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Productivity and Competitiveness: Where Does France Stand in the Euro Zone?

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July 2019 Report Productivity and competitiveness: where does France stand in the Euro zone? First report PRODUCTIVITY AND COMPETITIVENESS: WHERE DOES FRANCE STAND IN THE EURO ZONE? First report Chair Philippe Martin Members Agnès Bénassy-Quéré, Olivier Blanchard, Laurence Boone, Gilbert Cette, Chiara Criscuolo, Anne Epaulard, Sébastien Jean, Margaret Kyle, Xavier Ragot, Alexandra Roulet, David Thesmar JULY 2019 FOREWORD This first report by the National Productivity Board (NPB) seeks to present an overview, for France, of the key issues and questions concerning productivity and competitiveness. This is an original exercise that is set to evolve in step with the discussions with the social partners and other stakeholders, as well as with the other national productivity boards organised within a European network. The substantive work accomplished by rapporteurs – Vincent Aussilloux, Amandine Brun-Schammé, Flore Deschard, Margarita Lopez-Forero, Sébastien Turban (France Stratégie), Matthieu Jeanneney (Directorate-General of the Treasury), Matthieu Lequien (Banque de France), Fanny Mikol (Directorate for Research, Studies and Statistics/Dares) and Rémi Monin (National Institute of Statistics and Economic Studies/Insee) – has made a valuable contribution to this report, and I should like to extend sincere thanks to them on behalf of all the NPB for their dedication and professionalism. First and foremost, however, it is grounded in the joint deliberations of the Board members who played an active part in writing it. Harking from diverse backgrounds, these members are economists and researchers who are currently working or have previously worked in academic centres or international organisations and who share their views here completely independently of the economic and political authorities. The NPB’s work has been constructively informed by the extensive range of expertise covered by these specialists in macroeconomics, productivity, innovation, foreign trade, the labour market and business analysis. This initial report aims at determining current knowledge on productivity in France and on the country’s competitiveness in the context of the euro area. By doing so, certain points have been clarified, but a number of overlooked grey areas also emerge – sometimes casting doubt over questions or concepts that had been considered largely defined. Without addressing every single question, this report does, however, make it clear that productivity and competitiveness are two distinct concepts, with NATIONAL PRODUCTIVITY BOARD 3 JULY 2019 Productivity and competitiveness: where does France stand in the euro zone? very different implications, not least for a country forming part of a monetary union. Several of the points identified, and as yet unresolved, will be the focus of future deliberations led by the Board. Philippe Martin Chair of the National Productivity Board NATIONAL PRODUCTIVITY BOARD 4 JULY 2019 CONTENTS Summary ..................................................................................................................... 7 Introduction................................................................................................................ 15 Part One – The productivity slowdown in France and the OECD countries ...... 21 Chapter 1 – Definition and findings ........................................................................... 23 1. Definitions ...................................................................................................................... 23 2. Productivity is slowing down in France and the OECD countries ................................. 24 2.1. In France, productivity levels are relatively high… ................................................... 24 2.2. …but productivity gains have fallen sharply since the late 1990s ........................... 27 Chapter 2 – Explanatory factors common to all developed nations ........................... 31 1. Sectors with low productivity gains are gaining ground in the economy ....................... 31 2. Fall in the contribution ICTs are making to growth ........................................................ 33 3. Are the decreasing interest rates a factor? .................................................................... 36 4. The links with trade, industrial and competition policy .................................................. 37 5. Increasingly divergent productivity at business level ..................................................... 39 Chapter 3 – Explanatory factors specific to France ................................................... 43 1. Insufficient levels and matching of skills ........................................................................ 43 1.1. Attainment and skills of the working population ....................................................... 43 1.2. Skill matching: a problem ......................................................................................... 46 1.3. Inadequate managerial quality ................................................................................. 47 1.4. Increasing need for skills in an age of global production chains .............................. 49 2. French production is under-performing ......................................................................... 49 2.1. More dispersed productivity levels within low-skilled services ................................. 49 2.2. Insufficient automation and dissemination of digital technology within firms ........... 54 2.3. Regulatory barriers are higher in France ................................................................. 55 2.4. Research & development efficiency could be improved .......................................... 56 NATIONAL PRODUCTIVITY BOARD 5 JULY 2019 Productivity and competitiveness: where does France stand in the euro zone? Part Two – Competitiveness .................................................................................. 61 Chapter 4 – The current account: a measure of French competitiveness ................. 63 1. A slight current account deficit which has not widened since 2008 .............................. 64 1.1. Impact of prevailing economic conditions ................................................................ 65 1.2. Current account components ................................................................................... 65 2. Balance on goods and services and market shares ..................................................... 67 3. Measuring the competitiveness of French exports ....................................................... 71 3.1. Competitiveness in their destination: price and non-price competitiveness ............ 71 3.2. Competitiveness in the production process: cost competitiveness and mark-ups applied .............................................................................................. 76 Chapter 5 – Determinants of production costs .......................................................... 79 1. Growth of wages and productivity in France ................................................................. 79 1.1. At the aggregate level and factoring in tax measures, wages have grown in line with productivity in France ............................................................................. 79 1.2. Unit labour costs have risen more quickly in sheltered than open sectors owing to the productivity differential ......................................................................... 83 1.3. Does the wage-setting process enable sufficient correlation with productivity? ...... 86 2. A similar cost of capital to other euro area countries....................................................... 90 2.1. Costs of capital ........................................................................................................ 90 2.2. The importance of the cost of capital for investment ............................................... 91 3. The cost of intermediate inputs ..................................................................................... 92 3.1. Imported intermediate inputs ................................................................................... 93 4. Taxes on production are particularly high in France compared with the other European countries ....................................................................................................... 97 Chapter 6 – Competitiveness and savings: the euro zone in focus ........................... 99 1. Current account balances of the main euro area countries .......................................... 99 2. The consequences of current account imbalances in the euro area .......................... 107 Conclusion – Heightened European surveillance of current accounts is key to the euro area’s sustainability ......................................................... 113 Annexes .................................................................................................................. 117 Annex 1 – The national productivity board .............................................................. 119 Annex 2 – Sector-level productivity trends in France .............................................. 121 Annex 3 – Productivity and intermediate inputs ...................................................... 127 NATIONAL PRODUCTIVITY BOARD 6 JULY 2019 SUMMARY Following a recommendation of the European Council in September 2016, all EU Member States sharing the euro must set up a National Productivity Board. These boards are in charge of analysing the developments and determinants of productivity
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