Excess Churn in Integrated Labor Markets

The 2004 and 2007 enlargements of the EU Single Market gave western European firms a new source of labor consisting of foreign workers willing to work for pay below that of native workers. As a job in one of Europe’s high-income countries also entails coverage in a more generous welfare and social insurance system, the migrant reservation wage may lie below the opportunity cost of their labor. This represents an externality: Employers and migrant workers can pass some of the remuneration cost onto the welfare state, and have an incentive to agree on a lower wage the higher is the expected payoff from future welfare state transfers. Once employment is obtained – and welfare state entitlements secured – the reservation wage of migrant labor is likely to rise. The firm will in turn have an incentive to replace existing migrant employees with new migrant workers willing to accept lower pay. This paper studies empirically the turnover of employees in Norwegian private-sector firms, and shows how turnover relates to the firm’s share of migrant labor. We identify what we label excess churn as labor reallocation within firms that involves the simultaneous flow from employment to unemployment insurance and hiring of similar replacement workers. We find that there is more excess churn in firms with a higher fraction of migrant workers from the new EU countries.