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Growth, Labour Markets, European Integration Francesco Saraceno MPA - 2012
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Outline 9 The Efficiency Effects of Integration 9 Growth Effects of Integration Medium Run Convergence Long Run Growth
9 Labour Markets A European Labour Market? Trade Integration g and Competition p
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The logic of growth 9 Economic growth means producing more and more every year. 9 European leaders have long emphasized the pro pro--growth aspects of European integration: it affects growth mainly via its effect on investment in human capital, physical capital and knowledge capital. 9 Growth effects fall naturally into two categories: medium term, like ‘induced pphysical y capital p formation’; formation’ long term, involving a permanent change in the rate of accumulation, and thus a permanent change in the rate of growth.
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The logic of growth 9 Schematically: European integration (or any other policy) → allocation effect → improved efficiency → better investment climate → more investment in machines, skills and/or technology → higher output per person. 9 Under mediummedium-run growth effects, the rise in output per person eventually t ll stops t att a new, higher hi h level. l l 9 Under longlong-run growth effects, the rate of growth is forever higher.
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The logic of growth: the evidence 9 By historical standards, continuous economic growth is a relatively recent phenomenon. Before the Industrial Revolution, which started in G t Britain Great B it i in i the th late l t 1700s, 1700 European E incomes i had h d stagnated t t d for f a millennium and a half. 9 With industrialization incomes began to rise at a respectable rate of something like 2 per cent per year. Growth rates, however, were hardly constant from this date:
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The logic of growth: the evidence 9Are growth and European integration related? Prima facie evidence: 9B&W take it as proof of the effectiveness of integration (more than trade). trade ). But what if it is just standard convergence?
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The logic of growth: the evidence 9 Are growth and European integration related? Statistical evidence medium--run effect of integration: shows sizeable medium
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Medium--term growth effects: the Solow model Medium 9 Integration improves the efficiency of the European economy by encouraging a more efficient allocation of European resources: this positive allocation effect improves GDP per capita. 9 This leads to a higher K/L ratio, and hence triggers an adjustment process with high capital accumulation (convergence to the new steady state 9 Schematically: integration → improved efficiency → higher GDP/L → higher investmentinvestment-per per--worker → economy’ economy’s K/L ratio starts to rise towards new, higher equilibrium value → faster growth of output per worker during the transition from the old to the new K/L ratio. ratio This is the so so--called mediummedium-term growth bonus from European integration.
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Medium--term growth effects: EU accessions Medium 9 Accession countries provide a natural experiment to evaluate the medium--term growth effects of European integration since these medium countries experienced a rather sudden and wellwell-defined increase in economic integration when they joined. joined. 9 The logic described above should lead to observe the following:
stock market prices should increase; the aggregate investment to GDP ratio should rise rise;; the net direct investment figures should improve.
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Medium--term growth effects: EU accessions Medium Spain and Portugal:
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Medium--term growth effects: EU accessions Medium The Baltic States:
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Medium--term growth effects: EU accessions Medium Greece (sharp contrast with other accessions):
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Long--term growth effects: the evidence Long 9 Knowledge is not subject to decreasing returns, returns, thus growth can be forever.. forever 9 The evidence on long long--term growth effects of European integration is much harder to find. 9 Also Also,, the overarching fact is that longlong-term growth rates around the world, including those in Europe, returned to their pre pre--Golden Age levels It is hard to explain how the long levels. long--run growth rate in Europe returned to its pre pre--integration average, if European integration strongly boosted longlong-run growth. 9 For this reason, it is probably best to focus on mediummedium-term growth effects. 9 The experience of the new Member States will provide an important opportunity for testing the growth effects of EU membership, but as yet not have enough data to undertake serious statistical analysis. 13
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European labour markets: a brief characterization 9 Differently from goods, national labour markets in EU are on their own: limited migration within the EU; very different legislations and practices across countries.
9On average, average the EU is not doing well:
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European labour markets: a brief characterization 9 Strong heterogeneity 9 Most EU worse than Non--EU Non 9 New members are the worst p performing g
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Labour markets 9 Demand from firms: balancing cost (wages+contributions (wages+contributions)) and benefit (marginal productivity of labour labour). ). 9 Supply from people: balancing cost (disutility) and benefit (wage).
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Labour markets Notice that: 9 point i t A: A equilibrium ilib i with ith perfectly f tl flexible fl ibl labour l b market k t = full f ll employment 9 point B: equilibrium with unemployment 9 B&W claim that this can be explained by labour market rigidities : salaries are collectively negotiated; agreements hold for long periods, thus labour markets react slowly to changing g g conditions; wage contracts are often regulated; conditions for hiring and firing are also regulated; unemployment benefits.
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Labour markets Is it so? 9 Fitoussi Fit i and dS Saraceno (2012) review i th the lit literature t on labour l b market k t rigidities and they find that As Keynes (look at class 2) remarked problems in a market are not necessarily originated in that same market Evidence is mixed Link between rigidities and unemployment is often driven by outliers and not robust The h link li k with i h social i l protection i is i also l weak k
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Effects of trade integration on labour markets 9 If the labour markets are flexible, wages should rise in the industries that expand and they should decline in the industries that shrink. 9 And A d workers k would ld move from f shrinking h i ki to t expanding di industries, i d ti until wages are the same in both = no involuntary unemployment. 9 Huston we have a problem problem… …
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Effects of trade integration on labour markets 9 Economic integration creates winners and losers and willingness to undertake economic integration depends on the winners readiness to compensate the losers (i.e., social safety nets). 9 ‘Social dumping dumping’’ is common held view = competition from 12 new Member States reduces social protection in older Member States. 9 The crisis showed that this is only happening among the old members 9 Such fears lead to calls for social harmonization but founding nations decided that harmonization of most social policies was not a necessary component of European integration integration. 9 Was that a mistake mistake?? I believe it was, was, and it doomed the whole European p construction
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Social dumping 9 Model: flexible labour market where social protection with cost T is introduced in country originally closed and then opened to trade.
9 Competition ties the sum of wage and nonnon-wage costs to workers workers’’ productivity EU founders therefore believed that the division between productivity. wage and nonnon-wage costs could be left to the choice of each Member State. 21
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Migration: some facts 9 Europe has switched from net emigration to net immigration because of spectacular growth during the late 1950s and the 1960s.
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Migration: some facts 9 The 2004 and 2007 enlargements brought 12 countries (EU12) and about 100 million new citizens into the EU with the expectation of massive migration. 9 As a result, most EU15 nations negotiated long transition periods during which EU12 citizens cannot move freely into their labour markets. k t But B t countries t i that th t openedd their th i borders, b d suchh as Ireland, I l d Sweden and the UK, report no or little increase in net inflows: resistance to moving; prospect to catch with the EU15 countries reduced the incentives to leave home, family and friends.
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Migration: the simplest framework 9 Does it remind you of something? The allocative efficiency argument for capital mobility (class on financial markets)! The result is also similar… Initial situation
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Migration: the simplest framework 9 Like for capital, in each country, some lose and some gain from migration.
Workers at home lose Capital owners at home gain Immigrants gain Capital owners abroad lose
Workers abroad gain
9 In short, while migration creates winners and losers in both nations, collectively both nations gain, gain thanks to increased efficiency. efficiency. 9 Migration improves the overall efficiency of the EU economy and the gains from this are split between Home and Foreign.
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Complementary Complementar y or Substitutable? 9 Notice that unskilled workers complement skilled workers and capital and immigrants often have a skill mix that is very different from that of domestic workers: 9 Complementarity of migrants and native factors of production may provide a winwin-win situation. 9 Empirical evidence (inconclusive): 1% rise in supply of migrants changes native wages by +/+/-1%;
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Employment Effects? 9 It depends Complementary workers can be more employable thanks to immigration: u ↓ Substitutable ones mayy face competition competition: p :u↑ (Unlikely Unlikely)) wages can adjust to ensure full employment of native and migrants workers alike (the simple framework above): above): u ↔
9 Empirical evidence (inconclusive, (inconclusive once again): increase or decrease of risk of unemployment, depending on type of workers, or no effect.
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Barriers to mobility 9 Two key results emerge: immigration is likely to raise employment and national income; immigration is unlikely to affect wages or unemployment in either direction.
9 These results p provide a strong g endorsement for the fundamental principle of freedom of movement of workers within the EU. 9 Still, there is low mobility within EU: Restrictions for new EU members’ members’ nationals mobility; Differing Pensions systems; Unemployment benefits; Regulated professions; Language, housing, health systems, etc.
9 Does this remind you of something something?? The debate on OCAs OCAs!!
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Barriers to mobility Percentage of population of EU15 and EU10 workers in EU15:
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