European integration, labour market dynamics and migration flows.

• Author: Martinoia, Michela
• Position: Report

1. Introduction

   During the last few decades, trends in the Western European labour market have been characterised by two factors. The first is the high level of unemployment persistence, while the second is the sluggish disinflation process that accompanies rising unemployment. On the contrary, the US and UK have experienced a more cyclical evolution of unemployment and a lower price stickiness. These facts have stimulated an intense debate amongst economists on the causes of unemployment, its persistence and on its cross-country differentials. The problem of persistence can be interpreted, together with inflation stickiness, as signalling a shift in the NAIRU. Consistent with this view, many studies have interpreted unemployment as being structural, underlining the relevance of labour market rigidities and the intrusive role of institutions. A natural evolution of this phenomenon (defined as Eurosclerosis) emphasizes the relevance of long run unemployment and considers institutional rigidities and trade union activities as a cause of the hysteresis mechanisms that can prolong indefinitely the effects, that would otherwise be temporary, of aggregate demand shocks (2). This work lays inside this extensive literature. The objective is to analyse the type of effect that a greater economic integration of the EU-15 countries generates on migration flows from the enlargement countries. The question we want to address is whether greater economic integration renders the countries of the EU-15 more attractive for the populations of the NMS. Furthermore, we want to evaluate what effect migration has on the labour market of the EU-15 countries, considering them, however, as a single, combined entity.

   Economic literature dealing with the potential consequences of global and regional economic integration has displayed a consistent development beginning in the second half of the twentieth-century. Economic integration is perceived as an important factor for growth, and, as a result, in literature we find different theoretical and empirical research regarding the impact of economic integration on growth (Balassa, 1961; Baldwin, 1993 and 1995; Henrekson et al, 1997; Landau, 1995; Walz, 1998; Badinger, 2001 and 2005; Yanikkaya, 2002; Gao, 2005; Bussiere et al. (2008)). The contribution of this literature is to emphasise the different channels through which the process of economic integration generates an impact on economic growth. The most important channels can be summarised as: internal and external economies of scale, faster technological progress, increased competitiveness, reduced uncertainty, lower costs of capital and a more favourable environment for economic activity. One of the most controversial areas of this literature is the distinction between permanent and temporary growth effects. In the neo-classical theory of growth, economic integration does not affect the growth rate at a steady state. Economic integration, therefore, has only temporary effects. Under certain conditions the effects of permanent growth are possible in the endogenous growth theory, although they depend on the ability to disclose knowledge at an international level. If this condition is maintained economic integration leads to a scale effect in research and development that can then lead to permanent growth effects enabling a reallocation of intersectoral and international effects.

   From the literature review of economic integration it emerges that there are no similar studies to those related to the impact of integration on economic growth for the labour market, except for some contributions dealing with the relationship between economic integration and regional labour market dynamics (Blanchard and Katz, 1992; Decressin and Fatas, 1995; Fatas, 1998, Alecke et al., 2009). Among the most relevant aspects emerging from the studies on the link between economic integration and the labour market we find labour mobility and competition in the product market. These phenomena are often perceived as necessary factors to make the labour market flexible. Since labour is less mobile in Europe (Fertig and Schmidt, 2002; Puhani, 1999 and 2001; Nahuis and Parikh, 2004; Ederveen, Nahuis and Parikh, 2005 and 2007), the effects of integration on the labour market are seen through the integration of the product market. The issues of economic integration and labour mobility are also analysed from another point of view, taking into consideration expected migration flows from Eastern and Central European countries, in the enlargement phase, and their impact on the labour markets of the member states (Fertig, 2001; Fertig and Schimdt, 2002; Boeri and Brucker, 2001 and 2005; Dustmann et al., 2005 and 2007; Drinkwater et al., 2006; Manacorda et al., 2006; Lemos and Portes, 2008). For example, Fertig (2001), Fertig and Schimdt (2002) and Lemos and Portes (2008) analyse migration flows inside Germany after the enlargement using different models and estimation approaches. These papers conclude that expected migration flows from the enlargement countries towards Germany are moderate. Boeri and Brucker (2001 and 2005), instead, study the impact of the European Union (EU) enlargement on the labour markets of the member states focusing on trade, foreign direct investments and migration. The principal conclusion of the paper is that it is improbable that capital movements are unlikely to lead to a levelling-off of prices, especially of wages. Another aspect that emerges from the literature considers the relationship between European integration and unemployment. Blanchard and Wolfers (2000) verify that high European unemployment can be attributed to the interaction between unfavourable macroeconomic policies and real labour market rigidities. The authors analyse the interdependence of shocks like a reduction in growth of total factor productivity, higher real interest rates and adverse shifts in demand together with institutional rigidities, such as the generous insurance system covering European unemployment. Other authors analyse empirically the process of wage formation among the EU member states (Blanchflower and Oswald, 1994, 2005; Wagner, 1994; Baltagi and Blien, 1998 and Baltagi et al., 2007). Their results show that economic integration changes labour market structures, leading to wage convergence and to a stronger wage interdependency (Andersen et al., 2000 a and b). A theoretical contribution by Gruener and Hefeker (1999) analyses how the European Monetary Union will change the behaviour of trade unions in wage determination. Each of these contributions evaluates different aspects of the link between economic integration and labour market. However, a rigorous quantitative analysis of the impact of greater labour market integration has been omitted. An innovative paper in this sense is by Fertig (2003) that analyses the relationship between economic integration and employment in Europe, by constructing an economic integration measure to observe the macroeconomic developments of the labour market. The most important evidence that emerges from the study by Fertig (2003) can be summarised in three main points. First, he finds that the integration impact on the long term employment level does not seem statistically significant in all member states, whereas it results in being positive in the Southern enlargement countries (Greece, Spain and Portugal). Second, he observes that short run fluctuations in the integration measure do not have a substantial role in the explanation of relative employment levels. Finally, a greater integration tends to increase unemployment levels in the long run in the existing EU member states except for Southern enlargement countries.

   The literature concerning European economic integration offers several contributions that evaluate different aspects of the relationship between economic integration, the labour market and labour mobility, whereas a quantitative analysis of the impact of higher integration on the labour market in European countries has not provided significant results yet. This paper has two objectives. First, we want to evaluate the effect that the greater economic integration has on migration flows moving from the Eastern European enlargement countries towards the countries of the EU-15 (3), (considered as a single entity or bloc, rather than individually); second, we want to understand if the migration flows have any type of effect on employment, real wages and the labour force in the labour markets of the receiving countries(again, considered as an entire entity rather than individual countries). To conduct this analysis we consider the three fundamental aspects of economic integration, labour markets and migration flows from the enlargement (4) countries towards the EU-15 countries. Economic integration can be observed in different phenomena such as real, monetary and financial integration. These phenomena include business cycle synchronization, inflation rate convergence, exchange rate variability, interest rate convergence, trade openness, trade integration and convergence of income. This paper focuses on three of these phenomena in order to have two measures of real integration and one of monetary integration. We adopt a two step approach considering firstly three integration indicators that are included in a model which explains labour market trends. The basic hypothesis of our theoretical model is that of a labour market characterised by insider/outsider mechanisms with the presence a monopolistic trade union. The major innovations are the introduction of three economic integration measures and of migration flows that are modelled coherently with the neo-classical approach of the migration theory. The second step considers the estimation of a Structural Vector Autoregression Model (SVAR) used to evaluate the impact that shocks to integration indicators can have on migration flows towards EU-15 countries...