From Bismarck to Maastricht: The March to European Union and the Labor Compact


This paper considers the likely impact that European Union (EU) will have on the labor compact.
It is argued that, despite increased economic integration in Europe, countries will still be able to
maintain distinct labor practices if they are willing to bear the cost of those practices. The incidence
of many social protections probably already falls on workers. In addition, it is argued that imperfect
mobility of capital, labor, goods and services will limit the pressure that integration will place on the
labor compact. Evidence is presented suggesting that labor mobility among EU countries has not
increased after the elimination of remaining restrictions on intra-EU labor mobility in 1993.
Moreover, immigration from non-EU countries, which is much larger than intra-EU migration, has
declined since 1993. Evidence is also reviewed suggesting that the demand for social protection
rises when countries are more open, and therefore subject to more severe external shocks. This
finding suggests that increased economic integration and European Monetary Union could lead to
greater demand for social protection. The U.S. experience with state workers’ compensation
insurance programs is offered as an example of enduring differences in labor market protections in
highly integrated regional economies with a common currency.

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Labour Economics, vol. 7, no. 2, March 2000
Working Papers