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Theorie und Politik der Europäischen Integration Prof. Dr. Herbert Brücker Lecture 5 Growth effects and the integration of capital and labour markets Theory.

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Präsentation zum Thema: "Theorie und Politik der Europäischen Integration Prof. Dr. Herbert Brücker Lecture 5 Growth effects and the integration of capital and labour markets Theory."—  Präsentation transkript:

1 Theorie und Politik der Europäischen Integration Prof. Dr. Herbert Brücker Lecture 5 Growth effects and the integration of capital and labour markets Theory and Politics of European Integration

2 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

3 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Growth effects and capital market integration Last Lecture... EU competition policy ·EU competency: 1 st 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

4 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

5 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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.

6 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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).

7 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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.

8 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

9 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

10 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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/L o IoIo DoDo

11 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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/L o IoIo DoDo GDP per worker increases with increasing capital endowment, but marginal returns to capital decline

12 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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/L o IoIo DoDo Saving (investment) rate is constant, such that savings are a constant share of GDP per worker

13 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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/L o IoIo DoDo constant depreciation rate involves that the capital stock increases before we achieve point A, but declines thereafter

14 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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/L o IoIo DoDo 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.

15 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Growth effects and capital market integration Induced capital formation C E D B K/L euros/L GDP/L s(GDP/L) K/L) GDP/L A s(GDP/L) Y/L c Y/L Induced capital formation effect, i.e. medium-run growth bonus Allocation effect Y/L* K/L* Growth impact of a technological push or efficency gain from integration

16 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Growth effects and capital market integration Induced capital formation C E D B K/L euros/L GDP/L s(GDP/L) K/L) GDP/L A s(GDP/L) Y/L c Y/L Induced capital formation effect, i.e. medium-run growth bonus Allocation effect Y/L* K/L*

17 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

18 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Growth effects and capital market integration K/L =Knowledge/L euros/L GDP/L s(GDP/L) K/L) Y/L* K/L* B A Long-term endogenous growth

19 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

20 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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)

21 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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 EFTA countries grew at 3.4% p.a Poor countries grew at 4.2% p.a

22 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Growth effects and capital market integration Facts: European Growth Phases, PeriodReal GDPReal GDP per capita Real GDP per hour Whole Period

23 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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 % Belgium % Denmark % Finland n.a. France % Germany % Italy % Netherlands % Norway % SwedenThese nations grew during WWII Switzerland UK

24 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Growth effects and capital market integration Facts: GDP per capita & Rankings, 1950 and 1973 (1990 international dollars) GDP (1990 $) European Rank 1950 Change in Rank GDP Growth Rate EEC average 4, EFTA average 6, France5, Germany4, Italy3, UK6,

25 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Growth effects and capital market integration 1950 GDP (1990 $)European Rank 1950Change in Rank GDP Growth Rate EEC average4, Netherlands5, Belgium5, France5, Germany4, Italy3, EFTA average6, Switzerland8, UK6, Sweden6, Denmark6, Norway4, Finland4, Austria3, Others average2, Ireland3, Spain2, Portugal2, Greece1, For Comparison USA9, Japan1,8738.0

26 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Growth effects and capital market integration 1950 GDP (1990 $)European Rank 1950Change in Rank GDP Growth Rate EEC average4, Netherlands5, Belgium5, France5, Germany4, Italy3, EFTA average6, Switzerland8, UK6, Sweden6, Denmark6, Norway4, Finland4, Austria3, Others average2, Ireland3, Spain2, Portugal2, Greece1, For Comparison USA9, Japan1,8738.0

27 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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 % for EU-15 GDP level effect of 2-4% for NMS-10 Germany: GDP level effect of % e.g. Baas/Brücker/Hönekopp 2007; Baas/Brücker/Hauptmann 2009; Keuschnigg/Kohler 2002

28 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Growth effects and capital market integration Capital Market Integration

29 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Growth effects and capital market integration Microeconomics of capital market integration

30 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Growth effects and capital market integration Microeconomics of capital market integration Consider case where in initial situation capital per worker differs across countries. Interest rates differ as well.

31 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Growth effects and capital market integration Microeconomics of capital market integration Integration implies that capital stock per worker converge, such that eventually capital stocks and interest rates are the same across countries.

32 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Growth effects and capital market integration Microeconomics of capital market integration Home country (left axis) receives capital from foreign country (* denotes the foreign country), while foreign country (right axis) sends capital to home country.

33 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

34 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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.

35 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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.

36 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Growth effects and capital market integration Microeconomics of capital market integration Thus, net earnings increase in both countries, but labour loses in foreign and capital loses in home country.

37 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Integration of Labour Markets The Integration of Labour Markets

38 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

39 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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)

40 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

41 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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)

42 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

43 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Integration of Labour Markets The European income gap

44 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Integration of Labour Markets The American income gap

45 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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 Eastern enlargement II: 1.3 million people from BU+RO migrated into EU-15 between

46 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

47 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Integration of Labour Markets Net migration rates,

48 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Integration of Labour Markets Migration stocks in EU-15 by region of origin, 2006

49 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

50 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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).

51 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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)

52 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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)

53 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Integration of Labour Markets School enrolment rates

54 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Integration of Labour Markets Skill structure of migrant population

55 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Integration of Labour Markets Skill-selection with respect to the home population

56 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Integration of Labour Markets Skill-selection with respect to the home population Calculation: (s m h / s m l )/(s n h / s n l )

57 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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)

58 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Integration of Labour Markets Standard model of labour migration (like capital)

59 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Integration of Labour Markets Standard model of labour migration (like capital) Initial situation Marginal product of labour at destination higher than in sending country Hence, wage at destination higher than in sending country

60 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Integration of Labour Markets Standard model of labour migration (like capital) 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

61 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Integration of Labour Markets Standard model of labour migration (like capital) Welfare analysis Native labour force at destination loses A Native labour force in sending country gain F Migrants gain C+D

62 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Integration of Labour Markets Standard model of labour migration (like capital) Welfare analysis (cont.) Capital owners at destination gain A+B Capital owners at sending country lose F+D Net effect: B+C

63 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Integration of Labour Markets A model with unemployment Real wage S ScSc LILI wowo uouo Employment D Real wage S ScSc L wowo Employment D D w uouo LoLo LoLo u

64 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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)

65 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Integration of Labour Markets Capital-output ratio in Western Germany

66 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

67 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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)

68 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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.

69 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

70 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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), Also possible to do for other countries depending on data quality

71 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

72 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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 : 4.9% of labour force in Germany

73 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Integration of Labour Markets Brain Gain? (1% immigration of high-skilled)

74 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Integration of Labour Markets Middle of the road (1% immigration of medium skilled)

75 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Integration of Labour Markets Gains from Ghetto? (1% immigration of less skilled)

76 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Integration of Labour Markets immigration shock (actual immigration)

77 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Integration of Labour Markets An application to the EUs 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 EUs Eastern enlargement ·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, natives factor income, wages, unemployment ·Distinguish effects for skill groups

78 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Integration of Labour Markets An application to the EUs Eastern enlargement EU-15NMS-8EU-23 GDP long run GDP short run wages long run wages short run Unemployment long run Unemployment short run

79 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration Integration of Labour Markets NEXT LECTURE January 20, 15:30 – 18:00 hours EU Regional and Agricultural Policies Reading: Baldwin/Wyplosz (2006)


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