Theorie und Politik der Europäischen Integration
Prof. Dr. Herbert Brücker
Lecture 5
Growth effects and the integration ofcapital and labour markets
Theory and Politics of European Integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
Last Lecture
• Market Size and Scale Effects· Monopoly, Duopoly and Breakeven-Comp Diagram· Integration in the BE-COMP Diagram
– Larger Market Size– Falling Average Costs– Higher Competition– Falling Prices– Higher Demand– Industrial Restructuring– Problems:
» higher market power of firms» Mergers and acquisitions» Anti-competitive behaviour» State aid policies
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
Last Lecture
... EU competition policy· EU competency: 1st pillar· Forms of anti-competitive behaviour
– collusion – cartels (e.g. vitamin cartel)– territorial price discrimination (e.g. Nintendo, pharmaceuticals)– abuse of dominant market position (e.g. Microsoft)
· Two policy areas:– merger control– state aid policy
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
This lecture
• Growth effects• Some facts on EU post-WWII growth• The neoclassical growth model (Solow-model)• Integration in the neoclassical growth model
• Capital market integration• microeconomics of capital market integration
• Labour Market Integration• Microeconomics of labour market integration• Imperfect labour markets• Empirical evidence from Germany
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
Growth effects
• European leaders have long emphasised a different the pro-growth aspects of European integration
• These operate in a way that is fundamentally different from the way allocation effects operate;
• they operate by changing the rate at which new factors of
production – mainly capital – are accumulated,
• hence the name ‘accumulation effects’.
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
Verbal logic of growth
• Growth in income per worker requires more output per worker
• Nation's labour force can produce more goods and services year after year only if they have more/better 'tools' year after year.• 'tools' means capital broadly defined:
· physical capital (machines, etc.), · human capital (skills, training, experience, etc.), · knowledge capital (technology).
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
Verbal logic of growth
• ERGO, rate of output growth linked to rate of physical, human and knowledge capital accumulation.
• Most capital accumulation is intentional and it is called investment.
• Thus: European integration affects growth mainly via its effect on investment in human capital, physical capital and knowledge capital.
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
Verbal logic of growth: summary
• European integration (or any other policy) → allocation effect → improved efficiency → new profitable investment opportunities → more investment in machines, skills and/or technology → higher output per person.
• In neoclassical growth model medium run effects eventually peter out• Growth rate returns to its long-run rate
• In endogenous growth models long run effects raise long-run rate of technological progress, and, hence, the growth rate of output, capital stock and consumption forever
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
• Shows medium run growth effects in simple diagram• Key assumptions:
• Saving rate is constant• Depreciation rate is constant• Exogenous technological progress• Constant returns to scale
• To simplify, start with whole EU as a single, closed economy with fully integrated capital and labour markets and the same technology everywhere.
Neoclassical growth: The Solow diagram
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
The Solow diagram
A
B
K/L
euros/L
GDP/L
s(GDP/L)
K/L)Y/L*
K/L*K/Lo
Io
Do
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
The Solow diagram
A
B
K/L
euros/L
GDP/L
s(GDP/L)
K/L)Y/L*
K/L*K/Lo
Io
Do
GDP per worker increases with increasing capital endowment, but marginal returns to capital decline
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
The Solow diagram
A
B
K/L
euros/L
GDP/L
s(GDP/L)
K/L)Y/L*
K/L*K/Lo
Io
Do
Saving (investment) rate is constant, such that savings are a constant share of GDP per worker
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
The Solow diagram
A
B
K/L
euros/L
GDP/L
s(GDP/L)
K/L)Y/L*
K/L*K/Lo
Io
Do
constant depreciation rate involves that the capital stock increases before we achieve point A, but declines thereafter
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
The Solow diagram
A
B
K/L
euros/L
GDP/L
s(GDP/L)
K/L)Y/L*
K/L*K/Lo
Io
Do
Thus, the long-run dynamic equilibrium is achieved at point A. This is called “steady state”. The economy grows here only at the rate of the technological progress.
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
Induced capital formation
CE
D
B
K/L
euros/L
GDP/L
s(GDP/L)
K/L)
GDP/L’
A
s(GDP/L)’
Y/LcY/L’
Induced capital formation effect, i.e. medium-run growth bonus
Allocation effectY/L*
K/L*
Growth impact of a technological push or efficency gain from integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
Induced capital formation
CE
D
B
K/L
euros/L
GDP/L
s(GDP/L)
K/L)
GDP/L’
A
s(GDP/L)’
Y/LcY/L’
Induced capital formation effect, i.e. medium-run growth bonus
Allocation effectY/L*
K/L*
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
C
D
B
K/L
GDP/L
s(GDP/L)
K/L)
K/L’
A
s’(GDP/L)
Y/L’
Medium-run growth bonus
Y/L*
K/L*
Integration induced investment rate rise
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
K/L =Knowledge/L
euros/LGDP/L
s(GDP/L)
K/L)
Y/L*
K/L*
B
A
Long-term endogenous growth
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
Long-term growth impact of integration
K/L =Knowledge/L
euros/L
GDP/L
s(GDP/L)
K/L)
Y/L*
K/L*
B
A
s’(GDP/L)
C
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
Long-term growth impact of integration
K/L =Knowledge/L
euros/L
GDP/L
s(GDP/L)
K/L)
Y/L*
K/L*
B
A
s’(GDP/L)
C
Integration improves efficiency → improves investment climate → higher investment rate (s rises to s’) → faster growth (knowledge capital accumulates more rapidly)
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
Empirical evidence: Are growth and integration related?
• Prima facie evidence• EEC countries grew at 4.2% p.a. 1950-73• EFTA countries grew at 3.4% p.a. 1950-73• Poor countries grew at 4.2% p.a. 1950-73
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
Facts: European Growth Phases, 1890-1992
Period Real GDP Real GDP per capita
Real GDP per hour
1890-1913 2.6 1.7 1.6
1913-1950 1.4 1.0 1.9
1950-1973 4.6 3.8 4.7
1973-1992 2.0 1.7 2.7
Whole Period
1890-1992 2.5 1.9 2.6
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
Facts: Growth in the WWII Reconstruction Phase.
The Set-Back: (Pre-war year when GDP equalled that of 1945)
Back-on-Track Year (Year GDP attained highest pre-war level)
Reconstruction Growth (rate 1945 to col. 2 year)
Austria 1886 1951 15.2%
Belgium 1924 1948 6.0%
Denmark 1936 1946 13.5%
Finland 1938 1945 n.a.
France 1891 1949 19.0%
Germany 1908 1951 13.5%
Italy 1909 1950 11.2%
Netherlands 1912 1947 39.8%
Norway 1937 1946 9.7%
Sweden These nations grew during WWII
Switzerland
UK
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
Facts: GDP per capita & Rankings, 1950 and 1973 (1990 international dollars).
1950 GDP (1990 $)
European Rank 1950
Change in Rank 1950-1973
GDP Growth Rate
EEC average
4,825 8.0 + 1.2 4.2
EFTA average
6,835 3.6 -1.4 3.0
France 5,221 7.0 + 2 4.0
Germany 4,281 9.0 + 5 5.0
Italy 3,425 13.0 + 2 4.9
UK 6,847 2.0 -5 2.4
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
1950 GDP (1990 $) European Rank 1950 Change in Rank 1950-1973
GDP Growth Rate
EEC average 4,825 8.0 + 1.2 4.2
Netherlands 5,850 5 -1 3.4
Belgium 5,346 6 -2 3.5
France 5,221 7 + 2 4.0
Germany 4,281 9 + 5 5.0
Italy 3,425 13 + 2 4.9
EFTA average 6,835 3.6 -1.4 3.0
Switzerland 8,939 1 0 3.1
UK 6,847 2 -5 2.4
Sweden 6,738 3 + 1 3.1
Denmark 6,683 4 + 1 3.1
Norway 4,969 8 -4 3.2
Finland 4,131 10 0 4.2
Austria 3,731 11 + 2 4.9
Others average 2,401 14.3 -0.3 5.2
Ireland 3,518 12 -3 3.1
Spain 2,397 14 + 1 5.8
Portugal 2,132 15 + 1 5.6
Greece 1,558 16 0 6.2
For Comparison USA 9,573 2.4
Japan 1,873 8.0
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
1950 GDP (1990 $) European Rank 1950 Change in Rank 1950-1973
GDP Growth Rate
EEC average 4,825 8.0 + 1.2 4.2
Netherlands 5,850 5 -1 3.4
Belgium 5,346 6 -2 3.5
France 5,221 7 + 2 4.0
Germany 4,281 9 + 5 5.0
Italy 3,425 13 + 2 4.9
EFTA average 6,835 3.6 -1.4 3.0
Switzerland 8,939 1 0 3.1
UK 6,847 2 -5 2.4
Sweden 6,738 3 + 1 3.1
Denmark 6,683 4 + 1 3.1
Norway 4,969 8 -4 3.2
Finland 4,131 10 0 4.2
Austria 3,731 11 + 2 4.9
Others average 2,401 14.3 -0.3 5.2
Ireland 3,518 12 -3 3.1
Spain 2,397 14 + 1 5.8
Portugal 2,132 15 + 1 5.6
Greece 1,558 16 0 6.2
For Comparison USA 9,573 2.4
Japan 1,873 8.0
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
Empirical evidence: Are growth and integration related?
• Econometric evidence• Medium term growth bonus, but no long-run effects
· Badinger 2005a, 2005b, · Coe/Moghadem 1993; Italianer 1994, Henrekson 1997
• EU Eastern enlargement: CGE simulation evidence• GDP level effect of 0.2-0.3% for EU-15• GDP level effect of 2-4% for NMS-10• Germany: GDP level effect of 0.4-0.6% • e.g. Baas/Brücker/Hönekopp 2007;
Baas/Brücker/Hauptmann 2009; Keuschnigg/Kohler 2002
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
Capital Market Integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
Microeconomics of capital market integration
MPK
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euros euros
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K’Capital flow
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Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
Microeconomics of capital market integration
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euros euros
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K’Capital flow
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Consider case where in initial situation capital per worker differs across countries. Interest rates differ as well.
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
Microeconomics of capital market integration
MPK
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Ko+ K*oK*o
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euros euros
A
K’Capital flow
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Integration implies that capital stock per worker converge, such that eventually capital stocks and interest rates are the same across countries.
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
Microeconomics of capital market integration
MPK
Ko
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Ko+ K*oK*o
r*oMPK*
euros euros
A
K’Capital flow
r’r’
Home country (left axis) receives capital from foreign country (* denotes the foreign country), while foreign country (right axis) sends capital to home country.
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
Microeconomics of capital market integration
• ‘Native’ capital-owners in Home lose area ‘A’;
• Home labour gains area A+ B;
• Total economic impact on Home citizens equal to area B
MPK
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Ko+ K*oK*o
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euros euros
K’Capital flow
r’r’A B
C D
E
F
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
Microeconomics of capital market integration
• Foreign capital still employed in Foreign gains F;
• Foreign labour loses D+F; • total impact on Foreign-based
factors is -D.
MPK
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ro
Ko+ K*oK*o
r*oMPK*
euros euros
K’Capital flow
r’r’A B
C D
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F
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
Microeconomics of capital market integration
• if we count the welfare of Foreign capital owners whose capital now works in Home (gains C+D), so overall Foreign welfare gain is C.
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r’r’A B
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F
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Growth effects and capital market integration
Microeconomics of capital market integration
MPK
Ko
ro
Ko+ K*oK*o
r*oMPK*
euros euros
A
K’Capital flow
r’r’
Thus, net earnings increase in both countries, but labour loses in foreign and capital loses in home country.
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
The Integration of Labour Markets
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
The Integration of Labour Markets
• Labour market integration• Institutions: Free movement of workers• The determinants and scale of migration• The self-selection and out-selection of migrants• The labour market effects of migration
· Model with clearing labour markets· Model with wage rigidities· Adjustment of other markets
• Empirical evidence· Estimation of a model for Germany· Estimation EU enlargement effects
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Institutions
• Free movement of workers one of four fundamental freedoms in Treaty of Rome• fixed in 1957, came into force 1968
• Service trade: posting of workers
• ‘Equal treatment’: Incentives for welfare shopping?
• Transitional periods in case of low-income applicants• Southern enlargement: 7 years, but expired before time• Eastern enlargement (‘2+3+2’ formula)
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Eastern enlargement
• Selective application of transitional arrangements for NMS-8• Opening of labour markets in 2004: IE, UK, SWE• Opening of labour markets after 2006: ESP, FIN, FR, IT,
GR, LX, NL, PT• Still closed: AT, GER
• Selective application of transitional arrangements for NMS-2
• Opening of labour markets: FIN, SWE, ESP• All other countries apply, even IE and UK• But liberal conditions in IT
• Selective application has resulted in migration diversion
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
The scale of migration
• Theories of the migration decision• Migration is driven by wage differences (Hicks, 1932)• Migration as an investment in human resources
(Sjaastadt, 1962)· Net present value of earnings difference (incl. costs)· Consideration of social and psychic costs
• Employment opportunities (Harris/Todaro, 1970)• Network effects and chain migration (Massey, 1987)• Uncertainty, incomplete information and risk aversion
(Burda, 1995)• Representative vs. heterogeneous agents
· Stock vs. flow models (Brücker/Schröder, 2006)
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
The scale of migration: some facts
• The average GDP per capita in PPP of the sending countries of migration in the EU-15 has declined from 60 per cent (1970) to 35 per cent (2005)
• The income gap between the EU and the other countries on the European continent and its periphery is similar to that between the US and the sending countries in the Americas
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
The European income gap
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
The American income gap
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
0 100 200 300 400 500 600 700 800
population (millions)
GN
I per
cap
ita
(Atl
as M
eth
od
)
USA
Canada
Mexico
Southern America
Middle America and Carribean
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
The scale of migration: some facts
• Net immigration rates in the EU are below those of the US, but tend to converge
• Two-thirds of the EU-migrants stem from non-EU countries with increasing tendency
• Per capita GDP level of sending countries has fallen from 65 per cent of EU-9 recipient countries in 1970 to 35 per cent in 2005
• Intra-EU and intra-OECD migration increases slightly• Ireland, Spain, Italy and UK are today main destinations in EU• Eastern enlargement I: 1 million people migrated from NMS-8
into EU-15 between 2003-07• Eastern enlargement II: 1.3 million people from BU+RO
migrated into EU-15 between 2003-07
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
The scale of migration: some facts
• Migration diversion: 60 percent of the NMS-8 immigrants resided in DE and AT before enlargement, 70 percent moved to UK and IE after enlargement
• 70 percent of NMS-2 migrants resided in DE and AT until 1995, 80 percent reside in ITA and ESP in 2007
• Related to selective application of transitional arrangements for free movement, but also other factors: high GDP growth rates in UK, IE, ESP and (less) ITA, English as an additional factor in case of UK and IE
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Net migration rates, 1960 - 2005
-4
-3
-2
-1
0
1
2
3
4
5
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
net
mig
rati
on
rat
e (p
er 1
000
per
son
s)
Northern America
EU-15
Northern Africa & Midlle East
South-Eastern EuropeCIS
NMS-12
Sub-Saharan Africa
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Migration stocks in EU-15 by region of origin, 2006
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
The skill composition of migrants
• The education level of migrants and other abilities affect the labour market performance of migrants, their effects on native workers and on the fiscal balance of the welfare state
• Most empirical studies find that the benefits from migration increase with skill level of immigrant population• via the labour market channel• via the welfare state channel
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Is the skill composition relevant?
• The labour market channel• The unemployment rate of migrants is about twice as
high as that of natives• We can explain almost all of the difference in the labour
market performance of migrants relative to natives by observable human capital characteristics, i.e. by education and work experience
• Moreover, skilled immigrants replace less native workers than unskilled do
• The welfare state channel• The fiscal benefits of the welfare state increase with the
skill level of immigrants (Bonin et al., 1999; Brücker et al, 2002).
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
The skill-selection of migrants
• The composition of with respect to observable skills and unobservable abilities is driven by immigration policies (out-selection) and economic incentives (self-selection)
• Self-selection: the Roy(1951)-Borjas(1987) model:• migrants are positive self-selected on observable skills if
relative returns to education are larger at destination relative to sending country
• migrants are positively self-selected on unobservable skills if inequality of earnings is larger at destination relative to sending country and vice versa
• Caveat: Fixed migration costs or migration costs which fall with education change conclusion (Chiswick, 1999; Brücker/Defoort, 2009; Grogger/Hanson, 2008)
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Empirical evidence
• New data sets which distinguish immigrants in OECD countries from 200 sending countries by education levels facilitate empirical analysis (Docquier/Marfouk 2006; Defoort 2009)
• Key findings:• Skill-selective immigration policies increase skill-level of immigrant
population significantly (Belot/Hatton, 2008; Bertoli et al., 2009; Brücker/Defoort 2009; Grogger/Hanson, 2008).
• Ambiguous results for the wage premium and earnings inequality• Emigration rate among skilled population is about 2-3 times as
higher as that of unskilled population.• Econometric evidence: increasing the inequality of earnings in
destination country increases favorable self-selection (Belot/Hatton, 2008; Brücker/Defoort, 2009)
• Increasing the inequality of earnings in sending country increases favourable self-selection as well (Brücker/Defoort, 2009)
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
School enrolment rates
0
20
40
60
80
100
120
140
0 200 400 600 800 1000 1200 1400 1600 1800
Bevölkerung in Millionen Personen
Bru
tto
bild
un
gsp
arti
zip
atio
nsr
ate
EU-15
EU-15
NMS-12
NMS-12
Südost-Europa
Südost-Europa
GUS
GUS
Nordafrika, Mittlerer Osten
Nordafrika, Mittlerer Osten
Afrika südlich der Sahara
sekundäre Bildung
tertiäre Bildung
Afrika südlich der Sahara
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Skill structure of migrant population
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
An
teil
de
r Q
ua
lifi
ka
tio
ns
gru
pp
e i
n P
roze
nt
Hochqualifizierte Mittelqualifzierte Geringqualifzierte
Datenquelle: Docquier und Marfuk (2007).
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Skill-selection with respect to the home population
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
Kanada Australien USA GB Deutschland Frankreich
Mig
rati
on
sra
te d
er
Ho
ch
qu
ali
fizi
ert
en
/Mig
rati
on
sra
te d
er
Mit
tel-
un
d
Ge
rin
gq
ua
lifi
zie
rte
n
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Skill-selection with respect to the home population
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
Kanada Australien USA GB Deutschland Frankreich
Mig
rati
on
sra
te d
er
Ho
ch
qu
ali
fizi
ert
en
/Mig
rati
on
sra
te d
er
Mit
tel-
un
d
Ge
rin
gq
ua
lifi
zie
rte
n
Calculation:
(smh/ sm
l)/(snh/ sn
l)
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Impact on the labour market
• Standard model with fixed capital stock, clearing labour markets and no trade• labour loses in host country, benefits in sending countries• capital loses sending country, wins in host country• natives benefits in host country, lose in home country
• Models with unemployment• Ambiguous impact
• Models with capital stock adjustment• larger economic gains• neutral for aggregate wages and unemployment
• Models with trade• neutral in small open countries (FPI theorem)
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Standard model of labour migration (like capital)
MPL
Lo
wo
Lo+ L*oL*o
w*oMPL*
euros euros
L’migration
w’w’A B
C D
E
F
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Standard model of labour migration (like capital)
MPL
Lo
wo
Lo+ L*oL*o
w*oMPL*
euros euros
L’migration
w’w’A B
C D
E
F
• Initial situation• Marginal product of labour at
destination higher than in sending country
• Hence, wage at destination higher than in sending country
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Standard model of labour migration (like capital)
MPL
Lo
wo
Lo+ L*oL*o
w*oMPL*
euros euros
L’migration
w’w’A B
C D
E
F
• Labour moves from sending country to destination country
• New labour endowments L’• Hence, marginal product of
labour are equal in case of perfect mobility
• Wage at destination falls and increases at sending region
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Standard model of labour migration (like capital)
MPL
Lo
wo
Lo+ L*oL*o
w*oMPL*
euros euros
L’migration
w’w’A B
C D
E
F
• Welfare analysis• Native labour force at
destination loses A• Native labour force in sending
country gain F• Migrants gain C+D
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Standard model of labour migration (like capital)
MPL
Lo
wo
Lo+ L*oL*o
w*oMPL*
euros euros
L’migration
w’w’A B
C D
E
F
• Welfare analysis (cont.)• Capital owners at destination
gain A+B• Capital owners at sending
country lose F+D• Net effect: B+C
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
A model with unemployment
Real wage SSc
LI
wo
uo
Employment
D
Real wage
SSc
L’
wo
Employment
D
D’
w’
uo
Lo Lo
u’
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Other adjustment machanisms: capital stock adjustment
• incentives for domestic or international investment increases if labour supply increases
• capital-labour ratio remains eventually constant• hence, factor prices remain constant as well• empirical evidence: capital-output ratio and, hence,
productivity adjusted capital-labour ratio is constant over time (Kaldor, 1961)
· e.g. Western Germany: capital-output ratio has increased from 3.0 (1960) to 3.14 (1990)
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Capital-output ratio in Western Germany
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Other adjustment mechanisms: trade
• International goods prices depend not on domestic supply (small country assumption)
• Host countries imports after labour supply shock less labour intensive goods, exports less capital intensive goods (trade substitution)
• production share of labour intensive sector increases, production share of capital intensive sector declines (Rybczynski-effect)
• prices on goods markets remain constant• prices on factor prices remain constant (Factor Price
Insensitivity Theorem)• Large economies: picture changes if domestic supply
affects global supply curve and global goods prices
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Labour market effects: empirical evidence
• Spatial correlation approach· Uses variance of foreigner share across regions· endogeneity problem addressed by natural experiments or
IV-estimation· Find no or very small impact: at immigration of 1% of labour
force decline wages by 0.1% and increases unemployment rate by 0.1%-point (Longhi et al., 2005, 2006)
• National level approach· Uses variance of migration share across education and
experience cells· Regression and structural models· Find both large wage effects (Borjas, 2003) (0.4%) and
small effects (0.1%) (Ottaviano/Peri, 2006; Brücker/Jahn, 2008)
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Estimating the labour market effects: an example
• Analysis of the labour market effects of migration in an empirical model which considers wage rigidities, unemployment and capital stock adjustment (Brücker/Jahn, 2009)
• European unemployment is usually explained by relationship between wage setting, price setting and labour demand (Layard/Jackman/Nickell, 2005)
• Assumption of a wage setting curve: wages fall with increasing unemployment, albeit imperfectly
• Why imperfectly? Wage bargaining, efficiency wages, search theories etc.
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Estimating the labour market effects (cont.)
• Labour demand: once wages are set, profit-maximizing firms hire workers until the wage equals the marginal product of labour (plus an imperfect competition surcharge)
• Capital stock adjust to labour demand shock, but not immediately
• We distinguish four education groups, eight groups of work experience and native and migrants (64 types of labour)
• Estimating the elasticity of the wage-setting curve, of the parameters of the production function and of the speed of capital stock adjustment enables us to solve the model
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Estimating the labour market effects (cont.)
• Data base: German social security records (IAB Employment sample), 1980-2004
• Also possible to do for other countries depending on data quality
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
How flexible is the German labour market?Elasticities of wage-setting curves by education and work experience
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Estimating the labour market effects (cont.)
• Four scenarios:• 1 % immigration of labour force: high skilled only• 1 % immigration of labour force: medium skilled only• 1 % immigration of labour force: low skilled only• Actual immigration shock 1984-1993:
4.9% of labour force in Germany
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Brain Gain? (1% immigration of high-skilled)
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Middle of the road (1% immigration of medium skilled)
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
Gains from Ghetto? (1% immigration of less skilled)
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
1984-1993 immigration shock (actual immigration)
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
An application to the EU’s Eastern enlargement
• Parameters of the model are estimated for the EU-15 and the NMS-8 following the same procedure
• We simulate the labour supply shock triggered by the EU’s Eastern enlargement 2003-07
· Actual inflow minus expected influx under conditions before Enlargement
· Actual participation rates and qualification structures· Consideration of ‘brain waste’, i.e. employment below
qualification
• Calculate impact for GDP, GDP per capita, native’s factor income, wages, unemployment
· Distinguish effects for skill groups
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
An application to the EU’s Eastern enlargement
EU-15 NMS-8 EU-23
GDP long run 0.26 -1.10 0.20
GDP short run -0.09 0.25 -0.07
wages long run
-0.00 0.00 0.00
wages short run -0.09 0.25 -0.07
Unemployment long run 0.02 -0.03 0.02
Unemployment short run 0.06 -0.42 0.06
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration Integration of Labour Markets
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