Economic integration, labour markets and migration

Question 1

European labour markets: a brief characterisation

Answer 1

• limited migration within the EU
• very different legislations and practices across countries.
• > national labour markets in EU are on their own
• > on average, the EU is not doing well in comparison to USA (e.g. higher unemployment rates)

Question 2

Labour demand and supply

Answer 2

firms (demand):

• balancing cost (wages + contributions)
• benefit (marginal productivity of labour)

people (supply):

• balancing cost (disutility)
• benefit (wage)

Question 3

Reasons for involuntary unemployment

Answer 3

• salaries are collectively negotiated (most crucial factor, collective supply curve is above individual supply curve)
• agreements hold for long periods -> labour markets react slowly to changing conditions
• wage contracts are often regulated
• conditions for hiring and firing are also regulated
• unemployment benefits

-> rigidities lead to involuntary unemployment

Question 4

Characteristics of long-term unemployment in EU

Answer 4

EU countries have higher long-term unemployment than other OECD countries

Question 5

Effects of trade integration on labour markets

Answer 5

• trade integration does affect unemployment
• severe rigidities, unemployment and inequalities are likely to rise since the expanding sector does not see more unemployment, but the contracting sector does
• trade is blamed for creating unemployment when trade is only the messenger, which reveals the adverse effects of underlying distortions

-> economic integration creates winners and losers and willingness to undertake economic integration depends on the winners’ readiness to compensate the losers (i.e., social safety nets)

Question 6

Institutional effects of trade integration

Answer 6

• labour market distortions related to institutional arrangements reflecting a country’s political and social history
• ‘Social dumping’ a commonly held view = competition reduces social protection

-> trade competition is ultimately competition between national social arrangements -> survival of the fittest, gravitating towards most efficient arrangements

Question 7

Social dumping

Answer 7

• founding nations decided harmonisation of most social policies was no necessary component of European integration
• capital movements take place between developed states
• lower wages frequently reflect lower productivity levels

-> harmonisation will occur through market competition

Question 8

Migration

Answer 8

• Europe became a net immigration country since 1950/60s
• 2004/2007 enlargements: 100 million new citizens
• > long transition period for these citizens for free movement
• migration is stable (0.2% of population per year)
• 1% increase of migrant workers change native incomes by +/- 1%
• unlikely to affect unemployment in either direction

-> migration improves the overall efficiency of the EU economy and the gains from this are split between Home and Foreign (often complimentary skills of migrants)

Question 9

Reasons for low mobility within EU

Answer 9

• restrictions for new EU members’ nationals mobility
• differing pensions systems
• unemployment benefits
• regulated professions
• language, housing, health systems, etc.