Excess churn in integrated labor markets
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Excess churn in integrated labor markets Bernt Bratsberg 1 & Oddbjørn Raaum 1 & Knut Røed 1 Received: 20 November 2019 / Accepted: 14 August 2020/ # Springer-Verlag GmbH Germany, part of Springer Nature 2020
Abstract The common European labor market enhances allocative efficiency, but certain institutional features may also trigger inefficient migration. As a job in a high-income country entails generous welfare and social insurance entitlements, migrants’ reservation wages may lie below their opportunity cost of labor. We show that this gives rise to an externality when employers and migrant workers can pass some of their remuneration costs onto taxpayers. Once welfare benefit entitlement is secured, the reservation wage of the migrant rises, giving the firm an incentive to replace the worker with a similar migrant willing to accept lower pay. This leads to excess churn—a reallocation of labor within firms that simultaneously involves a flow of employees to unemployment benefits and the hiring of similar workers. Based on Norwegian data, we present evidence of high excess churn rates in firms with many workers from the new EU member states. Keywords Churning . Integrated labor markets . Social dumping . EU enlargement JEL codes F22 . D62 . E24
1 Introduction When firms hire workers, they expand employment or replace departing workers. Churn is the hires and separations that offset each other within the firm. In undistorted labor markets, churn is a productive process, whereby employers and employees separate when the value of an alternative option exceeds the value of the current match net of reallocation costs (Lazear and Spletzer 2012). When labor markets with different patterns of productivity merge, workers are allowed to flow more easily toward their best potential use (Kahanec 2013; see also Clemens 2011; Kennan 2012). In an optimal Responsible editor: Klaus F. Zimmermann
* Oddbjørn Raaum [email protected]
1
Ragnar Frisch Centre for Economic Research, Oslo, Norway
B. Bratsberg et al.
currency design area, factor mobility forms a key element (Mundell 1961; McKinnon 1963) as worker mobility generally will enhance social efficiency when productivity differentials and business cycles are not fully aligned across countries (Lundborg 2006; Basso et al. 2019). The enlargements of the EU Single Market in 2004 and 2007 are typically hailed as offering new opportunities for better job matches, where Western European firms gained a new source of labor at low cost, while workers from Eastern and Central Europe could raise their productivity and wages. Thus, labor market integration represents a powerful source for improved allocative efficiency. At the same time, there is widespread political concern about “social dumping” where foreign workers are paid considerably less than comparable domestic labor, thereby putting a downward pressure on native low-skill wages and employment opportunities; see, e.g., the recent collection of papers in Bernaciak (2015). The impacts on native wages and employment var
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