Labor Market Effects of Open Borders: Lessons from EU Enlargement

We exploit the expansion of the European Union as a natural experiment to study the labor market consequences of open borders. The eastern enlargement of the EU differentially exposed workers in different regions and occupations in Finland to foreign workforce. Using a triple-differences strategy and detailed individual-level administrative data, we provide robust evidence that the entry of new EU countries decreased the annual earnings of vulnerable workers persistently relative to less vulnerable workers in the construction sector. This decrease was about 1,700 euros per year, on average, which corresponds roughly to a month's salary. The vulnerable workers were not able to close the wage gap even ten years after the EU enlargement. Most estimates suggest that the workforce nearly doubled in size after the EU enlargement, which would imply an elasticity close to zero. We also find a small increase in unemployment. The effect on earnings is predominantly driven by workers below 30 years old, who became more likely to switch to other sectors of employment or establishments of work, and workers over 50 years old, who became more likely to retire.