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