Sluggish growth in the mid-1990s threatened France and West Germany's prosperity. This report shows that the main barriers to growth were product market regulations that stifled innovation and high minimum wages that discouraged hiring.
The purpose of this MGI study is to evaluate France and West Germany in terms of productivity, output, and employment performance at the industry level. MGI has taken a case study approach to identify barriers to faster growth and higher employment in key industries.
In the manufacturing sectors, France and West Germany face a 20 percent and 15 percent gap in terms of total factor productivity. The case studies in six targeted sectors show how rigidities in labor, capital, and product markets as well as differences in macroeconomic environments can impair economic performance.
At the production process level, the adoption of lean production techniques has been the main explanatory factor for productivity differences. Managers and supervisors have been slow to adopt proven innovations, hampering better productivity for French and German companies.
Lower productivity in the French and German housing construction sectors is largely caused by over regulation of product markets. Local communities in both countries do not permit much land to be used for large-scale production programs.
German and French telecom companies are dramatically underutilizing their phone networks and not taking advantage of marketing possibilities. French and German governments, as both owners and regulators, give managers a host of competing objectives and incentives, which undermine efficient use of resources for making decisions.
Overall, productivity in the French retail banking sector is 15 percent higher than West Germany. Differences in the level of pressure on management to increase productivity exerted by both capital markets and forces at work at the industry level appear to be the main causes for productivity differences.
Despite a constraining regulatory environment aimed at protecting employment and cities, retail sectors in France and West Germany managed to rapidly develop modern formats. Reducing the cost of low-skilled labor while removing the constraints of product market regulations could lead to higher employment.
Weak productivity levels can be explained on the demand side by a poor environment for entrepreneurial high tech companies. On the demand side, spending on information technology tends to be low.
France and West Germany have, respectively, 40 percent and 30 percent lower output levels than other benchmark countries. Artificial barriers have led to less stimulation of productivity growth.
