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 (% )
12
10
8
6
4
2
EU
Euro area
USA
0
1970
1974
1978
1982
1986
1990
1994
1998
2002
Standardized Unemployment Rate
12.0
10.0
8.0
1988
6.0
1998
4.0
2006
2.0
0.0
France Germany
United
Kingdom
United Euro area
States
Currently…
Unemployment Rate in 2007
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
United Kingdom
United States
Euro area
Total OECD
Similar…Different
Unemployment Rate in 2007
12.0
10.0
8.0
6.0
4.0
2.0
0.0
Proportion of long-term unemployment
o Percentage of people who are unemployed for one year or more
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
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 Dumping
Germany=100 (2005)
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
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 welfaremagnet 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
4
3.5
3
2.5
2
1.5
1
0.5
0
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 Immigrants
(% of pop) from EU
Nationals
EU
Non-EU
foreign foreigners
ers
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