Economic Policy Review ISSN 1313 - 0544

The Liberalization of the EU Labor market – a myth or a reality?

Author: Veliko Dimitrov / 26.01.2007
Rate This Article:

The Treaty of Maastricht [1] that established the European Union (EU) divided all EU policies, which had to be carried out into three main areas, called pillars.

  • The first or “Community” pillar concerns economic, social and environmental policies
  • The second or “Community Foreign and Security Policy (CFSP)” pillar concerns foreign policy and military matters
  • The third or “Police and Judicial Co-operation in Criminal Matters” (PJCC) unites the efforts in establishing co-operation in the fight against crime. This pillar was originally named “Justice and Home Affairs”

One of the main elements that constitute the first pillar is the institution of a single market, also called a common market. In fact, out of 16 policy fields, setting up the Community pillar, the single market vision is put on the first place and this not by a mere accident. Having all factors of production (goods, services, capital and labor) move freely in a certain area represents the fourth stage of an economic integration [2] , which completion in the EU-zone has actually been the central objective for almost half a century. Thus, there has always been a bright recognition that market allocation of resources is not a bad thing, but a desirable aim.

But is it just a paper wish that looks into the distant future or it will be soon a reality?

“Unfortunately”, in order to achieve complete economic integration, and therefore to enjoy all the positive implications on economic growth, employment and finally the standard of living, there is no way around the liberalization of all the national markets, be they for goods, services, labor force or financial instruments. That means not only removing physical barriers (borders) and producing common technical standards (which has already been done), it is much more at skipping national regulations which shelter whole industries and markets. Once the competition is blocked there is no way for resources to find their most proper place on a natural basis (impossible to achieve that artificially – command economies) and thus to perform best. Since the allocation of production factors is not effective, occurring costs are at a higher level, and so are the prices.

Liberalization of markets has a perfect mathematical and economical justification however since decisions are taken by politicians and open markets are not a beloved pre-election instrument that does not mean much, it is always at the people's expenses.

Within the European Union the free movement of the three main production factors – goods, services and capital – is by largely secured (except for import / export quotas on some products and the like), however the labor market in most of the old member states stands closed or hardly accessible as for workers coming from outside the union as for those coming from the new EU-countries.

Before the last enlargement that took place on May 1 2004, 12 out of 15 old members (exceptions: United Kingdom, Ireland and Sweden) introduced special agreements containing restrictions to labor force from the new member states. Except for Spain and Finland, the rest (10 countries) stated they would keep these transitional arrangements until 2009, which means sheltering the labor market for 4 more years. Blocking the natural allocation of the labor force resource is definitely not the right way to prosperity, but still can help counting more votes.

A couple of weeks ago the European Commission (EC) adopted a report listing economic arguments against those restrictions, which is to be handed over to EU leaders at a March summit this year. According to the report “the migration flows following the enlargement have had positive effects on the economies of EU15 member states”. In reverse: any restriction of the labor force migration would limit the favorable impact on the economy or generally intensify the negative trends in labor market in the most of the old member states.

The data in the following table undoubtedly supports the conclusions made by the EC experts:

 

Table 1: Real GDP growth rate (at constant prices 2000; percentage change on previous year)

 

2004

2005

USA

4,2 %

3,5 %

United Kingdom

3,2 %

1,8 %

Ireland

4,5 %

4,4 %

Sweden

3,7 %

2,5 %

EU15

2,3 %

1,4 %

Source: Eurostat [3]

 

United Kingdom, Ireland and Sweden are exactly those three countries, which did not introduce any transitional arrangements that would have shut out partially or entirely their national labor market. No wonder that their GDP growth rates are significantly higher than the EU15 average (in fact, the difference is even bigger because their rates pull up the average level) [4] .

The figure for the USA is just a reference point. The annual real GDP growth rate in America would have never been twice and more than twice as high as the one in EU15 if for instance a teacher or a gardener from Texas gets a better job in California but still can not go there because the State of California is sheltering the labor market and does not allow workers from other states to enter.

If that would have happened there, America would not be America and California would not be California.

Why then is it possible in the European Union?



[1] Formally, The Treaty on European Union was signed on 7 February 1992 in Maasrticht between the members of the European Community and entered into force on 1 November 1993, under the Delors Commission.

[2] The degree of economic integration is usually categorized into six stages: Preferential trading area – Free trade area – Customs Union – Common market – Economic and Monetary Union – Complete Economic Integration

[4] That could not be the only reason but is still one of the most important ones.