The labour mobility problems that are created when a common market for labour is extended to more countries have been a major concern of the European Union when considering expansion because member states have always feared their economies would suffer due to the cheap labour coming from poorer nations. Considering the fact that the recent expansion added ten members eight of which have significantly lower wages than other countries and large labour forces makes this concern even more pertinent.
Since labour mobility is part of the core freedoms in the Union, the Treaty of Rome that was put into effect in 1958 committed member states to allow for the free movement of labour. This implied that nothing would stop labour from moving within member states and there will be no discrimination against workers based on their nationality, provided the nation is within the customs union.
Even though the European Union has always had a great extent of labour mobility, the reason why the nations already within the union fear the consequences of the extension of the common market for labour after the enlargement are the rising unemployment rates observed in recent years. This is mainly because in the EU the job market has only grown by 0. 5% from 1980 to 1993 as opposed to the 1% observed in Japan and the 1. 5% observed in the US. This essay will therefore assess the extent to which the fears of the European Union have realistic foundations or not.
In order to determine the effects of creating a common market for labour we first must see how wages are determined within these economies and why they differ. Wages are determined by the marginal productivity of the last labour unit employed because a firm can only afford to hire workers if they generate enough output to cover the costs of employing them. Thus wages are formulated where: However, the marginal productivity of labours differs amongst countries within the union for a number of reasons.
For example a German worker that has had the ability to benefit from a good state education system that teaches its students a wide variety of skills will have higher marginal productivity than a worker from Poland that possibly had to drop out of school early to support his family. Also, the capital employed in Germany enables workers to maximise their marginal productivity since machinery employed in Germany is more technologically advanced than machinery used in Poland.
Finally the fact that workers in Germany will receive more social benefits due to the institutional environment that pushes for minimum wages and more rights to workers will mean the workers will be more willing to work harder. Thus, from the comparison of Germany and Poland we have seen that since marginal product of labour will be higher in the wealthier nation, wages will be higher and when the market for labour opens the tendency will be for workers to act as rational economic beings and move from the low wage to the high wage economy as illustrated in the following diagrams.
The above diagram illustrates the situation for the two economies before the introduction of Poland into the common market for labour. Wg are the higher wages paid to German workers whereas Wp are the lower wages paid to polish workers. In order for our model of the impact to work we have to assume that Polish and German workers have the same skills so what causes the marginal product of labour to be higher in Germany is their use of better capital.
When the common market for labour is extended to more countries, there is free movement of labour between Germany and Poland, so some Polish workers will move to take advantage of the higher wages and production in Germany will rise, however, the marginal productivity of its workers will decline leading to reduced wage rates. Contrastingly in Poland since workers will be leaving even though production will decline, marginal productivity will increase leading to higher wages.
This is all illustrated in the following diagram. In the above diagram, we see that migration from Poland to Germany will occur from D to C and there will be output gain equal to the yellow triangle because even though Polish output reduces by the amount illustrated by the blue area, that amount is recaptured by the increase in German output which also adds the yellow triangle to total quantity produced thus leading to a net gain in output.
Moreover there will be a reduction in wages in Germany from Wg to Wcm and an increase in wages in Poland from Wp to Wcm so wages will eventually converge in both countries to Wcm. From the above model we can make a couple of very useful conclusions even though it is overly simplified. Firstly workers originally in the high wage country, in this case Germany, will lose because wages will decline whereas workers that stay behind in the low wage country, in this example Poland will gain because wages will increase.
Producers in Germany will gain from the expansion of the common market because the influx of cheaper workers will mean that they will produce a greater percentage of output at a lower cost per unit within the customs union whereas producers in Poland will lose because the higher wages mean that now they will account for a smaller percentage of output and will have a higher cost per unit produced. Finally the union as a whole benefits due to the increase in output and the overall reduction in labour costs.
From the above we could also conclude that immigration in the short term helps ease unemployment as labour moves from countries with high unemployment usually associated with low marginal productivity of labour to countries with lower unemployment illustrated by high marginal productivity of labour. Also the country that labour migrates to, benefits from the skills this labour acquired at home and the country receiving them didn’t have to pay for. Similarly the home country could benefit from the skills the labour gained in the foreign country if the labour returns.
Indeed we see that with accession as seen in the case of Spain and Portugal, when these member states start to gain investment nationals abroad tend to return thus leading to an increase in the initial boost brought about by new investment because they bring back to the country skill acquired abroad. In the long term benefits depend highly on the amount of dependants each working migrant brings with him as well as the extent of unemployment of domestic workers this influx of cheap labour will result in.
Finally the reduction in labour costs could potentially lead to a reduction in cost push inflation which usually arises due to high costs of labour and consequently this inflation reduction will lead to higher growth rates. However, since this model depends greatly on the assumptions we made of full employment, wage flexibility, capital fixity and wage differentials arising from differences in capital as opposed to skill, we have to see if the conclusions we drew above from theory work in practice by examining the extent to which they applied to countries after the 2004 enlargement.
Indeed we see that since the 2004 enlargement there has been considerable migration from east to west due to the low wages in the east and the specific skill shortages in the west. The 2004 enlargement has been the largest one the EU has had and included the following nations: Cyprus, Malta, Lithuania, Latvia, Czech Republic, Estonia, Hungary, Poland, Slovenia and Slovakia. When examining the effects of EU migration we tend not to include Cyprus and Malta because their labour force is very small and represents a tiny percentage of overall migration.
The accession of these nations has enabled the EU to call itself the world’s largest single market, however many worry that the fact that the GDP per capita of these nations being 40% of the average GDP per capita of already existing nations will make them an economic burden. This is why many nations have employed short-term limits for employment rights for people from new member states as a means of responding to those who fear expansion.
However, we see that Germany, one of the nations that is overflowing with immigrants is currently seeing its unemployment to be at a 4-year low. Another big success story is that of the UK, that was one of the few countries to allow for free labour movement after the expansion. In the years following the EU expansion the UK has seen an all time high influx of Polish workers due to the fact that wages are considerably higher there than in Poland.
For example, when a teacher in Poland receives £200 per month, the same person in the UK would receive £600 for distributing flyers. This is why from the 427 thousand workers from the eight EU accession states that successfully applied for work in the UK 62% were Polish and 82% were aged 18-34, because these are the people who will benefit the most from the favourable circumstances in the UK.
Moreover the fact that they are considerably young and unskilled enables us to give them jobs that nationals are unwilling to fill which are usually minimum wage jobs in the food industry, catering, agriculture or manufacturing and production. This, as EU committee chairman Lord Grenfell very aptly put it means that “in a global economy, where competitiveness is key, immigration from Eastern Europe has helped British companies compete with those in the emerging economies of Asia. Thus from economic theory and the case study of the effects of EU expansion in the UK we see that overall migration is beneficial for both the economy that workers leave from and for the country that receives the migrants. This is because the country they leave from gains investment by family members sending money back home and higher wages due to the increase in the marginal productivity of labour and the country they go to gains competitiveness due to the fact that wages decline and gains in output due to the fact that it gets to utilise its high marginal productivity.
