Barriers to Labor Mobility in the EU. Which One to Tackle First?

Introduction

While unemployment rates are soaring up to record-high levels in Southern European states, Germany, Austria and the Netherlands are experiencing all-time low unemployment rates, and the lack of skilled labor is becoming an increasing concern for employers. The current situation is the result of an ongoing divergence of labor market trends since the outbreak of the financial crisis (Bräuninger, 2012). Despite the extreme situations, an equilibration effect via worker migration towards the job-rich countries in Europe has not yet been observable. With the right of free movement across borders being granted to all EU citizens, why do European workers remain locally bound even in times of crises? This question has given rise to a large number of studies and discussions on existing barriers to labor mobility which have persisted despite the legal freedoms. The goal if this essay is threefold: it will identify the most critical barriers, show via which mechanisms these barriers can be lowered, and assess for which barriers the EU, considering its capacities and those of Member States and conforming to the subsidiarity principle, can have the greatest direct impact on lowering them. While the essay will not directly evaluate the effectiveness of previous EU policies targeted towards increasing labor mobility, it will show in which areas increased efforts by the EU can transform into tangible results in the most efficient way.

The essay proceeds in the following way: In the first section, I recap the economic rationale underlying the importance of labor mobility in a monetary union. In the second section, I show which patterns of labor mobility can currently be observed in the EU. Section three introduces the four key barriers that constrain labor mobility in the EU, and section four outlines through which mechanisms these barriers can be addressed and provides the assessment of the EU’s impact on lowering them. The last section concludes.

The Economic Role of Labor Mobility in a Monetary Union

Joining a monetary union brings about both benefits and costs. Amongst the benefits are increased trade flows amongst Member States, gains from the elimination of transaction costs, increased price transparency and competition, and the potential advantage of creating a more international currency. The main cost results from the fact that member countries are sacrificing their ability to conduct national monetary policy (Mundell, 1961).

In the absence of monetary union membership, an incident that reveals the importance of monetary policy is the experience of an economic downturn, or, in OCA-theory vocabulary, “an asymmetric demand shock” (Grauwe, 2012). The following adjustment mechanism via monetary policy is most easily illustrated using a two-country-example: One country experiences such an asymmetric shock in the form of a reduction in aggregate demand vis-à-vis another country, which experiences an increase in aggregate demand. Given flexible exchange rates, the country experiencing the downturn can stimulate demand by reducing interest rates. A reduced interest rate will also case a depreciation of its currency, make its exports cheaper abroad and thereby stimulating domestic production (Grauwe, 2012). When exchange rates are pegged, they can be devaluated directly, leading to the same result via the trade channel.

As a member of a currency union, a country experiencing a downturn can neither devalue its currency nor reduce the interest rate. The exchange rate to all other members of the union is fixed, and the interest rate is regulated by a central body in accordance with the overall economic needs of all Member States. Adjustment now can be brought about via two different channels: the first is wage flexibility, the second one labor mobility (Mundell, 1961; Grauwe, 2012). The first mechanism works though a change in the overall wage level affecting the competitiveness of exports. As more worker in the country experiencing the downturn become unemployed, they reduce their wage claims, while in the other country workers will demand higher wages in times of economic upswing. Consequently, exports of the weaker country will become cheaper, while exports of the booming economy will become more expensive and less competitive. The functioning of this mechanism is based on the assumption that both countries share large amounts of trade between each other. The second mechanism involves the mobility of labor. Instead of waiting for the indirect adjustment via wages, the adjustment between both countries can be brought about directly when workers re-locate from the country facing unemployment to the country experiencing the economic boom and providing job vacancies (Grauwe, 2012). In the absence of either of the two mechanisms, the adjustment can solely be achieved through price increases in the booming country, resulting in relative real wage decreases in the country facing the downturn. This process of passively ‘sitting out’ the situation can be lengthy and burdensome, as it implies that the country will go through many years of high unemployment (Obstfeld & Peri, 1998). To sum up, theory predicts that, adjustment to asymmetric demand shocks in a monetary union is achieved faster the lower barriers to labor mobility are, particularly when wages are inflexible.

Besides the positive effects associated with balancing out economic shocks, there are further positive externalities to labor mobility such as a reducing in labor market imbalances, improved skill matches on the labor market, higher investments into education, and higher levels of innovation and entrepreneurship, implying that efforts targeting at increasing labor mobility will bring about gains even in the absence of crises (see Bonin et al., 2009).

The next section provides an assessment of the current dynamics of labor mobility between EU Member States.

The Status Quo of Labor Mobility in the EU

When considering the past decades leading right about to the outbreak of the crisis, there is a broad consensus amongst scholars that the mechanism of labor mobility has only had a limited impact and has worked slowly – and, as many argue, too slow (Bräuninger, 2011; Zimmermann, 2009; Bonin et al., 2009). The trend of low labor mobility in Europe has in fact shown to have been immune even in light of major changes, such as the abolishment of border controls brought about by the Schengen agreement or the introduction of a common currency, as shown by Fuchs-Schündeln and Baatz (2012). Despite the strong general agreement, the quantification of labor mobility poses a challenge. What can be said with certainty is that labor mobility rates are relatively low in the European Union, both within and between countries, by comparison with other regions (EC, 2010). According to Bonin et al., workers’ mobility within individual Member States, also referred to as regional mobility, amounts to only one per cent each year. For comparison, regional mobility in Australian territories and US states amounts to two to three per cent. Gáková and Dijkstra (2008) find that the share of cross-border mobility on the EU's total labor mobility was only 0.18 per cent of the working age population in 2008. In a 2009 Eurobarometer poll, only two per cent of EU citizens declared to live in another Member State at the time, without further qualification for working (Eurobarometer, 2010).

Despite the lack of comprehensive data on migration patterns, mostly due to due to the free movement of people within the EU, a shift in the trend has become foreseeable in recent years. The willingness amongst Europeans to move to other EU Member States for work now seems to be growing. In 2011, 53 per cent of citizens between the age of 15 and 35 years declare to be willing to re-locate to other Member States with better job prospects, with the share increasing to 68 per cent amongst Spanish respondents, in a Eurobarometer survey (Eurobarometer, 2011). The 2009 Eurobarometer poll had already shown that the readiness to move for work is higher the younger and the higher qualified Europeans are. Furthermore, it revealed that today’s younger generations have already caught up to their older counterparts in terms of the amount of work experience gained in other Member States, implying an increasing rate of international learning (Eurobarometer, 2010).

With the general willingness of moving encompassing an ever-larger group of people, and reasons such as “leaving home”, “leaving property” and “need to make adjustments for the family” losing their significance for working decisions (Eurobarometer, 2011), the critical questions becomes which are the factors that are holding back the many who are generally not opposed to working abroad.

Four Key Barriers to Labor Mobility in the EU

Migration theory builds on the assumption that worker migration is generally motivated by economic concerns in terms of expected future earnings as a function of the wage level and the unemployment rate in the destination country (Puhani, 1999). However, a number of additional direct and indirect costs arise from various both individual preferences and legal or administrative hurdles in the context of migration, and need to be considered in addition to the expected wealth levels.

Based on a comprehensive literature review, I identify four key barriers to labor mobility in the EU: language requirements, recognition of qualifications, intransparency of foreign job markets, and high mobility costs, which are broken down into housing market frictions, pension entitlements, and unemployment benefits. I will provide a brief explanation to each of the barriers in the following.

1. Language requirements

There is broad agreement that foreign languages represent the largest of all personal hurdles to labor mobility (EC, 2008; Bonin et al., 2009). Fuchs-Schündeln and Bartz (2012) provide strong econometric evidence that not country, but language boarders mark the critical frontiers for migrant workers. However, Zimmermann (2009) shows that despite the measurable difference between both types of frontiers, mobility rates remain low even within the same language zones, e.g. less than two per cent between Germany and Austria.

2. Lack of recognition of qualifications

This barrier is twofold: Firstly, according to the OECD, only seven out of over 800 professions across EU Member States allow for automatic recognition of qualifications across borders, Secondly, regulated professions are still widely prevalent in EU countries, for instance in Germany, where for over 60 professions, qualifications must be recognized by an official body (Bräuninger, 2012; Heinz & Ward-Warmedinger, 2006). Besides the direct discouragement of migration, this situation also causes many EU migrant workers - as many as 20 per cent according to the EC - to take on jobs for which they are over-qualified, thereby lowering the gains from re-locating (EC, 2008).

3. Intransparency of foreign job markets

A complex, non-centralized job-searching process and the provision of large amounts of convoluted and not targeted information on terms, working conditions, and tax and social benefit structure discourages and deters applicants, the more so as these are unfamiliar with the foreign labor market characteristics and labor laws. Transparency of the market is highly needed in order to allow for timely and accurate assessments of job opportunities for a specific level of qualifications from abroad (Zimmermann, 2009; Bonin et al, 2009).

4. High migration costs – housing markets, pensions, unemployment benefits

The three most relevant positions in the context of fixed costs include housing market frictions, pensions, and unemployment benefits (Bräuninger, 2012; Heinz & Ward-Warmedinger, 2006). Regarding the first point, it has been shown that transaction costs associated with buying and selling property are particularly high in Europe when compared to the US, and vary significantly between states (Rupert & Wasmer, 2012). As the rate of home ownership has been consistently increasing in Europe, the impact of this barrier is intensified (Zimmermann, 2009).

With regards to pension benefits, a loss of eligibility can become a significant economic deterrent to all those that have previously been employed. When transferring into a job abroad, workers – oftentimes depending on a certain age threshold– may not be able to transfer their occupational pension rights due to the absence of harmonized rules and a common framework to regulate the portability of pensions (Gunn, 2010; Bodin et al., 2009).

In absence of access to unemployment benefits abroad, workers face stronger liquidity constraints when moving to find new employment as compared to staying in their home country. This encourages the search for positions abroad to be conducted only from within the home country. Those who do leave to search locally may find themselves under pressure to settle for the first offer they find, even when this represents a suboptimal choice (EC, 2008; Bonin et al., 2009). At the moment, unemployment benefits are only exportable for three months when moving to a different EU Member State. They include only the sum of direct payments, and indirect subsidies such as housing subsidies are not included (EC 2011a; Council of the European Union, 1971).

The vigor of EU Policies to Mobilize Labor

Building on the four barriers identified in the previous part, this section presents a twofold approach: for each barrier, mechanisms to reduce them are outlined and followed by an assessment of the EU’s capacities vis-à-vis those of Member States and its positioning to advance the reduction. In doing so, the fields in which the EU can most effectively contribute to encouraging labor mobility are identified.

1. Language Requirements

I. Mechanisms to lower the barrier

The language barrier can be directly decreased through a wider availability to language learning programs, which are be both easily accessible and affordable for all groups of the workforce, including the unemployed. While the tertiary education system serves as a catalyst both for the acquisition of foreign langue skills and experience abroad, a critical challenge remains to expand language learning amongst both older generations and the younger working population (Bonin et al., 2009). A key role falls to the national education levels to upgrade language teaching facilities to ensure both wider and deeper language acquisitions for future generations. However, in order to encourage those who are already part of the workforce to improve their language skills, additional offers are needed outside of the schooling and university system.

II. Potential EU Impact

With the responsibility for education, including languages, falling to the national education systems, the EU’s role remains limited to that of an advising agent. While the responsibility to define national language policies lies with the elected political institutions, Vez (2008) points out that many countries and regions in the EU have not developed official language policies, and the responsibility to actively integrate language classes in the curriculum remains with individual schools. The resistance of Member States to amend educational programs has shown to be large. The EU’s last broad offensive to tackle language barriers through involving the institutions of its Member States in 2003, the Action Plan for the Promotion of Language Learning and Linguistic Diversity, provides an illustration of the limited impact vis-à-vis national policy makers. Its aim was to support actions taken by local, regional and national authorities to promote language learning and linguistic diversity in the period from 2004 to 2006 (EC, 2003). In retrospect, the action plan has been judged as a “low key intervention” (Bonin et al., 2009, p. 98), especially since it did not include additional financial resources but instead merely addressed existing community programs, and its impacts remained entirely conditional on the member states willingness to adopt the proposed initiatives, which has appeared to be rather low.

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