Extending the EU Single Market Eastwards: Sectoral Trade and Real Wage Effects1

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.