Labor Flexibility

Going Where the Work Is

People enter a government-run employment office in Madrid
Queues at employment centers in Spain could be eased by countries like Germany.
  • Why it matters

    Why it matters

    • High unemployment in crisis countries endangers the currency union. Supporting immigration from these countries benefits the euro zone as a whole.
  • Facts


    • Greek unemployment now stands at about 25 percent.
    • Despite a rebounding economy, Spain’s unemployment rate is around 23 percent.
    • Economically robust Germany had a jobless rate of 6.4 percent in March, a record low.
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How can a crisis-ridden monetary union be stabilized without members leaving it more or less voluntarily?

Robert A. Mundell, who won the Nobel memorial prize for economics in 2000, recognized more than 50 years ago that high labor mobility must exist in an efficiently functioning common-currency area. Especially when there is only minimal flexibility with the downward direction of prices and wages in the regions of this currency space.

This seems to be precisely the situation in the crisis countries of the euro zone ― with the exception of Ireland. Labor mobility allows regions with low growth and employment to “export” part of their labor force to regions that, because of stronger growth, show a correspondingly higher demand for workers.

In this way, high unemployment can be avoided in one part of the monetary union, while in another part the boost to employment puts a damper on the upward trend in prices.

If human capital remains to a large extent unused in the countries of origin because of high unemployment, then it quickly loses its value.

From this perspective, the discussion about immigration in Germany and other euro zone countries isn’t being is not being properly conducted. If we want not only to fulfill our own needs with regard to the labor market and social-security system but also to contribute to the European currency union’s stabilization, then we should facilitate immigration from countries such as Spain and Greece.

We would relieve pressure on the crisis countries’ labor markets and simultaneously prevent the rapid devaluation of their human capital.

The oft-heard criticism of emigration out of crisis countries is nonsense. The argument about a so-called “talent drain” in the emigration countries would be valid only if high employment predominated there. If, on the other hand, human capital remains to a large extent unused in the countries of origin because of high unemployment, then it quickly loses its value.

There is a superficial legitimacy to the objection expressed in reference to Spain – that the workforce available there doesn’t fit the demand for labor in the other euro-zone countries. It can’t be denied that the dramatic rise in Spanish unemployment from about 8 percent in 2007 to more than 25 percent in 2013 was due primarily to the bursting of the Spain’s real-estate bubble.

The idle workforce, however, doesn’t consist solely of skilled personnel from the construction industry in a narrower sense. As investigations by Spanish labor-market economists have shown, the booming real-estate sector at that time also provided jobs to unemployed academics and high-school graduates who are now pushing up Spanish unemployment.

Over the long run, the euro zone can scarcely endure if individual member states continue to have high unemployment rates. There is the danger that political extremists could use the situation to turn back reformers’ successes. If it is possible to improve the necessary and desired mobility of workers within the euro zone, exits of crisis countries from the monetary union are likely to become obsolete.


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