Is a Policy of Free Movement of Workers Sustainable?

• DOI: http://doi.org/10.1111/sjoe.12163
• Author: Tim Worrall,Pierre M. Picard
• Published date: 01 October 2016
• Date: 01 October 2016

Scand. J. of Economics 118(4), 718–754, 2016

DOI: 10.1111/sjoe.12163

Is a Policy of Free Movement of Workers

Sustainable?∗

Pierre M. Picard†

University of Luxembourg, L-1511, Luxembourg

pierre.picard@uni.lu

Tim Worrall

University of Edinburgh, Edinburgh, EH8 9JT, UK

tim.worrall@ed.ac.uk

Abstract

In this paper, we study the costs and benefits of the adoption of a policy of free movement

of workers. For countries to agree on uncontrolled movements of workers, short-run costs

must be outweighed by the long-term benefits of better labor-market flexibility and income

smoothing. We show that such a policy is less likely to be adopted when workers are more

impatient and less risk-averse, when production technologies display stronger decreasing

returns, and when countries trade a significant share of their products.

Keywords: Labor-market flexibility; migration; sustainable plan

JEL classification:F22; J61

I. Introduction

Since its inception, the European Union (EU) has aimed at implementing

a policy of free movement of workers between member states (Article 45,

EU Lisbon Treaty). However, some EU member states have been reluctant

to implement this policy, implementing it in stages, applying different stan-

dards of implementation, or in some cases applying policies as restrictive

as for non-EU immigrants. Similar projects and difficulties have emerged

in other country associations such as the North American Free Trade Area

†Also affiliated with CORE, Catholic University of Louvain, Louvain-la-Neuve, Belgium.

∗We thank two referees for many useful comments and suggestions. We are also grateful to

participants at the 2011 NORFACE Conference on migration and seminars at Erasmus Uni-

versity, Oxford University, and University Carlos III, and University of Lille for comments.

We are grateful to M. Beine, C. D´

etang-Dessendre, G. Fachini, A. Margherita, P. Neary, T.

Mueller, E. Toulemonde, and A. Venables for helpful comments and suggestions. The first

author gratefully acknowledges the support of the grant F2R-CRE-PUL-10EGQH, University

of Luxembourg. The second author gratefully acknowledges the support of the Hallsworth

Research Fellowship Fund at the University of Manchester. The usual caveats apply.

CThe editors of The Scandinavian Journal of Economics 2015.

P. M. Picard and T. Worrall 719

(NAFTA), in which the TN status currently allows the free movement of

workers only between the US and Canada. The main reason for this re-

luctance lies in the fear that inflows of migrant workers might depress

local labor-market conditions and lower the welfare of the host country’s

workers.1

It is not difficult to find evidence for why country associations might aim

for a policy of free movement of workers and fail to agree on it. Migration

offers large benefits to the immigrants (see, for example, Klein and Ventura,

2009; Clemens et al., 2010) but imposes short-run costs on local workers,

particularly the low-skilled ones (see, for example, Borjas, 2003). In this

paper, we consider the balance of short-term costs with long-term benefits,

and examine the decision of countries to open their borders and adopt

policies of unconditional and uncontrolled movements of workers. The

approach we adopt is similar to the literature on sustaining free trade

(see, for example, Bagwell and Staiger, 1990; Staiger and Bagwell, 1999;

Bagwell and Staiger, 2005; Grossman and Helpman, 1995).2We consider

a repeated model with a simple stochastic structure. To sustain a policy

of free movement of workers requires that no country finds it unilaterally

beneficial to breach the policy. As in the sustainable trade literature, we

suppose that a breach leads to reversion to repetition of a short-run Nash

equilibrium where labor migration is completely controlled. Each country

therefore weighs the short-run cost of immigration against the long-term

benefits, and the policy of free movement of workers is sustainable if, at

each date and state, the long-term benefits exceed the short-run costs for

each country.

To examine this issue, we consider a simple, two-country, dynamic model

where, under free movement of labor, workers freely choose their location

in each time period. Although our main aim is to consider the implications

of migration and trade together, we proceed in stages to develop the model.

Initially, we consider a model where immigration imposes a cost on locals

without specifying how these costs arise (Sections II and III). Taking the

source of this cost as given, we examine how it might be offset by a

long-run benefit stemming from a policy of free movement, in which

labor markets are integrated and workers (and their descendants) are able

to relocate to more productive countries, allowing them to smooth their

consumption. In considering these costs and benefits, it is important to take

1In 2005, the referenda rejecting the European Constitution by the Dutch and French publics

occurred in the context of the debate over the accession of Turkey to the EU. In 2011,

the fear of uncontrolled immigration waves has enticed France to threaten to suspend its

obligation to the EU freedom of movement (Schengen Treaty; see Waterfield, 2011).

2More generally, our approach relates to the discussion about sustainable government poli-

cies (see, for example, Chari and Kehoe, 1990; Acemoglu et al., 2010) and self-enforcing

insurance mechanisms (see, for example, Thomas and Worrall, 1988; Ligon et al., 2002).

CThe editors of The Scandinavian Journal of Economics 2015.

720 Is a policy of free movement of workers sustainable?

into account a possible externality created by free movement of labor. Free

movement will lead to equalization of utilities in equilibrium, but there is

no specific price for the migration decision. Migrants do not inter nalize the

effect of their move on the productivity and consumption of local workers.

If free movement creates a greater cost in the receiving country than gain

in the sending country, then reducing the extent of migration could increase

aggregate welfare: free movement leads to excessive agglomeration of labor

in the receiving country. However, if free movement creates a lower cost

in the receiving country than gain in the sending country, then increasing

the extent of migration could increase aggregate welfare: free movement

leads to under-agglomeration of labor in the receiving country. Under-

or excessive agglomeration decrease the long-run benefits of a policy of

free movement of labor. However, they have opposite effects in the short

run: excessive agglomeration increases the short-run costs while under-

agglomeration ameliorates the short-run costs.

It is therefore important to know more about the relative costs and

benefits of a policy of free movement of labor. We consider these costs and

benefits by more precisely specifying the model in Sections IV and V. In

Section IV, we examine a standard migration model without trade but with

productivity shocks. If production is iso-elastic, then there is no excessive

agglomeration. However, weaker congestion enhances countries’ incentives

to adopt a policy of free movement of workers, because it mitigates the

short-run costs of immigration. Similarly, stronger risk-aversion enhances

countries’ incentives to adopt such a policy because it raises the benefits

from income smoothing that the policy brings. We also show how labor-

market frictions, in terms of minimum wages, affect the sustainability of

policies of free movement of labor.

Finally, in Section V, we discuss the costs and benefits of adopting

a policy of free movement of workers in the presence of international

trade. In the Hecksher–Ohlin benchmark, factor prices are equalized across

countries and workers have no incentives to migrate. To discuss migration

issues, we therefore depart from this model and present a simple Ricardo–

Viner trade model with production of both tradeable and non-tradeable

goods. Because there is a non-tradeable good and differences in technolo-

gies across countries, factor price equalization does not hold and there will

still be an incentive for migration. As has been recognized by Davis and

Weinstein (2002) (see also, Felbermayr and Kohler, 2007), in the presence

of trade, migration induces a terms-of-trade effect. With both tradeable and

non-tradeable goods, the change in the terms of trade caused by migration

has an adverse effect on the relative import prices and the consumption

basket of domestic workers. However, this terms-of-trade effect also at-

tenuates the impact of productivity shocks on consumption and reduces

workers’ incentives to move. We show that the presence of trade leads

CThe editors of The Scandinavian Journal of Economics 2015.