Growth Effects and Factor Market Integration

1. The Economics of European Integration Chapter 7 Growth Effects and Factor Market Integration

2. Growth Effects • European leaders have long emphasised a different the pro-growth aspects of European integration. • These operate in a way that is fundamentally different from the way allocation effects operate. • They operate by changing the rate at which new factors of production – mainly capital – are accumulated, i.e. the name ‘accumulation effects’.

3. Verbal Logic of Growth • Growth in income per worker requires more output per worker. • Nation’s labour force can produce more goods and services year after year only if they have more/better ‘tools’ year after year: • ‘tools’ means capital broadly defined: • physical capital (machines, etc.) • human capital (skills, training, experience, etc.) • knowledge capital (technology).

4. Verbal Logic of Growth • ERGO, rate of output growth linked to rate of physical, human and knowledge capital accumulation. • Most capital accumulation is intentional and it is called investment: • thus: European integration affects growth mainly via its effect on investment in human capital, physical capital and knowledge capital.

5. Verbal Logic of Growth: Summary • European integration (or any other policy) → Allocation effect → Improved efficiency → Better investment climate → More investment in machines, skills and/or technology → Higher output per person. • Medium run effects eventually peter out • Growth returns to its long-run rate. • Long-run effects raise long-run rate forever.

6. Some Facts European Growth Phases, 1890-1992

7. Some Facts Growth in the WWII Reconstruction Phase

8. 1950 GDP (1990 $) European Rank 1950 Change in Rank 1950-1973 GDP Growth Rate EEC average 4,825 8.0 + 1.2 4.2 EFTA average 6,835 3.6 -1.4 3.0 France 5,221 7 + 2 4.0 Germany 4,281 9 + 5 5.0 Italy 3,425 13 + 2 4.9 UK 6,847 2 -5 2.4 Some Facts GDP per capita & rankings, 1950 and 1973 (1990 international dollars)

9. Some Facts GDP per capita & rankings, 1950 and 1973 (1990 international dollars) – full list

10. Some Facts GDP per capita & rankings, 1950 and 1973 (1990 international dollars) – full list, cont.

11. Solow Diagram • Show medium run growth effects in simple diagram. • To simplify, start with whole EU as a single, closed economy with fully integrated capital and labour markets and the same technology everywhere.

12. Solow Diagram

13. Induced Capital Formation

14. Integration Induced Investment Rate Rise

15. Integration-induced investment in Spain and Portugal

16. Integration-induced investment in Ireland

17. Integration-induced investment in Greece

18. Long-Term Growth in Solow-Like Diagram

19. Long-Term Growth Impact of Integration euros/L Integration improves efficiency → improves investment climate → higher investment rate (s rises to s’) → faster growth (knowledge capital accumulates more rapidly) GDP/L s’(GDP/L) Y/L* s(GDP/L) C A d(K/L) B K/L* K/L =Knowledge/L

20. Microeconomics of Capital Market Integration

21. ‘Native’ capital-owners in home lose area ‘A’; home labour gains area A+B; Total economic impact on home citizens equal to area B. Foreign capital still employed in foreign gains F; foreign labour loses D+F; total impact on foreign-based factors is -D: if we count the welfare of foreign capital owners whose capital now works in home (gains C+D), so overall foreign welfare gain is C. Welfare Effects of Capital ‘Migration’

22. Welfare Effects of Capital ‘Migration’

23. Labour Market Integration: Simplest Framework • Just like capital migration analysis

24. Immigration: Facts

25. Immigration: Facts (cont.)

26. Unemployment