Transcript The Economics of European Integration © Baldwin & Wyplosz 2006

The Economics of
European Integration
© Baldwin & Wyplosz 2006
Chapter 8
Economic
Integration,
Labour Markets
and Migration
© Baldwin & Wyplosz 2006
Why Labour Markets Matter
• Labour costs: key for international
competitiveness
– Half of all production costs
– Set nationally
• Labour markets are indirectly in
competition via goods markets
• Labour mobility
– One aspect of this competition
– Also helps know each other
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Controversies Abound
• Economic logic sometimes clashes with
social logic
• Effectiveness sometimes clashes with
equity
• Solidarity clashes with individualism
• Acquired advantages under threat
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Plan
• Unemployment
• Economic integration and the Labour markets
• Migration
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Unemployment
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Some Facts
Unemployment: a symptom
Unemployment rates (%)
14
1965
1985
2005
12
10
8
6
4
2
0
Big 3
UK
Small 7
New 4
USA
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Labour Market Rigidities:
the Simplest Interpretation
Flexible wages
deliver “full
employment”
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Labour Market Rigidities:
the Simplest Interpretation
Rigid wages result
in unemployment
Flexible wages
deliver “full
employment”
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Why wage rigidity?
• Labour markets are different
– Domination by one side
– Information asymmetries
– Losing a job is a major vulnerability
– Human capital and special skills
• Social imperatives
– Fairness
– Need for income stability
– Need for job security
© Baldwin & Wyplosz 2006
The Standard Response:
Collective Negotiations
Real wage
Collective negotiations
lead to higher wages
Sc
S
Individual supply
w’
B

C

 A
w
D
L’
L
L”
Employment
© Baldwin & Wyplosz 2006
The Standard Response:
Collective Negotiations
Collective negotiations
lead to higher wages
Real wage and to unemployment
Sc
S
Individual supply
w’
B

C

 A
w
D
L’
L
L”
Employment
© Baldwin & Wyplosz 2006
Economic Integration and
Labour Markets
A two-way relationship
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Effects of economic integration
on the labour markets
• More competition on the goods market
means that labour costs are a strategic
issue
• Goods market integration indirectly leads
to labour market integration.
• It also calls for faster reaction to shocks:
flexibility is at a premium
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Effects of the labour markets
on economic integration
• Economic integration creates winners and
losers
• Willingness to undertake economic
integration depends on the winners
readiness to compensate the losers
• This calls for safety nets that make labour
markets more rigid and less able to face
competition
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The case of social dumping
Wages and productivity in 2005
(Germany = 100)
Country
Bulgaria
Croatia
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Poland
Romania
Slovakia
Slovenia
Weekly private sector earnings
5
22
19
13
20
7
10
16
7
15
33
Labour productivity
32
57
66
54
69
46
51
63
36
60
77
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Migration
Western fears of Eastern Hordes
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Immigration: Facts
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Immigration: Facts (cont.)
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Migration: The Simplest
Framework
Initial situation
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Migration: The Simplest
Framework
Post-migration
situation
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Migration: The Simplest
Framework
Loss of
home workers
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Migration: The Simplest
Framework
Gain of home
capital-owners
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Migration: The Simplest
Framework
Loss of foreign
capital-owners
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Migration: The Simplest
Framework
Gain of
foreign-workers
staying abroad
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Migration: The Simplest
Framework
Gain of migrant
workers
Gain of
foreign-workers
staying abroad
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Migration: The Simplest
Framework
Home gains
Foreign gains
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