Labor Outflows and Economic Convergence in NMS: Theoretical and Historical Perspectives

The objective of the paper is to better understand the situation of the NMS from a macroeconomic point of view. In particular, the paper draws on both theoretical predictions and historical experiences to answer several questions: How important is migration for the convergence process? Is the degree of labour migration in the NMS unusual? What are the longer-term prospects of the NMS? Outward immigration in the NMS has raised concerns about social and economic stresses that could intensify in the near future. However, as argued in the presentation, net outward migration can be viewed as a natural part of economic convergence, since shedding labour can raise both the capital-to-labour ratio and labour productivity. So far, the NMS do not appear to be heading towards a scenario where both capital and labour are exiting the country. Rather, capital inflows have been strong, wages have been increasing, and the employment rate has been rising, which has more than offset losses in the overall labour force. Nevertheless, complete economic convergence is a distant prospect, and some NMS face a number of challenges to achieve a desirable outcome, where convergence is reached in an orderly fashion and without significant loss of population. Also, with more open borders with other EU members in the near future, both capital and labour flows might look very different in a few years' time. Comparing the NMS experiences to historical experiences, the NMS do not look all that unusual. Indeed, recent rates of net migration are in line with some historical episodes, and net migration was an important part of convergence for many of those countries. Finally, an analytical model indicated that migration is likely to have a small, positive effect on labour productivity over the medium term, but it will have no impact over the longer run.

Allan Brunner is in the European Department at the International Monetary Fund. He serves as the desk economist for Sweden, and conducts research on various topics in applied macroeconomics. He received his PhD from Duke University.


Countries covered: New EU Member States

Research Areas: Labour, Migration and Income Distribution