Reference no: EM133082580

Role of Labor Markets

France's labor markets have evolved very differently than those in the United States in the decades following WWII. While the employment-to-population ratio was significantly higher in France in 1950, it declined steadily afterward and now sits much lower than the United States' level (see Exhibit 2). In this question you will analyze how this development matters. Start from the initial values described in Question 1, but this time use a growth rate of TFP equal to 2% in both countries (Exhibit 2 shows that the relative productivity levels did not change much over time).

(i) If the employment-to-population ratio of France had stayed constant at its 1950 level, how would France's output per capita compare to that of the United States right now? Is it in line with the evidence presented in Exhibit 1? How about the growth rates of output per capita?

(ii) Now consider the realistic scenario where the employment-to-population ratio in France fell to eventually reach a level 75% that of the US, consistent with the information in Exhibit 2. To be precise, suppose that the US employment-to-population ratio is constant, but that the one in France is 125% that of the US from 1950 to 1955; 100% that of the US from 1955 to 1975; and 75% that of the US from 1975 onward. How does this affect the level of output per capita in France relative to the US in the long run? Is this more consistent with the evidence presented in Exhibit 1? What is the impact of this development on the growth rate of output per capita in the short run (i.e., in the years following 1955) and long run?