The macroeconomic consequences of migration diversion: Evidence for Germany and the UK

This paper examines the macroeconomic consequences of the diversion of migration flows away from Germany towards the UK in the course of the EU's Eastern Enlargement. The EU has agreed transitional periods for the free movement of workers with the new member states from Central and Eastern Europe. The selective application of migration restrictions during the transitional periods has resulted in a reversal of the pre-enlargement allocation of migration flows from the new member states across the EU. Based on a forecast of the migration potential under the conditions of free movement and of the transitional arrangements, we employ a CGE model with imperfect labour markets to analyse the macroeconomic effects of this diversion process. We find that EU Eastern enlargement has increased in the GDP per capita in the UK substantially, but that the diversion of migration flows towards the UK has reduced wage gains and the decline in unemployment there. The effects of the EU Eastern enlargement are less favourable for Germany, but the diversion of migration flows has protected workers there against a detrimental impact on wages and unemployment.

► EU Eastern enlargement has increased the GDP per capita in the UK substantially.
► For Germany, transitional periods reduced potential gains from EU Eastern enlargement.
► Transitional periods have protected workers against a detrimental impact on wages and unemployment in Germany.