Labor Mobility and the Integration of European Labor Markets EU Labor Markets after Post-Enlargement Migration Prof. Dr. Klaus F. Zimmermann IZA, DIW Berlin und Bonn University Higher School of Economics (HSE), Moscow April 7, 2010

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3 Background Migration is an integral part of Europe’s past and present EU Enlargement –May 2004: Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia joined the EU (EU10) –January 2007: Bulgaria and Romania (EU2) The EU eastern enlargements were unprecedented in several ways: –CEECs: political and economic transformation –In general, no free migration to the West after the WWII until the fall of the Iron Curtain –Significant income and unemployment differentials –Substantial population size This all contributed to the sensitivity of the migration topic in the European public and policy discourse

4 Policy reaction: Transitional arrangements Pre-enlargement fears: mass migration, “welfare tourism” and displacement effects in the labor markets Transitional arrangements on the free movement of workers from CEECs for up to 7 years based on the “2+3+2” formula adopted 2004 Enlargement: –In 2004: only Ireland, the UK and Sweden opened up their LMs –Currently: France, Spain, Finland, Greece, Portugal, Italy, the Netherlands, Luxembourg, Belgium and Denmark provide free access to EU8 –Austria and Germany have simplified the procedures but announced that the will apply transitional measures until Enlargement: –Only Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Poland, Slovenia, Slovakia, Finland and Sweden have opened up their LMs for EU2 –Spain, Greece, Hungary and Portugal opened up in the second phase, Denmark followed the suit on May 1, 2009

5 Theory: Should we fear migration? Migration generally benefits the economy: –Improves the allocative efficiency of labor markets –Brain circulation facilitates international trade, transfer of technologies and knowledge, and eliminates bottlenecks to economic development Free movement benefits the migrants themselves Redistributive effects –Skilled immigration benefits unskilled and may hurt skilled native workers –Unskilled immigration hurts unskilled and may benefit skilled native labor –Correspondingly for skilled and unskilled emigration –Skilled immigration reduces inequality Effects on public finance A priori: No fear, but let us look at the empirics!

6 Post-enlargement migration: The receiving countries In general, we observe an increase in migrant inflows from both EU10 and EU2 after EU enlargement but there is substantial heterogeneity: –Share of EU10 increased remarkable in Ireland, UK and Luxembourg due to free mobility –Migrants from the EU2 continued to go predominantly to Italy and Spain Nonetheless, the proportion of non-EU27 nationals in the EU15 remains larger than that of migrants from the new member states

7 Share of EU8 foreign nationals resident in the EU15 Source: Brücker and Damelang (2009). EU8: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia Share increased remarkable in Ireland, UK and Luxembourg due to free mobility

8 Share of EU2 foreign nationals resident in the EU15 Source: Brücker and Damelang (2009). EU2: Bulgaria and Romania Migrants from the EU2 continued to go predominantly to Italy and Spain

9 Share of foreign nationals resident in the EU15 Note: EU10 = EU8 + Cyprus and Malta. Source: European Commission (2008). The proportion of non-EU27 nationals in the EU15 remains larger than that of migrants from the new member states

10 Post-enlargement migration: The sending countries Increase in emigration between 2000 and 2007 in both EU8 and EU2 countries Emigration rates –Highest: Romania, Bulgaria, Lithuania, Poland, Estonia, Slovakia –Lowest: Czech Republic and Hungary Poland –Increased emigration, relative shift from Germany to the UK –The number of Poles who stayed abroad for at least two months has tripled since early 2004 till early 2007 from around 180,000 to around 540,000 –Emergence of two distinct emigrant groups – low-skilled individuals from the periphery and highly-skilled ones from the cores

11 Post-enlargement migration: The sending countries EU10: LT, PL, EE, SK EU2: RO, BG Share of sending countries foreign nationals resident in the EU15

12 How do the post-enlargement migrants fare? (I) Greater labor market participation and higher employment rates than the populations in either the sending or receiving countries –Exceptions: recent EU8 immigrants in Germany exhibit lower employment and participation rates After enlargement among EU8 migrants –Higher employment rate –Lower unemployment and inactivity rates –Exception: Germany Self-employment rate –Low among recent EU10 immigrants in the UK –High among EU2 immigrants in the UK (50%) and among recent EU10 migrants in Germany (40%) –=> self-employment a way to circumvent transitional arrangements!

13 How do the post-enlargement migrants fare? (II) NMS immigrants overrepresented in low and medium-skilled sectors and occupations But relatively well educated –Almost a quarter of EU8 immigrants have high education, majority medium –EU2 immigrants less educated than EU8 immigrants –The proportion of highly educated migrants from the EU8 is lower for post-enlargement arrivals; but also the share of the less-skilled has declined. Improvement on average Transitional arrangements imply negative selection –In the UK post-enlargement EU8 immigrants MORE educated –In Germany post-enlargement EU8 immigrants LESS educated Predominantly temporary (self-reported), males (but females in Germany), young

14 Unemployment rates: Labor cost index: The effects of migration: Any disruptions in EU15? No disruptions

15 The effects of migration: Any negative effects in EU15? In general, no negative impact on receiving countries’ wages, unemployment or employment, or the welfare systems The UK –No impact on unemployment rate or wages, even after controlling for potential observable and unobservable confounding factors –Perhaps some negative effect on the relative wages of the least skilled –It is rather the “fear of unemployment” that has risen in response to immigration from the new member states and that may suppress inflationary pressures –The number of EU8 nationals applying for UK social benefits is low, and child benefits constitute the largest category. –Immigrants generally fill gaps in labor supply Ireland –Similarly no negative effects, no “welfare tourism”, even if displacement took place in some sectors, since no rise in aggregate unemployment, “upgrade” jobs for nationals

16 The effects of migration: Models using calibrations EU as a whole –Substantial positive effects in terms of GDP, GDP per capita, productivity and wages; and a somewhat smaller effect for employment in the long run –GDP (and GDP per capita) will increase by about 0.1 percent in the short run and by about 0.2 percent in the long run –Long-run impact corresponds to a sum of 24 billion Euros (i.e., 28,571 Euros per post enlargement migrant) EU15 –A decline in wages by percent and an increase in unemployment by percent in the EU15 in the short run, but no significant effects in the long run –Increase in GDP and small increase in employment, but GDP per capita decreases EU8 (EU2) –GDP declines (people leave), but there are gains for real wages, productivity and GDP per capita as well as a decrease in employment

17 Unemployment rates: Labor cost index: No disruptions The effects of migration: Any disruptions in NMS?

18 The effects of migration: Any negative effects in NMS? Generally, aggregate data document decreasing unemployment, increasing number of vacancies, and employment growth, as well as increasing wages in the post- enlargement period Outflow of skilled migrants generates shortages and may put strain on social security There was no incidence of massive “brain-drain” from the new member states, although in some sectors (such as health care) the emigration of highly skilled specialists was relatively large. Brain circulation expected in the long run Some risks, but positive developments and outlook

19 Remittances Remittances constitute a significant part in Bulgaria’ and Romania’s GDPs and are also important in the Baltic States. Mostly of seasonal nature in Poland and the Baltic states Largely used for household consumption and purchase of durable goods with a recent tendency to invest in human capital, particularly tertiary education The impact of these remittances on the economic development so far is rather limited

20 The Case of Germany Pre-enlargement fears: mass migration, “welfare tourism” and displacement effects in the labor market Transitional arrangements: –Germany has not opened up its labor market to workers from new member states –Self-employed workers from the EU8 are allowed to settle in Germany and run a business. However, they may not employ workers from their home country. January 1, 2009: Opening to high-skilled workers, but the generally strong negative signals may nullify its effectiveness Despite these arrangements, the numbers of migrants from the accession countries have clearly increased in Germany since the 2004 enlargement The net flow of EU8 immigrants has become 2.5 times larger than in the four-year period before enlargement Without the immigration from the EU8, Germany would have had a net loss of migration

21 Net annual immigration to Germany by region of origin Immigration from EU8 has increased after EU enlargement

22 Composition of immigrants in 2007 The total number of immigrants between the age of 15 and 65 in Germany at the end of 2007 was close to 5.5 million, or approximately 10% of the total population in that age group. Immigrants from EU8 countries constituted only 9.3% of all immigrants at the end of 2007 (24.6% of the 5.5 million are from EU15 countries, 24.1% from Turkey, 13.2% from the former Yugoslavia, 5% from the ex-Soviet Union, 20.1% from outside of Europe) Among EU8 immigrants, Poles constitute the largest net immigrant group: after enlargement, 71% of EU8 immigrants and 63% of all immigrants came from Poland

23 The stock of EU8 immigrants in 2006 by year of arrival and gender Mostly female, but difference has decreased after the EU enlargement

24 Average years of schooling of male immigrants by year of arrival and country of origin EU8-males’ education declines after the EU enlargement (absolutely and relatively)

25 Average years of schooling of female immigrants by year of arrival and country of origin EU8-females’ education declines after the EU enlargement (relatively)

26 Changes in the composition and labor market outcomes of EU8 immigrants since the EU enlargement The composition of EU8 immigrants to Germany has changed since the EU enlargement: –Recent immigrants are comparably older and have lower levels of education –The migration flow after the EU enlargement has consisted mostly of Polish migrants, especially men, who have moved to Germany, and migrants from the EU8, which have exhibited large fluctuations –The most significant group is aged between 25 and 45 But also the labor market outcomes of EU8 immigrants have changed since the EU enlargement: –They work in low-paid jobs and work longer hours –Their net monthly income is the lowest on average among all immigrant groups except recent non-EU immigrants –They are 23.1% less likely to be employed than natives –They have the lowest labor force participation rate among all immigrant groups except recent non-EU immigrants –However, they are 15.7% more likely to be self-employed than natives

27 Net effects of being an immigrant (before and after the enlargement) Recent EU8 immigrants: - lower income, - lower wages, - and lower employment probability, - but more likely to be self-employed

28 Consequences: The failure of continued mobility restrictions in Germany The analysis of the immigrants’ composition suggests that recent EU8 immigrants are more likely to compete with immigrants from outside Europe for low-skilled jobs than with natives in Germany Self-employment seems to have been used as a means to circumvent transitory arrangements in Germany Although Germany needs high-skilled immigrants, recent immigrants from the EU8 only replace non-EU immigrants in low-skilled jobs This underlines the importance of more open immigration policies targeting high-skilled immigrants The current German policy not only fails to attract the required high-skilled workforce, but is also unable to avoid the attraction of low-skilled immigrants A missed opportunity!

29 The current economic crisis Deterioration of most aggregate variables Slow down of migration flows Many migrants may return home –Economic reasons (job loss) –No restrictions on movement –Temporary intentions –Social pressure fuelled by economic difficulties in the destination countries –Shrinking social (ethnic) networks –Overqualified workers may prefer returning home However: –Crisis hits both destination and source countries, and some source countries possibly even harder –East-west migration flows may thus continue despite the crisis, but their composition might change

30 Concluding remarks: Receiving countries Migration from the new member states to the old EU15 has increased after the 2004 and 2007 enlargements “Migration diversion” effect into countries that opened labor markets (UK, IRL, ES, IT) But “closed” economies also experienced increased immigration after the enlargement (AT, DE) Some evidence that migration diversion occurred through migrants’ characteristics. No evidence on negative impact on the receiving countries’ labor markets in terms of wages, employment, or unemployment No evidence on negative impact of post-enlargement migration on public budgets or “welfare tourism”

31 Concluding remarks: Sending countries In the long-run: –Large outflows of young and skilled individuals may have negative impacts on countries’ economic growth, demographic situation and public budget –However, the temporary nature of these flows implies brain- circulation and thus positive effects overall In the short-run: –Decreased unemployment –Labor shortages and increasing number of vacancies (mismatch between vacancies and workers) –Employment growth –Upward pressure on wages –Remittances large but their effect so far limited

32 Future challenges Will many more people decide to leave new member states for the old ones, or will the numbers stabilize at much lower figures than current? What will the composition of migration flows be like? What will be the timing, duration and frequency of migrants’ stays abroad? How the transitory arrangements have affected the post- enlargement migration flows and their repercussions? How to ensure that free mobility in the EU it is upheld in all aspects, that it contributes to economic prosperity as well as the well-being of the individual and the society, and that it helps to alleviate economic and financial disturbances such as the ongoing economic crisis, is a major policy task for the present and future

33 Recent publications on the topic Klaus F. Zimmermann and Martin Kahanec (eds.): EU Labor Markets after Post-Enlargement Migration, Berlin et al.: Springer, 2009 Klaus F. Zimmermann and Martin Kahanec (2009): International Migration, Ethnicity and Economic Inequality, in: Salverda, Nolan and Smeeding (eds.), The Oxford Handbook of Economic Inequality, Oxford University Press Klaus F. Zimmermann (2009): Labor Mobility and the Integration of European Labor Markets, IZA Discussion Paper No. 3999, Bonn

Prof. Dr. Klaus F. Zimmermann IZA, DIW Berlin und Universität Bonn IZA, Postfach 7240, Bonn Telefon: +49 (0) Fax: +49 (0)