Credible redistributive policies and migration across U.S. states

Abstract

Does worker mobility undermine governments'ability to redistribute income? This paper analyzes the experience of US states in the recent decades. We build a tractable model where both migration decisions and redistribution policies are endogenous. We calibrate the model to match skill premium and worker productivity at the state level, as well as the size and skill composition of migration ‡ows. The calibrated model is able to reproduce the large changes in skill composition as well as key qualitative relationships of labor ‡ows and redistribution policies observed in the data. Our results suggest that regional di¤erences in labor productivity are an important determinant of interstate migration. We use the calibrated model to compare the cross-section of redistributive policies with and without worker mobility. The main result of the paper is that interstate migration has induced substantial convergence in tax rates across US states, but no race to the bottom. Skill-biased in-migration has reduced the skill premium and the need for tax-based redistribution in the states that would have had the highest tax rates in the absence of mobility.

Understanding gross worker flows across U.S. states

“…Morris and Ortalo-Magne (2007) study the joint distribution of housing prices and wages across metropolitan areas. The paper is also related to the research on the determinants of population flows within the U.S. developed by Greenwood and Hunt (1984), Treyz et al (1993), Rappaport (2004), and Armenter and Ortega (2007). Kennan and Walker (2006) estimate a partial equilibrium model of optimal migration across U.S. states.…”

The Affordable Care Act Medicaid expansion and interstate migration in border regions of US States

“…Thus, they act as "magnets" for low-income individuals. This could lead to a race to the bottom in setting benefit levels due to competition among states (Armenter and Ortega 2010;Bailey and Rom 2004;Saavedra 2000).…”

“…States with relatively high welfare benefits are long believed to attract low-income individuals from lower-benefit states, acting as "welfare magnets" (Armenter and Ortega 2010;Borjas 1999;Brown and Oates 1987). Similar reasoning might apply to the expansion of public health insurance programs such as Medicaid.…”

Distributional Impacts of State and Local Tax Policy in a Heterogeneous-agent Model

“…Several results in this article are presented in the context of tax progressivity. Armenter and Ortega (2010) show how labor mobility generates convergence of optimal tax schedules across US states, but offsetting tax base effects allow a progressive tax system to feasibly redistribute income in equilibrium. Therefore, in a steady state, tax competition and regional migration are not likely to undermine the local governments’ ability to implement progressive tax schedules, as in Tiebout (1956), Oates (1972), Zodrow and Mieszkowski (1986), Feldstein and Wrobel (1998), and Braid (2013).…”