – September 14, 2006

In his column this week, Jim Stanford points out that the French typically work less than the Americans, but that they are more productive in the time they do work, allowing them to earn high incomes and spend more time enjoying themselves, dining out and making love. He suggests the French way may be closer to true prosperity than conventional GDP rankings reveal, and that Canadians perhaps "should, in fact, become more like the French."

Mr. Stanford is right that GDP is not a complete measure of prosperity, although it is arguably the best one we have. GDP is a measure of economic production through the legal market system. It ignores a lot of things that add to people's quality of life, and is often misused in popular discussion.

The fact that France has higher productivity — value-added per hour worked — than the United States is quite consistent with the economic principle of diminishing marginal returns. Think of an upward-sloping, concave production function relating hours of work to economic output. The French work fewer hours and employ a smaller share of working-age citizens, so the position they occupy on their overall production function is "lower" and to the left, relative to the United States or Canada. The counterpart is that the "marginal" units of effort that are expended in the U.S. are not expended in France, and since those marginal units of effort yield lower marginal returns (lower productivity), the average level of productivity in France is higher.

But the real issue that Mr. Stanford fails to explore in his article is why? Why do the French work less? A lot of empirical research points to mainly three factors: first, a preference for leisure; second, high and increasing marginal tax rates; and, third, labour regulation and union-imposed standards for work time, including retirement regulations.

The first factor is a non-issue: To the extent that the French work less than Americans because they value income from work relative to leisure differently, that's fine. Neither is better, people just make different choices based on what they like.

Factor two points to good, old-fashioned incentives. People in France work less because the reward for working more is smaller. The result is higher average productivity because taxes and other regulations keep the least-productive members of society — and the least-productive hours of those who do work — out of the work force altogether, because the net after-tax personal reward to working those marginal hours is too low.

Factor three points to laws regulating working conditions, such as minimum wage laws and vacation time. Here, there is a trade-off between ensuring better working conditions for those employed (although the majority of them are so far above minimum working conditions that the regulations don't affect them much) and creating some unemployment. How one perceives the trade-off is a value judgment. In making this judgment, it helps to keep in mind that those most negatively affected by the "regulationist" approach are the people with low productivity: the less educated, the young, the untrained, the immigrants, as one can tell by looking at the demographic profile of people who rioted in the streets of France in the fall of 2005 (as well as the fact that France's overall unemployment rate of 9 per cent translates to 21 per cent for those under 25).

Also, 15 per cent of young men and 13 per cent of young women aged 15-19 in France are not in school or the labour force. These are twice Canada's rates.

In fact, the effect of much labour regulation — including the minimum wage — is to force employers to discriminate against people with low skills. No one describes it this way, but that is, in fact, what it does.

Some may claim that social assistance affords a better quality of life than a low-wage job. This argument forgets the sense of self-worth and actualization, as well as the opportunities to climb up the job ladder that comes with holding a job, even a low-productivity one. When an employer and a worker are free to enter into an employment contract under terms they both agree to, what results is a mutually beneficial arrangement that, by definition, creates more prosperity than in its absence.

At the end of the day, the best society is the one where citizens are free to make the choices that enhance their own welfare. Citizens in the U.S. may choose to work more because of the higher rewards associated with work, but nothing prevents them from cutting back on work if they so choose. On the other hand, many low-skilled people in France cannot find a job, even if they want one. They are prevented from doing so by laws and regulations that limit their own and employers' economic freedom. In finding its place between the French and American models, Canada should shoot for true prosperity, that which can only be achieved through personal, as well as economic, freedom.

Yvan Guillemette is a policy analyst at the C.D. Howe Institute.