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Regional Study: Cross-Border Labor Flows in New European Union Member States

Author(s):
International Monetary Fund. Research Dept.
Published Date:
March 2009
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In recent years, new European Union member states have experienced sizable net labor outflows driven by a combination of persistent income differences and a significant decrease in costs and other barriers associated with cross-border labor movement. So far, the recorded outflows have had a limited effect on economic outcomes in the source countries and have facilitated the ongoing income convergence process in the region. Main outflow-related challenges for the source countries include erosion of competitiveness and underutilization of labor resources. This article summarizes recent and ongoing IMF research on cross-border labor flows in new member states.

Following European Union (EU) accession, the new member states—the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic, and Slovenia, and later Bulgaria and Romania—experienced sizable cross-border labor flows. During 2004–07, some 200,000 to 250,000 workers left the eight initial new member states annually, intensifying the trend that had occurred since the outset of the transition in the early 1990s. By comparison, cumulative net migration from new member states between 1989 and 2000 is estimated at 650,000. So far, cumulative net outflows since 2004 represent 1.5 percent of the source countries’ total population, which is broadly in line with the predicted outflows (Bertola and others, 2002).

Cross-border flows show growing heterogeneity within new member states, with labor flowing in both inbound and outbound directions. While the majority of new member states witnessed sizable outflows to higher-income countries, Slovenia, the Czech Republic, and Hungary simultaneously benefited from large inflows from their lower-income neighbors and on balance have been net labor recipients. In terms of destinations, it is estimated that between 2004 and 2007, the number of persons from the 10 new member states living in the United Kingdom increased by 140,000 annually, making the United Kingdom by far the most significant recipient country (Pollard, Lattore, and Sriskandarajah, 2008; Iakova, 2007). Although reliable data on flow composition are scarce, the limited evidence suggests that young people are highly represented in both outflow and inflow statistics. Comprehensive data on skill composition of labor flows are not available and partial evidence from selected countries offers conflicting findings.

Cross-border flows have been driven to a large extent by income differences between new member states and recipient countries. Brunner (forthcoming) shows that net migration rates are strongly correlated with income differentials. The author’s estimated relationship between income and migration, based on historical data for European countries, can explain a significant share of the size and cross-country variation in net migration in new member states. The timing of the intensification of the cross-border flows can be attributed to the elimination of labor movement restrictions in recipient countries after the EU expansion, as well as to a major reduction in other migration related costs, such as the cost of air travel and telecommunications (Bems and Schellekens, 2008). Another contributing factor has been the growth of migrant communities in recipient countries, which further lowers the cost of migration.

So far, net labor outflows from new member states have been smaller than in comparable historical episodes and have played a limited role in economic outcomes in source countries. Brunner (forthcoming) examines the mass migration of 1870–1910, and concludes that despite similar income gaps, larger migration flows were recorded in the mass migration episode. The same conclusion is reached from a comparison with the migration that followed German reunification. At the same time, recent cross-border labor flows in new member states are comparable to migration flows in selected European countries during 1960–2000.

Two other observations about the relative importance of cross-border labor flows in new member state economies are noteworthy. First, natural changes in population in new member states—i.e., changes from fertility and mortality—are in magnitude similar to migration-induced changes. Second, in line with the findings of Decressin and Fatás (1995) for European countries, labor force participation margin plays the dominant role in labor force dynamics in new member states. In fact, despite the net labor outflows and the natural decrease in population, the size of the labor force increased during 2004–07 in all new member states.

Labor outflows have facilitated the ongoing income convergence process. In theory, cross-border labor flows can add a new dimension to the income convergence in the region. Using a two-sector growth model from Bems and Hartelius (2006) and Bems and Schellekens (2007) with an endogenous cross-border labor supply decision, Bems and Schellekens (2008) show that by boosting the capital-labor ratio, labor outflows speed up the convergence process in capital-poor new member states. In the model, labor outflows moderate the boom in the nontradable prices and the buildup of current account deficit that arises during the convergence process.

Subsequently, labor outflows also lessen the requirements for internal factor market flexibility to direct resources to the tradable sector, which facilitates the required reduction in the current account deficit and reorients the economy toward tradables. Income convergence can be further accelerated by remittance flows, although empirically the contribution of remittances has so far been small. Under certain conditions, the theoretical framework can also generate the more recently observed return migration. In a related empirical investigation, Brunner (forthcoming) decomposes changes in capital/labor ratios in new member states over 1995–2006 into their components and finds that convergence has taken place mostly through capital accumulation.

If left unattended, the accompanying real wage growth can cause problems for new member states. Bems and Schellekens (2008) show that in the income convergence process wage rate is the only price that increases as a result of labor outflows. Furthermore, they argue that recent real wage developments in new member states are in line with this model prediction—economies with the largest net labor outflows have experienced rapid growth in wages, while in net labor recipient countries real wages have stayed roughly flat.

The relevance of this transmission channel is confirmed in a recent study by Mishra and Spilimbergo (forthcoming). They estimate the direct effect of labor migration on wages for a large set of countries and find an elasticity of 0.4 for countries with highly flexible labor markets. Although wage increases are an integral part of the income convergence process, over the medium term, second-round effects of wage inflation possibly associated with outward labor flows need to be avoided so as to prevent an erosion of competitiveness.

Notwithstanding the recent improvements, there is further scope to mobilize and better utilize labor resources in most new member states. While the average employment rate has improved in most countries, it remains in all countries below the Lisbon target of 70 percent (Bems and Schellekens, 2008). The average employment rate in 2007 stood at 63 percent, with some countries experiencing rates below 60 percent. Also, unemployment rates remain high in several countries. The process of income convergence is accelerated if policymakers stimulate labor force participation and employment rates. Greater labor market participation and lower structural unemployment could be achieved through better targeted active labor market policies, less rigid regulations regarding hiring and dismissals, and an improved design of the tax benefits system.

References

    BemsR. and K.J.Hartelius2006“Trade Deficits in the Baltic States: How Long Will the Party Last?”Review of Economic DynamicsVol. 9 (January) pp. 179209.

    BemsR. and P.Schellekens2007“Finance and Convergence: What’s Ahead for Emerging Europe?”IMF Working Paper 07/244.

    BemsR. and P.Schellekens2008“Macroeconomics of Migration in New Member States,”IMF Working Paper 08/264.

    BertolaG.T.BoeriH.BrückerF.CoricelliA. de laFuenteJ.J.DoladoJ.FitzgeraldP.GaribaldiG.HansonJ.F.Jimeno-SerranoR.PortesG.Saint-Paul and A.Spilimbergo2002“Who’s Afraid of the Big Enlargement?”CEPR Policy Paper No. 7 (London: Centre for Policy Research).

    BrunnerA.forthcoming“Labor Outflows and Economic Convergence in the New Member States: Theoretical and Historical Perspective,”IMF Working Paper.

    DecressinJörg and AntonioFatás1995“Regional Labor Market Dynamics in Europe,”European Economic ReviewVol. 39 (December) pp. 1627655.

    IakovaD.2007“The Macroeconomic Effects of Migration from the New European Union Member States to the United Kingdom,”IMF Working Paper 07/61.

    MishraP. and A. Spilimbergoforthcoming“Exchange Rates and Wages in an Integrated World,”IMF Working Paper.

    PollardN.M.Lattore and D.Sriskandarajah2008“Floodgates or Turnstiles? Post-EU Enlargement Migration Flows to (and from) the UK,”Institute for Public Policy ResearchApril. Available via the Internet: http://www.ippr.org.uk/publication-sandreports/publication.asp?id=603.

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