Free Migration between the EU and Switzerland Peter Stalder, Swiss National Bank European...

Free Migration between the EU and Switzerland Free Migration between the EU and Switzerland Peter Stalder, Swiss National Bank

European Integration Conference, Laurier University, Waterloo, April 30 – May 1, 2010

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1. Background information

2. Migration agreement with the EU – main results

3. Modelling approach

4. Simulation results in more detail

5. Can the results be generalized?

Free Migration between the EU and Switzerland: Impacts on the Swiss Economy and Implications for Monetary Policy

January 2010

Peter Stalder, Swiss National Bank, Research



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European Union and Switzerland as an outsider


Population in 2009: Total 7.8 Mio Swiss 6.1 Mio Foreign 1.7 Mio

Bilateral Agreements with the EU Reciprocal opening of markets in several areas: •Free movement of persons (effective as of mid-2002)•Technical trade barriers•Public procurement procedures•Agriculture•Air and land transport•Participation in research programs



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French, (Swiss-)German, Italian and Romansh as languages




4

Foreigners in total population in percent, 1900 - 2007




5

Foreign population (in 1000) by origin, 1988-2008

other countries

FranceSpainTurkey

Germany

Portugal

Italy

ex Yugoslavia




6

Foreign employment by category, 1960-2008

Cross-border

Seasonal / temporary

Permanent residence permit

27% of total employ-ment

1960 1965 1970 1975 1980 1985 1990 1995 2000 2004 2008


Annual permit (renewable)

5-year permit for EU citizens



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40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

1985 1990 1995 2000 2005

Immigration

Emigration

Net-immigration

1

2

3

4

5

6

1985 1990 1995 2000 2005

Unemployment rate

Net-immigration and unemployment, 1981-2009




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Net-immigration and unemployment, 1981-2009

0

20,000

40,000

60,000

80,000

100,000

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5

Unemployment rate

Ne

t-im

mig

rati

on

2007

2008

2009


1981



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Agreement with the European Union on free migration between the EU and Switzerland:

o Effective as of June 2002.o Entitles citizens from EU member states to take long-term residence

in Switzerland on the condition that they possess a valid work contract.

o Reciprocal right for Swiss citizens to work and live in the EU. o Certain quotas remained in place in the first years of the treaty but

were abolished by mid-2007. o Prior to that date, firms tended to circumvent the restrictions by hiring

workers from the EU for a start on basis of temporary permits. o Since June 2004 Swiss firms do no longer have to give priority to job

applicants already residing in Switzerland.

2. Migration agreement – main results



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Main results:• Facilitated immigration reduced the incidence of labor shortages. • It also stimulated the economy from the demand-side (consumption, housing investment,

equipment investment).• GDP growth was raised by 0.5 percentage points p.a. on average, amounting to a level

difference of 3.2% in 2008.• The employment effect was a bit weaker, implying slightly higher productivity growth. • Inflation was reduced only marginally because the increased supply potential was largely

absorbed by a stronger expansion of aggregate demand. A relatively lax course of monetary policy contributed to this outcome.

• The unemployment rate was lifted by 0.5 to 0.7 percentage points. • Households incurred a loss in real wage growth of 0.25 percentage points p.a. on

average, amounting to a level difference of 1.7% in 2008.

o Analysis on basis of an existing macroeconometric model, accounting for the dynamic interaction between immigration, the labor market, aggregate demand, wage-price setting and monetary policy.

o Comparison of the development 2002-2008, as it took place under the agreement, with a “status quo ante” simulation.

2. Migration agreement – main results



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Supply Block Production function

GDP vs. Potential Output

G

Labor demand vs. labor supply

Employment L

Wage and price formation

W = f(P, L )

P = f(W, G )

Household income = f(wage- and capital income)

Proportion of capacity-constrained firms

Proportion of labor-constrained firms

Inflation

Aggregate Demand Block Consumption Investment Export - Import GDP

Monetary BlockSRATE = f(, ΔGDP, ECHF/EUR) “Taylor rule“

LRATE = f(SRATE, LRATEEU)

ECHF/EUR = f(spreadCHF vs. spreadEU)

World Economy (exogenous): GDP in EU, USA , Japan and “Dynamic Asia“ International Prices and Interest rates, Oil price




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LDiLS

Excess demand: Li = LS < LDi

Excess supply: Li = LDi <

LS

Demand and supply-constrained micro labor marktes

LD



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LDiLS



LS

LD

L

V

L

U




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LDiLS



LS

LD

L

L

Filling vacancies by EU workers


L



16

0

1

2

3

4

0 1 2 3 4

URATE

VR

AT

E

Status quo

Migration agreement

Beveridge curve

NAIRU

Impact of the migration agreement: Idealistic view




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2001q1

2003q2

2008q2

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5

URATE

VR

AT

E

2001q1

2008q2

1997q12003q2

2009q4

Empirical U-V relationship,1997q1-2009q4




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2001q1

2003q2

2008q2

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5

URATE

VR

AT

E

1997q1

2001q1

2003q2

2008q2

3,900

4,000

4,100

4,200

4,300

4,400

4,500

4,600

1996 1998 2000 2002 2004 2006 2008

+ 4.8%

+ 8.4%

Empirical U-V relationship,1997q1-2009q4 Total employment (in 1000), 1995q1-2009q4




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0

1

2

3

4

0 1 2 3 4

URATE

VR

AT

E

Status quo

Beveridge curve

Migration agreement

Impact of the migration agreement: Realistic view


Migration agreement



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LDi



LS


LD LS

L



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LD L LS(LF, …) πL

LF = LFSwiss+ LFforeign (long-term residents, 16-64)

LFforeign = f(πL)

Ltemp = f(πL) (temporary and cross-border workers)

Production function

Aggregate demand

POP = POPSwiss + POPforeign (long-term residents)

POPforeign = f(πL)


Under the migration agreement, the reactions to πL

became stronger and/or quicker.



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Δlog(Ltempt) = -b1Δlog(1-πt) – γ[log(Ltempt-1) - β0 + β1log(1-πt-1)]

0.19 4.20 1.15 historical(status quo ante)

0.32 4.57 1.94 under theagreement

Example: Equation for the number of temporary and cross-border workers – Parameter shifts due to the agreement:

Ltemp = f(πL)




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U-V relationship

actual (under the influence of the agreement) “status quo ante” simulation (suppressing the parameter shifts caused by the agreement)

In the downturn 2001-2003, the unemployment rate increased from 1.8% to 3.9%. Under "status quo ante" conditions, it would have risen to 3.5% only.

In the upswing 2004-2008, unemployment fell from 3.9% to 2.5%. Under “status quo ante” conditions, it would have declined more strongly to 1.8%.


0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.5 2.0 2.5 3.0 3.5 4.0URATE

VRATE

2001q4

2003q4

2008q2

2003q3

2008q2



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U-V relationship

actual (under the influence of the agreement) “status quo ante” simulation (suppressing the parameter shifts caused by the agreement)

In the downturn 2001-2003, the unemployment rate increased from 1.8% to 3.9%. Under "status quo ante" conditions, it would have risen to 3.5% only.

In the upswing 2004-2008, unemployment fell from 3.9% to 2.5%. Under “status quo ante” conditions, it would have declined more strongly to 1.8%.


URATE

VR

AT

E

Migration agreement

Status quo ante



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.10

.15

.20

.25

.30

.35

.40

.45

2002 2003 2004 2005 2006 2007 2008

actual status quo ante

-2

-1

0

1

2

3

4

2002 2003 2004 2005 2006 2007 2008


Proportion of labor-constrained firms Real GDP growth in %

Together with the stimulating effects of immigration on aggregate demand, this has raised GDP growth, entailing a level difference in real GDP of 3.2% in 2008.


The agreement has mitigated labor shortages, raising firms’ production potential from the supply side.



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0.95

1.00

1.05

1.10

1.15

1.20

1.25

00 01 02 03 04 05 06 07 08

actua l WA GE status quo ante WAGEactual CPI status quo ante CPI

Wages and prices (indices 2000 = 1)

On the other hand, households were facing higher unemployment …


1.5

2.0

2.5

3.0

3.5

4.0

00 01 02 03 04 05 06 07 08


Unemployment rate in %

and weaker real wage growth, amounting to a real wage loss of 1.7% in 2008.



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0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2002 2003 2004 2005 2006 2007 2008


-1

0

1

2

3

4

5

6

2002 2003 2004 2005 2006 2007 2008

actual status quo antestatus quo ante, but 3M-Libor actual

3M-Libor in % Inflation in % (GDP-deflator)

Under the positive supply-side effects of the migration agreement monetary policy pursued a relatively lax course, stimulating GDP growth from the demand side. Even so, inflation was slightly lower than it would have been under “status quo ante” conditions.

This policy course, which was appropriate given the positive supply-side effects of the agreement, would have been inflationary in its absence. Inflation as measured by the GDP deflator (CPI inflation) would have increased to 5.7% in 2007 (5.3% in 2008).




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The above simulation results refer to the period 2002-2008. Can they be generalized? Two difficulties:

oThe opening of the Swiss labor market towards immigration from the EU has transitory and permanent effects: Transition to a “new regime”, changed functioning of the economy under the “new regime”. These two effects are difficult to disentangle.oThe parameter shifts are estimated over a period in which the Swiss economy was on an upswing. The finding of increased upward flexibility of labor supply does not necessarily imply symmetrically increased downward flexibility in a downturn.




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Replication of the forecasting situation at the end of 2008, under the following assumptions in the forecast period:

oExogenous world economy variables: Recession in 2009, followed by a somewhat hesitant recovery from 2010 onwards.oThree versions of the model for Switzerland, distinguished by the equations used for Ltemp = f(πL), LFforeign = f(πL) and POPforeign = f(πL):

• Status quo ante (parameter shifts suppressed): SQA• Stronger reactions to πL symmetrically both in downturns

and upturns: SYM• Stronger reactions to πL only in upturns: ASYM




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.08

.12

.16

.20

.24

.28

.32

2008 2009 2010 2011 2012 2013 2014 2015

SQA SYM ASY M

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2008 2009 2010 2011 2012 2013 2014 2015

SQA SYM ASY M

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

2008 2009 2010 2011 2012 2013 2014 2015

SQA SYM ASY M

Proportion of labor-constrainedfirms (πL)

Foreign labor force(LFforeign, q-on-q change in %)

Unemployment rate(URATE, in %)

Comparing SYM with SQA: The symmetrically enhanced reaction of foreign labor to tension in the labor market (πL) dampens the swings in unemployment without affecting the level of unemployment in the long run.

Comparing ASYM with SQA: Stronger reaction of foreign labor to tension in the labor market only in the upswing results in a “ratchet effect”: Unemployment increases by more in the downturn than it decreases in the subsequent upswing.


Free Migration between the EU and Switzerland Peter Stalder, Swiss National Bank European...

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