Reader's Letter Of The Day

Spotted by Carol W in the FT:

Sir, I normally agree with your Europe correspondent, Wolfgang Münchau, and his incisive comments on European economic matters, but I disagree with him when he says that the eurozone “needs free movement [of labour] as a macroeconomic stabiliser — with people moving from countries with high unemployment to those with a shortage of labour” (“Opt-outs and the high price of misguided pragmatism”, July 25).

He states the orthodoxy, but not the reality. Labour migration is a dynamic process that tends to generate cumulative expansionary forces in the countries of destination and relative contractionary forces in the countries of origin; a process of “circular and cumulative causation”, as the famous Swedish economist Gunnar Myrdal once called it.

If one of the purposes of the free movement of labour (and capital) within the EU is to promote the convergence of European economies, the movement to an equilibrium is far from guaranteed. The free movement of labour from poorer to richer countries is not necessarily a “macroeconomic stabiliser”. The same argument applies to regions within countries: witness the continuing north-south divide in the UK and Italy despite years of labour flows from poor to richer regions.

The disequilibrating nature of free factor movements is a powerful reason for taking work to workers, rather than encouraging the free movement of workers to work. The EU could do much more in this regard if it is serious about the economic plight of the peripheral economies of Europe with high unemployment.

Tony Thirlwall, Professor of Applied Economics, Keynes College, University of Kent.

I don't agree with his conclusion (i.e. that we should encourage businesses to relocate to low-wage/high-unemployment areas), but the observation is sound: free movement increases regional inequalities. (I suppose some would use this as justification for restricting freedom of movement, I'm not sure that's a good idea either).

This is exactly mirrored by land values, of course. If people move from north to south, then land values in the south will increase, regardless of how many new homes are built there (building more homes to dampen prices is like throwing twigs on a fire to cool it down - more homes = more people = even higher values), and land values in the north will fall.

The obvious policy conclusion seems to me to just leave capitalism to itself to do what it does best (i.e. allow free movement and avoid subsidies to poorer regions) and collect the uplift in destination areas via LVT; reduce other taxes accordingly and distribute the rest as a Citizen's Dividend and you are half way there - stronger economy and less inequality. What's not to like?