Edited by Ramón Gómez-Salvador, Ana Lamo, Barbara Petrongolo, Melanie Ward and Etienne Wasmer
DOES EU ENLARGEMENT IMPLY A 'RACE TO THE BOTTOM' IN EU LABOUR MARKETS?
DOES EU ENLARGEMENT IMPLY A ‘RACE TO THE BOTTOM’ IN EU LABOUR MARKETS? Dennis J. Snower The ‘race to the bottom’ thesis is that EU enlargement will make labour markets more ﬂexible by reducing wages. The underlying reasoning is well known: the more generous the welfare beneﬁts provided by a country, the greater will be the inﬂow of immigrants to that country. The immigrants, furthermore, will self-select, that is, the people with the largest incentives to immigrate will be those who are most likely to be or to become dependent on welfare beneﬁts. To ﬁnance these beneﬁts, the government will need to raise taxes, thereby reducing the incentives to work and invest. As a result, there will be an outﬂow of capital from the country. In these ways, countries will be punished for providing generous welfare beneﬁts and thus will have an incentive to reduce them. Consequently, real wages will fall and labour markets will become more ﬂexible. A necessary condition for this to happen is that labour, capital, or goods and services are suﬃciently mobile across countries. In addition, such mobility must not generate a signiﬁcant increase in rent-seeking activities by incumbent ﬁrms and employees with vested interests in the status quo, thereby preventing the ‘race to the bottom’ through the political process. In practice, however, there are good reasons to believe that these conditions are highly unlikely to be met. Let us begin by considering labour mobility. Although income di...
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