Free Movement of Persons

1. Welfare analysis of the free movement of labor

Under very restrictive assumptions free movement of goods is sufficient that factor prices and marginal productivities are the same in all member states (Heckscher-Ohlin-Samuelson theory).

However, two problems with this approach:• Not all goods are tradeables, and some tradeables face high

transportation costs.• There are not only economic reasons for free movement of

persons.

Under more realistic conditions, removing the barriers to free movement of persons affects the allocation of resources and the distribution of income.

Let us start with a simple model:• There are two countries: Home country H and partner country

P.• There is a given capital stock in each country. Capital and

goods are completely immobile between the countries.• Labor is homogeneous and perfectly mobile between the

countries.

0H L* L0 0P

h

g

f

f

i

j

e

da

bb

c

€€

i

j

w*

wH

w*

wP

VMPLP

VMPLH

Explanation:

• Initially, the quantity of homogeneous labor is 0HL0 in country H and L00P in country P.

• The curves VMPLH and VMPLp represent the value of the marginal product of labor in countries H and P.

• With perfect competition on the labor market, the wage rate is equal to the value of the marginal product of labor in each country.

• Reallocation of labor from H to P will produce a gain in allocative efficiency.

• If there were no barriers to the free movement of persons and no migration costs and if migrant workers were induced exclusively by wage differentials, migration would stop only when wages (and marginal productivities) are the same in both countries.

• In this case the welfare gain for the union as a whole is i + j.

Allocative and distributional effects of labor mobility

1. Production and distribution without labor mobility

H P

Labor income a + d f + g

Capital income b + c + e h

National income a + b + c + d + e f + g + h

Allocative and distributional effects of labor mobility (ctd.)

2. Production and distribution with labor mobility

H P

Labor income a + b d + e + f + j

Capital income c g + h + i

National income a + b + c d + e + f + g + h + i + j

Allocative and distributional effects of labor mobility (ctd.)

3. Change of production and distribution

H P H + P

Labor income b – d d + e + j - g b + e + j - g

Capital income - b - e g + i g + i - b - e

National income - d - e d + e + i + j i + j

Result of our simple model:• Free movement of labor increases overall production in both

countries.• Winners are: migrant labor, remaining labor in H, capital

owners in P.• Losers are: capital owners in H, existing labor in P.

This result is based on the following simplifying assumptions:• Homogeneous labor• Flexible labor markets• Homogeneous regions in both countries• No free movement of goods and capital.

Modification of the simple model:

a) Heterogeneous labor

Immigrants who have skills that are complementary to the skill mix of the country of destination are typically less likely to create losers in this country.

When immigrants are highly skilled: Possible problem of “brain drain” for country of origin.

b) Inflexible labor markets and unemployment

With homogeneous labor unemployment will increase in the country of destination and decrease in the country of origin. Without additional assumptions it is not clear whether unemployment in both countries together will be increasing or decreasing.

When immigrants have complementary skills unemployment may decrease in the country of destination.

Modification of the simple model (ctd.):

c) Heterogeneous regions

When the country of destination consists of a high-wage region (with flexible wages) and a low-wage region (with minimum wages) immigration may reduce unemployment.

d) Free movement of goods

For a small country which is not able to affect world market prices immigration may be neutral with respect to wages and unemployment since migrant worker tend to increase specialization toward labor-intensive products.

Labor mobility and the social insurance system

Additional problems of increased labor mobility may result when mobility is not induced by productivity differences between the countries concerned.

Actually, workers will be induced by differences in net compensation in the broadest sense, i. e. gross compensation minus all kinds of taxes and contributions on gross compensation plus all kinds of social benefits such as children’s allowances, housing subsidies, unemployment relief, social welfare, free access to schools and universities and so on.

Problem: Differences in net compensation do not necessarily reflect productivity differences.

Labor mobility and the social insurance system (ctd.)

In this case (i.e. redistributive instead of productivity induced labor mobility) two negative consequences may result:

First of all, labor force is induced to emigrate even though its marginal productivity is lower in the country of destination than in the country of origin, if the productivity difference is overcompensated by generous social transfers in the country of destination.

Secondly, if workers with low skills and low income have strong incentives to emigrate to countries with generous social insurance systems, these systems get under pressure.

Labor mobility and the social insurance system (ctd.)

Problem of a general transition period for free movement of labor:

Redistributive as well as productivity oriented mobility of labor is impeded.

Proposal of council of economics advisors of the German Ministry of Finance: Principle of delayed integration, i. e. immigrants remain for a transition period members of the social insurance system of their country of origin.

However, this proposal has not been successful.

2. Free movement of persons put into practice

Originally, the free movement of persons between the member states was restricted in several ways:

• The right of free movement was restricted to nationals of the member states.

• The right of free movement was restricted to the working population.

• Free movement was interpreted as a prohibition of (direct or hidden) discrimination on the grounds of nationality.

In the last 50 years, this situation has been changed by secondary legislation and by clarifying ECJ judgments:

• The link between the right of free movement and economic activity has been removed.

• The right of free movement was extended to family members who do not own the nationality of a member state.

• The prohibition of discrimination was extended to a general prohibition of obstacles to the free movement of persons.

2.1 Free movement of workers (Articles 39 – 42 EC)

Article 39 (1) guarantees the free movement of workers within the Community.

According to Art. 39 (2) any discrimination based on nationality between the workers of the member states as regards employment, remuneration and other conditions of work and employment is prohibited.

Article 39 (3) specifies the principle of freedom of movement by granting workers certain rights, such as the right• to accept offers of employment actually made,• to move freely within the territory of member states for this purpose,• to stay in a member state for purpose of employment,• to remain in the territory of a member state after having been employed in that state.

There are two limitations to the principle of free movement of workers:

Barriers to the free movement of workers may be justified on grounds of public policy, public security and public health (Art. 39 (3)).

• The provisions of Art. 39 do not apply to employment in the public service (Art. 39 (4)). Remark: “Public service” is narrowly defined by the ECJ.

Article 40 empowers the Community to issue directives or make regulations setting out the measures required to bring about freedom of movement for workers, as defined in Article 39. Of special importance are:

• Regulation 1612/68 which elaborates on the equal treatment principle and sets out many of the substantive rights and entitlements of workers and their families.

• Directive 68/360 which regulates the formalities and conditions of entry and residence of workers and the self-employed.

• Regulation 1251/70 protects the right of the worker, and those members of the worker’s family listed in Regulation 1612/68, to remain in the territory of a member state, mainly in the event of retirement, permanent incapacity to work, or death, after having been employed in the state for a period of time and subject to certain conditions.

Important regulations and directives (ctd.)

• Regulation 1408/71 on the social security of migrant workers from other member states provides some mutual recognition of social insurance claims acquired in other member states.

• Directive 2004/38/EC which merges into a single instrument all the legislation on the right of entry and residence for Union citizens, consisting of two regulations and nine directives.

Important provisions of directive 2004/38/EC

• For stays of less than three months, the only requirement on Union citizens is that they possess a valid identity document or passport.

• The right of residence for more than three months remains subject to certain conditions: Applicants must be either engaged in an economic activity or they must have sufficient resources and sickness insurance to ensure that they do not become a burden on the social services of the host member state during their stay.

• After a five-year period of uninterrupted legal residence Union citizens acquire the right of permanent residence in the host member state.

Important ECJ judgments

The ECJ interprets primary and secondary legislation on the free movement of workers very integration-friendly:

• the term “worker” is very broadly interpreted

• the provisions on free movement of workers have direct effect, not only with respect to discriminatory actions by public authorities, but also with respect to certain discriminatory collective rules (such as collective wage agreements, certain regulations in professional sports and so on), and even with respect to discriminatory practices by private employers (Angonese, 2000).

• not only direct discrimination on grounds of nationality is prohibited, but also indirect discrimination and even non-discriminatory obstacles to the free movement of workers.

Important ECJ judgments (ctd.)

Let us discuss two interesting ECJ judgments:

The case Allué/Coonan (1989)

According to Italian law employment contracts between universities and foreign language lecturers were of limited duration, whereas the other employees typically faced no limitation of their employment period.

Motivation: When foreign language lecturers have been living for many years in a foreign country they will be loosing their quality as a “native speaker”. For this reason, they have to be replaced after some years.

ECJ judgment: Since foreign language lecturers come usually from foreign countries, this practice was interpreted as indirect discrimination.

Important ECJ judgments (ctd.)

The case Bosman (1995)

1. Background:

• The local football (soccer) clubs in Europe (and most of the rest of the world) belong to national associations.

• The national associations are members of the FIFA, the world-wide association of football.

• Under the roof of FIFA there are regional groupings such as the UEFA

• The associations have developed very detailed rules on the rights of clubs and players to participate in matches organized under the roof of the associations.

• There are two important rules related to this case: (1) transfer rules, (2) nationality clauses (‘3 + 2 rule’)

2. Facts:

Bosman was a Belgian national employed by the Belgian first division club RC Liège. When his contract expired he wanted to play for the French second division club, US Dunkerque. Because no transfer certificate had been sent to the French Football Federation Bosman was left without a club for the following season. He did manage to sign two short contracts with French clubs before ending up at Olympic de Charleroi, a Belgian third division club. There was strong circumstantial evidence that Bosman was being boycotted by other clubs which might have employed him.

Bosman brought proceedings against his former club and the national court eventually made a reference to the ECJ for interpretation of Art. 39 EC.

The case Bosman (1995)(ctd.)

3. Judgement:

• The nationality clause (‘3 + 2 rule’) infringes the principle of non-discrimination and is not in accordance with Art. 39 EC.

• Although the transfer fees do not represent a direct or indirect discrimination on grounds of nationality they restrict the sportman’s access to the market and insofar impede the free movement of workers.

• But the ECJ recognized that sport is special and transfer fees are insofar legitimate as they are aimed at supporting competitive balance and encouraging the recruitment and training of young players.

• However, the ECJ ruled that the specific design of the transfer rules is not proportionate to achieve both aims.

The case Bosman (1995)(ctd.)

4. Consequences:

• Effects of a prohibition of transfer fees: players’ salaries tend to increase, contract length tends to increase, transfer fees for breach of contract tend to increase, investment in talents tends to decrease.

• After negotiations between the FIFA, UEFA and the European Commission in 2001 new transfer rules were implemented (so-called “Monti rules”): (1) players’ contracts should have a term between one and five years; (2) every time a player between the age of twelve and twenty three is transferred a fee should be paid and distributed among the clubs that participated in the training of the player (including some “solidarity tax” to be paid to other clubs that are involved in training of players). The compensation to be paid is determined by category of the old and the new club.

The case Bosman (1995)(ctd.)

4. Consequences (ctd.):

• Since July 2005 new FIFA transfer rules with some special provisions for Europe have come into force. In order to bring the transfer rules more in line with the Bosman decision than the 2001 rules the transfer fees are now called training compensation and are calculated in a different way.

The case Bosman (1995)(ctd.)

According to Art. 43 EC restrictions on the right of individuals and companies to maintain a permanent or settled place of business in a member state are prohibited. Such prohibition does also apply to restrictions on the setting up of agencies, branches, or subsidiaries.

The core of the freedom of establishment is the principle of non-discrimination, i.e. the principle of equal treatment of nationals and non-nationals.

Distinguish:

• freedom of establishment: permanent basis

• freedom to provide services: temporary basis

2.2 Freedom of establishment (Arts. 43 – 48 EC)

• Activities which are connected with the exercise of official authority (Art. 45 EC). Example: recording notaries.

• Public policy exemption, i.e. discrimination because of public policy, public security and public health (Art. 46 EC)

Exemptions from the freedom of establishment

Secondary law

Arts. 44 and 47 EC empower the Community to enact directives in order to implement the right of establishment.

According to Art. 44 EC some liberalization directives were enacted, such as directive 73/148 on the rights of entry and residence and directive 75/34 on the right to remain permanently in a member state after having been self-employed there. These directives are now replaced by the more general directive 2004/38 (see free movement of workers).

Secondary law (ctd.)

Of large importance are the directives on harmonizing or mutually recognizing the national education- and qualification-requirements necessary to pursue an economic activity or profession that are enacted according to Art. 47 EC.

Initially, since the 1960s, the Community followed a harmonization approach (vertical approach) which focused on specific sectors of economic or professional life, so as to obtain agreement from all member states on the minimum standard of training and education needed for a qualification in that field.

Consequence: Many directives for different sectors; difficult and time consuming.

Secondary law (ctd.)

For this reasons, since the 1980s a change from harmonization in detail to the principle of mutual trust (= horizontal approach) has taken place. (see Cassis de Dijon).

According to this new approach, three important directives have been enacted that aimed at facilitating the mutual recognition of formal qualifications:

• directive 89/48 on mutual recognition of higher education diplomas and certificates (education of at least three years duration),

• directive 92/51 on mutual recognition of diplomas and certificates awarded after a post secondary education course of at least one year’s duration,

• directive 99/42 on all other sectors and professions that were covered only by vertical directives.

Important ECJ decisions

As it is the case with the other basic freedoms, the ECJ has gone beyond the notion of discrimination to state that even non-discriminatory obstacles to the right of establishment may be prohibited by the Treaty provisions. At the same time, the ECJ defined mandatory requirements of the general interest as additional justifications for non-discriminatory obstacles to the right of establishment.

General discussion:

• eliminating discrimination vs. ensuring mobility

• equal treatment vs. creation of a single market

• diplomas and certificates as quality signals or barriers to entry.

Important ECJ decisions (ctd.)

The case Reyners (1974)

Jan Reyners was a Dutch national who obtained his legal education in Belgium, but was refused admission to the Belgian Bar solely on the ground that he was not of Belgian nationality. He challenged the relevant Belgian legislation before the Conseil d’Etat which referred several questions to the ECJ, including the question as to whether Art. 43EC was directly effective in the absence of implementing directives under Arts. 44 and 47 EC.

The ECJ judged that after the expiring of the transitional period Art. 43 EC has become direct effective.

Important ECJ decisions (ctd.)

The case Klopp(1984)

Mr. Klopp was a German lawyer with chambers in Düsseldorf, Germany. Several of his clients were German enterprises with activities in France and French enterprises doing business in Germany. In 1969 Klopp obtained a doctorate in law from the faculty of law and economics of the University of Paris, and in 1980 he passed the Paris bar exam. Nevertheless, his application for admission to the Paris Bar was rejected because French law allows for establishing chambers only in one place and that place must be within the territorial jurisdiction of the ‘tribunal de grand instance’ with which he is registered.

Important ECJ decisions (ctd.)

The case Klopp(1984)(ctd.)

ECJ judgment:

• Each member state is free to regulate the exercise of the legal profession in its territory.

• But this does not mean that the legislation of a member state may require a lawyer to have only one establishment throughout the Community territory. Such a restrictive interpretation would mean that a lawyer once established in a particular member state would be able to enjoy the freedom to establish himself in another member state only at the price of abandoning the establishment he already had. (not proportionate to guarantee the quality of legal services)

• Remark: The ECJ extended the application of Art. 43 to non-discriminatory obstacles to the right of establishment.

Important ECJ decisions (ctd.)

The case Gebhard (1995)

Mr. Gebhard is a German national who obtained a German law degree and started practising as a Rechtsanwalt in Germany in 1977. From 1978 until 1989 Mr. Gebhard worked with a Milan law firm under the provisions of directive 77/249 to facilitate the effective exercise by lawyers of freedom to provide services. The rules of this directive essentially require the foreign lawyer to work under the supervision of a domestic lawyer

In 1989, Mr. Gebhard opened his own chambers in Milan, started using the title avvocato and employed a number of Italian procuratori. Subsequently, disciplinary proceedings were initiated against him for falsely using the title of avvocato and for having established himself in Italy on a permanent basis. He was suspended from the Bar Association and ordered to seize his professional activities.

Important ECJ decisions (ctd.)

The case Gebhard (1995) (ctd.)

ECJ judgement:

• Where the taking-up or pursuit of a specific activity is subject to such conditions in the host member state a national of another member state intending to pursue that activity must in principle comply with them.

• However, national measures liable to hinder or make less attractive the exercise of fundamental freedoms guaranteed by the Treaty must fulfill four conditions: (1) they must be applied in a non-discriminatory manner; (2) they must be justified by mandatory requirements in the general interest; (3) they must be suitable for securing the attainment of the objective which they pursue; (4) they must not go beyond what is necessary in order to attain it.

Important ECJ decisions (ctd.)

The case Gebhard (1995) (ctd.)

ECJ judgement (ctd.):

• Hence, the Court stated explicitly that the application of the principles developed in cases on the free movement of goods should be applied to all basic freedoms.

• In applying their national provisions, member states must take account of the equivalence of diplomas and, if necessary, proceed to a comparison of the knowledge and qualifications required by their national rules and those of the person concerned (German exam plus professional experience in Italy plus supplementing examination of some specific skills are sufficient).