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

Standardized Unemployment Rate

Currently…

Similar…Different

Proportion of long-term unemployment CountryPercentageCountryPercentage France41.6Spain37.7 Germany51.8Sweden18.9 Italy49.7Switzerland33.5 Japan33.7UK21.4 Netherlands32.5USA12.7 o Percentage of people who are unemployed for one year or more

Participation Rate CountryLabor Force Participation Rate CountryLabor Force Participation Rate France68.5Spain73.2 Germany77.8Sweden79.5 Italy63.1Switzerland88.2 Japan80.3UK76.2 Netherlands79.8USA75.2 Denmark83Turkey52.6

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 failureStandard solutionEconomic 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)

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?

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 NationalsEU foreign ers Non-EU foreigners Austria Germany Belgium France Denmark UK Ireland

Migration