Mittwoch, 4. März 2009

On the Benefits of a Free Movement of People Policy

Is migration of labor among a group of countries beneficial? Critics argue income inequalities and differences in social welfare among countries may lead to waves of migrants flooding wealthier countries and threatening their social welfare systems and societal structures. Simultaneously, poorer countries would suffer brain drain, critics warn, while pleading for restrictive migration and protectionist labor policies. This article claims that the principle of the free movement of people (FMP) is generally beneficial on economic and social grounds, as it expands labor markets and allows increased exchanges of ideas across borders, which provides beneficial spill-over effects.
This article assesses key arguments for and against the FMP with regard to experience of the EU and affiliated countries such as Switzerland. This leads to the discussion of possible implementation problems and policy implications based upon which the article closes with some major conclusions for successful policymaking.

The Free Movement of People (FMP)

Since its inception in the 1950s, the European Communities (and subsequently its legal successor, the EU) have promoted the idea of the free movement of goods, services, capital and people. Given its politically sensitive nature, the last of those four freedoms is a more recent phenomenon and currently in the second phase of implementation. The FMP is understood as the ability to enter, stay and work without discrimination in other member states, as well as to travel without internal border checks (European Commission [EC], 2008a). The FMP policy and its implementation are closely linked to cross-border security issues (dealt with in the Schengen treaty, which enables border-crossing without passport checks among member states), labor policies and national idiosyncrasies (e.g. ethnic composition, socioeconomic diversity and political culture).

The Benefits
The major argument in favor of the FMP is grounded in economic theory: the larger the pool of available labor is, the more efficient the allocation of labor to its most productive use will be, disregarding any market rigidities. This argument has several components. First, from the perspective of a firm seeking specific types of workers, for example truck engineers, it is more likely to find adequate employees if the labor market is larger, because a larger market is likely to have more truck engineers as a smaller one. Similarly, from the view of a worker: the larger the job market is, the more probable he is to find an adequate job.
Second, if a market has many participants, price distortions are less likely as there are more individual supply and demand bargains that aggregate to a smoother determination of the market-clearing wage. This implies that one individual engineer has a negligible influence on the market wage, given that he has to compete with other engineers for a job.
Third, larger labor markets lead to more competition – among employers as well as employees – and increase specialization that sparks innovation and raises productivity. Fourth, if member states of a FMP area are not perfectly synchronic with regard to economic cycles, the FMP could mitigate recessions in one country while enabling another county’s economy to meet its labor needs, as the latter can hire workers from the former. The higher the number of FMP members states, the more effectively negative impacts of recessions could be mitigated mutually.
Overall, the FMP is expected to lead to more efficient, flexible markets and to contribute to economic growth in the participating countries. Empirical evidence supports this argument. Although some European states still have transitional restrictions in place , the effects of labor migration so far have been significant. Switzerland has seen an additional GDP growth of at least 1% due to the FMP introduction with the EU-15 in 2002 and its subsequent extension to the EU-10 in 2006 (Swiss Federal Government [SFG], 2008). The mobility between the EU-15 and the newer EU member states increased the GDP of the enlarged EU by 0.15 – 0.28% and reduced inflationary pressures in most (net) receiving countries (EC, 2008b, pp. 11-12). Eventually, remittances can be an important contribution of income for sender countries if income differentials between the sender and receiver country is large. Data for Romania and Bulgaria suggest that remittances contribute up to 5.5% of their GDP (EC, 2008b, p. 26).

A second major argument for the FMP is the simpler border-crossing which entails simpler access to study (exchanges) abroad as well as a boost for tourism. More student migration spurs the exchanges of ideas, opinions and cultures and this will inspire new ideas and innovation. Increased educational mobility and competition could raise the quality of education and increase cultural diversity. Likewise, increased cross-border tourism can contribute to cultural enrichment and enhance mutual understanding among societies. This may have positive social effects on people’s ability to adapt, to relate to others and thus to thrive in a globalizing world.
Theses social effects beneficially translate into economic gains through at least four channels. First, new ideas could lead to new products or improved production processes. Second, higher student mobility is likely to put pressure on educational institutions to compare and improve their curricula, degree programs and reputation to better fit the needs of students and to attract better faculty members, as academic institutions increasingly compete across borders throughout FMP member states. Third, cultural diversity and increased mutual understanding may reduce barriers to interact and to engage in cross-border trade. Finally, increased tourism as a result of the FMP directly feeds into enlarging a country’s GDP.

The Counterarguments
The FMP is often feared to induce mass migration, as people from poorer FMP countries seek to migrate to wealthier FMP countries with (often) higher wages and better social welfare schemes. While this argument implies important incentives that are indeed at work and while it can explain a part of the labor migration that took place within the EU, it massively overstates their significance. There are at least two important factors that restrain massive migration. First, cultural proximity matters. Workers are less inclined to accept the same job in a country that is culturally very different from their background. Second, having a family at home and being embedded within a social network reduces the readiness to move. This implies that the income differential must be large enough to overcome restraining factors and that people move to jobs in culturally similar countries where they feel more comfortable and accepted.
Empirical evidence supports both explanations: migrating people in the EU are on average substantially younger than the average workforce in both the sender and receiver country (EC, 2008b, p. 10) which supports the claim that people with a family and a strong social network at home move less; workers from Bulgaria and Romania move foremost to Italy, Spain and Portugal (EC, 2008b, pp. 5-7), as their mentalities and cultures are more similar compared to other EU states. Thus, cultural proximity seems more important than higher wages or higher social benefits (as Italy, Spain and Portugal are not known for an extensive welfare state, like Sweden, or for high wages, like Germany or Switzerland). Strikingly, Sweden, which has never had restrictions on the FMP, has seen very low levels of immigration, lower than for example Austria, which has restrictions and is comparable with regard to wage and social benefits levels (EC, 2008b, p. 7).

A second major counterargument against the FMP purports that labor migration would take away jobs from domestic workers in receiving (wealthier) countries, undercut their wages (dumping), lead to more illegal employment, and would cause higher unemployment. However, it appears logical that workers only move if they have a reasonable chance to find a job in the receiving country or if they have found a job before actually moving, relative to their level of sacrifice (e.g. leaving behind friends and family, and a familiar culture and language) when they migrate. If the opportunity to work abroad no longer exists (e.g. the worker was laid-off; shrinking labor demand) or has become less attractive (e.g. worsening economic conditions; decreasing income differential as his original country’s economy is growing faster than the country to which he moved; homesickness), the worker has strong incentives to move back to his original country. Hence, it is unlikely that the FMP causes increased unemployment in relatively wealthier, Western European countries.
Evidence from the European FMP helps to reject this counterargument on three grounds. First, labor migration so far has been relatively small and seems to be temporary. Data from Ireland and UK show that migration from the EU-10 has peaked in about 2006; new entries into those two states have decreased and return migration increased, particularly since fall, 2008, as both countries fell into a recession, thus reducing available jobs (EC, 2008b, p. 9). Hence, migrated workers are most likely not the main driver of unemployment in a receiving country, as they move back when economic conditions worsen. Second, the Dutch experience undermines the claim that migrating workers take away jobs from domestic workers, as the former chiefly fill positions that are apparently undesired by the domestic workforce as well as positions for which the domestic labor supply is insufficient (SZW, 2007). Third, it is unlikely that the FMP lead to more illegal or informal employment as the FMP implementation is usually accompanied by (increased) labor law compliance inspections and subsequent punishment of illicit actions. Employers seem to be willing to comply with the law when they have access to a larger labor pool: the Dutch evidence suggests that lifting restrictions on the FMP actually decreases illegal employment (SWZ, 2007).

A third counterargument accuses the FMP to cause brain drain that leaves poorer countries worse off. However, evidence from the EU highlights that FMP-induced labor migration seems to be largely temporary and mostly due to low-paid labor. Additionally, there is also migration to those relatively poorer countries, for example driven by business pioneers who seek to exploit investment opportunities in Central and Eastern Europe (i.e. EU-10 and EU-2) which has grown much faster than the EU-15 in the last few years. Further, the EU-10 and EU-2 have been very successful in attracting massive foreign direct investments and new industries (cf. the car industry in Slovakia), which drive technology and knowledge transfer. Finally, increased student exchanges mitigate possible brain drain, as foreign students come into the poorer countries and as their own students benefit from having gained experiences in Western Europe.

Policy Implications
A FMP implementation needs to take into account possible side effects. Despite evidence refuting the above mentioned counterarguments against the FMP, the fact that fears among the public (usually in the relatively wealthier countries) persist requires a careful approach. Here are four tools that support a successful FMP implementation.
First, an FMP policy works better if it is combined with a coordination on cross-border security and police affairs among the participating countries (e.g. to address issues such as smuggling and human trafficking). Neglecting to address “international issues” may lead (a.) to important negative externalities (e.g. crime) of the FMP and (b.) voters, interest groups and lawmakers to anticipate this and threaten to veto the FMP.
Second, and following from (b.) above, a successful implementation requires a broad political support domestically. This may necessitate compromises on “national issues” and could entail for example the introduction of labor compliance controls, (additional) labor standards, cross-country coordination on standards for self-employed workers and transitory restrictions with a slow phasing-in of the full FMP.
Third, political acceptance necessary for the implementation and the exploitation of beneficial effects of the FMP both depend on adequate and transparent information provision to the public by the authorities, the media and various interest groups. Even in participatory democracies with complicated political decision procedures and an initially skeptical public is an FMP adoption possible, if the decision making process is intensive and enriched by a plurality of views, opinions and arguments, as the Swiss example regarding the controversial FMP extension to the EU-2 in February 2009 has shown (International Herald Tribune, 2009). Further, if the people are ill-informed about the opportunities offered by the FMP, then fewer people do actually move and this limits possible economic gains.
Fourth, as the actual effects of the FMP on migration are hard to predict, it may be reasonable to retain some policy discretion, for example the ability to reintroduce temporary restrictions if the labor market is heavily disrupted, or if the flow of migration unexpectedly has led to social disruptions and increased tensions between the migrating and the domestic population.

A successfully implemented FMP policy expands the labor market, increases its efficiency and thus can contribute to economic growth. Simplified travelling and extended study abroad opportunities due to FMP-induced simplified border-crossing have beneficial direct and indirect economic and social effects. The European experience with the FMP suggests that labor migration is temporary, limited and depends on cultural proximity, and the job opportunities of a country. Income differentials and expected benefits play a role, but that may be limited by restraining factors (migrant’s sacrifices). The FMP in Europe does not seem to have led to increased unemployment or crowding out of domestic workers by (cheaper) foreign workers. Thriving economies of sender countries attract foreign investors and can thus effectively offset purported brain drain in sender countries.
While the FMP can face public skepticism, this could be addressed with a number of policy tools, such as accompanying measures on the international level (e.g. through combining the FMP with security issues) and on the domestic level (e.g. through compliance measures and step-by-step FMP implementation). Together with an adequate information policy about FMP, some retained policy discretion will enable governments to implement the FMP successfully and to maximize its beneficial effects.

EU-2: Romania and Bulgaria (joined the EU in 2007)
EU-10: States that joined the EU in 2004: Cyprus, Czech Republic, Estonia, Hungary, Malta, Latvia, Lithuania, Poland, Slovakia, Slovenia
EU-15: EU member states as of 1995: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxemburg, the Netherlands, Portugal, Spain, Sweden, United Kingdom
EU-27: EU-10, EU-15 and EU-2 together

European Commission [EC] (2008a). Free movement within the EU – a fundamental right. Retrieved February 28, 2009 from:
EC (2008b). Report on the impact of free movement of workers in the context of the EU enlargement [COM(2008)765 final]. Retrieved February 28, 2009 from:
EC (2009). Europe – Glossary. Retrieved March 3, 2009 from:
International Herald Tribune (2009). Swiss OK Romanian, Bulgarian workers in referendum. Retrieved February 28, 2009:
Swiss Federal Government [SFG] (2008). Bilaterale I Schweiz – EU: Positive Zwischenbilanz. Retrieved February 28, 2009 from:
SFG (2009). Allgemeines - Was regelt das Abkommen Schweiz-EU zur Personenfreizügigkeit (Freizügigkeitsabkommen)? Retrieved February 28, 2009 from:
SZW (Netherland’s Ministry of Social Affairs and Employment). (2007). More than 100.000 people from Central and Eastern Europe employed in the Netherlands. Retrieved February 28, 2009 from:
Telegraph (2009). Swiss extend labour deal with EU in referendum. Retrieved March 3, 2009 from: s

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