The central focus of this literature summary was to describe labour markets and regional development in transition countries, identify the sources of changes in the candidate countries triggered by accession to the European Union and discuss some of the results regarding the likely impact of the changes on labour markets in the candidate countries. We find that there has been substantial convergence of candidate countries to Western European institutions and labour market outcomes. Furthermore, there has been substantial heterogeneity among countries. Despite this, the labour markets in the candidate countries have their individual features, most important among them:
· Long and persistent reductions in employment rates to levels which are in general lower than in the more successful member states as well as a higher incidence of long-term unemployment, which ranges in the upper half of the EU member states for all candidate countries.
· More severe mass redundancy regulations and weaker trade unions and social partnership organisations.
· Low turnover in and out of unemployment despite substantial structural change. In particular flows out of unemployment have remained small and most of the change in the sector composition of the work force seems to have been accomplished by job-to-job mobility paired with early retirements and new workers.
· Declining internal migration rates despite rising regional disparities.
Given these stylised facts, only few of the studies have been concerned with the issues of labour market dynamics and adjustments in candidate countries. Preliminary evidence suggests that wages may react somewhat more strongly to changes in regional unemployment rates, but the evidence is far from conclusive. Furthermore, little is known on how, e.g., labour supply, migration and wages react to aggregate changes in labour demand.
We also identified three sources through which EU candidate countries may experience changes in their institutions. These are: first, institutional changes triggered by adopting the social acquis, environmental and competition policy as well as probably at a later stage accession to EMU, second, the impact of the EUs structural policy on the candidate countries, and third, changes in trade, foreign direct investment and migration. We find that in assessing the consequences of most of these changes the literature is far from unanimous. It is thus probably still too early to assess the potential effects of these changes from the literature. Nonetheless a number of important hypotheses can be developed from the literature surveyed:
1. Substantial evidence suggests that integration has important structural and distributional effects as well as positive aggregate effects. In particular, both for theoretical reasons as well as from
empirical evidence it can be held that some sectors will be affected positively and others more negatively. This may result in differentiated regional outcomes, to the degree that regions are specialised in certain sectors.
2. Given the effect of integration on structural change, this suggests that the capability of labour markets in candidate countries to adjust to structural shocks will to a large degree determine the labour market effects of integration.
3. There is substantial theoretical evidence, however, which suggests that extrapolating purely from the current labour market dynamics to a time after enlargement may lead to misinterpretations, since the adjustment mechanism may be endogenous to integration. 4. Empirical work on previous enlargements and integration cases suggests that national policy
decisions and use of structural funds are a key element in triggering regional development and catching up.
This suggests that regional (and more generally distributional) issues should be given attention when analysing integration effects. Experience from previous enlargements, although far from conclusive, seems to suggest that accession to the European Union is associated with a series of structural shocks and thus accelerates the speed of structural change and industrial restructuring. This confirms the importance of flexibility for accession to be economically successful.
Furthermore, the scant scientific analysis of previous enlargements suggests that convergence of GDP per capita levels is far from automatic after accession. Policy takes a more decisive role in determining the experience of enlargement than is usually suggested by pure model-oriented economic analysis. In this respect looking at previous research on regional development in candidate countries points at some potential for further divergence of intranational disparities even after accession if national policies are not formulated to counter these effects. The literature finds evidence for divergence in regional development, low migration rates between regions, as well as some evidence that the expected shocks of enlargements (FDI, trade and migration) may have decisively regional implications which are likely to reinforce existing lines of differentiation. Much of the developments of concentration and specialisation by contrast seem to be country- and or industry-specific and to a large degree shaped by the inherited economic geography of the socialist regimes. This suggests that in the accession countries regional policy may play a decisive role in determining the speed of convergence at both national and regional level.
Issues
While differences among the candidate countries seem to be larger than among current EU member states, these facts point to a number of challenges that will be faced in regional labour markets of most candidate countries. Given the importance that accession will succeed for
candidate countries as well as member states, answers to the following questions seem to be particularly urgent:
· Why is the probability of escaping from unemployment so low in the candidate countries and how can schooling, active labour market policy and wage policy help to increase flexibility in the particular economic circumstances of candidate countries? What hinders firms to hire unemployed? These issues may be particularly relevant from a policy perspective when considering the importance of both labour market flexibility in the candidate countries and the importance of human capital development in catch-up processes.
· Why are migration rates so low despite high regional disparities? Can inefficiency in housing markets, spatial mismatching or liquidity constraints help to explain the lack of migration? How is low migration reflected in other aspects of regional labour market adjustment (such as wage flexibility, unemployment and participation decisions)? Answering these questions is important for policy makers for two reasons: first, answers to these questions will make it possible to formulate proper policies to enhance labour market adjustment; second, if analysed in sufficient detail, an indication will be obtained of which social groups may be most strongly affected by integration.
· What have been the reasons for regional divergence in most labour market indicators in the candidate countries and how has this divergence impacted on more latent features of the labour market such as labour supply decisions by individuals and recruiting decisions by firms?