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Extending the EU Single Market Eastwards: Sectoral Trade and Real Wage Effects

In this paper we address the question of the impact of permitting free migration in an enlarged trading bloc. We estimate two sectoral equations for trade flows and real wages of three regional blocs of the enlarged EU that we defined as North (wealthiest EU), South (Greece, Portugal and Spain) and East (acceding Central and Eastern European countries). We then use the estimated coefficients to compute potential trade flows and real wages for these three groups under the two alternative scenarios of an enlargement with and without free movement of labour. A fully-fledge Single Market allows the North, with good market access and human capital endowments, to consolidate its current hub position by attracting more firms and skilled workers. Thus its net exports of high scale economy, skill-intensive goods increase and so do overall real wages, though they decrease in low scale economies sectors. The South, with poor market access and human capital endowments, retains competitiveness in low scale economies, low skill-intensity sectors and sees an overall reduction in real wages, except in high scale economies, low skill-intensity sectors. The East, with poor market access but well endowed in human capital, has a marginal gain in trade terms but suffers a real wage loss. Moreover, skilled migration would cause a brain drain that, if of sufficiently large proportions, could have very damaging consequences in the long-term.

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Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2003_10.

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Date of creation: Oct 2003
Date of revision: Oct 2003
Handle: RePEc:lbo:lbowps:2003_10
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  16. Laszlo Matyas, 1997. "Proper Econometric Specification of the Gravity Model," The World Economy, Wiley Blackwell, vol. 20(3), pages 363-368, 05.
  17. Wang, Z.K. & Winters, L.A., 1992. "The Trading Potential of Eastern Europe," Discussion Papers 92-21, Department of Economics, University of Birmingham.
  18. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
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  20. Hanson, Gordon H, 1997. "Increasing Returns, Trade and the Regional Structure of Wages," Economic Journal, Royal Economic Society, vol. 107(440), pages 113-33, January.
  21. Gary L. Hunt & Richard E. Mueller, 2002. "A Methodology for Estimating Returns to Skills for Canadian Provinces and U.S. States," Journal of Regional Science, Wiley Blackwell, vol. 42(1), pages 127-143.
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