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
Logic
Definitions
1. Q = (Q/P) . P
1
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
2
 Also conquest/imperialism
 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?
3
Phases of European Growth (Tables 7.1
to 7.3)
 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.
4
7.2 Causes of Growth in Medium
Term
Solow 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?
5
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 key
6
 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
7.3 Long –Run Growth
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.
8
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 migration
9
 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
Characteristics
Labour
Markets:
Definitions (Box 8.1)
 L = (P) . (Pa/P) . (L/Pa)
10
 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: parttime v full-time, temporary to longterm, 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
11
 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
12
- 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
someone
4. 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.
13
 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
15
 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.
16
 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.
17
 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 nonEU countries so contentious?
 Again gainers and losers.
 Educated v unskilled migration.
18
 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 winwin 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
20
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
21
 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
22
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.
23
9.2 Changed Circumstances and CAP
Problems
 Hypothetical Example (see also
Section 9.2.1)
Large Farmer
Small
-----------------------------------------------------Output (litres)
800K
40K
Cost/litre
€1
€3
Total cost
€800K
€120K
Market price
€1
€1
-----------------------------------------------------Balance
Breakeven Loss €80K
Support Price
€3
€3
-----------------------------------------------------Balance Profit €1.6M
Breakeven
 Inefficient: for both small and large
farmers
24
 Inequitable (Fig 9.3 and Table 9.2)
 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
25
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
26
 Luxembourg Agreement 2003 and
Health Check 2009. Three strands.
 Payments not linked to output (decoupled)
 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)
27
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
28
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
29
 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
30
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
31
 Reinforced by other measures of wellbeing.
 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’
32
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.
33
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.
34
 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.
35
 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 cofinancing exists
 Also additionality applies, i.e. would
not happen otherwise
 EU enlargement: Insiders v outsiders.
 Empirical Evidence
37