A Nation of Poets and Thinkers - Less so with Eastern Enlargement? Austria and Germany

Many people in the European Union fear that Eastern enlargement will lead to major job losses. More recently, these fears about job losses have extended to high skill labour and IT jobs. Using new firm-level data, this Paper examines whether these fears are justified for Austria and Germany - two countries neighbouring Eastern enlargement. We find that Eastern enlargement leads to surprisingly small job losses, because jobs in Eastern Europe do not compete with jobs in Austria and Germany. Low cost jobs of affiliates in Eastern Europe help Austrian and German firms to stay competitive in an increasingly competitive environment. We also find, however, that multinational firms in Austria and Germany are outsourcing the most skill-intensive activities to Eastern Europe taking advantage of cheap, abundant skilled labour in there. We find that the firms’ outsourcing activities to Eastern Europe are a response to a human capital scarcity in Austria and Germany that became particularly severe in the 1990s. Corporations’ outsourcing of skill-intensive firm activity to Eastern Europe has helped to ease the human capital crisis in both countries. We find that high-skilled jobs transferred to Eastern Europe accounted for 10% of Germany’s and 48% of Austria’s supply of university graduates in the 1990s. We then discuss what can be done to address the skill exodus to Eastern Europe. We show that R&D subsidies do not work in economies with a skill crisis and we suggest liberalizing high-skill labour movement with Eastern enlargement.