Lecture 7 - The Economics of a Common Market for Labour

Intro

Pre-Brexit, the UK labour market was integrated with the EU labour market. Which meant free movement of labour without restrictions.

A theory of wage rates

Assumptions of the model

  1. All goods are produced using a combination of Labour and Capital
  2. Workers are homogeneous
  3. Capital is a fixed factor

- Marginal Value Productivity, increase in output per additional worker
As more workers are employed, MVP falls because the Capital/Labour ratio falls and becomes inefficient due to overcrowding etc.
(cf. Law of Diminishing Marginal Returns)
ECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide3.png
4) Perfectly competitive labour market
- In a competitive markets, employers hire workers only if they generate extra output to cover their cost
-
- All other workers employed generate more value then their cost to employ

What are the economic effects of free movement of labour within a common market?

In a model of two countries
Suppose that:
There is a fixed number of total workers in the two countries, at full employment
Initially workers are in Poland and in Sweden
Swedish and Polish workers are homogeneous
Sweden has high levels of capital per worker, Poland has lower Capital/Labour ratios.
Resultantly, MVP is higher in Sweden
The labour markets are initially separate: Polish workers cannot obtain working rights in Sweden. Therefore with a closed off system, Swedish workers are paid higher wages than Polish workers“ECON1013_EconomicIntegrationI/ECON1013_L7_ComMkt/Slide5.png” could not be found.ECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide6.png
Swedish Labour Force

ECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide7.png
As , Polish workers will migrate to Sweden as reflected in the diagram below.ECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide8.png
In the model we assume, that the migrants are classified as "Polish". Causing wages to clear at a new MVP value equilibrium. Causing a rise in Poland of and a fall in wages of
Therefore, migration derived unemployment for Swedish workers is reflected at .

What will happen to output due to a CM?

ECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide9.png

"Labour market output due to a CM will generate winners and losers in each case"

If Poland are losing output, why should they even join a CM?

Welfare - "The sum between the capital welfare and the workers welfare". It is the net gain/loss, not hte overall output. As shown belowECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide10.png

Welfare analysis of labour mobility between Poland and Sweden

The diagram shows the welfare effects of labour migration between Poland (P) and Sweden (S) when a common labour market is formed. Initially, Polish wages are lower than Swedish wages , creating an incentive for Polish workers to migrate. Migration continues until wages equalise at .

In Poland, the outflow of labour reduces total output by areas a + b, representing a loss for Polish capital owners. However, remaining workers receive higher wages , gaining area a, while migrant workers earn higher wages abroad, gaining areas b + c.
→ Net Polish welfare gain: area c.

In Sweden, the inflow of labour lowers wages , causing native workers to lose area e. Capital owners gain from employing more labour at lower wages, with total gains d + e.
→ Net Swedish welfare gain: area d.

Overall, global welfare rises by the sum of areas c + d, the shaded green triangles, representing the efficiency gain from reallocating labour where it is more productive. Although some groups lose (e.g. Swedish workers, Polish capital owners), total welfare across both economies increases due to better use of resources.

Conclusions on model of common market

Consequences forming a CM:

  • Migration of workers from Poland (Lower efficiency) to a Sweden (Higher efficient)
  • Convergence of MVP of workers and wage
  • Convergence of wage rates
  • Higher output in total in the CM
  • Income redistribution
    • within countries
      in Sweden : from workers to owners
      in Poland   : from capital owners to workers
  • across countries : 
    • Workers : from Sweden to Poland
    • Capital owners: from Poland to Sweden

Reservations

The model is simple and therefore acting as a starting point for examining effects in the CM

Effects depend on the assumptions made, i.e.

  • wage flexibility – is there a minimum wage?
  • full employment – is there unemployment in Poland?
  • capital fixed – remittances raise in Poland and reduce migration
  • wage differentials arise from differences in the capital–labour ratio rather than differences in human capital – are Swedish workers paid more because they are more skilled?
  • genuinely free movement – e.g. transferability of pension rights, etc. – do migration costs prevent full convergence?
  • comparative static (one-off) – how is the growth rate affected?

Common market for labour in EU

Treaty of Rome (1958) commits member states to form a CM
This includes free movement of capital and labour

Free movement is defined as

Article 45 TFEU (Free Movement of Workers)

  1. Freedom of movement for workers shall be secured within the Union. oai_citation:0‡EUR-Lex
  2. Such freedom of movement shall entail the abolition of any discrimination based on nationality between workers of the Member States as regards employment, remuneration and other conditions of work and employment. oai_citation:1‡EUR-Lex
  3. It shall entail the right, subject to limitations justified on grounds of public policy, public security or public health:
    (a) to accept offers of employment actually made; oai_citation:2‡EUR-Lex
    (b) to move freely within the territory of Member States for this purpose; oai_citation:3‡EUR-Lex
    (c) to stay in a Member State for the purpose of employment in accordance with the provisions governing employment of nationals of that State laid down by law, regulation or administrative action; oai_citation:4‡EUR-Lex
    (d) to remain in the territory of a Member State after having been employed in that State, under the conditions laid down by law, regulation or administrative action of that State. oai_citation:5‡EUR-Lex
  4. The provisions of this Article shall not apply to employment in the public service. oai_citation:6‡EUR-Lex

Directive 2004/38/EC (Free Movement and Residence of EU Citizens and their Family Members)

“Citizenship of the Union confers on every citizen of the Union a primary and individual right to move and reside freely within the territory of the Member States, subject to the limitations and conditions laid down in the Treaty and to the measures adopted to give it effect.” (Recital 1) oai_citation:7‡EUR-Lex

Article 1 – Subject
This Directive lays down:
(a) the conditions governing the exercise of the right of free movement and residence within the territory of the Member States by Union citizens and their family members; oai_citation:8‡EUR-Lex
(b) the right of permanent residence in the territory of the Member States for Union citizens and their family members; oai_citation:9‡EUR-Lex
(c) the limits placed on the rights set out in (a) and (b) on grounds of public policy, public security or public health. oai_citation:10‡EUR-Lex

What is the significance of labour mobility among EU countries in practice?

  • Migration from South to North was important in the 60s
  • 70-90s Labour mobility among EU15 countries was low as a result of:
    • Unemployment in the North
    • Linguistic and cultural barriers
    • 'The failure to establish an EC labour market (Pelkmans, 2001)'
  • Since the 2004 englargement, considerable East-West migration (3mn) because of large wage disparities and specific skills shortages in the west