Joern Quitzau (PhD, University of Hamburg) was a Visiting Fellow at AICGS in April 2014 and an American-German Situation Room Fellow in April 2018. He is a Senior Economist at Berenberg, Germany’s oldest owner-managed private bank. In addition, he is a lecturer at Frankfurt School of Finance & Management. He specializes in economic trend research and economic policy and has been working on several aspects of the European integration for more than ten years.
Prior to his position at Berenberg, Joern Quitzau worked for Deutsche Bank Research in Frankfurt (2000-2006) with a special focus on tax and fiscal policy.
How mobile are workers in the euro currency area? Everyone directly or indirectly involved in devising, designing, and implementing the single European currency had to deal with this question in great depth, with good reason. According to Robert Mundell, winner of the Nobel Prize for Economics, one of the elementary characteristics of an optimum currency area is the high mobility of the factors of production. In his essay “A Theory of Optimum Currency Areas” published in 1961, Mundell defines an optimum currency area as an area at whose borders mobility of the factor “labor” comes to a halt. When the people within the area migrate to where they have good employment prospects, there is no need for separate currencies in regions within this area—and hence no need to devalue the currency in order to boost regional competitiveness. Mundell came to the conclusion that an area in which the factors of production are mobile should have a single currency.
Underlying this is the following concept: If various regions in a currency area are affected to a different extent by an economic shock, leading to an increase in unemployment in individual regions, for instance, the job-seekers must be mobile and go to where jobs are available. In other words, it must be possible to cushion economic shocks with a high level of labor mobility, because the exchange rate is of course not available as a means of adjustment within a currency area. What this means in concrete terms is that the labor market must be flexible and open in the currency area. Flexible factor prices—mainly wages—represent a further potential instrument for cushioning economic shocks. If unemployment rises during the course of a crisis, the demand for workers can be stimulated by falling wages.
These fundamental insights of currency theory were already the subject of fierce debate before the euro was introduced. Economists were mostly of the opinion that the listed criteria of an optimum currency area were not reflected in Europe. The cross-border mobility of workers within the envisaged euro zone was too little—at least if countries like Italy, Spain, or Portugal were to be included. Alongside different attitudes and less of a willingness to look for a job abroad if necessary, language barriers played a major role. Many economists viewed this as a major difference from the United States, where the same language is spoken throughout the country. Thanks to a lack of language barriers and the generally greater flexibility of U.S. citizens, the mobility of Americans was and still is considered much greater than that of Europeans. Even if a majority of economists in the 1990s came to the conclusion that the euro zone could not become an optimum currency area, Robert Mundell, the founder of the theory of optimum currency areas was and still is—paradoxically—a fully-fledged supporter of the euro.
So much for the theory. But what does the reality look like in the euro zone? In economic terms, the individual euro zone countries were affected to very different extents first by the global crisis and later by the crisis of confidence in the euro. In countries like Spain and Greece, the unemployment rate soared from under 10 percent to over 25 percent, while the employment boom in the German labor market continued at the same time despite the euro crisis. Were the euro zone an optimum currency area, Greeks and Spaniards would have needed to come to Germany in large numbers in order to exploit the opportunities offered by the German labor market.
Before we take a look at the empirical evidence and highlight whether the pressure of the euro currency crisis has changed the behavior of workers in Europe in terms of whether their mobility has increased, we should have a short glance at the U.S. The U.S. labor market could serve as a role model for the European labor market.
When it comes to the flexibility and—above all—the mobility of labor, the United States is generally viewed as the perfect example. In Germany, this view is reinforced by media images of Americans who set off with all their worldly belongings—sometimes their house as well—on the back of a trailer on their way to a new place to work and live. Alongside this more anecdotal evidence, the high mobility of U.S. citizens is also well documented by empirical evidence.
A series of studies comes to the conclusion that inter-regional mobility has been greater in the United States than in Europe for decades. The study results relate to the time before the global crisis and in some cases stretch back to the 1960s. When it comes to the question of whether the United States meets the criteria of an optimum currency area, it is safe therefore to assume that the American population is mobile enough to migrate to where jobs are available in the event of asymmetrical economic shocks. Thus, the American labor market assumes part of the internal balancing function required by a currency area experiencing different regional economic trends because it is of course not possible to use the exchange rate to bring about an adjustment.
A closer look at U.S. migration data also shows, however, that mobility has declined over the course of time. Even during the U.S. financial crisis, inter-regional mobility failed to increase appreciably—as would normally have been expected. The higher level of home ownership is sometimes put forward as a possible explanation for reduced mobility. There has been much speculation about the correlation of home-ownership rates on the one hand and mobility and labor market efficiency on the other hand. A clear, generally accepted reason has not yet been found. It does seem highly likely, however, that especially those homeowners whose house value fell below the value of their mortgage during the course of the real estate crisis are severely restricted in their mobility. Relocating entails additional migration costs, because real estate losses would have to be realized. All in all, it is safe to assert that the United States can still be considered the benchmark despite all the necessary qualifications and the declining mobility among Americans that has been observed for some time now.
Migration Trends in Europe during the Crisis Years
Comparing the situation prior to the financial crisis with the situation during the crisis, it is obvious that migration patterns have changed. Workers in Europe have responded to the euro crisis. Cross-border migration flows have changed considerably over recent years.
However, the single currency has not yet given mobility within the euro zone a direct, visible boost. Instead, the euro crisis primarily diverted the migration flows from the new EU member states in central and eastern Europe. Instead of heading for Spain, Ireland, and Italy, workers from the accession countries are now going to other countries in Europe. Some workers from central and eastern Europe have even returned to their home countries from the countries hit by the euro crisis or moved on to other European states, for example Germany. This redirection of the migration flows from central and eastern Europe after 2007 is playing a much greater role in labor mobility than direct internal migration from the countries badly affected by the euro crisis to economically stronger euro zone countries. In the end, the redirection has capped the top of the labor market crisis in Europe.
Employment and incomes are the actual drivers of labor mobility in Europe. People go where the jobs are. Thus, the European Monetary Union is more mature today than it used to be a couple of years ago. In addition, the persistent income gap between the countries of central and eastern Europe and western Europe is acting as a lever initiating migration.
The migration balances of the crisis-hit countries have come under pressure from two sources: fast-falling immigration figures coupled with rapidly rising emigration at the same time. A number of previously popular countries for immigration, like Spain, turned into net emigration countries during the crisis. Workers are reacting to the crisis. Migrants from the new member states in central and eastern Europe have proven to be especially mobile. They head for those euro zone countries where the labor market gives them opportunities, and they leave those countries again when the situation on the labor market deteriorates badly.
Migrants are increasingly young and well educated. In general, a positive selection can be observed among emigrants, measured by the distribution of education in their home countries. Highly skilled migrants are in some cases buying their job by working below their formal qualifications at the new place of work. At the same time, a job for which they are actually overqualified is the better choice for them, provided this represents the only alternative to unemployment in the short run. However, the rising average age of the population is likely to dampen labor mobility within Europe in the future. This makes it all the more important to address structural reforms in order to boost employment growth in Europe and the euro zone.
At the end, there is one more aspect worth to be mentioned: The gap between skills offered and those demanded by the labor market widened rapidly during the crisis, especially in the crisis-hit countries but also in the euro zone overall. The skill mismatch implies high structural deficits on the labor markets in the euro zone that cannot be overcome by more labor mobility alone. Actually, the skill mismatch has hardly anything to do with the common currency. Parts of the labor market problems that are often attributed to the euro are in fact the result of a far-reaching structural change.
With regard to the question whether the euro zone is on the way to an optimum currency area, recent labor market and migration trends provide some interesting implications: The euro zone’s workforce is not yet mobile enough to fully absorb asymmetric economic shocks. Europe still lags behind the United States. However, the situation has been significantly improving during the crisis years because mobile workers from the accession countries left the crisis countries and moved to Europe’s core countries, where the jobs are. In the light of the skill mismatch, it is important to point out that even perfect labor mobility could not fully eliminate unemployment in the euro zone. In other words, low flexibility and/or mobility are only a minor cause of labor market problems in Europe. Structural change is a very important cause for unemployment. Technological progress is devaluating qualifications, which used to be highly demanded in the past, in virtually all countries. Hence, qualification, education, and training are the appropriate measures for this part of the labor market problems especially for low-skilled workers, who were heavily hit by the crisis.