Extending the EU Single Market Eastwards: Sectoral Trade and Real Wage Effects

Helena Marques and Hugh Metcalf ()
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Hugh Metcalf: University of Newcastle-upon-Tyne

Discussion Paper Series from Department of Economics, Loughborough University

Abstract: In this paper we address the question of the impact of permitting free migration in an enlarged trading bloc. We estimate two sectoral equations for trade flows and real wages of three regional blocs of the enlarged EU that we defined as North (wealthiest EU), South (Greece, Portugal and Spain) and East (acceding Central and Eastern European countries). We then use the estimated coefficients to compute potential trade flows and real wages for these three groups under the two alternative scenarios of an enlargement with and without free movement of labour. A fully-fledge Single Market allows the North, with good market access and human capital endowments, to consolidate its current hub position by attracting more firms and skilled workers. Thus its net exports of high scale economy, skill-intensive goods increase and so do overall real wages, though they decrease in low scale economies sectors. The South, with poor market access and human capital endowments, retains competitiveness in low scale economies, low skill-intensity sectors and sees an overall reduction in real wages, except in high scale economies, low skill-intensity sectors. The East, with poor market access but well endowed in human capital, has a marginal gain in trade terms but suffers a real wage loss. Moreover, skilled migration would cause a brain drain that, if of sufficiently large proportions, could have very damaging consequences in the long-term.

Keywords: EU enlargement; gravity model; human capital; labour demand; migration; wage equation (search for similar items in EconPapers)
JEL-codes: F1 F15 F22 J31 L6 (search for similar items in EconPapers)
Date: 2003-10, Revised 2003-10
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Working Paper: Extending The EU Single Market Eastwards: Sectoral Trade And Real Wage Effects (2004)
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