Chapter 8 Economic Integration, Labour Markets and Migration

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1 Chapter 8 Economic Integration, Labour Markets and Migration Chapter Overview Unemployment Economic integration and the labour markets Migration 1 2 Why Labour Markets Matter Controversies Abound Economic and Labour Market Integration encourages labour market flexibility Social Protection results in labour market rigidities Labour migration is another form of integration Economic logic sometimes clashes with social logic Effectiveness sometimes clashes with equity Solidarity clashes with individualism Acquired advantages under threat 3 4 Supply and Demand of Labour Labour Market Rigidities: the Simplest Interpretation Labour demand: employment by firms The cost of labour is the wage per hour plus contributions The benefit of hiring workers is the additional output they produce, or the marginal productivity of labour This is a gross simplification Labour supply: offered by people in exchange for a wage Represented by an upwards sloping curve Flexible wages deliver full employment 5 6 1

2 Labour Market Rigidities: the Simplest Interpretation Why wage rigidity? Labour markets are different from goods markets; paying attention to social imperatives. Rigid wages result in unemployment Flexible wages deliver full employment Characteristics: Collective wage bargaining Negotiations at more or less regular intervals Regulations such as minimum wage Conditions of hiring and dismissal regulated The issue of unemployment benefits 7 8 The Standard Response: Collective Negotiations The Standard Response: Collective Negotiations Real wage Collective negotiations lead to higher wages S c S Real wage Collective negotiations lead to higher wages and to unemployment S c S w B C Individual supply w B C Individual supply w A w A D D L L L Employment L L L Employment 9 10 Problem of unemployment Labor unions: Valuable services Insiders vs. outsiders Ideology Business cycles + wage rigidity adjustment problems Long-term unemployment Often not seen in statistics ( frustrated workers + early retirement) Youth unemployment Over 20% in EU!! Economic Integration and Labour Markets Problem of evolving culture (work ethic vs. leisure & hedonism) 11 2

3 Economic integration and labor markets Labor costs = competitiveness Goods market integration indirectly leads to labor market integration Firms in more direct competition workers compete for jobs Flexibility is key in changing environments Restructuring (chapter 6) Winners and losers Different countries Different sectors Enlargement and labor markets Median Wages in 2008 Country Weekly pay in euros Index: Germany = 100 Bulgaria 48 6 Croatia Czech Republic Estonia Hungary Latvia Lithuania Poland Romania Slovakia Slovenia Source: FedEE, Pay in Europe, February Enlargement and labor markets Country Median Wages and Productivity in 2005 (Germany = 100) Weekly pay (Germany = 100) Labor productivity (Germany = 100) Bulgaria 5 32 Croatia Czech Republic Estonia Hungary Latvia 7 46 Lithuania Poland Romania 7 36 Slovakia Slovenia Wages and productivity Source: FedEE, Pay in Europe, February Questions 1. How do you explain the relative wage/productivity gap? 2. What will happen over time (to both variables)? Migration Facts and Theory 17 3

4 Free movement of workers EU: free movement of workers Main reasons for leaving a country Flee poverty Flee political instability or violence EU 2004 enlargement: fear of flood to richer countries Explicit temporary restrictions (up until 2011) Result: perhaps less than expected many countries removed restrictions Barriers to mobility Fact: low mobility within European Union Barriers to mobility: Restrictions for new EU members nationals mobility (2004 agreements) Differing pensions systems switching costs Unemployment benefits (3-month rule for foreigners) Regulated professions (although increasing harmonization) Language, culture, housing, etc Immigration: Facts Free movement what happens? Who benefits? Who loses? Simple model: 2 nations Full employment Different productivity and wages Initial situation: no freedom of movement Allow free migration Adjustment of wages (no unemployment: full employment) Who loses/benefits? Workers? Capital-owners? Which country? Initial situation

5 Post-migration situation Gain of foreign-workers staying abroad Gain of migrant workers Gain of foreign-workers staying abroad Loss of foreign capital-owners Gain of home capital-owners Loss of home workers

6 Migration: model results Collective foreign gains Collective home gains Winners Migrant foreign workers (higher wages) Foreign workers staying abroad (higher wages) Home capital-owners (lower home wages) Losers Home workers (lower wages) Foreign capital-owners (higher wages) Collectively both nations gain More efficient allocation of productive resources (just like in trade generally!) Substitutes and complements Substitutes and complements Substitutes cake and ice-cream oranges and apples renting and buying car and bus and train novels and films Nokia and iphone new & second-hand different brands different meals... Complements sports and lemonade films and popcorn ipods and itunes hardware & software skis and boots flights & hotels studies & textbooks 33 Substitutes compete against each other Complements support each other Demand for one boosts demand for the other! Labor: not all homogeneous Production process: need various kinds of skills Simple model: skilled workers + unskilled workers + capital Complementarity of migrants and native factors of production a win-win situation Empirical evidence not conclusive: 1% rise in supply of migrant labour changes native wages by +/-1% Increase or decrease of risk to unemployment, depending on type of workers, or no link 34 Immigration and skills Conclusion Importance of labor markets Politically and ideologically sensitive Economic efficiency vs. social needs & justice (especially short-term) Unemployment: wage rigidity etc. Goods market integration and labor markets Indirect integration Education / occupation gap among immigrants? Languageskills; climbing the social ladder ; role of contacts Prejudices, racist attitudes 35 Migration Freedom and barriers to mobility Simple model of winners & losers 36 6