EU Labor Markets after Post-Enlargement Migration Klaus F. Zimmermann (IZA, Bonn University and DIW Berlin) September 2009

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IZA Migration Program Area • Research – Journal articles articles, books, books edited volumes – Internal and international mobility, ethnicity and ethnic identity, east-west migration, language, labor markets, risk, transition, brain d i / i / i l ti drain/gain/circulation, entrepreneurship, t hi di discrimination, i i ti homeownership, citizenship, intermarriage, attitudes, remittances • Policy – Policy reports and advising (European Commission, World Bank, European Parliament, German and other governments)

• “EU Enlargement and the Labor Markets” research sub-area – – – – –

Annual workshops since 2006 Expert Network This book summarizes the first stage g – Pre-crisis experience p Next project – Crisis and free mobility in an enlarged EU IZA Expert Opinion Survey – 82.5 percent of respondents report that their evaluation of the need for immigrant g labor has not changed g with the crisis (Kahanec and Zimmermann, 2009) 3

Chapter 1: Lessons from Migration after EU Enlargement Martin Kahanec (IZA) Anzelika Zaiceva (IZA and University of Bologna) Klaus F. Zimmermann (IZA, Bonn University and DIW Berlin)

Chapter 4: EU Enlargement under Continued Mobility Restrictions: Consequences for the German Labor Market Karl Brenke (DIW Berlin) Mutlu Yuksel (IZA) Klaus F. Zimmermann (IZA, Bonn University and DIW Berlin)

Background • Migration is an integral part of the European past and present • EU Enlargement – May 2004: Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, M l Poland, Malta, P l d Slovakia Sl ki and d Sl Slovenia i jjoined i d the h EU (EU10) – January 2007: Bulgaria and Romania (EU2)

• The EU eastern enlargements were unprecedented in several ways: – CEECs – political and economic transformation – In g general,, no free migration g to the West after the WWII until the fall of the Iron Curtain – Significant income and unemployment differentials – Substantial p population p size

• This all contributed to the sensitivity of the migration topic in the European public and policy discourse 5

Policyy reaction: Transitional arrangements g • Pre-enlargement fears: mass migration, “welfare tourism” and displacement effects in the labor markets • Transitional arrangements on the free movement of workers from CEECs for up to 7 years based on the “2+3+2” formula adopted • 2004 Enlargement: – In 2004: only Ireland, the UK and Sweden opened up their LMs – Currently: France, Spain, Finland, Greece, Portugal, Italy, the Netherlands, Luxembourg, Belgium and Denmark provide free access to EU8 – Austria and Germany have simplified the procedures but announced that the will apply transitional measures until 2011.

• 2007 Enlargement: – Only Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Poland, Slovenia, Slovakia, Finland and Sweden have opened up their LMs for EU2 – Spain, Spain Greece, Greece Hungary and Portugal opened up in the second phase, phase Denmark followed the suit on May 1, 2009. 6

Theory: y Should we fear migration? g • Migration generally benefits the economy – Improves p the allocative efficiencyy of labor markets – Brain circulation facilitates international trade, transfer of technologies and knowledge, and eliminates bottlenecks to economic development

• Free movement benefits the migrants themselves • Redistributive R di ib i effects ff – – – –

Skilled immigration benefits unskilled and may hurt skilled native workers Unskilled immigration hurts unskilled and may benefit skilled native labor Correspondingly for skilled and unskilled emigration Skilled immigration reduces inequality

• Effects on public finance

A priori: NO! Let’s look at the empirics 7

Post-enlargement migration: The receiving countries • Generally, an increase in migrant inflows from EU10 and EU2 • In 2003, each EU10 and EU2 about 0.2% of the EU15 population. In 2007 about 0.5%. Compare to 1.7% of other EU15 in EU15, or 4.5% of non-EU nationals • EU10: Diversion away from Austria and Germany to Ireland and the UK • EU2: Continued migration mostly to Italy and Spain

8

The distribution of EU8 nationals in the EU15 45 4.5 4 3.5

Share increased remarkably in Ireland, UK and Luxembourg due to free mobility

3 2000

2.5

2003 2

2007

1.5 1 0.5

15 EU

K U

Sp ai n Sw ed en

Ita Lu ly xe m bo ur N g et he rl a nd s

Au st ria Be lg iu m D en m ar k Fi nl an d Fr an ce G er m an y G re ec e Ire la nd

0

9

The distribution of EU2 nationals in the EU15 2 1.8 1.6

Italy and Spain attracted EU2 migrants g

1.4 1.2

2000

1

2003

0.8

2007

0.6 0.4 0.2

15 EU

K U

Sp ai n Sw ed en

Ita Lu ly xe m bo ur N et g he rl a nd s

Au st ria Be lg iu m D en m ar k Fi nl an d Fr an ce G er m an y G re ec e Ire la nd

0

10

Be lg D iu m en 1 G ma ) er rk m an 2) Ire y 3 la ) G nd re 4 ec ) e Sp 1) a Fr in a n 3) ce N et It 1 ) he al rl a y 2 n ) Au ds st 3 ) Po ria rtu 2) g Fi a l nl 1) Sw and ed 2) en 3 U ) K EU 1) 15 6)

The distribution of foreigners in the EU15 14

12

Non-EU and EU15 nationals much more numerous than EU10 or EU2

10

8

6 Non-EU27

EU2

EU10

EU15

4

2

0

11

Post-enlargement migration: The sending countries • Increase in emigration between 2000 and 2007 in all EU8 and EU2 • Emigration rates – Highest: Romania, Bulgaria, Lithuania, Poland, Estonia, Slovakia – Lowest: Czech Republic and Hungary

• Poland – Increased emigration, relative shift from Germany to the UK – The number of Poles who stayed abroad for at least two months has tripled since early 2004 till early 2007 from around 180,000 to around 540,000 – Emergence g of two distinct emigrant g groups g p – low-skilled individuals from the periphery and highly-skilled ones from the cores

12

Post-enlargement migration: The sending countries 8

EU10: LT LT, PL PL, EE EE, SK EU2: RO, BG

7 6 5

2000 4

2003 2007

3 2 1

2 EU

8 EU

om an ia R

Bu lg ar ia

. Sl ov en ia

R Sl ov ak

Po la nd

Li th ua ni a

La tv ia

Es to ni a H un ga ry

C

ze ch

R

.

0

13

How do the post-enlargement migrants fare? (I) • Greater labor market p participation p and higher g employment p y rates than the populations in either the sending or receiving countries – Exceptions: recent EU8 immigrants in Germany exhibit lower employment and p participation p rates

• After enlargement among EU8 migrants – Higher employment rate – Lower unemployment and inactivity rates – Exception: Germany

• Self-employment rate – Low among recent EU10 immigrants in the UK – High among EU2 immigrants in the UK (50%) and among recent EU10 migrants in Germany (40%) – => self-employment a way to circumvent transitional arrangements!

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How ow do the post-enlargement post enla ge ent migrants g ants fa fare? e? (II) • NMS immigrants overrepresented in low and medium-skilled sectors and occupations • But relatively educated – Almost ost a qua quarter te o of EU8 immigrants g a ts high h gh educat education, o , majority ajo ty medium ed u – EU2 immigrants less educated than EU8 immigrants – The proportion of highly educated migrants from the EU8 is lower for post-enlargement p g arrivals;; but also the share of the less-skilled has declined. Improvement on average

• Transtitional arrangements imply negative selection – In the UK post-enlargement EU8 immigrants MORE educated – In Germany post-enlargement EU8 immigrants LESS educated

• Predominantly temporary (self-reported), males (but females in Germany), young

Doing well well, but “downskilling” downskilling 15

20 03 q 20 03 03 q 20 04 04 q 20 01 04 q 20 02 04 q 20 03 04 q 20 04 05 q 20 01 05 q 20 02 05 q 20 03 05 q 20 04 06 q 20 01 06 q 20 02 06 q 20 03 06 q 20 04 07 q 20 01 07 q 20 02 07 q 20 03 07 q 20 04 08 q 20 01 08 q 20 02 08 q 20 03 08 q0 4

• Unemployment p y rates:

• Labor cost index:

No disruptions 20 03 q 20 02 03 q 20 03 03 q 20 04 04 q 20 01 04 q 20 02 04 q 20 03 04 q 20 04 05 q 20 01 05 q 20 02 05 q 20 03 05 q 20 04 06 q 20 01 06 q 20 02 06 q 20 03 06 q 20 04 07 q 20 01 07 q 20 02 07 q 20 03 07 q 20 04 08 q 20 01 08 q 20 02 08 q0 3

The effects of migration: Any disruptions in EU15? 12

10 8

6

4

2

0

EU15 Germany

Germany

Ireland

Ireland

Sweden UK

160

140

120

100

80

60

40

20

0

UK

16

Th effects The ff off migration: i i A Any negative i effects ff iin EU15? • In general, no negative impact on receiving countries’ wages, p y or employment, p y or the welfare systems y unemployment • The UK

– No impact on the UK unemployment rate or wages, even after controlling for potential i l observable b bl and d unobservable b bl confounding f di ffactors iin an econometric i analysis – Perhaps some negative effect on the relative wages of the least skilled – It is rather the “fear fear of unemployment unemployment” that has risen in response to immigration from the new member states and that may suppress inflationary pressures – The number of EU8 nationals applying for UK social benefits is low, and child benefits constitute the largest category. – Immigrants generally fill in gaps in labor supply

• Ireland

– Similarly no negative effects, no “welfare tourism”, even if displacement took place in some sectors, since no rise in aggregate unemployment, “upgrade” jjobs for nationals

G Generally, ll NO negative i effects ff

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Th effects The ff off migration: i i C Calibrations lib i using i models d l • EU as a whole

– Substantial positive effects in terms of GDP, GDP GDP per capita, capita productivity and wages; and a somewhat smaller effect for employment in the long run – GDP (and GDP per capita) will increase by about 0.1 percent in the short run and byy about 0.2 percent p in the long g run – Long-run impact corresponds to a sum of 24 billion Euros = 28,571 Euros per post enlargement migrant!

• EU15

– A decline in wages by 0.08-0.09 percent and an increase in unemployment by 0.04-0.06 percent in the EU15 in the short run, but no significant effects in the long run – increase in GDP and a small positive effect on employment, but GDP per capita decreases

• EU8 (EU2)

– GDP declines (people leave), but there are gains for real wages, productivity and GDP per capita as well as a decrease in employment

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No disruptions 2004

Po la nd R om an ia Sl ov en ia Sl ov ak ia

C ze ch

2004

M al ta

Li th ua ni a H un ga ry

La tv ia

• Labor cost index:

Bu lg ar ze ia ch R ep ub li c Es to ni a C yp ru s

ep ub li c

yp ru s

ia Sl ov en ia Sl ov ak ia

R om an

Po la nd

M al ta

ia Li th ua ni a H un ga ry

La tv

C

Es to ni a

R

Bu lg ar ia

EU 15

• Unemployment p y rates:

C

The effects of migration: Any disruptions in NMS? 20 18

16 14

12 10 8 6 4

2 0

2007

500 450 400 350 300 250 200 150 100 50 0

2007

19

The effects of migration: Any negative effects in NMS? • Generally, aggregate data document decreasing unemployment, increasing number of vacancies, and employment growth, as well as increasing wages in the post-enlargement period • O Outflow tfl off skilled kill d migrants i t generates t shortages h t and d may putt strain t i on social security • There was no incidence of massive “brain-drain” from the new member states, although in some sectors (such as health care) the emigration of highly skilled specialists was relatively large. Brain circulation expected in the long run

Some risks, but positive developments and outlook 20

R mitt n Remittances • Remittances constitute a significant part in Bulgaria’ and Romania’s p in the Baltic States. GDPs and are also important • Mostly of seasonal nature in Poland and the Baltic states • Largely used for household consumption and purchase of durable goods with a recent tendency to invest in human capital, particularly tertiary i education d i • The impact p of these remittances on the economic development p so far is rather limited

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The Case of Germany •

Pre-enlargement fears: mass migration, “welfare tourism” and displacement effects in the labor market

•

Transitional arrangements: – Germany has not opened up its labor market to workers from the new member states. – Self-employed p y workers from the EU8 are allowed to settle in Germanyy and run a business. However, they may not employ workers from their home country.

•

January 1, 2009: Beitrag der Arbeitsmigration zur Sicherung der Fachkräftebasis in Deutschland: Opening to high high-skilled skilled workers workers, but the generally strong negative signals may nullify its effectiveness

•

p these arrangements, g the numbers of migrants g from the accession Despite countries have clearly increased in Germany since the 2004 enlargement

•

The net flow of EU8 immigrants has become 2.5 times larger than in the four four-year year period before enlargement

•

Without the immigration from the EU8, Germany would have had a net loss of g migration

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Net annual immigration to Germany by region of origin 140000 EU accession countries 2004 120000

EU accession countries 2007 Old EU member states

100000

Non-EU countries Germany

80000 60000 40000 20000 0 -20000 -40000

Immigration from EU8 has increased after the EU enlargement

-60000

2000

2001

2002

2003

2004

2005

2006

23

Composition of immigrants in 2007 • The total number of immigrants between the age of 15 and 65 in Germany at the end d off 2007 was close to 5.5 million, or approximately 10% of the total population in that age group. • Immigrants from EU8 countries constituted only 9.3% of all immigrants at the end of 2007 (24.6% of the 5.5 million are from EU15 countries 24.1% countries, 24 1% from Turkey, Turkey 13.2% 13 2% from the former Yugoslavia, Yugoslavia 5% from the ex-Soviet Union, 20.1% from outside of Europe) • Among EU8 immigrants, Poles constitute the largest net immigrant group: after enlargement, 71% of EU8 immigrants and 63% of all immigrants came from Poland

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The stock of EU8 immigrants in 2006 by year of arrival and gender 0.17 0.19

0.18 0.16

0.19 0 17 0.13 0.17

0.12

0.14

0.13

0.10

0.07

0.10

0.06

0.05 0.04

0.03 0.03

0.06

2004‐20 006

2001‐20 003

1998‐20 000

1995‐19 997

1992‐19 994

1989‐19 991

0.03 1986‐19 988

0.01

0.04

1983‐19 985

0.01 1974‐19 976

0.01

0.01

1980‐19 982

0.01

1977‐19 979

0 02 0.02

0.02 0.00

EU8‐female

0.12

0.08

0.04

EU8‐male

0.14

0.12

1971‐19 973

opulation by G Gender Perccentage of Po

0.20

Mostly female, but difference has decreased after f the h EU enlargement

Year of Arrival

25

Average years of schooling of male immigrants by year of arrival and country of origin 15.5 15 13 88 13.88

14

13.45

13.56

13.39

13.38 13.33

13.5 12.80

13 12.5 12

12.80 12 42 12.42

12.32

EU8‐male

11.87

11.80

NonEU‐male

11 5 11.5

EU15‐male

Year of Arrival 

2004 4‐2006

2001 1‐2003

1998 8‐2000

1995 5‐1997

1992 2‐1994

1989 9‐1991

1986 6‐1988

1983 3‐1985

1980 0‐1982

1977 7‐1979

1974 4‐1976

11 1971 1‐1973

Years o of Schooling

14.5

EU8-males’ education declines after the EU enlargement (absolutely and relatively)

26

Average years of schooling of female immigrants by year of arrival and country of origin 15.5 15 13.71

14

13.28 13.35

13.5

13.60

13.52 13.44 13.51

13.41

13.69 13.77

13.10

13 12.5

EU8‐female

12

NonEU‐ female

11.5

EU15‐female

Year of Arrival

2004‐2 2006

2001‐2 2003

2000 1998‐2

1995‐1997

1992‐1994

1989‐1991

1986‐1988

1983‐1985

1980‐1982

1977‐1979

1974‐1976

11 1971‐1973

Years o of Schooling

14.5

EU8-females’ education d i declines after the EU enlargement ((relatively) y)

27

Changes in the composition and labor market outcomes of EU8 immigrants since the EU enlargement •

The composition of EU8 immigrants to Germany has changed since the EU enlargement: – Recent immigrants are comparably older and have lower levels of education – The migration flow after the EU enlargement has consisted mostly of Polish migrants, especially men, who have moved to Germany, and migrants from the EU8, which have exhibited large fluctuations – The most significant g group g p is aged g between 25 and 45

•

But also the labor market outcomes of EU8 immigrants have changed since the EU enlargement: – Th They work k iin llow-paid id jjobs b and d work k llonger h hours – Their net monthly income is the lowest on average among all immigrant groups except recent non-EU immigrants – They Th are 23 23.1% 1% lless lik likely l tto b be employed pl d th than natives ti – They have the lowest labor force participation rate among all immigrant groups except recent non-EU immigrants – However, However they are 15.7% 15 7% more likely to be self-employed self employed than natives

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Net effects of being g an immigrant g (before and after the enlargement) Recent EU8 immigrants: - lower l iincome, - lower wages, - and lower e p oy e employment probability, - but more likely to be self employed self-employed

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Consequences: The failure of continued mobility restrictions in Germany • The analysis of the immigrants’ composition suggests that recent EU8 immigrants are more likely to compete with immigrants from outside Europe for low-skilled jobs than with natives in Germany • Self-employment seems to have been used as a means to circumvent transitory arrangements in Germany • Alth Although hG Germany n n needs d hi high-skilled h kill d iimmigrants, i nt recent nt iimmigrants i nt from the EU8 only replace non-EU immigrants in low-skilled jobs • This underlines the importance of more open immigration policies targeting high-skilled immigrants • The current German p policyy not onlyy fails to attract the required q high-skilled workforce, but is also unable to avoid the attraction of lowskilled immigrants

A missed opportunity!

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The current economic crisis • Deterioration of most aggregate variables & • Slow down of migration flows •

Many migrants may return home – – – – – –

Economic reasons (job loss) No restrictions on movement Temporary intentions Social pressure fuelled by economic difficulties in the destination countries Shrinking social (ethnic) networks O Overqualified lifi d workers k may prefer f returning i h home

• However – Crisis hits both destination and source countries, and some source countries possibly even harder – So east-west migration flows may continue despite the crisis, but their composition might change 31

Concluding remarks: Receiving countries • Migration from the new member states to the old EU15 has increased after f the h 2004 and d 2007 enlargements l • “Migration diversion” effect into countries that opened their labor markets k t (UK, (UK IRL IRL, ES, ES IT) IT). B Butt ““closed” l d” economies i also l experienced i d increased immigration after the enlargement (AT, DE). Some evidence that migration diversion occurred through migrants’ characteristics. • No evidence on negative impact on the receiving countries’ labor markets in terms of wages, employment, or unemployment • No evidence on negative impact of post-enlargement migration on public budgets or “welfare tourism”

Generally non-negative effects, transitional arrangements backfire 32

Concluding remarks: Sending countries • In the long-run: – Large outflows of young and skilled individuals may have negative impacts on countries’ economic growth, demographic situation and public budget – However, the temporary nature of these flows implies brain-circulation and thus positive effects overall

• In the short-run: – Decreased unemployment – Labor shortages and increasing number of vacancies (mismatch between vacancies and workers) – Employment growth – Upward pressure on wages – Remittances large but their effect so far limited

Some risks, but positive developments and outlook 33

Future challenges • Will many more people decide to leave new member states for the old ones, n orr will ill th the n numbers mb r stabilize t biliz att m much h llowerr fi figures r th than n current? rr nt? • What will the composition of migration flows be like? • What will be the timing, duration and frequency of migrants’ stays abroad? • How the transitory arrangements have affected the post-enlargement migration flows and their repercussions? • How to ensure that free mobility in the EU it is upheld in all aspects, that it contributes to economic prosperity as well as the well-being of the individual and the society, and that it helps to alleviate economic and financial disturbances such as the ongoing economic crisis, is a major j policy li task k ffor the h present and d ffuture 34

Klaus F. Zimmermann IZA IZA, P.O. Box 7240, 53072 Bonn, Germany Phone: +49 (0) 228 - 38 94 -0 0 Fax: +49 (0) 228 - 38 94 180

http://www.iza.org

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