Does the Business Cycle Matter for France? A Business Cycle Accounting Approach

This paper applies the business cycle accounting procedure to French 1978-2007 data. The main source of business cycle fluctuations in France is shocks to TFP, not changes in the labor wedge. More importantly, the French business cycle is shown to be the mere residual of two counterbalancing effects: a structurally worsening labor wedge and a structurally improving efficiency wedge that (almost) cancel each other out. The 30-year drop in per-capita hours worked is mainly explained by a worsening labor wedge, not by TFP and only marginally by the investment wedge. For future theoretical work concentrating on France, modeling these long-run phenomena is of more importance and promise that modeling the structural sources of fluctuations. A model consistent with these results based on increasing union power and increasing competition on the goods market is introduced