Chapter 7: Growth Effects and Factor Market

Integration

Introduction Why do some countries/regions

grow or not grow? How EU integration affects growth.

7.1 Logic of Growth and the Facts LogicDefinitions

1. Q = (Q/P) . P1

2. (Q/P) = (Q/E) . (E/P)3. (Q/E) = (Q/H) . (H/E)4. Q = (Q/E) .(E): explains increases

in Q/E, not E

See Table 7.1 for differences. Short, long and medium-run effects. Later revisions

Determinants of Growth (NOT in book)Q/E = A.F (K/E, H/E, I, R) or q = A.f (k, h, i, r) All four factors vital. A represents technology k physical capital h human capital i political and other institutions r natural resources; land, water, oil,

climate Also conquest/imperialism

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Interconnected: increased i could increase h, k and A say.

EU integration could affect some or all of these factors. Did it and how?

Evidence

1996-2012 period: EU v US. P increasing in US.

2012-2016 Other Measures of Living Standards Do higher living standards make us

any happier? H/E?

Phases of European Growth (Tables 7.1 to 7.3)

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Living standards of Roman artisans higher than average British worker in 1850.

1913-1950: two World Wars and ‘miracle’ recovery after WWII.

Golden Age: 1950-73. Mid- 1970s to early 1980s: oil crises.

1985 to 1994: recovery but not in E. 1995-2005; slower growth. Jury out

on 2006 to 2015. Marked pick up in 2016 though

Did EU integration play a role? Counterfactual the real problem. (Tables 7.3 and 7.4) Yes, maybe. How integration could benefit

growth easier to demonstrate.

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7.2 Causes of Growth in Medium TermSolow Model (Box 7.1) Q/E increases less with increases in

K/E: i.e. diminishing returns. Equilibrium K/E depends on inflow

(investment) And outflow (depreciation) of new

capital. Assumes fixed proportion of Q/E

saved (s) and fixed proportion of K/E depreciated (δ) (see Figure 7.2).

Each country gets to equilibrium. How does economy grow after this?

EU integration phases: effects on growth Integration could shift out GDP/L

curve. How?

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Liberalization of trade (Chaps 4 and 5: see summary at end of each chapter) Leads to increased competition

implies pressure to lower costs and introduce new technology.

However, winners and losers with tariffs. Diffuse v identifiable groups.

Marginal political constituency. Non-economic reasons: oil, food,

water, energy, uranium, etc Non-tariff barriers bigger hindrance

to trade. Free movement of people perhaps

the most factor in exploiting single market

Single market, industrial restructuring and increased competition (Ch 6) (Figure 7.3)

Economies of scale the key6

Single market implies mergers and industrial restructuring possible.

First manufacturing (e.g. Airbus) but now services: insurance, retail, banking (eg Aldi, Axa, Allianz).

Result a small number of big ‘players’ in intensely competitive market.

Pressure to exploit economies of scale and adopt new technology.

Have to ensure competition though. Gainers and losers like with tariffs. Also freedom to open a business. Brings technology transfers and

assimilation. Financial integration also (Module B). Need for regulation and governance.

7.2.4 Skip

7.3 Long –Run Growth7

Remember: Q/E = A.F (K/E, H/E, I, R) or q = A.f (k, h, i, r)

Continuous invention possible, means A can increase indefinitely (see Figure 7.8).

How to increase h and i also critical. Link between i , h and A. Integration ensures maximum use of

k (i.e. efficiency) and the adoption and development of new technology.

Difficult to get evidence.

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Chapter 8: Operation of EU Labour Markets

Introduction How will EU influence labour market

performance And institutions in member states,

especially of eurozone?

Population P (2025) depends on: P (2016), plus

natural increase, plus net migration9

Natural increase = births minus deaths

Difference between net and gross migration.

Absolute size of population important, but also geographic distribution (see Ch. 10).

8.1 European Labour Markets: Characteristics

Definitions (Box 8.1) L = (P) . (Pa/P) . (L/Pa)

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L = E + UE (E/Pa) = (E/L) . (L/Pa)

Facts US v Europe Comparison of E/Pa and

UE/L (Fig. 8.1) US better on both counts, but not in

2013 Gap on both counts closing Nature of employment growth: part-

time v full-time, temporary to long-term, etc

Measurement of unemployment: valid over time and between countries?

Invalidity benefit and early pension payments v unemployment benefit (why E/Pa best measure)

Standardised rates v social welfare records: e.g. Germany lower than UK using latter but higher using former

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Long-term UE (see Fig 8..6). Two factors influence LTU: flow into

it from STU and time in LTU. Duration and level of UE benefits

critical here. Little in US and must accept work or

training offer in Nordic countries

8.2 Operation of Labour Markets

Normal demand and supply analysis does not apply, as in Figs 8.3 and 8.4

Not just another market. - Wages negotiated, minimum wages

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- Limits on dismissals, minimum working conditions enforced, unemployment benefits paid.

Thus in short to medium term markets may not clear.

Labour market special though. 1. excessive market power by

employers or unions. 2. information asymmetry.3. price of labour is livelihood for

someone4. Human capital: quality of

labour changes over time

Yet, labour market must work or high UE, to non-one’s advantage.

Policy still mainly national.

Role of Trade Unions Historic role still holds.

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Stability, employment (Germany, public sector in UK).

Strong unions in Nordic countries and low UE

Unions negotiate much more than wage (see earlier)

Insiders outnumber outsiders and anyway outsiders have no voice.

Spain’s two-tier labour market for example: change underway.

Unions always support welfare payments.

High and persistent UE benefits in turn creates LTU.

Why no effective EU-wide unions?

Special Case of Long-term Unemployment Source of persistent UE in Germany,

Italy and France in past.14

Hysteresis effects, namely deskilling and demotivation: e.g. surgeon, electrician?

Outside labour market implies not influencing wage rate either

Why drift from STU to LTU the key question.

Unemployment payments: Undoubted benefits to recipients.

May cause UE though. Less cost to leisure Increases bargaining power of unions Encourages black economy. Enforcement the key. Verification checks for fraud

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Availability for work Active labour market policies: LTU an

economic and social issue LTU have to be ‘brought’ back to

work: cannot depend on market. Must have right to withhold benefit

(e.g. Nordic countries). Co-ordination of EU Social policy to

avoid social ‘dumping’ (8.3.3)

8.3 Effects of Integration Integration has led to more intense

competition It has meant flatter labour demand

curves. However, demand curves also move

up. Compositional effects though: some

lose.

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Monetary union increased competition and trade.

Major implications also for Unions. No exchange rate option. Also affects operation of industrial

relations. Why no move to EU-level unions?

8.4 Migration (economic and political)

Issues in General Free movement of labour in Rome

Treaty Free movement of labour could lead

to great efficiency gains.

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In past south-north immigration, plus from outside EU.

Then from new EU countries and Turkey to north and south (see Fig 8.11).

Now again south-north, for skilled works though.

Migrations flows not linked to EU Enlargement effects (Box 8.2 and

Table 8.3) Why is migration from new and non-

EU countries so contentious?

Again gainers and losers. Educated v unskilled migration.

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Complementarity v substitutability (see 8.4.2)

Irish example: import of entrepreneurs/high skills to create other employment.

Also to adopt and adapt new technologies.

Little controversy over migration within EU.

Why? More complementary and also two-way.

Restrictions apply in most countries in relation to non-EU migration.

Also many other barriers to mobility (8.4.4)

Analytical Framework Effects on wages Immigrants may be prepared to work

for less, which means lower wages.19

Increased E and W for foreign workers.

Different if immigrants wish to work only for going home rate.

If immigrants complements a win-win situation.

Effects on unemployment (Fig 8.4) Impact in all cases unclear. Worst case scenario loss to home

workers is large drop in wages and E. Gain to consumers: gainers and

losers again then

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Chapter 9: Common Agricultural Policy

Introduction (not in book)Key Considerations Still an important sector. Uses very large portion of land area

(around 60%) Accounts for large share of

greenhouse gas emissions Huge government intervention in

sector

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Critical to WTO trade talks, environment and health and safety of EU citizens.

Uniqueness of Sector Supply factors: disease, weather,

storage costs, health/safety. Causes instability.

Inelastic demand Large number of producers Immobile factors of production:

labour and land Small shop analogy (Box 9.1) Security and safety of supply

essential, like water Long-run v short-run cost of

production Cultural role of family farm: Ireland,

France, Germany, Poland

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9.1 Old Simple Logic of CAP French/German ‘deal’ Objectives in Treaty of Rome:

increased Q, fair standard of living, stabilize markets, guarantee supply, reasonable prices to consumers

Target and floor prices (Fig 9.2) Import tariffs, export subsidies and

intervention purchases FEOGA: Guarantee (price support) or

Pillar 1 and Guidance Funds (structural change) or Pillar 2.

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9.2 Changed Circumstances and CAP Problems Hypothetical Example (see also

Section 9.2.1)

Large Farmer Small------------------------------------------------------Output (litres) 800K 40KCost/litre €1 €3Total cost €800K €120KMarket price €1 €1------------------------------------------------------Balance Breakeven Loss €80KSupport Price €3 €3------------------------------------------------------Balance Profit €1.6M Breakeven

Inefficient: for both small and large farmers

Inequitable (Fig 9.3 and Table 9.2)

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High budgetary costs and disposal problems (Fig 9.6)

Damaged world trade (through ‘dumping’) (Box 9.2)

Concern for Developing Countries (Box 9.3)

Factory farming encouraged. Damaged environment (through use

of fertilizers etc) Animal welfare and factory farming Does world price reflect all costs?

9.3, 9.4 and 9.5 New Economic Logic, CAP Reform and Today’s Cap

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Price and Income Supports: Pillar 1 Mansholt 1968 Avoid distorting market as above Pressure through WTO: change in US

stance McSharry 1992: reduced support

prices; supply controls (e.g. set aside land).

Direct payments, coupled to output measures.

New environmental, forestry and early retirement emphasis

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Luxembourg Agreement 2003 and Health Check 2009. Three strands.

Payments not linked to output (de-coupled)

Now a Single Payment Scheme based on historical factors

Less so since 2013 ‘Cross compliance’ must apply to

receive payments: with environment, food safety and animal welfare

Importance of rural development Direct payments still favour hugely

the larger farmers, but to be reduced over time (Boxes 9.5, 9.6)

Benefits landowners: (Boxes 9.5 and 9.6)

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Future Reform

Irreversible change now: emphasis switching to guidance funding.

Strategic importance and sustainability of food supply understood

Budget 2014-21 added urgency Almost all on direct payments Fairer distribution of payments ‘Green’ emphasis Shift cost to national governments

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Postscript Food Processing and Food Safety Few products sold directly to

consumer Food industry value is three times

that of primary agriculture Growing Concern over Food Safety Always a concern: e.g. water in 18th

century and around world today Huge variety of issues:

- diseased animals posing threat to human health (BSE and ‘bird flu’)

- to other animals (‘foot and mouth’ and ‘bird flu’)

- sanitary conditions in food preparation

- use of pesticides and hormone residues, GM food, etc

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Can lead to dramatic drops in demand: e.g. listeria in soft cheeses, salmonella in eggs, BSE in cattle, etc

Also more awareness now of animal welfare and environmental damage

Common eating areas and provision (e.g. schools)

Nutrition always an issue: e.g. huge debate over obesity problem

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Chapter 10: Location Effects

10.1 and 10.2 Facts and Trends Core v Intermediate v Peripheral

regions (Figs 10.1 and 10.2). Last has 40% of pop and 20% of

income.

Economist October 14th 2012. Do the seeds of growth spread to the periphery?

Huge income gaps, especially in EU 28

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Reinforced by other measures of well-being.

Poor regions in ‘new’ and ‘old’ member states.

Distribution within countries: variation by factor of 2 to 3.

Over time? (Fig 10.4 Within countries (Fig 10.3 and Fig 10.5) Enlargement greatly worsened

situation. Inequality at individual level much

more marked. Overall v compositional effects: focus

on industry. Former not significant. Krugman specialization index (Table

10.1): measure of ‘difference’

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10.2 Comparative Advantage Integration leads to

- specialisation across countries and- agglomeration within countries.

Nature of specialization depends on factors of production, especially labour: low v medium v high education (see Figure 10.6).

Not just labour though. Natural resources such as land, water,

mines (e.g. oil) access to sea, etc, matter hugely also.

Also, physical infrastructure such as roads, cultural life, environment, etc

Climate matters also. Bananas or citrus fruit, sun and snow holidays.

Liberalisation implies more specialization in composition, not level, of industrial activity.

Movement of labour v movement of industrial activity.

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10.3 Agglomeration and the New Economic Geography

Clustering/agglomeration Overall v sectoral clustering. Why do Banks in London cluster, or

similar retail stores in every city? Large economies of scale, in overall or

part of production process: e.g. cars. (Box 10.1)

Want to be close to largest market. This creates a cycle, with other

companies and spin-offs following. Cost linkages.

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Firm has bigger pool of labour. Region not dependent on one industry. UK and France very concentrated,

Germany and Spain more dispersed Dispersion forces also.

- Land and labour prices- less competition- congestion- technology (e.g. call centres)

(skipping 10.3.2)

10.4 Putting it all Together Greater labour movement within

country. Effects of integration on regional

variations in income? Greater specialization across countries

but agglomeration within countries. Regional unemployment (10.4.1):

wage negotiation at national level.

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Firm can move quickly between regions.

Peripherality and real geography (10.4.2 and Fig 10.12)

Core has transport and a host of other advantages: same in every country, bar perhaps Germany

10.5 and 10.6 EU Regional Policy

Expenditure Nothing in early days: budget minor

(Fig 10.13) 1980s: accession of Greece, Spain and

Portugal also SEA in 1986 Monetary union: large increase in

‘structural’ funds.36

Instruments, Objectives, Principles New schemes for 2014-2220 period

(Table 10.2) Eleven thematic objectives Convergence Projects chosen at local level and co-

financing exists Also additionality applies, i.e. would

not happen otherwise EU enlargement: Insiders v outsiders. Empirical Evidence

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