Curbing Free Movement is a Bad Idea

Phedon Nicolaides, 2 December 2013

Immigration_myth_bustingOn 27 November, David Cameron, the UK Prime Minister, wrote an article in the Financial Times arguing in favour of restrictions on the right of persons to move freely in the European Union. Next day the Financial Times reported that Germany and France were also concerned about the imminent lifting of restrictions on the movement of Bulgarians and Romanians. When Bulgaria and Romania joined the EU in 2007, several Member States requested transitional derogations from the principle of free movement of persons and workers. These derogations are due to expire on 1 January 2014.

Mr Cameron’s article is significant because it marks a change of policy by an important Member State on one of the fundamental principles of the European Union. Here I focus on the two main strands of the article: The causes and impact of inflows of foreign workers and his proposals for reform.

First, concerning the cause of cross-border movement of workers, the premise of the Prime Minister’s argument is that immigrants from Eastern Europe have been attracted to the UK because of “income disparity”. He thinks that the previous UK government made a “monumental mistake” by not securing the right to impose restrictions at the time of the EU enlargement in 2004. But this income disparity is precisely what is likely to have contributed to substantial benefits for the UK.

When foreign workers enter the domestic labour market, labour supply expands and, if wages are flexible, there is a decline in wages. This may hurt domestic workers but the country as a whole gains from extra output as firms hire more workers.

However, if foreign workers differ from domestic ones — which they often do to a certain extent — then foreign workers do not necessarily displace domestic workers. Foreigners take jobs that they can do better or jobs that locals do not want. This is a form of specialisation that benefits the host country without hurting domestic workers. Productivity-improving specialisation generates gains which go mainly to foreign workers in the form of salaries. But in addition, there are indirect benefits for the domestic population through lower prices for the goods and services provided by the foreign workers. A recent study in the United States has found that the benefits to the domestic population are in the range of $38 billion to $75 billion per year or about 0.5% of GDP.

Public concern about immigration is fuelled by fear that foreigners take away jobs from the natives. Certainly, some displacement does occur. Moreover, it has been documented that there are adverse effects on low-skilled domestic workers who compete more directly with foreign workers. However, so far there is no evidence of massive job losses caused by immigration.

Another concern is the perception that foreigners are scroungers, intending to exploit the social security benefits enjoyed by native populations in wealthy countries. Yet most studies have found that foreigners, as a group, tend to exhibit higher employment rates than natives and draw fewer unemployment and other social security benefits than the native population.

These empirical findings do not necessarily imply that immigration causes no problems at all. Since immigrants tend to be poorer, they are more likely to live in poorer, perhaps run-down neighbourhoods. As a result, they concentrate in neighbourhoods where there is also higher likelihood that native residents experience higher unemployment rates. Social tension may occur.

The high concentration of foreigners in certain neighbourhoods may also generate negative externalities. Natives move out, depressing property prices which in turn make these areas more attractive to new arrivals of low-income foreigners. The children of immigrants may have lower language skills than native children and, for this reason, they may require remedial lessons at school putting pressure on school budgets.

Mr Cameron in his article does not consider the economic contribution of foreign workers on host economies and concentrates instead on their negative social impact. He announces that the UK will reform its social security system to make it more difficult for foreigners to claim benefits. EU law does recognise that Member States have discretion to organise their social security systems as they wish. What EU law requires is that there is no overt or covert discrimination against foreigners. In this respect, I very much doubt that some of Mr Cameron’s statements can stand up before the Court of Justice. For example, a rule whereby foreigners are barred from entry “unless they can prove they have a proper reason to be here, such as a job” is a blatant infringement of EU law. First, the right to move is not conditional on being motivated by a “proper reason”, otherwise it would not be much of a right. Second, EU citizens have the right to go abroad to look for a job. Any requirement to obtain a job before moving would be more onerous on foreigners than natives, which is a form of indirect discrimination.

The second main strand in Mr Cameron’s article is that the current EU rules need reform in order to address the allegedly “vast population movements”. The latest Eurostat data indicate that EU citizens living in another EU country barely exceed 3% of the population. In 2005, the corresponding figure was 2.2%. That is, during the past 8 years there has been an increase of about 1%. This hardly constitutes a “vast population movement”. But for this reason and because too many foreigners are thought to live off benefits, Mr Cameron wants free movement to be a “qualified right” and to returned to a “more sensible basis”. He wishes to “put in place new arrangements that will slow full access to each other’s labour markets until we can be sure it will not cause vast migrations”. In this connection he makes two proposals.

The first is to “require a new country to reach a certain income or economic output per head before full free movement was allowed”. The second is for “individual member states [to] … be free to impose a cap if their inflow from the EU reached a certain number in a single year.”

Both proposals are likely to do more harm than good. As explained above, disparities between countries lead to movement of workers, which generates economic benefits. Host countries will only hurt themselves by capping the inflow of workers. Moreover, if the inflow of workers is fueled by domestic demand for labour due to the growth of the economy, imposing a cap would throttle the economy. It would also make it difficult for companies to expand without bureaucratic interference [the curbing of which is, incidentally, another of Mr. Cameron’s policy aims].

Anyone who proposes a deviation from a fundamental principle should also explain why it will not lead to further weakening of the same or other fundamental principles. According to Mr Cameron, the previous UK government made a “monumental mistake” in not imposing restrictions on workers from the new Member States. Does this mean that EU rules should change to reflect the political beliefs of the government of the day? And what if other countries have problems with other internal market freedoms? Once such questions are posed, it becomes rather obvious that the EU system with 28 Member States cannot function effectively when countries can pick and choose the rules they like.

Undoubtedly, some foreigners do attempt to exploit the British social security system, as both foreigners and natives try to do so in all countries. The UK has indeed attracted proportionately more workers from the new Member States, but its problems with benefits cheats are not unique or confined to foreigners. Mr Cameron’s proposals seem to neglect the benefits to be had from foreign workers and over-generalise the trouble caused by some foreigners. More seriously, his proposals are more likely to end up harming host countries and will undermine the integrity of the EU.

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