Excess churn in integrated labor markets

Bernt Bratsberg (), Oddbjørn Raaum and Knut Røed ()

Journal of Population Economics, 2021, vol. 34, issue 3, No 4, 865-892

Abstract: 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; F22; D62; E24 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s00148-020-00795-1

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