Journal of Political Economy

May 25, 2021

Articles in journals

Opromolla, L., Caliendo, L., Sforza, A.

1-50

The economic effects of labor market integration are crucially affected by the extent to which countries are open to trade. In this paper we build a multi-country dynamic general equilibrium model to study and quantify the economic effects of the trade and labor market integration associated with the 2004 European Union (EU) enlargement. In our model, trade is costly and households of different skills and nationalities face costly forward-looking relocation decisions. We use the European Union Labour Force Survey to construct annual migration flows by employment status, skill, and nationality across EU countries for the period 2002-2014. We exploit the timing of the changes in policies due to the EU enlargement to identify the changes in migration costs. We apply our model and use these estimates, as well as the observed changes in tariffs, to quantify the effects of the enlargement. We find that new member state countries are the largest winners, with heterogenous effects across skill groups. We find smaller welfare gains for EU-15 countries. However, in the absence of these changes to trade policy, the EU-15 countries would have been worse off after the enlargement. We also study the interaction effects between trade and migration policies, the importance of the timing of migration policy changes, and the role of different economic mechanisms in shaping our results. Our results highlight the importance of trade for quantifying the welfare and migration effects of labor market integration.