The European Union and Immigration from New

Member Countries

THE IMPACT OF LABOUR MIGRATION

Supervisor: F. Arab

N. Dytianquin K. Diakidis

T. Krume

C. Tonne

Pigeonhole 374

Date: 09-06-2009

International Economics - 2E

Version: Final Draft

Group 9 – Team A

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Table of Contents

1. Introduction…………………………………………………………………..…………….2

2. Case Situation Audit………………………………………………………………..………2

3. Theoretical Framework: Labour Migration……………………………………..………….3

4. Possible Alternatives………………………………………………………………….……6

5. Case Analysis………………………………………………………………………………6

6. Conclusion…………………………………………………………….……………………7

Bibliography…………………………………………………………………………………….8

Table of Illustrations

1. Illustration 1: Labor Migration………………………………..……………..……………4

2. Illustration 2: Welfare Effects of Labor Migration…..……………………..……………..4

3. Illustration 3: Growth Effect……………………..……………..…………………………5

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1. Introduction

The European Union is a supranational organization of currently twenty-seven Member State,

following among other issues, the free movement of workers (EU, 2009). Nevertheless, this was

challenged by the „big-bang‟ enlargement of 2005. Some of the old member states prevented

labourers form the new central-eastern European member states to migrate freely into their labour

markets, while the UK, Sweden and Ireland fully applied the principle of free movement. This had

diverse effects on the economies of the respective Member States.

Accordingly, this essay will aim at illustrating the impact of labour migration, respectively

restrictions on it, on the labour markets of the EU‟s older Member States. Therefore it asks in how

far labor migration is beneficial for the old member states. First, a detailed illustration of the

specific case will be given. Second, the theoretical concept behind labour migration and its welfare

effects will be presented and followed by a description on potential alternatives for tackeling the

presented problem of labour migration. Fourth, the theoretical concept of labour migration will

specifically be applied to the case at stake and followed by a conclusion, providing the main

answers to the research question and recommendations for future actions planes on the case of

labour migration form central-eastern European member states. The research question will thereby

be: Should all member states allow migrant workers from central-eastern European countries to

enter their labour market.

2. Case Situation Audit

Labour Migration is not just a phenomenon within the European Union. As commonly known,

“(h)uman migration, or the movement of people from one place to another, is a phenomenon that

is as old as mankind itself.” (Guajarathi, 2006, p. 2). Moreover, immigrants arrival into a new

country has ever since evoked different reactions, namely fear of the disturbance of the country‟s

ethnic or religious character on the one hand and very welcoming reactions on the other hand (pp.

2 ff.).

In the course of its development from a Coal and Steel Community in 1951 over an

Economic Community into a Customs union, promoting the free movement of goods, services,

capital and people; the European Union faced different enlargement waves. Enlargement in turn

lead to labour migration between the new and old member states, meaning that the freedoms of

movement enabled them to migrate within the Union. In May 2004, fourteen years after the fall of

the Communist bloc, nine CEE countries (Central and Eastern European Countries) and Malta

fullfilled the Unions membership criteria, the so-called Copenhagen criteria and became new

member states. Among these were, for instance, Latvia, Poland, Hungary or the Slovak Republic

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(pp. 3 f.). Compared to the older Member States of the Union, they “were very small in GDP, but

quite large in terms of population and labor force” (p. 5).

Although one might expect the freedom of movement to allow new member state citizens

to immigrate freely into the older member states and attain the labour market, there, old member

states were allowed to impose restrictions to the movement of workers for a transition period of

seven years (pp. 5 f.) No more than three old member states abstained from imposing these

restrictions – the UK, Ireland and Sweden. Accordingly, the community rules on the free

movement of workers fully applied in these countries and workers from the new member states

immigrated and shared these countries labor market.

Many of the old member states faced demographic and economic problems, which created

several gaps in the labour market. First, welfare systems with charitable unemployment benefits

made some people prefer being unemployment and reluctant to look for job opportunities.

Consequently, high unemployment benefits were combined with high unemployment rates.

Second, the old member states faced low economic growth (1,0%-3,8%) and an ageing population

which “would increase public spending on pensions, healthcare, and long-term care by 4% to 8%

of GDP in most of the EU‟s 25 states by 2050” (p. 6). In comparison to the old member states the

new ones additionally faced even higher unemployment rates (19%) and lower wages. As a result,

workers started to migrate from the new members states into the UK, Ireland and Sweden – the

countries not imposing temporary migration restrictions (pp. 6 f.).

So, should all old member states allow migrant workers from CEE countries to enter their

labour market?

3. Theoretical Framework

In order to analyze to what extent the old member states allow migrant workers from CEE

countries to enter their labor market, it is important to look at the reasons for migrations as well as

the labor migration theory beforehand.

So, what are the reasons for migration from the CEE countries? Zervoyianni identifies

several push and pull factors. The so-called push factors are the reasons for emigration, such as

high unemployment, poverty or political instability. Pull factors on the other hand, are the

opportunities associated with the destination country, as for instances higher wages, more jobs and

also political stability. In addition, he argues that immigration of high-skilled workers increases

competitiveness and efficiency in the new country. As a result, the old member states benefit from

migration of high-skilled labor. (Zervoyianni, 2006, pp.384-388)

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The common European market stands for enhanced advantage of factor mobility, freedom

of movement of capital and labor and services. Its effects can be analyzed by the aid of the simple

model presented in illustration one. However, it has to be noted that the model underlies certain

preconditions such as perfect competition, two countries (A+B), two production factors (Labor (L)

+ Capital (C)) and no mobility costs. In addition, it is also assumed that migration was not allowed

before the customs union. So, for the analysis of the case presented above, it is to be noted that

country A represents the old member states with high wages and country B represents the former

CEE countries with low wages for workers.

Illustration 1 – Labor Mobility

Source: Dytianquin, N. (2009). Session 6A – Slide 31

Illustration one demonstrates that wages in two countries will equalize in the long run, causing

increasing welfare effects. Due to low wages in country B (WB), workers in a customs union will

migrate to country A, because of its high wages (WA). Consequently, because of the increase in

labor supply in country A by the number of migrants, wages in country A will fall. At the same

time, wages in country B increase, because the labor supply decreases. As a result, wages will

converge at W*, which is the point at which migration will stop, because wages will fall to that

point in country A and rise in country B. Hence, an additional gain from migration is the factor-

price equalization effect. (Nello, 2009, p.184).

Illustration 2 – Welfare Effects of Labor Migration

Labor Capital Net

Country A -b +(b+c) +c

Country B +(d+e+g) -(e+g) +d

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In addition, due to the fact that migration increases efficiency because one of the results of

migration is that workers are more effective. Accordingly, the overall world output increases.

Looking at the marginal product of labor curves and the effects of migrations on income

distribution, it can be argued that migration increases the total welfare net. After migration, it

becomes visible in illustration two, that triangles c and d are gained. As a result, migration does

influence the distribution of income. Whereas the noticeable effect of immigration to the

population of the high-wage countries (country A) is that worker‟s lose b, but in the long run,

country A gains c. As a result, the labor mobility theory demonstrates that migration is beneficial

for both countries.

Moreover, another effect of integration is enhanced growth. Illustration three, based on the

Solow-growth model (Solow, 1957), is often criticized for its fact that technology is not as Solow

argues „Manna from heaven‟. In economic integration, however, the shift from the red line (Af(K))

to the green line (A*f(K)) occurs because of the sharing of technology and know-how between

member states. In the case of emigration from the CEE countries, this model demonstrates that due

to the technological know-how of emigrants, the GDP per capita will increase. For the new

member states, availability and know-how transfer of technology will also lead to an increase in

GDP. As a result, migration has also a growth effect on the economy.

Illustration 3 – Growth Effect

Source: Dytianquin, N. (2009). Session 3 – Slide 37

Additionally, one negative effect of emigration is brain drain. Because high-skilled labor is

leaving the former CEE countries to receive higher wages in the old member states, the amount of

high-skilled workers, who are important for future innovation and stabilizing the economy,

decreases, making it harder for those countries to increase their growth rates.

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4. Possible Alternatives

In order to address the old member states‟ problems of high unemployment, gaps in the labor

market and low economic growth, several alternatives should be considered. First, these member

states‟ governments could maintain the restrictions on labour migration from CEE countries and

therewith prevent them form entering their labour market. Possibly migrant workers will take over

jobs from locals of the country in which they immigrated. Accordingly, this would increase the

unemployment rates even further. Unemployed migrant workers would in turn cause an increase in

government spending, as they would need welfare benefits. Consequently, less money can be

directly invested in the economy and economic growth rates can not improved. Second, the old

member states‟ governments could impose quotas on migrant workers from CEE countries. That

way a too big influx of migrants into the labour market and the previously depicted problems

could be rendered manageable.

Third, the governments should try to increase the birth rates amongst their population.

Bigger birthrates will increase the labour force of their economies and consequently fill the gaps of

job vacancies. A younger population (in average) will also lead to less welfare expenses for the

government, because less money will have to be spend on pensions. As fourth alternative for

solving the problems of low economic growth, unemployment and gaps in the labour market, the

old member state should consider to open up their labour markets for labourers from CEE

countries. The previously depicted model of factor price equalization illustrated that labour

migration will in the long run lead to mutual benefits for both sides. The next section will analyze

this phenomenon on the example of the given case in more detail.

5. Case Analysis

High unemployment rates are one of the biggest problems in the old European member states.

Arising problems such as less welfare contributions, public disturbances, more government

spending, less growth and development are to be tackled by economic policies. The case audit

above has shown that the EU enlargement rounds of 2004 and 2007 led to immigration to the old

member states. Whereas most countries restricted this migration by setting 7 year moratoriums for

labor migration, a 2-year freeze or set quotas, France, Ireland, Denmark, Sweden, UK and Spain

did not set restrictions. They rather set conditions on social security, welfare shopping and

reservations on their right to refuse a work permit. As a result, they had higher growth rates than

the other member states.

Governments, that are restricting labor migration or setting quotas on migrant workers,

fear a worsening of their BOP (Balance of Payments), because migrant workers might send their

wages back home to support their families. Other reasons for restrictions are the short-run

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employment for the receiving country which will decrease wages. Until capitalist employ more

labor to go back to its natural rate, this unemployment will also decrease the total welfare of the

society. In order to analyze restrictions and quotas, one has to note that in the long-run

unemployment rates are independent of the size of the labor force vis-à-vis immigration. The

factor-prize equalization effect demonstrates that migration increases the total welfare of an

economy (+c; +d) and thus is benefiacary to both countries, the old EU member state and the CEE

country. In addition, the growth effect, which occurs because of new technology and know-how

provided by integration, underlines the growth in GDP/per capita of the country. As a result,

government restrictions and labor quotas are hindering the potential of one‟s economy, thus are

inefficient. Nonetheless, the wages of worker‟s in the old member state economy will decrease,

which will upset the population and might lead to fear of rise in criminality rates (gang wars) and

disturbance of internal peace.

Moreover, because of low birthrate, the welfare expenses are diminishing in the near

future. Migration is one possibility to increase the amount of young and skilled workers that

benefit the economy of an old member state, by filling the gaps of job vacancies. In addition,

government programs that promote birthrates and education might arguably fill in the gaps.

6. Conclusion

After having reviewed the theoretical framework and highlighted the possible alternatives

of labour migration within the EU after the integration of CEE countries in 2005, it is important to

conclude that the old EU member states should open their labour markets for the CEE countries.

The fact that England, Ireland and Sweden did not impose restrictions meant that huge labor forces

would enter the country. Although wages might decrease in the old and brain drain might occur in

the new member states in the short run, in the long run, the unemployment rate of one country will

not be effected by labor migration and the factor-price equalization effect will equalize wages and

in the end, the total net effect is positive. Additionally, the Solow Growth theorem illustrates that

migration of workers form CEE states into the older member states of the Union it will lead to an

increase in GDP per capita.

Put in a nutshell, the research question „Should all member states allow migrant workers

from central-eastern European countries to enter their labour market?‟ has to be answered in the

affirmative. Beside the economic reasoning presented in the course of this essay, one should

additionally bear political goal behind the free movement of workers within the EU in mind. Being

a supranational organization of twenty seven member states, the EU strives for political as well as

economic integrity. Accordingly, the integration of new member states into this community should

not be prevented by restrictions on the free movement of workers.

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Bibliography

Literature

Dytianquin, N. (2009). Making a European Market. Lecture 3. Maastricht University

EU (2009) The Free Movement of Workers. Retrieved 02-02-2009 from:

http://europa.eu/scadplus/leg/en/s02305.htm

Guajarathi, S. (2006). The European Union and Immigration from New Member Countries. ICFAI

Center for Management Research

Senior Nello, S. (2009). The European Union: Economics, Policies and History (2nd

ed). Mc-Graw

Hill.

Solow, R. M. A. (1957). Technical change and the aggregate production function. Review of

Economic and Statistics, 39, 312-20.

Zervoyianni, A., Argiros, G. & Agiomirgianakis, G. (2006). European Integration, Palgrave

Macmillan. Chapter 10, pp.371-400.

Illustrations

Dytianquin, N. (2009). Making a European Market. Lecture 3. Maastricht University

Dytianquin, N. (2009). International Economics. Lecture 6. Maastricht University

Front Page Illustration (2009). Enlargement. Retrieved 02-06-2009 from:

http://www.radiowebeurope.eu/img/debate/ill_enlargement.jpg