Goods and Factor Market Integration: A Quantitative Assessment of the EU Enlargement

The economic e?ects from labor market integration are crucially a?ected by the extent to which countries are open to trade. In this paper we build a multi-country dynamic general equi¬librium model with trade in goods and labor mobility across countries to study and quantify the economic e?ects of trade and labor market integration. In our model trade is costly and features households of di?erent skills and nationalities facing costly forward-looking relocation decisions. We use the EU Labour Force Survey to construct migration ?ows by skill and na¬tionality across 17 countries for the period 2002-2007. We then exploit the timing variation of the 2004 EU enlargement to estimate the elasticity of migration ?ows to labor mobility costs, and to identify the change in labor mobility costs associated to the actual change in policy. We apply our model and use these estimates, as well as the observed changes in tari?s, to quantify the e?ects from the EU enlargement. We ?nd that new member state countries are the largest winners from the EU enlargement, and in particular unskilled labor. We ?nd smaller welfare gains for EU-15 countries. However, in the absence of changes to trade policy, the EU-15 would have been worse o? after the enlargement. We study even further the interaction e?ects between trade and migration policies and the role of di?erent mechanisms in shaping our results. Our results highlight the importance of trade for the quanti?cation of the welfare and migration e?ects from labor market integration