Migration to Help German Construction Boom

Germany ends work restrictions on some citizens from the new, former communist European Union members on May 1; but the country is torn between fears of a wave of immigration and hopes that a shortage of labor for its booming construction and manufacturing sectors will end.

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In 2004, the EU admitted 10 new members, eight of them drawn from the former Soviet Bloc.

But worried by the prospect of unskilled migrants unsettling labor markets, some governments in Western Europe delayed the right to free movement of labor across borders enjoyed by citizens of older member states.

In 2009, average annual wages in Germany were $36,716, more than double Poland’s $17,812, according to the Organisation for Economic Cooperation and Development.

Germany and Austria are the last two core nations to relax their restrictions on the first eight Eastern European accession countries, while restrictions still persist in many EU countries for the two that joined in the second wave – Bulgaria and Romania.

Analysts say that this fresh labor from Eastern Europe could provide a boost to a German economy that is still emerging from the economic crisis, with a recovery largely driven by exports.

Any influx could benefit the country’s manufacturing, construction and services industries, which remain major drivers of gross domestic product growth, as well as taking the edge off longer term concerns over the country’s ageing society.

German unemployment fell to 18-year lows of 7.3 percent in April 2011, prompting concerns that the market may be running short of skilled workers.

Good Timing

With investment options in Greece, Spain and Portugal curtailed by those countries’ sovereign debt crises, more German money is remaining in the domestic market and flowing into construction projects, Daniel Gros, director of the Centre for European Policy Studies, told CNBC.com.

“This couldn’t be better timed, especially in the areas that need foreign labor, such as the construction industry,” Gros said. "For the first time in over a decade, construction is booming in Germany, and you need large numbers of unskilled labor.”

The accession countries also maintain a relatively large talent pool of skilled labor from the engineering, manufacturing and service industries, he said. While skilled workers were able to find work in Germany previously, the administrative barriers were too high for many companies and individuals.

Migrants in Germany have a higher tendency towards entrepreneurship, often due to their constrained circumstances, and hence create economic value and employment opportunities, the Nuremberg-based Institute for Employment Research said in an April 2011 report.

Nevertheless, the relaxation of controls may seem politically inexpedient during a period of widespread austerity across the euro zone.

Immigration has long been a hot-button issue within the EU, particularly in the UK, France, Italy and Spain, where anti-immigration and right-wing parties have made gains in the face of fiscal tightening and high unemployment.

Immigration became a major touch-point in the UK’s general election in 2010, with then-Prime Minister Gordon Brown famously losing press support after being caught on tape calling a voter with anti-immigration views “a bigot”.

The country allowed migration from most of the Eastern European accession countries in 2004, and experienced far higher levels than originally anticipated. The government predicted net annual inflows of between 5,000 and 13,000 from new EU members, but immigration from Poland, the largest of the so-called “A8” countries admitted under the new rules, increased by around 60,000 per year.

But the evidence supporting the fear that this migration undercut wages in the UK is scant. A 2009 report from the Institute for Public Policy Research, a think-tank, suggested that the net effect on wages from immigration was actually marginally positive, contributing to around 3.5 to 4.5 percent of real wage growth per year.

However, the report also warned, the distribution of immigrants towards the bottom of the wage scale may mean that low-salaried and occasional workers may have felt a greater pressure.

In 2008, a study by the Low Pay Commission showed that over the previous decade, immigration had led to a 1.5 to 2 percent increase in the GDP per capita in the UK.

Multiculturalism Failed?

Germany has had debates around immigration and integration, and Chancellor Angela Merkel controversially claimed in October 2010 that the “multikulti” or multiculturalism experiment had “failed.” However, such arguments have generally focused more around migrant communities from outside of Europe.

Germany has contained unemployment far better than other EU countries and is better able to absorb migrants into the labor force, experts say.

Furthermore, according to figures from the Institute for Economic Research in Cologne, it has experienced one wave of immigration from Eastern Europe – around three million – in the 1990s following the fall of the Berlin Wall.

By contrast, institute forecasts a total of around one million immigrants into Germany by 2020.

“The migration will not go to all regions. It will mainly be in the southern states, Bavaria, Baden-Württemberg, Hesse, and into the big cities. These are regions with very low unemployment,” Karl Brenke, an expert in labor migration at the German Institute for Economic Research in Berlin, told CNBC.com

Brenke is not convinced that there will be any significant inflow of migrants, not least because economic opportunities remain relatively strong in source countries.

“On the one hand there is the booming industry in construction, manufacturing and the service [sector],”he said. “But on the other hand, we also have an economic boom in Eastern Europe, especially in Poland.”

Poland has typically provided a large number of seasonal and permanent migrant workers for the German market. The country has been recovering strongly, posting economic growth of 4.5 percent in the first quarter of 2011.