Lorenzo Caliendo, Yale

"Goods and Factor Market Integration: A Quantitative Assessment of the EU Enlargement"

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The economic effects from labor market integration are crucially affected by the extent to which countries are open to trade. In this paper we build a multi-country dynamic general equilibrium model to study and quantify the economic effects of trade and labor market integration in the context of the 2004 European Union enlargement. In our model, trade is costly and features households of different skills and nationalities facing costly forward-looking relocation decisions. We use the EU Labour Force Survey to construct migration flows by skill and nationality across 17 countries and a constructed rest of the world for the period 2002-2007. We exploit the timing of the change in policies due to the 2004 EU enlargement to identify the corresponding changes in labor mobility costs. We apply our model and use these estimates, as well as the observed changes in tariffs, to quantify the effects from the EU enlargement. We find that new member state countries are the largest winners from the EU enlargement, and in particular low-skilled labor. We find smaller welfare gains for EU-15 countries. However, in the absence of changes to trade policy, the EU-15 would have been worse off after the enlargement. We study even further the interaction effects between trade and migration policies, the importance of the timing of migration policy, and the role of different mechanisms in shaping our results. Our results highlight the importance of trade for the quantification of the welfare and migration effects from labor market integration.

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