Switzerland and European Integration: What’s wrong with free movement of labour?

Phedon Nicolaides and Roxana Sandu, 12 February 2014

Source: BBC, 2014

Source: BBC, 2014

On Sunday, 9 February 2014, the Swiss people voted in favour of re-introducing restrictions on the free movement of workers between the European Union and Switzerland.The reaction of the EU was swift. On Monday, 10 February, the European Commission issued a short but terse press communiqué. “The European Commission regrets that an initiative for the introduction of quantitative limits to immigration has been passed by this vote. This goes against the principle of free movement of persons between the EU and Switzerland. The EU will examine the implications of this initiative on EU-Swiss relations as a whole. In this context, the Federal Council’s position on the result will also be taken into account.”

On the same day, the Financial Times reported that “Viviane Reding, European Commission Vice-President, suggested that Swiss companies could face limits on their access to the European single market if the country pressed ahead with the new quotas.” “The single market is not a Swiss cheese”, she told the Financial Times. “You cannot have a single market with holes in it. Business people will make their cost-benefit analysis and decide where to establish their companies.”

These statements do not forebode well for the future of EU-Swiss relations. Both sides have much to lose from any retaliatory measures. Switzerland sells in the EU more than half of its total exports. The EU is very important to Switzerland. But so is Switzerland to the EU. Switzerland is the third largest export destination of EU products, after the US and China, and the fourth largest trade partner of the EU, after China, the US and Russia.

Switzerland, like many other European countries, is experiencing high levels of immigration. It is true, however, that the percentage of foreign workers in Switzerland is much higher than in the average EU country. Foreigners account for 30% of the labour force in Switzerland (FSO, 2013) but only of 7% on average in the EU (Eurostat, 2013). Only Cyprus and Luxembourg come close to Swiss levels, with 23% and 50%, respectively (Eurostat, 2013). EU nationals make up close to 65% of foreign residents in Switzerland. Italians are the largest group of foreign residents [16%], followed by Germans [15%], and Portuguese [13%]. The largest increase in foreign residents was registered for Portuguese and German nationals. So if the Swiss people worry about immigration, in a sense they are right to worry about immigration from the EU. But should they worry about immigration at all? Apparently, they do. The Federal Council already reintroduced quotas, as of May 2012, for citizens from eight Central and East European countries. Is there hard evidence to justify these defensive measures?

Looking at the impact of foreign workers on host economies, most studies conclude that on the whole they raise the competitiveness of firms by increasing labour productivity as well as innovation. Consequently, they impact positively on the rate of economic growth (Kerr et al., 2012; Peri, 2012). Restrictions on foreign workers would only hurt domestic firms that cannot hire cheaper but more skilled labour.

Given the fact that in 2012, 64% of the EU/EFTA  nationals entered Switzerland for the purpose of finding employment (FOM, 2013) what is the impact on domestic workers? Again, most studies find that some displacement of domestic workers does occur but at a much smaller extent. Available hard evidence does not support the apocalyptic claims that foreigners cause mass unemployment or become a burden to the host economy. On the contrary, immigration helps to reduce unemployment and increase overall employment (Basten and Siegenthaler, 2013). This is because native workers benefit from positive externalities deriving from the inflow of high-skilled immigrants and from companies not having to relocate in search of skilled labour force.

Foreigners are no loafers. They tend to exhibit higher rates of employment. This has been borne by recent studies in the UK, which is another European country that agonises about foreign workers. The UK National Institute of Economic and Social Research has found that the employment rate is higher among foreigners than among natives. As a result foreign workers contribute more in terms of taxes than what they receive in social security benefits.

What is often forgotten in the debates on immigration is that immigration is just one side of the migration coin. Host countries may also be home countries for those of their citizens who emigrate. In the same issue of Financial Times on Monday, 10 February, there was another article on migration trends in the UK. According to that article, “about 2.2m Britons live in Europe, with Spain boasting an expat population of just over 1m UK citizens, according to government estimates. Of the Britons living in Europe, 400,000 are claiming a state pension from the UK. That compares with an estimate of 2.34m EU citizens living in the UK.”

Although Switzerland has a low rate of unemployment and there appears to be no strong  evidence of a negative effect of EU immigrants on the Swiss wage levels and job security, Swiss voters seem to have ignored  the fact that they themselves benefit from unrestricted access to the rest of Europe. Of course, being a small country, Switzerland sends fewer workers abroad than it receives, but it still gains from free entry into the labour markets of other countries. Switzerland also benefits from access to the EU single market.

If the dispute between the EU and Switzerland would be confined to labour movement, it would not be a big problem. But it would become a very big problem if it leads to retaliatory measures that restrict the trade of goods and services. The numbers cited earlier indicate that both sides will suffer. And this is the irony of using trade to exert political pressure on other countries. By hurting them, you end up hurting yourself. The EU may try to play “smart” by identifying one or more sectors that are important to the Swiss but relatively insignificant to the EU. Although this kind of “smart” action will be tempting, it will still be harmful to both sides.

There is, however, still some hope that such an outcome can be averted. The referendum has not specified the precise policy that the Swiss government will have to implement. The government in Bern understands well that any binding labour restrictions will raise the costs of Swiss industry. It would not be surprising, therefore, that any quotas controlling the inflow of foreign workers would either be set at a high level or would only apply to workers who are not in short supply.

But whatever happens in the end, populists have scored another victory over free markets.

References

Migration Report 2012, Federal Office for Migration, 2013.

Labour market indicators for 2013, Federal Statistical Office FSO, 2013.

Basten, C. and Siegenthalery, M., 2013, Do immigrants take or create residents’ jobs?

Quasi-experimental evidence from Switzerland, ETH Zurich.

Peri, G., 2012,  The effect of immigration on productivity: Evidence from U.S. states, Review of Economics and Statistics, 94(1), pp. 348–358.

Kerr, S. P., Kerr, W. R. and Lincoln, W. F., 2012, Skilled immigration and the employment structures and innovation rates of U.S. firms, Technical report.

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