🇪🇺Is Europe a common living space (like the USA is)?

The economics of the integration of the European labor market

At least Berlin (where I took this picture) is a common living space: The share of the foreign population in the total population in Berlin is almost 20 percent - and it is increasing for years.

Today I would like to compare the USA with the European Union. Not in general but regarding a fundamental question of how often and how many people move within their territory. To go and to live wherever you want makes a free country, right? So has Europe become a common living space?  

I have found an enlightening paper by the economists David Dorn and Josef Zweimüller, both from the University of Zurich, Switzerland, called "Migration and Labor Market Integration in Europe". 

Before that: What is anyway the territory we are talking about? It is the so-called European Economic Area (EEA). Because the permission to live and work wherever you want does not only include the European Union (EU). The EEA includes 27 EU countries plus Iceland, Liechtenstein and Norway. The European labor market allows the border-free mobility of workers across these 30 countries. 

So more than 515 million citizens can choose to reside in any other partner country; they can work there without needing a work permit, and they are entitled to equal treatment with nationals in access to employment and public services. This is the theory.

Dorn and Zweimüller look at reality. In their paper, they write: "The European labor market remains considerably less integrated and more heterogeneous than the one of the United States, which comprises a population of 330 million across the 50 states." 

How do they come to this conclusion? They compare benchmarks.

One is the unemployment rate. The assumption here is: The smaller the differences in unemployment rates in a considered area the more integrated it is. Otherwise, people would move from places with high unemployment to places with low unemployment. As a result, the differences would be equal. Dorn and Zweimüller compared the EEA with the USA: "In 2019, national unemployment rates in European countries were as low as 2.0 percent in the Czech Republic and 3.2 percent in Germany, but as high as 13.7 percent in Spain and 16.6 percent in Greece. By comparison, state-level unemployment rates within the United States ranged from 2.4 percent to 6.1 percent."

Another benchmark is mobility itself. Looking at the overall average, only 5 percent of European citizens live in a different country than their country of birth (with a steady, albeit slight, upward trend); in the USA, it is close to one-third. 

If you take a closer look, the differences between the EEA countries are big. The richer a country, the more immigration. "Immigrant stocks are positively correlated with countries' income levels," Dorn and Zweimüller write. For example, the share of foreign nationals in the domestic population is largest in Luxemburg with 47.5 percent (with 40.1 percent from EU nationalities and 7.4 percent non-EU nationalities) and Switzerland with 25.1 percent (16.5 percent / 8.6 percent), which are among the countries with the highest income per capita worldwide. - Check for more details in the table below (I copied it from Dorn’s and Zweimüller’s paper).

A third benchmark: wages. In a single labor market, you would expect an alignment of wages over time. But despite strong forces in favor of convergence by the EU, economic differences between EU member countries remain large. Dorn and Zweimüller: "In 2019, average labor costs in the European Union ranged from 6 Euro/hour in Bulgaria to 45 Euro/hour in Denmark." For comparison: In the USA, according to the US Bureau of Labor Statistics, the employer costs for employees range from 32.69 US-Dollars/hour in the South to 41.17 US-Dollars/hour in the Northeast. 

The bottom line: The European Union (plus Iceland, Liechtenstein and Norway) is far less integrated than the USA but Inter-European migration is increasing. 

What is also interesting: More and more people from foreign countries are skilled. From 2000 to 2015, "average education levels of immigrants increased in all countries but Finland and the increases were often large," Dorn and Zweimüller write. Their explanation: "Globalization and technical change have raised the relative demand for high-skilled workers, particularly in countries with a comparative advantage in skill-intensive goods. As a consequence, worldwide migration to high-income countries has become more skill-biased in recent decades." 

But still, immigrant education levels are lower than of the natives in most European countries. Therefore, foreign people earn less than domestic citizens. And their unemployment rate is higher. That might be why many people don't move to another country although wages are generally higher. 

Dorn and Zweimüller also looked for the reasons why Europe isn’t like the USA. Here is what they found: 

1) Heterogeneity in languages. The EU alone lists 24 different official languages. Dorn and Zweimüller: "A lack of proficiency in the destination country's language not only limits immigrants' ability to find jobs quickly but can also reduce productivity in the workplace and social inclusion."

2) Institutional differences, like the large heterogeneity in social insurance rights (like old-age pension, unemployment payments and healthcare services) across European countries or the education and occupational training system that are organized and administered at the national level. 

3) Discrimination and anti-immigrant attitudes. "There is ample evidence from Europe and elsewhere for discrimination against racial and ethnic minorities in the labor market," Dorn and Zweimüller write. 

4) Inflexible domestic labor markets: Job-to-job mobility is often low within many European countries due to employment protection regulations that require employers to pay sizable compensation to workers in case of layoffs. Dorn and Zweimüller: "Such measures strongly reduce worker mobility across jobs." 

To come back to the question at the beginning, if Europe is already a common living place, Dorn and Zweimüller have an unequivocal answer: "We are still far from a common European market." But looking at the trend, you could at least say that Europe is growing together. 

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