Tuesday 27 September 2016

EU Services Part I

The issue of immigration is currently a hot debated topic and is often put in connection with globalization and the current political backlash. Both are actually two sides of the same coin. If goods which are produced by labour in one country cannot move across borders to another, then people themselves carrying along labour can always decide to move.

This substitution-effect is for economists nothing new as it has been found in several studies regarding trade and immigration. In other words, immigrants displace specific offshore tasks that could otherwise be imported by firms.

Yet, there is more to this relationship between immigration and trade, particularly when looking at services. For instance, this recent paper by Ottaviano, Peri and Wright (2015) finds that next to the reassignment of offshore tasks to immigrants, immigration also has a positive effect on the receiving country’s exports. How does that work?

First, this effect is bilateral between countries. This means that immigrants of a specific country promote exports significantly to that country where they come from. This is predominantly so for services which are known to be language-intensive and institutional-knowledge intensive such as legal or accounting services, recruiting and training services or advertising services, etc.

Obviously, it helps for a firm’s exports when it employs immigrants that know their origin country’s language and institutional structure where these sophisticated services are going to. Second and more interestingly, however, is that this paper also finds an additional aggregate productivity effect. That is, next to their bilateral export effect, immigrants also cause the economy overall and on the whole to have greater levels of productivity and exports.

Putting this in EU context, what does that mean in terms of policy? In my view, a couple of messages come out. For one, it clearly helps to have open borders across countries in that the free flow of skills complement trade, which results in greater economic benefits. In that regard, the four freedoms of the EU, namely those of goods, services, capital and people, are economically at least a rock-solid principle to stick at.

But there is more. It also means that diversity or a multi-cultural workforce is important for economies thriving on services and most EU countries do so. Although that may be an unpopular message in some EU countries right now, fact is that services which carry along most value-added are precisely those that actually benefit from having immigrants in the labour market and are precisely those that many EU countries produce.

Third, the EU needs to deregulate further its services markets. Although all the above results are “corrected” for the effect of burdensome regulations in services sectors, they nonetheless still matter. Many EU countries still have substantial trade and domestic regulations in services in place. A forthcoming World Bank report on the EU shows that lowering services regulations matters a lot for the EU in order to reap productivity benefits.

Fourth, and most important in my view, these results mean that policies related to the movement and employment of labour skills are important. Or, in other words, more efficient labour markets are necessary to foster benefits from cross-border skill movements. For instance, some EU countries have an oversupply of architects whilst others within the EU have a shortage. Making EU labour markets more flexible might bring another big push to unlock exports and productivity effects in services, a much needed factor for overall EU growth. 

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