‘A Nation of Poets and Thinkers’ - Less So with Eastern Enlargement? Austria and Germany

Many people in the European Union fear that Eastern Enlargement
will lead to major job losses. More recently, these fears about job
losses have extended to high skill labor and IT jobs. The paper
examines with new firm level data whether these fears are justified
for the two neighboring countries of Eastern Enlargement Austria
and Germany. I find that Eastern Enlargement leads to surprising
small job losses, because jobs in Eastern Europe do not compete
with jobs in Austria and Germany. Low cost jobs of affiliates in
Eastern Europe help Austrian and German firms to stay competitive
in an increasingly competitive environment. However, I also find
that multinational firms in Austria and Germany are outsourcing the
most skill intensive activities to Eastern Europe taking advantage
of cheap abundant skilled labor in Eastern Europe. I find that the
firms’ outsourcing activities to Eastern Europe are a response to a
human capital scarcity in Austria and Germany which has become
particularly severe in the 1990s. Corporations’ outsourcing of
skill intensive firm activity to Eastern Europe has helped to ease
the human capital crisis in both countries. I find that high
skilled jobs transferred to Eastern Europe account for 10 percent
of Germany’s and 48 percent of Austria’s supply of university
graduates in the 1990s. I then discuss what can be done to address
the skill exodus to Eastern Europe. I show that R&D subsidies
do not work in economies with a skill crisis and I suggest to
liberalize the movement of high skill labor with Eastern
Enlargement.