EU Enlargement and Migration

8/13/2019 EU Enlargement and Migration

1/23


2/23

Clearly it is difficult to measure what migration might have happened had

the EU enlargement in May 2004 not taken place, and hence to measure thechange in migration from EU enlargement. There are relatively few dataavailable on migration to be able to disentangle an explicit EU enlargementeffect and the data that exist are not necessarily comparable across countriesand time, or comprehensive. Bearing this in mind, we construct a set ofnumbers intended to mimic the change in migration from EU enlargement.Next, we assess the macroeconomic implications of these changes. We illus-trate how these might depend on the labour market characteristics ofmigrants, the structure of sending and receiving economies, the skill compo-sition and the nature of migration, whether it is temporary or permanent;rather than presenting a central case. Our tool for analysis is the NationalInstitute Global Econometric Model (NiGEM), a global DSGE style model,which includes fully specified country models for most European countries(details are given in Appendix B).

The next section describes the magnitude of population movementsbetween the NMS and EU-15 that might be described as directly related toEU enlargement. Thereafter we discuss a simple model simulation exercise

illustrating the macroeconomic impacts of these population movements,where cross-country differences arise primarily from the size of the migrationshocks, but other structural factors are also important. We then illustrate thesensitivity of the results to assumptions about migrants. A final section offerssome conclusions.

I. EU Enlargement and Migration

In the majority of the EU-15 the legislative barriers facing NMS nationals,wanting to work or reside there, were little different following EU enlarge-ment in 2004. Ireland, Sweden and the UK were alone in allowing NMSworkers to move freely across national boundaries.1 Based on data availableone year after this eastward expansion of the EU, Boeri and Brcker (2005)suggest the restrictions imposed in the EU-15 led to a diversion of NMSmigrants from traditional destination countries bordering the NMS (Austria,Germany and Italy) to EU-15 countries with liberal immigration policies.More recent data reinforce that conclusion.

1 Limits on free labour mobility were allowed for a maximum of seven years. In 2006 Finland,Greece, Portugal and Spain removed all restrictions; six other countries adopted more liberalpolicies.

374 RAY BARRELL, JOHN FITZGERALD AND REBECCA RILEY

2010 National Institute of Economic and Social ResearchJournal compilation 2010 Blackwell Publishing Ltd


3/23

NMS Migration to Countries with Less Restrictive

Transitional Arrangements

Table 1 shows estimates of the change in the two and a half years followingEU enlargement in the number of NMS nationals or residents born in theNMS in Ireland, Sweden and the UK, the countries that adopted an opendoor policy towards NMS migrants. In the few years before accessionthe number of NMS nationals in these countries was broadly stable orrising slowly, so that the increase since then in the NMS population inthese countries may reasonably be attributed to EU enlargement. Appendix

A provides data sources and assumptions underlying the numbers inTable 1.

The numbers suggest relatively little impact of EU enlargement inSweden, with a significantly larger impact in Ireland and the UK. Ireland inparticular has experienced a large change in the number of NMS nationalspresent of 1.5 per cent of the total population; 2.2 per cent of the working agepopulation. The UK is by far the most popular destination for NMS emigrantsto the EU-15, but relative to population size this migration appears muchsmaller than for Ireland.

The UK has seen strong immigration since the end of the 1990s, when netmigration flows to the UK rose from around 50,000 to 150,000 per annum(ONS, 2008, Table 2.63). These developments have been attributed to anincreasingly liberal immigration policy (Hatton, 2005) and demographic andeconomic factors (Mitchell and Pain, 2003). EU enlargement brought UKimmigration to new heights, particularly for work reasons. Salt and Millar(2006) suggest that 2005 may have recorded the largest ever entry of foreignworkers to the UK. It seems likely that the recent inflow of NMS nationals to

both Ireland and the UK largely reflects a relatively liberal approach to NMSimmigration.More difficult to explain are the apparent differences in NMS migration to

the English-speaking countries vis--vis Sweden, which also operated anopen door policy upon accession. The rate of unemployment in Ireland andthe UK was little different from that in Sweden. The language may be a factorcontributing to the popularity of the English-speaking countries.

Table 1 illustrates the change in the stock of NMS migrants resident incertain EU-15 countries that is likely to have been associated with EU

enlargement. This is different from the corresponding inflow of NMSmigrants, which tends to be much larger. In Ireland, 299,000 Personal PublicService Numbers were allocated between May 2004 and November 2006 toNMS nationals. This compares to an estimate of 96,000 NMS nationalsresident in Ireland in the third quarter of 2006 (Irish Quarterly National

EU ENLARGEMENT AND MIGRATION 375



4/23

Table1:ChangeinNMSPopulationResid

entinSelectedEU-15Countriesinthe21/2YearsfollowingEUEnlargementM

ay

2004(thousands)

Ireland

Sweden

UK

Austria

Germany

Italy

Totalemigrant

population

%oftotal

population

%ofworking

agepop.

CzechRepublic

2.5

0.1

13.5

0.3

6.1

2.2

24.7

0.2

4

0.3

4

Estonia

1.1

-0.1

3.0

0.0

0.8

0.3

5.0

0.3

8

0.5

5

Hungary

1.9

-0.3

8.0

0.3

6.0

2.2

18.1

0.1

8

0.2

6

Latvia

4.8

0.3

15.7

0.0

1.4

0.5

22.7

0.9

9

1.4

4

Lithuania

9.6

1.3

29.7

0.1

2.0

0.8

43.5

1.2

7

1.8

7

Poland

37.9

6.3

167.5

6.0

62.0

30.9

310.6

0.8

1

1.1

8

Slovakia

5.1

0.2

27.3

1.6

3.2

1.2

38.7

0.7

2

1.0

0

Slovenia

0.0

0.1

0.3

1.1

1.2

0.4

3.1

0.1

6

0.2

2

TotalNMS

62.8

8.0

265.0

9.3

82.7

38.5

466.4

%

oftotalpopula

tion

1.4

9

0.0

9

0.4

5

0.1

1

0.10

0.0

7

%

ofworkingage

population

2.1

7

0.1

4

0.7

2

0.1

6

0.15

0.1

0

Source:Authorsca

lculationsbasedonavarietyofd

atasourcesdetailedinAppendix

A.




5/23

Household Survey).2 The UK Worker Registration Scheme suggests that

510,000 NMS nationals came to work as employees in the UK between May2004 and September 2006. The UK Labour Force Survey suggests there were265,000 NMS nationals resident in the UK in autumn 2006 who had arrivedsince accession (Blanchflower et al., 2007). Despite issues of differentialcoverage, the differences in magnitude between the stock and flow datasuggest NMS migration to Ireland and the UK has been of a temporary nature,with relatively short stays before return.

NMS Migration to Traditional Destination Countries

Data are more scant for the countries that might have received the majority ofNMS migrants had labour been allowed to move freely across the EU-15. Butit seems likely these countries experienced only a modest increase in immi-gration from the NMS as a result of EU enlargement. Data from the AustrianFederal Ministry for Economic Affairs and Labour suggest that in 2005 onaverage, 1,200 NMS migrants registered to work as employees in Austriaevery month. It would be difficult to attribute this to EU enlargement alone,since Austria saw significant immigration from the NMS before accession.

However, it seems quite likely that the numbers of NMS workers in Austriahave increased more rapidly since then. From Poland alone, the number ofwage and salary earners entering the Austrian labour force rose from 3,328 in2003 to 4,309 in 2005 (January to mid-November). Further, Austrian LabourMarket Service data show a near doubling of the number of self-employedNMS workers in Austria between 2003 and 2005, reflecting a four-fold risein self-employed Polish nationals and a 43 per cent rise in self-employedHungarian nationals. We have taken these figures to imply an increase of

0.16 per cent in the population of working age in Austria due to EU enlarge-ment, as shown in Table 1.We assume the near doubling of NMS nationals in Italy between January

2003 and January 2006 can be attributed to EU enlargement. However, wenote the general increase in foreign nationals residing in Italy over this period(from 1.3 million to 2.4 million), suggesting the increase in the NMSpopulation there may have occurred independently of EU enlargement. Thenumber of migrants from Albania and Romania rose by 334,700 over thisperiod, dwarfing the 38,500 increase in the number of NMS migrants.

Germany has traditionally been a popular destination for Polish emigrants.The number of Polish nationals residing in Germany averaged 318,000 in the

2 Irish Quarterly National Household Survey, Central Statistics Office http://www.ucd.ie/issda/dataset-info/qnhs-details.htm.




6/23

years 2001 to 2003, an increase of 8.9 per cent on the average in the three

years before (OECD, 2008, Table B.1.5). In 2004 the number of Polishnationals in Germany fell back by 35,000 and it is possible to speculate thatPolish emigrants substituted other destination countries for Germany with thenew possibilities that arose upon EU accession (Fihel et al., 2006). However,this fall coincided with a change in the way these data were collected,resulting in a sharp decline in the measured population of all foreign nationalsin Germany between 2003 and 2004. Between 2003 and 2006 these data showan increase in the number of Polish nationals resident in Germany of 10.6 percent. Data from the Federal Statistical Office Germany suggest that theforeign population fell slightly from 7.342 million at the end of 2003 to 7.288million at the end of 2004, remaining virtually unchanged in 2005. It isdifficult to discern from these data any impact specifically associated with EUenlargement. For the purposes here we assume that net migration to Germanyfrom the NMS increased by an amount proportionally similar to that calcu-lated for Italy and Austria.

NMS Emigration

Summing across the EU-15 countries listed in Table 1, the largest migrationsfrom the NMS (relative to population size) have occurred from Latvia,Lithuania, Poland and Slovakia (consistent with the findings of Fihel et al.,2006). According to our calculations, 1.9 and 1.2 per cent, respectively, of theLithuanian and Polish populations of working age were residing in the EU-15at the end of 2006 because of accession. The magnitude of these shocks is notnecessarily reflected in the population statistics of the NMS (Eurostat, 2006,Table C-1); for example, according to these the population of Poland declined

by 0.04 per cent between 2004 and 2005. Population numbers are of courseinfluenced by many factors, one of which may be increased immigration tosome NMS from less affluent eastern European countries, a process whichhas been under way throughout the 1990s (Fihel et al., 2006). The discrep-ancy between the population statistics and the estimates in Table 1 may alsoreflect the temporary nature of migration, leading to a situation where peopleleaving the NMS register for work in the EU-15 without giving up residencyin their home country. Again, a comparison of migrant stocks and flows issuggestive of sizeable churn. Estimates of the number of Polish nationals

leaving Poland for the EU in the first couple of years after accession rangefrom 500,000600,000 to one million (internal estimates provided by Centrefor Migration Studies and Ministry of Labour, Poland). This compares to ourestimate of the change in the stock of Polish nationals resident in the EU ofa little more than 300,000.




7/23

Figures 1 and 2 plot net immigration from individual NMS to EU-15countries, as shown in Table 1, against GDP per capita and unemployment,illustrating the correlation between emigration and economic conditions inthe source country. Figure 1 (Figure 2) shows a negative (positive) correlationbetween emigration and GDP per capita (the unemployment rate) in the

source country.3 The largest migrations have occurred from the pooresteconomies of the NMS, which also tend to have higher unemployment rates.Emigration from the poorer NMS following EU enlargement is significant,although the numbers reported in Table 1 are not indicative of any massmigration from east to west. We note that the migration flow numbers asso-ciated with EU enlargement are likely to be substantially larger than theeffects shown in Table 1. However, even if they are larger than shown inTable 1, the numbers are significantly lower than was anticipated prior toenlargement in the case of free movement of labour across all the EU-15(Boeriet al., 2002).

3 Blanchfloweret al. (2007) show correlations between NMS migration flows to the UK (measured as apercentage of NMS source country populations) and a range of well-being indicators in NMS sourcecountries, including the unemployment rate, the employment rate and GDP per head.

Figure 1: NMS Net Emigration and GDP per Head (2004)

4000

5000

6000

7000

8000

9000

10000

11000

12000

13000

5.225.115.00

Emigration to EU-15 (% of working age population)

GDP

perheadin2000e

xchangeratesandprices(euros)

Slovenia

Poland

LithuaniaLatviaSlovakia

Estonia

Czech Republic

Hungary

Source: Net emigration as shown in Table 1; GDP per head from NiGEM database.




8/23

II. Illustrations of Macroeconomic Impacts

Extensive previous research on the economics of migration has highlightedthe complex mechanisms through which changes in the labour force resultingfrom migration impact on the local economy. Borjas et al.(1997) show thatthe effect of migration on wage rates in recipient US states was masked by its

effects on the movement of the native population within the US, and theidentification of the true impact of migration on local wage rates required theuse of a modelling approach accounting for these complex interactions.4 Inthis article we are not only concerned with the direct labour market impact ofmigration, but also consider the wider economic significance of recent popu-lation movement in the EU. Reflecting the complexity of the channels throughwhich migration can impact on the economy, a suitable macroeconomicmodel is required to undertake this task. In this article we analyse the mac-roeconomic impacts on output, unemployment, productivity and inflationof migration on the scale indicated in Table 1 using NiGEM, a large esti-mated quarterly model of the world economy, which uses a New-Keynesian

4 While later work by Borjas (2003) developed a methodology for directly estimating the regional effectsof migration on wage rates, the complexity of the macroeconomic channels through which migrationaffects regional economies still remains of crucial importance for this study.

Figure 2: NMS Net Emigration and Unemployment (2004)

0

2

4

6

8

10

12

14

16

18

20

5.225.115.00

Emigration to EU-15 (% of working age population)

Unemploymentrate(%)

Lithuania

Latvia

Poland

Slovakia

Estonia

Czech Republic

HungarySlovenia

Source: Net emigration as shown in Table 1; unemployment rate from NiGEM database.




9/23

framework with forward-looking agents where nominal rigidities slow adjust-

ment to the long-run equilibrium. Most OECD countries are modelled sepa-rately; the rest of the world is modelled through regional blocks. All countrymodels contain the determinants of domestic demand, trade volumes, prices,current accounts and net assets. Domestic demand, aggregate supply and theexternal sector are linked via the wage-price system, income and wealth,financial and government sectors and competitiveness. The external sectorlinks the domestic economy to the rest of the world. Details of this model aregiven in Appendix B.

Crucial in any analysis of the macroeconomic impacts of migration are theways in which migrants enter the production function, their influence onwage-setting and the time horizon considered. In this section we assumemigrant and native populations in the receiving countries are equally produc-tive and perfect substitutes, and that their productivity rises at the same rateover time. Upon remigration to the home country individuals are assumed tohave the same productivity as natives there. An alternative interpretation isthat there is no remigration. We assume the structural parameters of the wagebargain are unaffected by migration. This means that in our model the migrant

population influences the supply side of the labour market via its effects onthe size of the population of working age, unemployment and productivityalone. We discuss and relax these assumptions in later sections.

With these assumptions in place the effects of migration on productivity,average wages and unemployment are very much dependent on our assump-tions about the elasticity of the supply of capital and the dynamics of capitaladjustment (see the discussion in Dustmann et al., 2008). All the economieswe analyse are small and open and hence in the long run the supply of capitalis perfectly elastic. However, adjustment costs and wage rigidities mean that

the capital stock does not change immediately to the new long-run equilib-rium. The period of adjustment for the business sector capital stock varies bycountry, but is typically around ten years (similar to the assumptions inOttaviano and Peri, 2006). Public infrastructures (such as transport) and thehousing stock adjust more slowly. When capital is fixed, a smaller elasticityof substitution between capital and labour increases the magnitude of thelabour market impacts of migration (Borjas, 2003). Our model assumes aCES technology with elasticity of substitution between capital and labour of

around 0.5, which fits the data better than the standard Cobb-Douglasassumption.In modelling the effects of EU enlargement we assume this changes the

population from the second quarter of 2004 and that the migrant stock reachesthe levels reported in Table 1 after two and a half years. Thereafter, as aworking assumption, we assume the number of migrants remains constant.




10/23

This implies that the migrant population does not necessarily grow in line

with the rest of the host country population, which seems appropriate giventhe transitory nature of migration and stationary population projections forthe majority of central and eastern European countries. The latter means thatour assumptions imply a constant emigrant stock in proportion to the sizeof the sending countries. The change in the population is implemented exog-enously, ignoring feedback from the macroeconomic implications of migra-tion to the size or direction of migration. NiGEM is used with all its defaultsin place, including forward-looking financial markets, policy feedbacks main-taining budget deficit targets (Barrell and Sefton, 1997) and inflation targets(Barrellet al., 2006).

Simulation Results

The simulation results show the possible effects of NMS migration to theEU-15 associated with enlargement; illustrated in Figure 3 for Lithuania,Poland, Ireland and the UK. Appendix Tables C1C6 give detailed results forindividual years 20059 and 2015. They do not take account of the widereffects of enlargement.

Conditional on the assumptions described above, the effect of a netincrease in Polish emigration of around one-third of a million people ofworking age is to reduce output in Poland permanently by around 1 per cent.The reduction in output comes as a result of having fewer workers, but is notone for one because the capital stock does not fully adjust, leaving thecapitallabour ratio permanently higher. In the longer term, business sectorcapital adjusts downward to match the decline in the labour force. Both publicand housing capital enter the production function and, since these do not

adjust fully, productivity in Poland is permanently higher by around

1

/3 percent. Qualitatively the effects on output and productivity are similar for theother NMS countries.

In Ireland and the UK the reverse pattern is observed. The increase in thelabour force raises potential output, and in the longer term output rises tomatch this increase. Again the match is not one for one, since productivitychanges. In Ireland and the UK productivity falls as public sector infrastruc-ture and the housing stock fail to rise, by assumption, to maintain the ratio ofcapital to labour. Intuitively this assumption seems more restrictive for the

receiving than for the sending countries, where one assumes emigrationwould not lead to an immediate dismantling of public infrastructure. For thereceiving countries it seems more likely that public sector capital wouldadjust to accommodate the increased population, in which case the GDPeffects would be larger in the EU-15 than our simulations suggest, and




11/23

productivity would be less depressed. In the longer term output in the UK is2/3per cent higher than it would otherwise be. In Ireland output is higher by1.7 per cent reflecting mainly the size of the migration shock.5

We find a short-term effect on unemployment and inflation. Short-term

labour market equilibrium changes due to adjustment costs and the assump-tion that migration is initially unanticipated. This means that the capital stockrequired for the additional workers is not in place when they arrive. Hence,

5 The shock is constant in absolute size after 2006, hence representing a smaller per cent increase in theIrish workforce in 2015 than in 2006.

Figure 3: Macroeconomic Impacts of Migration within the EU

GDP

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

%d

ifferencefromb

ase

Ireland UK Lithuania Poland






Inflation

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

%p

ointdifferencefromb

ase

Unemployment

-1.5

-1

-0.5

0

0.5

1

1.5

%p

ointdifferencefromb

ase

Current account balance

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

%p

ointdifferencefromb

ase

Productivity

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

%d

ifferencefromb

ase

GDP per capita

-1.5

-1

-0.5

0

0.5

1

1.5

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

%d

ifferencefromb

ase

Source: Authors calculations.Notes: Values shown at year end. We do not include remittances in our balance of payments estimates.




12/23

labour demand is unchanged at given wages. As a consequence, in the short

run, new migrants either displace existing workers or become unemployed.Higher unemployment reduces negotiated wages and therefore the averagewage level as compared to where it would otherwise have been. In turn theamount of labour demanded and the level of employment rise (the laboursupply curve moves down the labour demand curve). The effect on unem-ployment in the receiving countries is temporary.

The process of adjustment involves lower inflation in comparison to base,given the monetary policy assumptions. Lower wages dampen inflation tem-porarily inducing lower interest rates, and the exchange rate jumps down asa consequence. A reduction in average productivity occurs because labour hasbecome more abundant and cheaper so that companies hire more and employ-ment increases. As this is associated with an increase in output, higher levelsof capital utilization raise the rate of return on existing capital. Householdincome and consumption rise because the increase in employment more thanoffsets the initial decline in wages. The combination of rising consumptionand increased profitability leads companies to raise capital investment, even-tually restoring productivity to around its initial level or to a new steady state.

The short-term effect of the population changes is to raise unemploymentin Ireland (UK) by one (quarter) percentage point on average between 2006and 2008; and to reduce inflation by 0.7 (0.1 to 0.2) percentage points. Theimpact comes through more quickly in Ireland because the exchange rate doesnot adjust downwards as much as in the UK. This is because the reduction inIrish inflation has noticeably less impact on interest rates than in the UK asthe ECB targets euro area inflation, which falls less than that in Ireland. Theshort-term pattern of higher unemployment and lower inflation in the EU-15countries is mirrored by lower unemployment and higher inflation in the

accession countries, in comparison to base.6 On average, in the years 2006 to2008, unemployment is reduced by 0.8 (0.4) percentage points in Lithuania(Poland). The downward shift in unemployment is permanent for Lithuania.7

All the economies considered here are small and open. Hence, the changein the rate of return on capital causes a capital inflow or outflow, until the rateof return is restored at world levels. The return to capital increases in coun-tries that are net recipients of migrants, causing a capital inflow. The extrainvestment is financed by a balance of payments deficit, which comes in

advance of extra income. As illustrated in Figure 3, the current account in

6 Fertig (2003) reaches a similar conclusion about the pattern of unemployment effects.7 The downward shift in unemployment is also permanent for some of the other smaller and less developedeconomies, i.e. Estonia, Latvia and Slovakia, as the estimation behind our model of their labour marketsembeds a reservation wage, which rises over time, but has little endogenous productivity effect. Hence, arise in productivity raises employment.




13/23

Ireland and the UK deteriorates. The deterioration is more marked in Ireland

because the shock is bigger, the Irish economy is more open, and there is asmaller exchange rate offset than in the UK economy. The NMS countries seean improvement in the current account.

Following a small reduction in GDP per capita in the short term in EU-15receiving countries, GDP per capita rises in the longer term (Figure 3);similar to Iakova (2007).8 The short-term reduction comes about as it takestime for the capital stock to adjust to the inflow of labour and for theadditional labour to be absorbed into employment. In the longer term GDPper capita rises as the population of working age increases relative to thepopulation as a whole. In the NMS GDP per capita generally rises relative tobase. The reduction in the population of working age relative to the popula-tion as a whole will tend to depress GDP per capita, but the rise in produc-tivity and the reduction in unemployment more than offset this change.

Differences in macroeconomic effects across countries mostly reflect dif-ferences in the magnitude of the migration changes. But there are otherstructural differences that determine the profile of effects. We have highlightedthe importance of the composition of the capital stock.All else being equal, the

larger the share of public sector and housing capital in the aggregate capitalstock, the more pronounced the effect on productivity and the less pronouncedthe effect on GDP. Also, the more capital intensive aggregate production is, theslower the economy adjusts to long-run equilibrium. Other factors of impor-tance include the openness of the economy, which is positively correlated withthe magnitude of current balance effects, and the dynamics of the labourmarket. The effects of migration on unemployment (inflation) are more (less)pronounced in countries with more sluggish labour markets.

III. Migrant Labour Market Characteristics, Learning Effects

and Remittances

In the section above we assumed all population groups in a particular countryexhibit the same labour market characteristics. Here we reconsider someof these assumptions. First, that the average NMS immigrant is identical tothe average worker in the EU-15, which is clearly rejected by the data. Theimpacts of migration on the labour market and the economy crucially depend

on the skill mix of immigrants versus natives in the host country (see, forexample, Borjas, 1999). Second, we re-examine the effects under different

8 Simulating the macroeconomic implications of NMS migration to the UK using the IMFs Multimod,Iakova (2007) finds a similar time profile for the effects on GDP per capita. There, a short-run reductionin GDP per capita is a result of average productivity differentials between young migrant workers andnative workers. This effect disappears over time as migrants age and their productivity increases.




14/23

assumptions about adjustment of the capital stock and labour demand. Last,

we consider the assumption that returning migrants are identical to nativeworkers in the home country.

Skills and Labour Market Participation

Recent NMS immigrants in the UK are concentrated in low-skill occupations,with 62 per cent of this group working in elementary or process, plant andmachinery occupations in comparison to 19 per cent of the population as awhole (Riley and Weale, 2006). This does not necessarily imply that NMS

migrants are low skilled. Indeed, Drinkwater et al. (2006) find that Polishworkers who have arrived in the UK since enlargement achieve significantlylower returns to their education than other residents. A similar pattern maybe observed in Ireland. NMS nationals there are much more likely to beemployed in industries that have a large share of low-skilled jobs (non-agriculture production industries, hotels and restaurants, construction) thanother residents (Irish Quarterly National Household Survey). Again it is likelythat the jobs immigrants take are below their skill levels. The studies byBarrettet al. (2006) and Barrett and McCarthy (2007) suggest that migrants

in Ireland (particularly from non-English-speaking countries) tend to beemployed in occupations that are not commensurate to their skill levels. AsFihelet al.(2006) point out, it is possible that the tendency for NMS migrantsto take up relatively low-skilled jobs reflects the transitory nature of thismigration.

In Figure 4 we illustrate the GDP and inflation impacts of NMS migrationin Ireland and the UK under different assumptions about immigrant relative tonative productivity. In the lower productivity case the average NMS job is 74

per cent as productive as the average native job, calculated by comparing theemployment weighted average of standard wage rates in three main occupa-tion groups between NMS migrants and others (UK Labour Force Survey, asreported in Riley and Weale, 2006). In this calculation immigrants and nativesare assumed equally productive and perfect substitutes in the same job. IfNMS workers are more productive than native workers in the same job, forexample, because NMS workers in the same job are likely to be on averagemore highly skilled, our calculation may exaggerate the productivity differ-ential. The estimated 26 per cent productivity differential is within the range

of figures provided by estimates of migrant pay penalties; for Polish workersin the UK (Drinkwateret al., 2006) and for non-English speaking migrants inIreland (Barrett and McCarthy, 2007). The migrant pay penalty may disap-pear over time as migrants adapt to the destination country and find jobs morecommensurate to their skill levels or as migrants in temporary arrangements




15/23

return to their home country. For simplicity we assume that all migration fromthe NMS is transitory and therefore that the pay penalty is constant over time.

We also show how our results change with the assumption about immi-grants labour market participation. The data suggest that NMS migrants aremore likely to be in the labour force than others in Ireland and the UK,consistent with the notion that migration is motivated by economic reasons.For the UK (Ireland) the difference in participation rates between NMSmigrants and the remaining population of working age is estimated at 7 (15)percentage points.

As illustrated in Figure 4 the differential productivity assumption reduces

the GDP effect of NMS migration in both Ireland and the UK. Becausemigration in this instance raises capacity by less than if there were identicalproductivity, the dampening effect on inflation of migration is more subdued.The need for additional capital is also lower, since the reduction in averageproductivity reduces the equilibrium ratio of capital to labour, and the impacton the current account balance is therefore more muted. Also illustrated in

Figure 4: Macroeconomic Impacts of Migration within the EU under Different

Assumptions about Immigrants versus Natives in Receiving CountriesIreland: GDP

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

%d

ifferencefromb

ase

identical

lower productivity

lower productivity and higher participation

identical

lower productivity


identical

lower productivity


identical

lower productivity


Ireland: Inflation

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

%p

ointdifferencefromb

ase

UK: GDP

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

%d

ifferencefromb

ase

UK: Inflation

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

%p

ointdifferencefromb

ase

Source: Authors calculations.




16/23

Figure 4, the effect of higher labour market participation amongst migrants

amplifies the shock to the labour force for a given shock to the population ofworking age, and thus the magnitudes of the inflation, GDP, unemploymentand current account effects.

Capital and Labour Demand

The short-term effects on unemployment from unanticipated migration inthis analysis apparently contradict the findings of several other studies (seereview in Blanchfloweret al., 2007). Gilpinet al.(2006) find no relationship

between unemployment changes and the rise in NMS migration across UKlocal authority districts, although this may be due in part to induced onwardmigration (Borjas, 2003; Hatton and Tani, 2005). One explanation for theapparent lack of unemployment effects is that immigrants are imperfectsubstitutes for native workers (Ottaviano and Peri, 2006; Manacorda et al.,2006). If immigrant and native workers are complements, immigration mightincrease aggregate labour demand also in the short run. Immigration to lesscapital-intensive sectors provides another explanation.

It is also possible that NMS migrants have increased the flexibility of host

economy labour markets, which would lead to faster adjustment of wagesand output and, potentially, a reduction in equilibrium unemployment in thereceiving countries. As discussed in the previous section, NMS migrants tothe UK have typically found low-skilled jobs. On the one hand this shouldincrease the magnitude of short-term unemployment effects, because low-skill wages in the UK exhibit less downward flexibility (Riley and Young,2007). However, there is evidence to suggest that immigrants in the UK haveincreased the flexibility of wage-setting, particularly in low-skilled occupa-

tions (Nickell and Saleheen, 2008). This may be reinforced by the temporarynature of NMS migration.With particular reference to the results obtained for Ireland, we note that

one or a combination of these factors is likely to be important. The Irishunemployment rate remained unchanged in the face of very large migrationflows upon accession. If the simulation results were taken at face value theIrish unemployment rate would have fallen below 3 per cent in the absence ofEU enlargement, something that has never been experienced in recent timesand is well below the experience of other seemingly fully employed econo-

mies. The fact that unemployment did not change much, while wages did,could indicate exceptional labour market flexibility or that NMS immigrantssimply displaced immigrants from other locations, such that immigration atan aggregate level was anticipated. The latter may well have been importantfor Ireland where the authorities changed policy on issuing work permits to




17/23

people from non-EU countries as a result of the influx from the NMS.

Immigration from outside the EU fell by a small amount after enlargement,though nothing like the increase in immigration from the NMS. Alternativelybusinesses may have anticipated that immigrants would have been found fromsomewhere and invested accordingly.

Figure 5 shows the macroeconomic impacts of NMS migration forIreland, as in Figure 3, alongside the impacts that would result if, for givenlevels of capital, labour demand temporarily increased to match the increase

Figure 5: Macroeconomic Impacts of Migration within the EU under DifferentLabour Demand Curve Assumptions (Ireland)

GDP

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

%d

ifferencefromb

ase

unchanged temporary increase


unchanged temporary increase unchanged temporary increase



Inflation

-1.5

-1

-0.5

0

0.5

1

%p

ointdifferencefromb

ase

Unemployment

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

%pointdifferencefromb

ase

Current account balance

-0.8

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

%pointdifferencefromb

ase

Productivity

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

%d

ifferencefromb

ase

GDP per capita

-1.4

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

%d

ifferencefromb

ase

Source: Authors calculations.Notes: Values shown at year end. We do not include remittances in our balance of payments estimates.




18/23

in labour supply from migration. This might occur when, for example,

migrant workers initially find work in less capital-intensive occupationswhere the additional labour supply is absorbed more quickly or if native andmigrant workers are in some way complementary in the production process(in the short term) as discussed above. In the long run the two scenarios inFigure 5 are identical, but they differ in the short run. Comparing the scenariowhere the labour demand curve shifts upwards to the scenario withunchanged short-run labour demand: GDP rises more quickly (in the firstfour years GDP growth is a quarter percentage point higher), inflation ismarginally less as the output gap is reduced, unemployment is much lower,productivity growth slows more markedly (because of the expansion in lesscapital-intensive production), but the short-run dip in output per capita is lessmarked because of the stronger increase in employment.

Learning Effects and Remittances

A number of studies suggest the productivity of emigrants returning to theirhome country is above that of natives there (Barrett and OConnell, 2001; Coet al., 2000; Mayr and Peri, 2008). For example, emigrants may have devel-

oped useful networks, language skills and new ways of working. Figure 6illustrates the GDP and inflation effects of the population changes in Table 1in Lithuania and Poland when returnees are no different from natives(as above) and when returnees to the home country are 10 per cent moreproductive than natives. In this scenario the flow of returnees equals the stockof emigrants per annum, consistent with the stock and flow figures observedfor Poland, Ireland and the UK. When returnees come back with enhancedproductivity, the negative effect on GDP from the reduction in the labour

force gradually reverses as the stock of more productive workers builds up.The expansion of capacity in the longer term means that inflation is lower incomparison to the case where workers are identical.

The analysis here assumes that migrants remittances to the home countryare as natives remittances in the host country to the source country. Intu-itively this seems an unlikely description of reality. Fihelet al.(2006) suggestthat remittances from NMS migrants are likely to be large, consistent with therelatively transitory nature of NMS migration. Increased remittances pay-ments from the EU-15 to NMS countries have obvious implications for the

balance of payments. Remittances payments will increase household incomesin the NMS, but the effects on incomes in the EU-15 will be relatively small,since incomes are significantly higher there. The effect of higher incomes inthe NMS will be reflected in higher GNP, rather than in higher GDP, and willtend to increase consumption in the NMS. The latter will tend to offset the




19/23

downward effect on GDP in these countries in the short run, but should havelittle long-run effect on GDP.

ConclusionIn this article we considered the possible effects on key macroeconomicvariables from NMS migration associated with EU enlargement. Based on avariety of data sources we suggest that immigration from the NMS to theEU-15 in the two and a half years following accession was probably stronglyinfluenced by the different policy stances adopted in individual EU-15 coun-tries. Measured in terms of permanent population changes NMS migrationhas not occured on the mass scale that some anticipated prior to enlargement

(see, for example, Boeri et al., 2002, and the studies summarized in Barrellet al., 2004, Table 4.5), although temporary population movements have beensubstantial. The concentration of migration amongst the poorest of the NMSand the English-speaking members of the EU-15 imply that the macroeco-nomic impacts of EU accession and migration are likely to be noticeable inthese countries. However, in comparison to the immigration that normally

Figure 6: Macroeconomic Impacts of Migration within the EU under Different

Assumptions about Returning Emigrants versus Natives in Sending CountriesLithuania: GDP

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

201

9

202

0

%d

ifferencefromb

ase

identical higher productivity

Lithuania: Inflation

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

%p

ointdifferencefromb

ase


Poland: GDP

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

%d

ifferencefromb

ase


Poland: Inflation

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

%p

ointdifferencefromb

ase


Source: Authors calculations.




20/23

occurs from countries outside the EU, the migration associated with the

enlargement of the EU in May 2004 has proved fairly modest.Our analysis highlights the importance of public infrastructure and

housing in determining the macroeconomic impacts of NMS migration.While these can and will adjust in the receiving countries there are temporary,though possibly quite long-lasting, effects on prices or shadow prices (forexample, congestion). Duffyet al.(2005) find that high levels of immigrationput upward pressure on house prices and rents reducing the benefits fromcoming to Ireland at the margin. It also has welfare implications for residentsand has a dampening effect on aggregate productivity. Interestingly, Spain,where the annual inflow of foreign nationals has increased from 99,000 in1999 to 803,000 in 2006,9 and the UK, have experienced a period of slowproductivity growth, much as might be expected on the basis of the analysisdiscussed here.

The degree of openness, migrant skills, labour market adjustment speedsand the remit of the central bank (in particular whether or not interest rates areset with reference to national or euro area inflation) also determine the way inwhich NMS migration and EU enlargement affects the macroeconomy. But it

is probably the size of the migration that is most important in determining themacroeconomic impacts of EU enlargement and migration. This may largelyhave been an issue of policy.

Correspondence:

Rebecca Riley

National Institute of Economic and Social Research

2 Dean Trench Street, Smith Square

London SW1P 3HE, United Kingdom

Tel +44 20 7222 7665 Fax +44 20 7654 1900email [email protected]

References

Anderton, R., and Barrell, R. (1995) The ERM and Structural Change in European

Labour Markets: A Study of 10 Countries.Weltwirtschaftliches Archiv, Vol. 131,

No. 1, pp. 4766.

Barrell, R., and Davis, E.P. (2007) Financial Liberalization, Consumption and

Wealth Effects in 7 OECD countries.Scottish Journal of Political Economy, Vol.54, pp. 25467.

Barrell, R., and Sefton, J. (1997) Fiscal Policy and the Maastricht Solvency Criteria.

Manchester School, Vol. 65, No. 3, pp. 25979.

9 OECD, International Migration Outlook, 2008.




21/23

Barrell, R., Hall, S.G., and Hurst A.I.H. (2006) Evaluating Policy Feedback Rules

Using the Joint Density Function of a Stochastic Model.Economics Letters, Vol.93, No. 1, pp. 15.

Barrell, R., Holland, D., and Pomerantz, O. (2004) Integration, Accession and

Expansion. NIESR Occasional Paper, No. 57.

Barrett, A. and McCarthy, Y. (2007) Immigrants in a Booming Economy: Analysing

their Earnings and Welfare Dependence. Labour, Vol. 21, No. 45, pp. 789

808.

Barrett, A. and OConnell, P. (2001) Is There a Wage Premium for Returning Irish

Migrants?Economic and Social Review, Vol. 32, No. 1, pp. 121.

Barrett, A., Bergin, A. and Duffy, D. (2006) The Labour Market Characteristics andLabour Market Impacts of Immigrants in Ireland. Economic and Social Review,

Vol. 37, No. 1, pp. 126.

Biffl, G. (2007) How to Balance Selective Migration and (Re)training Local

Workers? The Case of Austria. Paper presented at Euroframe meeting, Vienna,

26 January.

Blanchflower, D., Saleheen, J. and Shadforth, C. (2007) The Impact of the Recent

Migration from Eastern Europe on the UK Economy. IZA Discussion Paper, No.

2615.

Boeri, T., and Brcker, H. (2005) Migration, Co-ordination Failure and EU Enlarge-

ment. IZA Discussion Paper, No. 1600.Boeri, T., Bertola , G., Brcker, H., Coricelli, F., de la Fuente, A., Dolado, J.,

FitzGerald, J., Garibaldi, P., Hanson, G., Jimeno, J., Portes, R., Saint-Paul, G. and

Spilimbergo, A. (2002) Whos Afraid of the Big Enlargement? CEPR Policy

Paper, No. 7.

Borjas, G. (1999) The Economic Analysis of Immigration. In Ashenfelter, O. and

Card, D. (eds) Handbook of Labor Economics Volume 3A (Elsevier: North

Holland).

Borjas, G. (2003) The Labor Demand Curve is Downward Sloping: Re-examining

the Impact of Immigration on the Labor Market. Quarterly Journal of Econom-ics, Vol. 118, No. 4, pp. 133574.

Borjas, G., Freeman, R., and Katz, L. (1997) How Much do Immigration and Trade

Affect Labour Market Outcomes?Brookings Papers on Economic Activity, Vol.

1997, No. 1, pp. 190.

Co, C., Gang, I. and Yun, M. (2000) Returns to Returning. Journal of Population

Economics, Vol. 13, No. 1, pp. 5779.

Drinkwater, S., Eade, J. and Garapich, M. (2006) Poles Apart? EU Enlargement and

the Labour Market Outcomes of Immigrants in the UK. IZA Discussion Paper,

No. 2410.

Duffy, D., FitzGerald, J. and Kearney, I. (2005) Rising House Prices in an Open

Labour Market.Economic and Social Review, Vol. 36, No. 3, pp. 25172.

Dustmann, C., Glitz, A., and Frattini, T. (2008) The Labour Market Impact of

Immigration. Oxford Review of Economic Policy, Vol. 24, No. 3, pp. 478

95.




22/23

Eurostat (2006) Population Statistics, 2006 Edition. European Commission.

Fertig, M. (2003) The Impact of Economic Integration on Employment An Assess-ment in the Context of EU Enlargement. IZA Discussion Paper, No. 919.

Fihel, A., Kaczmarczyk, P. and Oklski, M. (2006) Labour Mobility in the Enlarged

European Union: International Migration from the EU8 countries. CMR Working

Paper, No. 14.72, Centre of Migration Research, Warsaw.

Gilpin, N., Henty, M., Lemos, S., Portes, J. and Bullen, C. (2006) The Impact of Free

Movement of Workers from Central and Eastern Europe on the UK Labour

Market. Working paper No. 29, Department for Work and Pensions.

Hatton, T. (2005) Explaining trends in UK immigration. Journal of Population

Economics, Vol. 18, No. 4, pp. 71940.Hatton, T. and Tani, M. (2005) Immigration and Inter-Regional Mobility in the UK,

19822000. Economic Journal, Vol. 115, pp. 34258.

Iakova, D. (2007) The Macroeconomic Effects of Migration from the New European

Union Member States to the United Kingdom. IMF Working Paper, 07/61.

Manacorda, M., Manning, A. and Wadsworth, J. (2006) The Impact of Immigration

on the Structure of Male Wages: Theory and Evidence from Britain. CEP Dis-

cussion Paper, No. 754.

Mayr, K., and Peri, G. (2008) Return Migration as Channel of Brain Gain. CReAM

Discussion Paper, No. 00804.

Mitchell, J. and Pain, N. (2003) The Determinants of International Migration into theUK: A Panel Based Modelling Approach.NIESR Discussion Paper, No. 216.

Nickell, S., and Saleheen, J. (2008) The Impact of Immigration on Occupational

Wages: Evidence from Britain.Federal Reserve Bank of Boston Working Paper,

No. 08-6.

OECD (2008) International Migration Outlook. SOPEMI.

Office for National Statistics (2008) International Migration. Series MN No. 33,

2006 Data.

Ottaviano, G. and Peri, G. (2006) Rethinking the Effects of Immigration on Wages.

NBER Working Paper, No. 12497.Salt, J. and Millar, J. (2006) Foreign Labour in the United Kingdom: Current

Patterns and Trends.Labour Market Trends, Vol. 114, No. 10, pp. 33555.

Riley, R. and Weale, M. (2006) Immigration and its Effects. National Institute

Economic Review, No. 198, pp. 49.

Riley, R. and Young, G. (2007) Skill Heterogeneity and Equilibrium Unemploy-

ment. Oxford Economic Papers, Vol. 59, pp. 70225.

Supporting Information

Additional Supporting Information may be found in the online version of thisarticle:

Appendix A. Migration DataAppendix B.The Structure of the Model




23/23

Appendix C. Detailed Simulation Results

Table C1. EU Enlargement and Migration: Impacts on GDP (% differencefrom base)Table C2. EU Enlargement and Migration: Impacts on Inflation (% pointdifference from base)Table C3. EU Enlargement and Migration: Impacts on Unemployment(% point difference from base)Table C4. EU Enlargement and Migration: Impacts on the Current Account(% point difference from base)Table C5. EU Enlargement and Migration: Impacts on Productivity (% dif-ference from base)Table C6. EU Enlargement and Migration: Impacts on GDP per Capita(% difference from base)

Please note: Wiley-Blackwell are not responsible for the content or function-ality of any supporting materials supplied by the authors. Any queries (otherthan missing material) should be directed to the corresponding author for thearticle.



EU Enlargement and Migration

Documents

Transcript of EU Enlargement and Migration