Economic Integration, Labour Market Institutions and
Migration
As the extent of economic integration approaches that of the United States, labour market institutions, and labour market outcomes may also begin to resemble their American counterparts.[..]Full an irreversible economic integration may call for harmonization of social and labor-market institutions within the European Union.
Guiseppe Bertola (2000)
A Brief Overview
Europe mostly fails on the labor mobility criterion
A substitute to labor mobility is labor market flexibility
How does Europe do on this front?
Dismal Labour Market Performance
Unemployment rate (%)
0
2
4
6
8
10
12
1970 1974 1978 1982 1986 1990 1994 1998 2002
EU Euro area USA
Standardized Unemployment Rate
Currently…
Similar…Different
Proportion of long-term unemployment
Country Percentage Country Percentage
France 41.6 Spain 37.7
Germany 51.8 Sweden 18.9
Italy 49.7 Switzerland 33.5
Japan 33.7 UK 21.4
Netherlands 32.5 USA 12.7
o Percentage of people who are unemployed for one year or more
Participation Rate
Country Labor Force Participation Rate
Country Labor Force Participation Rate
France 68.5 Spain 73.2
Germany 77.8 Sweden 79.5
Italy 63.1 Switzerland 88.2
Japan 80.3 UK 76.2
Netherlands 79.8 USA 75.2
Denmark 83 Turkey 52.6
Many other indicators of trouble
Not just the unemployment rate, also: Low rates of labour participation Youth unemployment Duration of unemployment spells
General picture Many people do not hold jobs People can remain unemployed for years
running Problem deeper in larger countries, with
recent improvements in the UK and the smaller countries
Microeconomics of Labor Market Rigidities
Why? General assessment is that labor markets
are rigid in most of Europe Real Wage Stickiness Restrictions on hiring and firing Restrictions on hours worked Minimum wages High unemployment benefits as disincentives
to search jobs
A deep conflict
These features have been introduced to fight labor market imperfections and/or social objectives
They make labor market rigid but serve other purposes
No universal response to this deep conflict
Market Failures: A Few Examples
Market failure Standard solution Economic Cost
The possibility for one side of the market to exercise excessive power
Minimum wages, labour protection laws, mandatory negotiations
Reduces competition on the labour market
Information asymmetry: no good knowledge of workers’ skills and effort at work
Collective wage negotiations
Reduces competition on the labour market
Workers are vulnerable to job uncertainty
Mandatory health and unemployment insurance, retirement benefits
Raises labour costs and reduces demand for labour
What is the link with economic integration?
Deepening integration exacerbates competition
Firms compete by reacting quickly and forcefully to opportunities or shocks
Inflexible labor markets reduce the ability of firms to react
Indirectly, social systems compete against each other
The delicate balance achieved in each country becomes challenged
Economics of Social Dumping a reduction of the level of social protection
due to competition with the new Member States Why?
Wages are much lower in NMSs. The level of social protection is also considerably
laxer in NMSs.
Economics of Social DumpingGermany=100 (2005)
Country Weekly private sector earnings Labour productivity
Bulgaria 5 32Croatia 22 57Czech Republic 19 66Estonia 13 54Hungary 20 69Latvia 7 46Lithuania 10 51Poland 16 63Romania 7 36Slovakia 15 60Slovenia 33 77
The Link between Labor Markets and Monetary Union
Trade Integration Exporters and importers to save on currency exchange
costs Eliminates risk on the exchange rate fluctuations Increases transparency and intensify competition
Monetary discipline and wage negotiations Key is the expected rate of inflation Removal of exchange rate option
Labour Market Institutions
Existing institutions differ from country to country
They are the outcome of a long, and often conflictual, history
A look at the most important ones illustrates the challenges posed by integration
Collective negotiations Social objective: protect workers from
bosses’ excessive powers
Collective negotiations Social objective: protect workers from
bosses’ excessive powers Economic impact: involuntary
unemployment The role of the degree of centralization
Plant level: induces some wage restraint National level: induces some wage restraint Industry level: less restraint
Minimum wage legislation Social objectives
Protect the weakest Reduce inequality
Minimum wage legislation Social objectives
Protect the weakest Reduce inequality
Economic impact: unemployment of the least skilled
Minimum wage legislation Social objectives
Protect the weakest Reduce inequality
Economic impact: unemployment of the least skilled
The integration and monetary union impact Enhanced competition favours low cost
countries Accessions of CEECs will sharpen this aspect Trade unions fear social dumping and call
for harmonisation of social norms
Unemployment insurance Social objective: protect workers from a
major risk
Unemployment insurance Social objective: protect workers from a
major risk Economic impact:
Paid out of labour taxes: raises labour costs Generous benefits reduce incentives to search
for jobs Overall, less employment and more
unempoyment
Unemployment insurance Social objective: protect workers from a
major risk Economic impact: more unemployment The integration and monetary union
impact Asymmetric shocks create temporary
unemployment Generous insurance may prolong the
adjustment Pressure to reduce generosity, mainly duration,
of benefits. Trade unions fear social dumping
Employment protection legislation Social objective: protect workers from
employers’ arbitrariness
Employment protection legislation Social objective: protect workers from
employers’ arbitrariness Economic impact
Reduces firing during downturns Limits hiring during expansions Overall no lasting effect on unemployment, but
reduces firms’ ability to deal with adverse shocks
Employment Protection Legislation
Social objective: protect workers from employers’ arbitrariness
Economic impact: no effect on unemployment but reduces firms’ flexibility
The integration and monetary union impact Harder to deal with adverse shocks Pressure to reduce strictness of legislation.
Trade unions fear social dumping
Payroll Taxes
Social objective: solidarity among workers in financing unemployment, health, retirement
Payroll Taxes
Social objective: solidarity among workers in financing unemployment, health, retirement
Economic impact: raises cost of labor, or reduces wages, or both
Payroll Taxes
Social objective: solidarity among workers in financing unemployment, health, retirement
Economic impact: raises cost of labour, or reduces wages, or both
The integration and monetary union impact
Enhanced competition favors low cost countries
Incentive to either reduce welfare payments or raise other taxes. Politically difficult.
How to respond to deeper integration?
Deeper integration desirable because it enhances competition on the good markets
More competition raises the economic costs of many labor market institutions
A sharpening of the conflict between economic effectiveness and social objectives
Existing arrangements are threatened
Three possible evolutions
Two-speed Europe
Deep reforms
Social harmonization
Possible evolution No.1 Two-speed Europe
Some countries flex their labour markets, others retain their highly social existing arrangements
Firms and risk-taking individuals move to the most flexible countries
Welfare-conscious are attracted by welfare-magnet countries
Part of Europe grows fast with low unemployment, another part grows slowly with permanently high unemployment
Two-speed Europe: already there?
Average annual rowth rates 1995-2003
0
0.5
1
1.5
2
2.5
3
3.5
4
Big Three UK USA CEEC Three Small Nine
Possible evolution No.2 Deep reforms
Thatcher takes over Europe Labour market institutions made more flexible Labour axes reduced
Possible evolution No.3 Social harmonization
The large countries export their welfare systems through social norms applicable to all EU countries
In the end There is no better way, just different socio-
economic equilibria On Flexibility and Security Axes
The continental model
In the end There is no better way, just different socio-
economic equilibria On Flexibility and Security Axes
The continental model (More emphasis on security, less flexible)
In the end There is no better way, just different socio-
economic equilibria On Flexibility and Security Axes
The continental model (More emphasis on security, less flexible)
The Anglo-Saxon model
In the end There is no better way, just different socio-
economic equilibria On Flexibility and Security Axes
The continental model (More emphasis on security, less flexible)
The Anglo-Saxon model (Flexible less emphasis on security)
In the end There is no better way, just different socio-
economic equilibria On Flexibility and Security Axes
The continental model (More emphasis on security, less flexible)
The Anglo-Saxon model (Flexible less emphasis on security)
The Nordic model
In the end There is no better way, just different socio-
economic equilibria On Flexibility and Security Axes
The continental model (More emphasis on security, less flexible)
The Anglo-Saxon model (Flexible less emphasis on security)
The Nordic model (Flexicurity)
In the end There is no better way, just different socio-
economic equilibria On Flexibility and Security Axes
The continental model (More emphasis on security, less flexible)
The Anglo-Saxon model (Flexible less emphasis on security)
The Nordic model (Flexicurity) The Southern European model and the evolving accessing countries
Migration
Migration in the EU
Migration: Facts
Share of Low Education
Immigrants (% of pop)
Immigrants from EU
Nationals EU foreigners
Non-EUforeigners
Austria 9 28 16 51
Germany 9 25 30 36 56
Belgium 9 63 41 -- 48
France 6 37 31 65 69
Denmark 5 21 31 28 66
UK 4 38 41 49 28
Ireland 3 71 52 38 21
Migration