Hamish McRae: A lack of continental drift

Economic view

Europe wants to encourage workers to move about more. The European Commission sees lack of labour mobility as one of the main reasons why productivity in Europe is lower than in the US, and last week called for barriers to be removed. In theory, there is full labour mobility within the EU. In practice, there are considerable barriers, both in culture and in bureaucracy.

The result is not only very large discrep- ancies in unemployment rates – 3 per cent in the Netherlands, 9 per cent in neighbouring Germany – but a severe labour shortage of the highly skilled. Most EU countries are looking at ways of relaxing immigration rules for skilled people and that may help a bit. But given Europe's longer-term economic disadvantage of an ageing and, in many countries, a shrinking workforce, there is no excuse for not making the best use of the people it already has.

It is all the more alarming because labour, far from becoming more mobile, seems to be less so. In the Sixties and Seventies there were large flows of workers from southern Europe to jobs in the north. But now that has almost ceased. In some ways this is welcome for it shows that places such as Spain, Portugal and southern Italy are improving their relative economic performance and creating more jobs. But the combination of high unemployment and labour shortages suggests something is seriously wrong.

By coincidence, PricewaterhouseCoopers has just done a survey on labour mobility in Europe, including non-EU members. Some of the results are of this are summarised in the charts: willingness to move varies enormously and in ways that seem quite random; Poles are very willing to move but Hungarians are not; the Swedes and the Swiss are prepared to move but the Germans and Spaniards less so.

For those who will move, the preferred choice of country also seems random. It is not shown in the chart but the French and Germans pick the US as the top choice, so they don't want to work elsewhere in Europe at all, a glum finding for the EU. The Dutch and British pick Spain (must be the weather), while Spaniards and Swedes pick the UK (can't be the weather).

From the company point of view, the only workers who need to be mobile are senior managers and professionals, the middle chart shows. French and Spanish companies particularly value mobility for senior managers; British and Swedish companies value it least. Why do firms need mobility? As you can see in the third chart, the overwhelming reason is either to buy skills or expand abroad. Costs are not important: companies do not look abroad for cheaper workers. Or at least that is what they say. My guess would be that while companies don't try to bring in cheaper labour, if they need to cut costs they simply outsource the work abroad.

Are there really barriers to mobility? Firms in the PwC survey say there are, and if they think that, they deserve a hearing. They point to different employment laws, different pension provisions, and in particular EU immigration policy as significant barriers. My own worm's-eye perspec- tive, from conversations with multinationals operating in Britain, is that the main problem is getting Americans, Canadians, Australians and New Zealanders in. They need people with English as a mother tongue and say they have to use their allocation of non-EU citizens for internal transfers. This means that they cannot employ as many of these people as they would like. This seems nuts.

How big a problem is this? Talking with firms, it would seem manageable rather than dreadful. But it is a more serious problem than the one the EU is focusing on. This leads to the core question: should Europe be worrying at all about lack of labour mobility within Europe? It should certainly be concerned about its poor economic performance vis-à-vis the US. But maybe the key issue is not the need to free up the labour market within the EU. Rather, it is to tackle labour market problems in specific EU countries where there is very high unemployment, and to allow skilled non-EU citizens to come in. It is almost politically incorrect to say Europe does not need more labour mobility between countries, but I suspect that is a second-order problem. First-order problems include the lack of labour mobility within countries and in particular the different economic performance of different parts of the same country. Why, for example, does Munich have half the rate of unemployment of Hamburg, and Hamburg half that of Berlin? If people don't want to move from one part of a country to another, why should they be expected to move between countries?

As for the barriers to labour mobility that result from different social security and pension systems, are they really so vital? When the EU was reporting on its concerns, the story was cited of two young Swedish people who were unable to draw their benefit in Spain. I cannot see how making it easier for Swedes to spend their dole money under the Spanish sun is going to improve European productivity.

The European labour market is a mess. All sorts of rigidities hold the economies back. But it is important to figure out which ones are "must fix fast" and which "nice to fix some time". And a lot of the action is in national rather than EU hands. Several European countries, including Germany, France and Italy, have very high unemployment by the standards of the rest of the developed world; others, such as the UK and the Netherlands, are all right. But we, for our part, should not be complacent if UK companies cannot employ as many Americans as they would like because of outdated immigration controls. If Europe wants to catch up with the US, it might try employing more of them for a start.