Tag Archives: Labor mobility

On the Gains from Integration in the European Union

In an interview with the NZZ, Gabriel Felbermayr explains where the European Union adds value, and where it doesn’t. The key points:

  • Free trade for goods and services as well as capital and labor mobility are partial substitutes. Partial, because factor mobility fosters trade and technology transfer.
  • Estimates suggest that free trade and capital mobility generate more than 80% of the welfare gains from European integration.
  • Even labor mobility does not require admission into welfare systems. “… der Nutzen uniformer Regeln im Güter-, Dienstleistungs- und Kapitalbereich [ist] sehr hoch … Dies stimmt indes nicht für das Sozial-, Arbeits- und Steuerrecht, auch innerhalb der EU. … Politisch will die EU die Harmonisierung im Arbeits- und Sozialbereich möglichst ausdehnen, um den Wettbewerb zwischen den Staaten zu disziplinieren. Das ist traditionell ein französisches Anliegen.”
  • The EU’s budget is mis-allocated: “Wenn man das EU-Budget ansieht, gehen 40% in die Landwirtschaft. Es gibt keinen einzigen guten Grund, dass das auf der zentralen Ebene angesiedelt werden muss. Es widerspricht dem Subsidiaritätsprinzip.”
  • What is missing: Capital requirements for government bonds held by banks; a European Monetary Fund; Germany’s long-overdue investments in cross-border rail and energy networks; more EUIs.
  • What is not missing: European redistribution mechanisms disguised as “insurance” schemes. “In den EU-Ländern ist die Qualität der Institutionen sehr unterschiedlich. Das erklärt, warum die Wirtschaftsleistung in manchen Ländern hoch, in anderen niedriger ist. Wir können nicht so tun, als hätten Griechenland und Italien immer Pech, die Niederlande und Deutschland immer Glück. Versicherungen sind gut bei zufälligen Schocks. Die sind aber nicht das Problem.”

Drivers of High Skilled Migration into Switzerland

In the December Issue of Die Volkswirtschaft, Ronald Indergand and Andreas Beerli argue that increased high skilled migration into Switzerland mainly resulted from (i) higher educational attainment in the source countries and (ii) stronger demand by Swiss firms for high skilled labor.

The authors argue that the agreement between Switzerland and the European Union on the free mobility of labor (which is in force since 2002) did not contribute to an improved skill mix. Rather to the contrary, lower barriers to migration for EU citizens might have contributed to a slight reduction in the average skill of immigrants from the EU.

Tax Federalism

In the NZZ, Marius Brülhart and Kurt Schmidheiny discuss the Swiss experience with a federalist tax system. Cantonal and municipal taxes average roughly 40 percent of the total tax take in Switzerland, see the first figure.

grafik-1

The decentralized tax system, tax competition between cantons and communities as well as mobility of high income tax payers imply that the effective average income tax rate substantially falls short of the unweighted average tax rate on high incomes. In fact, the effective average tax rate is degressive for high incomes, see the second figure (which the authors reproduce from an article by Roller and Schmidheiny (2015)).

grafik-2

Europe, Monetary Union and Fiscal Union

In a recent blog post, John Cochrane criticizes the common wisdom that, on economic grounds, the Euro was a bad idea for Europe.

He responds to an earlier New York Times article by Greg Mankiw who argued that conventional wisdom: A monetary union requires (1) cross-subsidization/insurance across regions (“fiscal union”) or (2) significant labor mobility across regions. The US has both, Europe does not; Europe therefore needs regional monetary policy instruments and fluctuating exchange rates to dampen the consequences of adverse regional economic shocks.

Cochrane retorts

I am a big euro fan. … I am also a big meter fan. I don’t think each country needs its own measure of length, or to shorten it when local clothiers are having trouble and would like to raise cloth prices.

Cochrane takes aim at the “deeply old-Keynesian” notion that small regions with fewer inhabitants than the Los Angeles metro area (Greece or Ireland say) are exposed to regional “demand” shocks which require regional fiscal or monetary policy responses. In his view, these are small open economies, and demand shocks arise externally.

Cochrane questions the characterization of the US as “fiscal union.”

In the US, we have Federal contributions to social programs such as unemployment insurance. Europe has the common agricultural policy and many other subsidies. We do not have systematic, reliably countercyclical, timely, targeted, and temporary local fiscal stimulus programs. Just how big is the local cyclical variation in state or local level government spending or transfers? (And why does fiscal union matter so much anyway? If you’re a Keynesian, then local borrow and spend fiscal stimulus should be plenty. The union matters only when countries near sovereign default and can’t borrow.) … Yes, both US and Europe have some pretty large cross-subsidies. But most of these are permanent. … Monetary policy has at best short-run effects, so the argument for currency union has to be about local cyclical, recession-related variation in economic fortunes, not permanent transfers.

He also points out that US monetary union far precedes US “fiscal union.” (And he questions the notion that “tight fiscal policy” lies at the root of Greece’s problems and easy monetary policy would have helped.)

Regarding labor mobility, Cochrane emphasizes again that it is cyclical labor mobility which should matter according to the conventional wisdom. He doubts that there are large differences in cyclical labor mobility between the US and Europe.

Not only are the gains from monetary decentralization in Europe small, according to Cochrane, but the benefits from monetary centralization are large, because of gains in credibility.

When Greece and Italy joined the euro, they basically said, defaulting and inflating now will be extremely costly. They were rewarded for the precommitment with very low interest rates. They blew the money, and are now facing the high costs they signed up for. But that just shows how real the precommitment was.

And Cochrane makes the point that policy should address underlying frictions:

The case for separate currencies is to protect the economy from sticky wages, sticky prices, and sticky people. But none of these stickinesses are written in stone. A plausible answer to my question about pre-new deal US is that prices and wages were not sticky (whatever that means) before the era of regulation. Well, that is a loss, and only very imperfectly addressed by artful devaluation of the currency.  Not every block can have its own currency, so local and industry variation within a country remains hobbled by sticky prices, wages, and people. If sticky wages,  prices and people are the central economic problem, we ought to have a lot of policies to unstick them. We do the opposite, and Europe even more so. The very social programs that Greg implicitly praises for fiscal stimulus tie people to location and undermine labor market flexibility.

He concludes:

So I think a lot of the conventional view seems to think implicitly of fairly closed economies, operating in parallel. But Europe’s economies are open. Moreover, the whole point of the eurozone is to open them further. Small open economies are much worse candidates for their own currency.