Divided Europe? Labor market restrictions and NMS…

The enlargement of the EU entailed serious obstacles to the access to labor markets of the western EU states for workers from CEECs. On the date of entry, only three “old” EU states (U.K., Ireland and Sweden) decided to open-up their labor markets to citizens from new EU members. Other countries, Germany and Austria among the ones with a toughest stance, proposed different “transition” periods during which they restrict the access of east Europeans to their job markets. These restrictions can last up to seven years. The Netherlands and Denmark despite previous declarations also introduced these types of arrangements.
Currently, as official declarations have it, on the 1st of May 2006 Spain, Portugal and perhaps Finland and Greece are to open up their labor markets to workers from the NMS. Italy withdrew on its previous statements and decided to prolong the “transition” till 2009.
Before we try to analyze some arguments in favor of this protectionist stance, it may be useful to have a look at the experience of countries that opened up.

It seems they do not regret their decision. U.K. Prime Minister Tony Blair summarizes : “I have not been alone in pointing out that those countries which opened their labour markets to people from the EU’s new member countries have benefited economically.”. Indeed, in the countries that decided to open up, thus, arguably in the line of fire - at risk of taking a bigger blow of immigrants, than if other countries did the same, the idea of revising their decision is not subject to much discussion.

So what is the rationale for keeping job-markets closed to new EU members?

Alas, it seems hardly economic reasons that keep countries from lifting restrictions on their job market. A textbook model of growth (Obstfeld and Rogoff, Foundations of International Macroeconomics, pp.448-453) based on the Ramsey-Cass-Koopmans shows that opening up labor markets, both to skilled and un-skilled workers, can have a positive effect increasing per capita income in the short run, and having no negative effect on the steady state. Although very simple and easy to contest, it serves to argue that economic theory does see the citizens of incumbent countries benefiting from the inflow of both un-skilled and skilled labor. Of course, the effect is aggregate, and through distributional effects specific groups may be negatively affected, however it is quite clear the interests of the protectionist groups are not that of the entire countries.

As for the arguments of enormous inflows of cheap labor bringing deterioration of living standards in the West by importing higher unemployment and lowering wages and working standards, they are based on some assumptions that do not look quite right when given a closer look.

First, unemployment rates, in countries like Poland do not entirely reflect the actual job market situation – many of the people registered as unemployed, are not active job seekers, main reason for being registered is that monthly health insurance is costly – and a person officially registered as unemployed receives it for free, without a time limit.

Minimum wage requirements and labor contracts will guarantee the wage pressures to be limited – in fact legal immigrants are a lesser threat to incumbents wages than grey-zone workers, who do not pay taxes, social security, are not subject to minimum wages or practically any labor standards. And as it seems, many industries, both low skilled (agriculture etc) and high skilled (engineering, computer software etc) do seem to feel the lack of suitable labor force. Furthermore, with capital (or simply companies) being relatively mobile, the single market for goods relatively well established, the flow of immigrant workers should not be viewed against the alternative of a sheltered labor market, but perhaps against the alternative of jobs being relocated to the NMS themselves.

The flood of workers from Eastern Europe is more a populist argument, than an economic menace. Especially if we remember that Italy, which was previously discussing the possibility of opening-up on the 1st of May 2006, but recently declared to postpone it, faces elections upcoming in April this year.
To stay with Italy, the Ministry of Foreign Affairs named problems with the large presence of illegal workers from NMS as one of the prime arguments against opening its job market. Easy to see that this populist argument is completely flawed – opening the job market would not only increase tax income, accountability to labor regulation, decrease in financing of criminal organizations but would also decrease the pressure of immigrant workers on wages and facilitate monitoring of their status.
I did not find convincing estimates of the number of NMS workers illegally employed in the EU, but “guesstimates” suggest the problem is significant, moreover, UK experience suggests that legal access to the job market creates a significant “coming out”.

Moreover, it is rarely recognized that quite a substantial amount of NMS citizens can already legally work in the EU. Studies quoted by J.H. Brinks estimate the number of Polish citizens with a German passport as somewhere between 400’000 to 1 mln mostly registered in Silesia. These are not subject to the obstacles to job-market access in and in fact many of them do work (be it seasonal or permanently) in the “old EU”. Exact numbers are difficult to obtain, but one can expect that “double-nationality” citizens from Poland, Czech Republic and other NMS who can already legally work in the whole EU constitute a substantial amount of the ‘labor emigrants’.

Additionally, each year many “old” EU states issue work-permits allowing external workers to work legally (Italy – 90 ths. increasing to 170 ths. next year, majorly for NMS and Accession countries; Germany issued 500 thousand work permits, Austria 70 thousand to various types of NMS workers according to a European Commision report ) allegedly in order to better control the structure of labor inflow but in fact not only going against the idea of “united” Europe, but also creating an additional source of costs, instability, lack of transparency and potentially corruption.

Finally, relocation is costly – even within a country, where regional labor markets have a lot in common: language, laws, taxes, skill recognition, health insurance and often proximity. Thus the apocalyptic vision of Poles from northern regions, with registered unemployment rates in excess of 40% ( National Statistics ) flooding labor markets of western EU, pushing Germans and Italians into unemployment, seems quite improbable. Flawed as they may be, the statistics show that although Warsaw and other regions with ca. 5-6% unemployment rates, are within a couple hours drive and regional wage differentials (which seem quite big –Warsaw having industrial wages 50-60% higher relative to high unemployment regions – National Statistics ) – the equalization doesn’t take place – people are less willing to relocate than populists tend to claim. Of course the wage differential is higher when we compare to “old” EU (though the statistics as crude and troubled by similar flaws), but so is the cost of moving, living and traveling.
Add to this language problems, imperfect skill/qualification recognition and the fact that U.K., historically one of the most desired labor markets for East Europeans is already open to them (~350ths. workers from NMS working in the UK, on various types of contracts usually well above minimum wage – Accession Monitoring Report, Homeoffice UK, February 2006, 107 thousand in Ireland Commission report ), and I would claim most of the people that would potentially seek employment abroad – are already there.

Probably, EU accession of Romanian and Bulgarian workers will spark an even fiercer discussion, but generally most arguments appearing in everyday press seem to both highly overvalue the potential threats to the old members and the potential benefits to the new members. Most discussions forget that the sheer fact of NMS workers being treated as an inferior category of EU citizens, is also subject to hot debate in these countries, increasing discontent with the EU and feeding the local populist parties. Hence for inter-EU relations, the direct effect on the labor market may turnout smaller than the effect of the signal given.

Thus, summarizing the previous argument - opening-up may fuel an increase in registered workers, but in fact I would not expect an actual substantial increase of workers inflow into these countries. Moreover, the threats associated with giving access seem relatively low, while the benefits, be it from inflow of needed labor or decriminalization of the worker underground, are substantial. It seems Italy, and many others may be shooting themselves in the foot.