Daily Management Review

Why Europe should preserve free movement of labour


12/14/2016


British Prime Minister Theresa May leaves no hope to achieve the most favorable conditions for "divorce" with the European Union. London would like to simultaneously maintain access to the single market and to strengthen national control over migration.



Brookings Institution via youtube
Brookings Institution via youtube
However, German Chancellor Angela Merkel is adamant on this issue. In early December, she reiterated inseparability of "four freedoms" of Europe. According to her, countries wishing to participate in the free movement of goods, services and capital, should also support free movement of labor.

The European project was originally conceived as a form of economic integration. Its main purpose, as stated in the Schuman Declaration of 1950, "to make war [in Europe] not just unthinkable, but materially impossible".

Today's disappointment in the EU is often attributed to the fact that original objective of economic integration is replaced by a wrong movement towards a political union. Which of these objectives the free movement of people promotes the most?

Some economists believe that free movement of people is extremely important for the European political project, but it is not necessary for a deeper economic integration, which reduces wage inequality between countries.

For the simple trade models, one of which was formulated by Eli Heckscher and Bertil Ohlin at the beginning of the XX century, it is true. These models suggest that comparative advantage of countries is defined by their relative abundance of resources. Countries with a large number of low-wage labor, for example, tend to export goods whose production requires a lot of low-wage labor.

Based on this theory, the American economist Paul Samuelson pointed out that emergence of trade between countries should lead to alignment of prices for tradable goods in all markets. This should also be reflected on the pay gap, including companies whose products are not being exported. One free trade is sufficient to achieve convergence, says The Economist.

However, this is a simplistic view on integration. New trading patterns do not imply that closer economic integration will necessarily lead to income convergence. Companies often correspond to economies of scale: they are more effective when they become larger. As free trade goes beyond boundaries of the market, manufacturers with initial advantage in size easily outperform competitors.

In an integrated market, one country can specialize in highly paid sectors with increasing returns to scale, as, for example, high-tech manufacturing and finance. Other countries, in turn, can success in areas where wages are much lower. As a result, free trade alone is enough to create conditions necessary for convergence.

For example, countries should use similar types of technology to align income. However, relative level of technological capabilities in different countries may require not only free trade but also supranational standards, as well as movement of knowledge, including free movement of people. 

Restricting movement of labor is a form of discrimination which certainly hinder economic integration. It prevents competition among personal services providers from different countries, and hinders development of cross-border social ties, which play an important economic role.

Thus, construction of barriers to movement of labor is not just a political choice. It means halt and perhaps even reverse economic integration.

source: economist.com






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