The Internal Market III Labour Markets and Migration

1
The Internal Market III Labour Markets and
Migration

• EC329 Economics of the European Union
• Holger Breinlich
• University of Essex

2
Introduction

• Looked at different channels through which
  European economic integration influenced income
  levels
• Static effects gains from reducing trade
  barriers under increasing returns to scale and
  imperfect competition
• Dynamic or growth effects medium and long-run
• Now study impact of European integration on
  another important policy variable (un)employment
• Impact of goods market integration on
  (un)employment
• Impact of factor market liberalization (?
  migration) on (un)employment

3
Plan of Talk

• Some facts on European labour markets
• Labour markets and (trade) integration
• The link between unemployment and labour market
  rigidities without integration
• Impact of economic integration on (un)employment
  with labour market rigidities
• Migration ( factor market integration)
• Facts on EU migration
• Theoretical framework and empirical evidence
• Summary and Learning Outcomes

4
EU Labour Market Facts
5
Unemployment

• Unemployment rate u U/L where
• U number of people declaring themselves
  unemployed (no job but actively looking for one)
• L labour force, i.e. people in work (E) plus the
  unemployed (U)
• Large variation in levels and trends of
  unemployment within the EU (figure 1)
• Also large variation in duration of unemployment
  (table 1)

6
Figure 1 Unemployment Levels

• Strong increase in unemployment rates during the
  1970s and early 1980s
• Reversal after that in USA, UK and smaller EU
  members but not in France, Germany and Italy
• 2004-members show persistently high unemployment
  (figures for 1995 and 2005)

Source OECD. Big-3 France, Germany, Italy
Small-7 Austria, Belgium, Denmark, Ireland, the
Netherlands, Portugal, Sweden New-4 Czech
Republic, Hungary, Poland, Slovakia
7
Table 1 Long-Term Unemployment
Source OECD (2008). Table shows people
unemployed for one year or more as a fraction of
all unemployed
8
Labour Market Participation

• Potential problems with only looking at
  unemployment?
• Labour market participation rate
• Working-age population (N) people who in
  principle should be able to work (usually defined
  as all valid people aged 15-65)
• Working-age population thus consists of those
  employed (E), those unemployed (U) and those out
  of the labour force (O)
• N E U O L O
• Out of the labour force people working in the
  black market, engaged in criminal activities,
  raising children or simply not looking for work
  (e.g. living on partners income or on welfare,
  unemployment or disability benefits)
• Connection between unemployment and labour market
  participation? (figure 3)

9
Figure 2 Unemployment and Participation
10
Labour Market Rigidities and Unemployment
11
Labour Markets without Rigidities

• If labour markets operated like other markets,
  there would be no (involuntary) unemployment
• The real wage rate would adjust in response to
  shocks so that everyone looking for work would be
  employed
• Consider a shock to labour demand (e.g. a
  recession) (Figure 3)
• Real wage rate would adjust to prevent
  involuntary unemployment (w1 to w2)
• Employment (hours worked) goes down but this is
  voluntary/rational decision by workers
• In the real world, there obviously is
  unemployment. So how can we model it?
• Rigidities leading to (real) wage inflexibility
  is a key cause (figure 3)

12
Fig. 3 Labour Markets with and w/o Rigidities
13
Why Wage Rigidity?

• Labour markets are different
• Domination by one side
• Information asymmetries
• Individual workers are highly vulnerable to
  uncertainty
• Human capital and special skills
• Social imperatives
• Fairness (minimum wages, established working
  conditions )
• Need for income stability
• Need for job security
• Formalise these insights by looking at one
  important institution leading to wage
  inflexibility collective wage bargaining

14
Fig. 4 Effects of Collective Negotiations

• Normal supply curve is S, would result in wage
  w and employment L
• Collective negotiations give workers bargaining
  power (e.g. through trade unions)
• As any agent with market power, unions withhold
  some supply (? Sc )
• Resulting wage is w, employment L and
  unemployment L- L
• Since only minority of workers employed, outcome
  democratically sustainable

Real wage

c





S





S

B


C





w



w



A






D



L L

L

Employment


15
Economic Integration and Unemployment
16
Economic Integration and Labour Markets

• More competition on the goods market indirectly
  leads to more competition between labour markets
• Labour costs make up 50 of total production
  costs
• Trade Liberalization leads to tougher competition
  between domestic and other EU firms
• Must use labour force more efficiently than firms
  in other member states
• In the following, look at the effects of trade
  integration on wages and unemployment in the
  presence of
• Social protection ( non-wage benefits)
• Labour market rigidities

17
The Economics of Social Protection

• Workers in many EU nations convinced that
  competition from new member states will lead to
  reduction in social protection (welfare/unemployme
  nt benefits, employment protection )
• Wages much lower there (table 2)
• Usually also lower levels of social protection
• Old concern (since Treaty of Rome) but founding
  nations of EEC6 decided against intervention
• Basic logic is that social protection is a form
  of non-wage income

18
Table 2 Wages and Productivity, Eastern Europe
Table shows labour productivity and median weekly
private sector earnings relative to Germany (
100). Source Federation of European Employers
(2005)
19
Fig. 5 Social Protection and Economic Integration

• Initial closed-economy outcome without protection
  (W, L)
• Introducing protection (W, L)
• Integration (flatter labour demand curve)
• Without productivity gains (W, L)
• With productivity gains (W, L)

20
Fig. 6 Unemployment and Economic Integration

• Now consider unemployment (S ? Sc )
• Social protection under economic integration
  lowers wages as before
• No impact on unemployment

21
Social Dumping Summary

• Competition in goods markets ties the sum of wage
  and non-wage costs to workers productivity
  (firms hire up to point where MC price)
• Higher social protection means lower wages and
  vice versa
• Integration raises wage-lowering effect of social
  protection (tougher competition means workers
  have to bear costs paid by consumers previously
  through higher prices)
• But integration can also enhance efficiency,
  leading to net wage increases (consistent with
  1960s experience)
• Integration per se has no clear impact on
  unemployment effects of social protection (also
  consistent with evidence)
• All this helps explaining why EEC6 founding
  members did nothing about possibility of social
  dumping

22
Migration
23
Key Facts

• Patterns of EU immigration changing over time
  (figure 8)
• Southern and SE-Europe main sending nations up to
  1973 (Italy, Spain, Portugal, Greece Turkey)
• Slowdown 1973 until mid-1980s
• Then pick-up in migration from Turkey and North
  Africa, later from Eastern Europe (but less than
  generally believed ? table)
• Fraction and origin of migrants in EU countries
  varies substantially
• Being part of the common labour market does not
  seem to influence origin of migrants much (?
  discriminatory goods market liberalization,
  compare lecture 1)
• Immigration seems to be more driven by wage and
  unemployment differences and labour shortages in
  the host country

24
Fig. 8 European Migration Flows 1950-2000
Source Brücker (2002), based on data from UN
Population Division
25
Net immigration before and after enlargement
26
The Microeconomics of Migration

• Labour migration unpopular in most receiving
  countries, anti-immigration political parties
  have done well in many European countries
• What effects on host country workforce does
  economic theory predict?
• Start with very simple formal framework
• Discuss extensions verbally

27
The Simplest Framework
Post-migration situation
28
Extensions

• Analysis so far implicitly assumes only one type
  of labour
• In reality, many types of labour (e.g. skilled
  vs. unskilled, different professions )
• Foreign workers can be substitutes or
  complements to domestic ones
• Examples Norwegian hotels, Foreign Sales Desks
  in the City
• In the extreme, perfect complementarity (kitchen
  workers, street sweepers )
• Effects in the simple migration diagram?
• What do aggregate data say? (figure)
• Formal empirical evidence
• 1 rise in labour supply via immigration changes
  native workers wage by between -1 and 1 (most
  estimates -/ 0.3)
• Probably due to fact that many countries
  cherry-pick immigrants

29
Substitutes vs. Complements
30
Immigration and Unemployment

• So effects of migration on wages not clear
• What about unemployment?
• Use collective bargaining framework to model
  unemployment
• If immigrants completely replace certain domestic
  workers Native employment and wages down. But
  total employment up and native unemployment not
  necessarily increased (figure 11)
• If immigrants and native workers are substitutes
  wage down, unemployment among both native workers
  and immigrants, total employment increased
  (figure 12)
• Empirical evidence
• Mixed results, depending on group of native
  workers studied
• But no evidence of large and negative effect on
  native unemployment
• In part again due to fact that EU nations pick
  immigrants

31
Fig. 11 Immigration and Unemployment
Sc
Real wage








U

S
A
w





B

U
w
'





D

D


Employment

L
L
32
Fig. 12 Immigration and Unemployment
Sc
Real wage








S
U

Sc
A
w




S
U

B
w








D



Employment

L
L
33
Summary and Learning Outcomes

• Studied key labour market concepts and facts
  about European labour markets
• Discussed wage rigidity as an explanation for
  unemployment
• Labour markets and EU integration with wage
  rigidity
• Trade integration and social dumping
• Migration ( factor market integration)
• Facts on EU migration
• Theoretical framework without wage rigidities
• Theoretical framework with wage rigidities
• Empirical evidence on wage and employment impacts
  of migration