The issue of obstacles to the mobility of workers in the euro area is one of several key questions raised in an in-depth analysis of the best-seller, EMU: Facts, Challenges and Policies. (See link below)
The principal authors, Jonathan Coppel and Alain de Serres, examine other pertinent questions too, concerning monetary and budgetary policies and the challenges facing the euro area. Yet, it is in the debate about the labour market that the authors present perhaps their most stimulating case and sound their sharpest warning.
The launch of the single currency on 1 January 1999 has created the second largest monetary zone in economic terms after the United States: the 11 countries that make up the euro area account for no less than 16% of world GDP, and have some 290 million inhabitants. That makes it bigger than the United States in population terms. Sound precautions were taken before setting up economic and monetary union (EMU) -- the establishment of an independent European Central Bank and the drive for macroeconomic convergence between all participating countries, for instance. Nevertheless, the tough part is only beginning and exactly how individual countries will react to external and internal economic shocks is not yet clear. For example, how will it be possible to respond to disruptions in supply and demand in one EMU region or country from having an impact on the monetary area as a whole? The answer, say the authors, is to make labour markets more flexible. That means introducing not only more responsive and rapid salary adjustments, but also greater mobility of workers within the EMU area.
The trouble is, if there is still relatively little workforce mobility in Europe there has to be a reason. Although all EU nationals have the right to work and live in other member states, only 5.5 million citizens -- 1.5% of the total population -- have opted to settle in another country. By contrast, in existing monetary zones like those in the United States or Australia, for example, there is far greater mobility geographically, which plays an important role when labour markets have to adjust to changes in the economy. In other words, people are prepared to move long distances, whether to change jobs or to find work.
This is an important point, even if it is one that is not unfamiliar. However, some people might argue that this is not comparing like with like. Despite their ethnic and cultural differences, all US citizens belong to a single country, and quite an old and established one at that. This is not true of the European Union, which is a recent construction. The freeing up of labour movements is foreseen under the Treaty of Rome, but its full implementation has been only gradual. Apart from that, the euro area incorporates a large number of different cultures, traditions, history, religious beliefs and prejudices. An unemployed French person who wanted to go and find work in the Netherlands where unemployment is low would have numerous barriers to surmount, not least of which would be the language. Perhaps comparing labour mobility in North America as a whole with Europe would throw up some interesting comparisons.
Nevertheless, the authors come up with a few trumps to hammer their argument home. For instance, even at national level most European countries do not demonstrate much in the way of geographical mobility: in Italy and Spain, migration rates average about 0.5% of the regional population. In the Netherlands and Germany, migration is almost three times as high, but it is still considerably lower than in the United States, or Australia, another OECD country where labour mobility is an important feature. The fact is that while considerable progress has been made in reducing the legal and institutional obstacles to mobility in the European Union, the movement of workers is still limited by a number of structural obstacles. These include differences in tax systems, education systems and the non-recognition of some professional qualifications, and problems relating to housing policies, uniform minimum wages and restrictive practices in the workplace. The economic incentive to migrate has also diminished as a result of convergence of incomes between countries in the euro area and higher unemployment throughout the monetary union."It is unlikely that labour mobility will increase greatly within the euro area over the next few years", the authors argue. "The capacity of wages to adjust rapidly to a change in labour market conditions", they urge, "is critical".
EMU countries have less room for manoeuvre than before, since the euro implies a common monetary policy operated by the European Central Bank. So other adjustment mechanisms have to be strengthened, and the capacity of wages to adjust to changing labour market conditions improved. To reinforce reforms in the labour market, product markets have to be made more competitive too. Prices and wages would then be able to respond quickly to new circumstances, leading to better efficiency and more sustainable economic growth. That, some would argue, was the purpose of the EMU project in the first place.
©OECD Observer No 217/218, Summer 1999