Chapter

VII Labor Mobility

Author(s):
International Monetary Fund
Published Date:
December 1990
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The free movement of labor is one of the four freedoms viewed by the EC as essential to the success of the internal market program. It requires that citizens of the member states be free to engage in their professions throughout the EC without discouraging restrictions. As in the case of trade in goods, free labor mobility requires the elimination of border controls and technical barriers—with technical barriers posing the greatest problem. Within the EC, the primary technical barriers relate to differences in national rules on professional and vocational qualifications.

Although the EC Court of Justice has restricted the right of officials in member states to reserve posts in private firms for nationals and much effort has gone into harmonizing national qualifications, Community-wide standards have not been established for many professions. Somewhat more progress has been made in formulating comparable vocational training qualifications. As with trade in goods, the Commission has applied the Cassis de Dijon principle of mutual recognition, implying that any person practicing a vocation in one member state should in principle be able to practice it in another. However, obstacles to the free movement of labor remain, including complex administrative procedures for residency permits and rules on the taxation of wage earners residing in one member state and earning their income in another.

Restricting labor mobility in the EC implies a less-than-optimal factor allocation, leading to efficiency losses and lower overall welfare (Pintado and others, 1988, p. 51). On the national level these effects have long been recognized, and labor mobility within countries is usually encouraged. However, at the Community level, protecting insiders’ positions vis-à-vis outsiders—particularly if domestic unemployment is high—and pride in national traditions and institutions may still lead to segmented labor markets. The importance of cultural and linguistic differences should also not be underestimated.

Labor mobility is driven by similar considerations as is goods trade (Krugman, 1987, p. 129). Labor migration from one country to another—one-way migration—corresponds to inter-industry trade in goods. When labor moves from a low-wage to a high-wage country, world income rises because labor is allocated more efficiently. On the other hand, two-way migration—which corresponds to intra-industry trade—can occur for a number of reasons, mainly mismatches in the supply and demand for specific skills in particular labor markets and movements within multinational firms. This may also have a beneficial effect on labor allocation.

One-way migration has been the main form of labor movement within the EC. In the 1960s and early 1970s, unskilled workers moved from the south of Europe to the strong labor markets in the north. However, wage disparities have continued. A recent study showed that industrial labor costs in Europe range from 25 percent of the EC average in Portugal to 30–40 percent above the average in some of the urbanized regions of the north, mainly Germany and the Netherlands (Begg, 1989). However, a rise in unemployment in the north has caused a fall in one-way migration, despite continued wage differentials.55,56

The EFTA countries generally require foreigners to obtain a work permit before permitting them to work in their domestic market. Since 1954, however, all Nordic citizens have the right to work in another Nordic country without a work permit; although movement is made difficult in certain professions, for example, the legal and medical professions. Nordic citizens also enjoy the same social security and social rights as the host country’s own citizens.

EC-EFTA cooperation regarding labor mobility is still at an early stage. Some progress has been made, for example, the mutual recognition of higher education diplomas and participation in European Community Action for the Mobility of University Students (ERASMUS). However, there appears to be a growing awareness within the EFTA that efforts must be intensified to benefit fully from the creation of the EES.

In October 1989, the EC-EFTA High Level Steering Group stated that the free movement of persons would be an important supplement to the three other freedoms. Employees, the self-employed, and their families should be allowed to move freely within the EES on the basis of mutual recognition, nondiscrimination, and reciprocity. However, recognizing the special situation in some EFTA countries, the EFTA emphasized that special agreements were required to guide negotiations in this area (“Schlussfolgerungen der EG-EFTA-Steuergruppe,” 1989). On the other hand, a major accord in this area would apparently not be reached outside of EES negotiations.

The EFTA’s Consultative Committee—which includes representatives of employers, labor, and other economic interest groups—favored the free flow of labor at its October 1989 meeting. In its final document, the Committee supported the creation of a Western European social space and recommended EC-EFTA negotiations on removing physical border controls under the principles of nondiscrimination, reciprocity, and mutual recognition. The Committee’s recommendations were endorsed by the EFTA’s ministerial meeting on October 27, 1989.

While concerns persist about a large one-way migration from EC countries with high unemployment rates, it appears that EFTA countries attach greater importance to the potential gains from two-way migration.57 It is also believed that, with rapid technological change, growth may be hampered by bottlenecks in specific skills and that barriers to labor mobility may slow technological development. Free labor mobility within the EES would also tend to reduce labor market pressures in countries with low unemployment and help contain wage drift.

Switzerland apparently still has reservations about allowing free labor mobility within the EES, although it has not raised objections to the recommendations of the EFTA’s Consultative Committee (“Officials Agree on Framework …, ” 1989). Switzerland is already a substantial net importer of labor58 and the size of its foreign work force is a sensitive political issue. On the one hand, it is feared that the free flow of labor within the EES could cause the foreign work force to increase sharply after 1992. On the other hand, inhibiting labor mobility could cause difficulties in hiring much needed skilled labor from EC countries (Hauser and others, 1988, p. 71). Thus, it remains uncertain whether Switzerland will go along with the EFTA decision to endorse free flow of labor across frontiers.

55

Helm and Smith (1989) argue that this also reflects the power of trade unions in the northern EC countries.

56

One-way migration may continue to slow even if existing barriers to labor mobility are completely removed. With the envisaged harmonization of working conditions and a common social policy in the EC—the “social dimension of the internal market”—some of the pressures that have in the past led to internal migration of labor may be reduced (“The Social Dimension of the Internal Market,” 1988). It has been argued that a harmonization of social standards would run counter to the aim of increased labor market flexibility and even development within the EC. See “Sachverständigenrat zur Begutachtung der gesamt-wirtschaftlichen Entwicklung” (1989), pp. 194–200.

57

While few official statements have come out against free labor mobility, the press in several EFTA countries has reported concerns. For example, there is a fear that foreign workers could flood Iceland’s small domestic labor market, while an inflow of new workers could raise the already high unemployment rate in Norway. In addition, there has always been a reticence to allow foreign workers in Finland.

58

In 1987, one fourth of all workers were foreign, with three fourths coming from EC countries; see Conseil Fédéral Suisse (1988).

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