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Chapter 4: Restoring Convergence between Member States in the EU and EMU
such adverse developments. See, for consequential risks of a slowdown or halt Domestic socioeconomic
instance, European Commission (2010). of the convergence process. Furthermore, developments include...
there is a risk that the diffusion of tech-
Labour mobility can strengthen nology weakens firms’ competitiveness When a Member State of a currency
upward convergence in international markets, so that firms union is hit by a temporary asymmetric
may decide to export rather than invest negative demand shock, its economy will
Increased labour mobility means that, in in production capacity in the other coun- temporarily (but not necessarily only for
principle, workers can move more eas- tries — with a potentially adverse impact a short period) deviate from its growth
ily from areas with a surplus of workers on convergence (see, for instance, Fosfuri path, before it eventually returns to its
48
(and lower real wages) to areas with a et al. (2001) and Kudo (1993)). original growth path ( ), at least in the
shortage (and higher real wages). Sig- absence of hysteresis effects, such as
nificant immigration flows put down- Finally, cross-border portfolio investment the erosion of employability of unem-
ward pressure on real wages in host can be affected by the development of ployed workers — as discussed below.
countries, while emigration flows put socioeconomic conditions, in particular
upward pressure on real wages in send- by adverse developments in unemploy- The cross-border effects will primarily
ing countries ( ) — thereby strengthen- ment and income distribution. Firstly, be transmitted via the trade channel as
45
ing convergence in earnings. low income earners are generally more the country’s real effective exchange rate
affected, since their capacity to service depreciates and its domestic absorp-
In addition, increased mobility of skilled debt may deteriorate more quickly than tion decreases ( ). While cross-border
49
workers can strengthen the diffusion of for other categories of the population. effects are transmitted through changes
knowledge and has strong potential to Secondly, as rising income inequality in average prices, wages and domestic
50
promote upward convergence in produc - and unemployment affects domestic income ( ), a full assessment of the
tivity growth. Nevertheless, increased economic, social and political stability, adjustment process needs to also take
labour mobility runs the risk of agglom- the ‘confidence’ of portfolio investors account of the socioeconomic adjustment
-
eration of knowledge-intensive industries may decrease and a higher risk pre channels (in particular, distributional and
and brain drain that may strengthen mium demanded. labour market hysteresis effects) as well
divergence (as discussed above). Hence, as other socioeconomic feedbacks.
the coordination of synergies between 3.2.2. Cross-border
policies that promote labour mobility transmission of domestic …cyclical distributional effects…
and knowledge networks will continue socio-economic developments
to be an important policy challenge (at in the economic cycle An adverse temporary asymmetric
the European level) in the future (see shock will not only affect total output
also Section 3.2 below). This section examines the cross-border and income, but can also intensify ine-
effects stemming from domestic labour quality resulting in important feedbacks
International capital flows: market adjustment in the face of a to aggregate demand, employment
direct foreign and portfolio temporary shock. More specifically, the and social cohesion along the follow -
investment analysis in this section will look beyond ing channels.
the traditional macro-economic adjust-
47
Domestic labour market conditions can ment channels ( ), and identify socio- Firstly, job losses are likely to be dis-
also trigger cross-border effects via their economic adjustment channels that may proportionally carried by the low-skilled
impact on international capital flows. also affect the depth and persistence since the hiring and firing costs of low-
Foreign direct investment (FDI) from of the downturn. Such socio-economic skilled workers are lower than those of
countries at the cutting edge of tech- channels include distributional effects, the highly skilled (notably since that the
nology to lagging countries is expected labour market hysteresis and interac- latter carry more valuable firm-specific
to have a positive impact on employment tions between labour and product mar- human capital) ( ). Consequently, as the
51
and growth as well as on human capital kets (as discussed in the first part of this low-paid generally have an above aver-
formation in the destination country ( ). section). In turn, these socio-economic age propensity to consume out of their
46
Increased dependency on FDI can how- developments may generate cross-bor- incomes, aggregate demand will experi-
ever make the host country more vulner - der effects via international trade and ence an additional downward push ( ).
52
able to sudden reductions in FDI flows, capital flows (as discussed in the second
48
such as labour market shocks, with part of this section). ( ) It should be noted that a similar argument
can be made in the case of a temporary
negative supply shock.
( ) If focusing only on macro-economic
49
adjustment in labour markets. It would
be beyond the scope of this chapter to
examine also cyclical cross-border effects
that arise from developments that are not
directly related to labour market adjustment,
such as developments in bond, money and
45
( ) See, for instance, European Commission 50 product markets.
(2012), Chapter 6, and European ( ) In a currency union with irreversible nominal
Commission (2014) EU Employment and ( ) I.e. changes in average prices, wages, exchange and an absence of fiscal capacity.
47
Social Situation Quarterly Review, June income, etc. (in a currency union with ( ) See, for example, Agénor (2001).
51
2014, supplement on mobility. irreversible nominal exchange in the absence ( ) To the extent that the related average
52
( ) See, for instance, http://ec.europa. of a fiscal capacity). See, for example, De propensity to consume will be higher than
46
eu/research/social-sciences/pdf/ Grauwe (2014) for an analysis of traditional the average propensity to consume in the
labfdi-final-report_en.pdf macro-economic adjustment channels. economy.
223
such adverse developments. See, for consequential risks of a slowdown or halt Domestic socioeconomic
instance, European Commission (2010). of the convergence process. Furthermore, developments include...
there is a risk that the diffusion of tech-
Labour mobility can strengthen nology weakens firms’ competitiveness When a Member State of a currency
upward convergence in international markets, so that firms union is hit by a temporary asymmetric
may decide to export rather than invest negative demand shock, its economy will
Increased labour mobility means that, in in production capacity in the other coun- temporarily (but not necessarily only for
principle, workers can move more eas- tries — with a potentially adverse impact a short period) deviate from its growth
ily from areas with a surplus of workers on convergence (see, for instance, Fosfuri path, before it eventually returns to its
48
(and lower real wages) to areas with a et al. (2001) and Kudo (1993)). original growth path ( ), at least in the
shortage (and higher real wages). Sig- absence of hysteresis effects, such as
nificant immigration flows put down- Finally, cross-border portfolio investment the erosion of employability of unem-
ward pressure on real wages in host can be affected by the development of ployed workers — as discussed below.
countries, while emigration flows put socioeconomic conditions, in particular
upward pressure on real wages in send- by adverse developments in unemploy- The cross-border effects will primarily
ing countries ( ) — thereby strengthen- ment and income distribution. Firstly, be transmitted via the trade channel as
45
ing convergence in earnings. low income earners are generally more the country’s real effective exchange rate
affected, since their capacity to service depreciates and its domestic absorp-
In addition, increased mobility of skilled debt may deteriorate more quickly than tion decreases ( ). While cross-border
49
workers can strengthen the diffusion of for other categories of the population. effects are transmitted through changes
knowledge and has strong potential to Secondly, as rising income inequality in average prices, wages and domestic
50
promote upward convergence in produc - and unemployment affects domestic income ( ), a full assessment of the
tivity growth. Nevertheless, increased economic, social and political stability, adjustment process needs to also take
labour mobility runs the risk of agglom- the ‘confidence’ of portfolio investors account of the socioeconomic adjustment
-
eration of knowledge-intensive industries may decrease and a higher risk pre channels (in particular, distributional and
and brain drain that may strengthen mium demanded. labour market hysteresis effects) as well
divergence (as discussed above). Hence, as other socioeconomic feedbacks.
the coordination of synergies between 3.2.2. Cross-border
policies that promote labour mobility transmission of domestic …cyclical distributional effects…
and knowledge networks will continue socio-economic developments
to be an important policy challenge (at in the economic cycle An adverse temporary asymmetric
the European level) in the future (see shock will not only affect total output
also Section 3.2 below). This section examines the cross-border and income, but can also intensify ine-
effects stemming from domestic labour quality resulting in important feedbacks
International capital flows: market adjustment in the face of a to aggregate demand, employment
direct foreign and portfolio temporary shock. More specifically, the and social cohesion along the follow -
investment analysis in this section will look beyond ing channels.
the traditional macro-economic adjust-
47
Domestic labour market conditions can ment channels ( ), and identify socio- Firstly, job losses are likely to be dis-
also trigger cross-border effects via their economic adjustment channels that may proportionally carried by the low-skilled
impact on international capital flows. also affect the depth and persistence since the hiring and firing costs of low-
Foreign direct investment (FDI) from of the downturn. Such socio-economic skilled workers are lower than those of
countries at the cutting edge of tech- channels include distributional effects, the highly skilled (notably since that the
nology to lagging countries is expected labour market hysteresis and interac- latter carry more valuable firm-specific
to have a positive impact on employment tions between labour and product mar- human capital) ( ). Consequently, as the
51
and growth as well as on human capital kets (as discussed in the first part of this low-paid generally have an above aver-
formation in the destination country ( ). section). In turn, these socio-economic age propensity to consume out of their
46
Increased dependency on FDI can how- developments may generate cross-bor- incomes, aggregate demand will experi-
ever make the host country more vulner - der effects via international trade and ence an additional downward push ( ).
52
able to sudden reductions in FDI flows, capital flows (as discussed in the second
48
such as labour market shocks, with part of this section). ( ) It should be noted that a similar argument
can be made in the case of a temporary
negative supply shock.
( ) If focusing only on macro-economic
49
adjustment in labour markets. It would
be beyond the scope of this chapter to
examine also cyclical cross-border effects
that arise from developments that are not
directly related to labour market adjustment,
such as developments in bond, money and
45
( ) See, for instance, European Commission 50 product markets.
(2012), Chapter 6, and European ( ) In a currency union with irreversible nominal
Commission (2014) EU Employment and ( ) I.e. changes in average prices, wages, exchange and an absence of fiscal capacity.
47
Social Situation Quarterly Review, June income, etc. (in a currency union with ( ) See, for example, Agénor (2001).
51
2014, supplement on mobility. irreversible nominal exchange in the absence ( ) To the extent that the related average
52
( ) See, for instance, http://ec.europa. of a fiscal capacity). See, for example, De propensity to consume will be higher than
46
eu/research/social-sciences/pdf/ Grauwe (2014) for an analysis of traditional the average propensity to consume in the
labfdi-final-report_en.pdf macro-economic adjustment channels. economy.
223
