The impact of European integration on the development of national labour markets

Foreword In this paper Philip Raines of the European Policies Research Centre of the University of Strathclyde sets out to trace the effects of European integration on European labour markets. Integration has taken the form of increased intra-regional trade and to some extent increased flows of foreign investment. It has not taken the form of flows of labour migration, which may if anything have declined. But trade flows should still have some effect on convergence in wages and labour costs. However, although some poorer, later joining, members of the European Union have experienced a faster rate of per capita income growth than the average there has in general been remarkably little convergence in wage costs. Intra-industry trade has predominated (in products which are imperfect substitutes for each other) and a hierarchy of country productivity levels has been little changed over the years. However, there is a possibility that increased trade flows have widened regional differences within countries. Raines stresses that one reason why no European Union wide labour market has emerged is because so many practices, institutions and rules determining labour market functioning are set nationally. This has not inhibited a fast rate of trade growth but, of course, appropriately harmonized rules and practices might improve the process of labour reallocation and lead to even faster trade growth. This was an issue in the early days of the European Economic Community when it was feared that some institutional features of labour markets would give certain countries an unfair competitive advantage. This fear was effectively based on a theory of trade which placed excessive emphasis on labour costs and homogenous products. A more recent fear is that the single currency places greater strain on labour markets in dealing with " asymmetric shocks ". This may in turn lead to greater labour market harmonization among European Union members. In fact there will probably continue to be many different ways by which different labour markets achieve the necessary flexibility to cope with this issue.