Shanghai Daily, 02.03.2007
Author: Hans Werner Sinn
In January, the European Union expanded eastward once again. Following the "Big Bang" enlargement of 2004, which added 75 million new EU citizens, the accession of Romania and Bulgaria has added 30 million more.
What does this mean for the labour markets of Western Europe?
Politicians tend to argueMany that, although some argue that, despite the loss of some jobs as plumbers and the like migrate to the West and companies relocate to the East, this will be offset by the West will enjoy more jobs in net terms due to the likely expansion of expansion of itsWest European exports.
That reasoning is familiar, but is it correct?
One thing is certain: enlargement has confronted Western Europe with extremely stiff wage competition.
The view that eastward enlargement will create jobs in the West assumes that East European low-wage workers will complement, and boost demand for, West European workers.
In fact, this is partly the case. West European engineers are needed to design world-class products to be manufactured by East European workers, while people with managerial skills can be sure that their abilities will be needed to integrate the EU's newest workers into the European economy.
But for the great majority of workers who have only their normal labor to sell, East European employees are actually substitutes, not complements.
The implications for the labor market are clear: for the highly qualified in the West European workforce, eastern enlargement will lead to an increase in labor demand; for all others, it will mean a decrease. Due to a fundamental asymmetry in the flexibility of wages this will lead to a net decline of employment.
To be sure, eastern enlargement is leading to an increase in West European exports, because more markets have been opened in which western firms can sell their products.
However, if exports increase, the factors of production - namely capital, qualified workers, and unskilled workers - must be diverted from other sectors of the economy, and this leads , on balance, to a loss of jobs there.
Since export goods are considerably more capital and knowledge-intensive in their production than other goods, the structural change will even reduce the net demand for unskilled labour.
The shrinking sectors include, of course, the labor-intensive preliminary stages of industrial production, where jobs have been outsourced to other countries - a phenomenon that is neither apparent to customers nor reflected in statistics on foreign direct investment.
Moreover, while it is often conceded that jobs can be lost via foreign direct investment, much more important are financial capital exports, that is, the loans that enable foreign firms to create jobs on their own turf.
Consider Germany, which in 2006 exported capital worth 108 billion euro, only 25 billion euro of which was for direct investments, whereas net domestic investment in all sectors combined was only 75 billion euro.
Part of this capital export flowed to the new EU members in Eastern Europe, which enjoyed, relative to their size, gigantic capital imports.
Considering all these factors, the assertion that the EU's eastward enlargement will lead to net job creation in Western Europe appears to be nothing more than empty politically correct rhetoric.
(The author is professor of economics and finance at the University of Munich, and president of the Ifo Institute. The views expressed are his own. Copyright: Project Syndicate, 2007. www.project-syndicate.org)
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