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

Journal of Political Economy, (2021) 129(12), joint with Luca D. Opromolla, Fernando Parro and Alessandro Sforza

Abstract

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 of the 2004 European Union enlargement. In our model, trade is costly and households of different skills and nationalities face costly forward-looking relocation decisions. We use the EU Labour Force Survey to construct annual migration flows by employment status, skill, and nationality across EU countries for the period 2002-2014. We exploit the timing of the changes in policies due to the EU enlargement to identify the changes in migration costs. We apply our model and use these estimates, as well as the observed changes in tariffs, to quantify the effects from the enlargement. We find that new member state countries are the largest winners, with heterogenous effects across skill groups. 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. We also use our framework to quantify the general equilibrium effects of imposing migration and trade restrictions due to Brexit.