Should I Stay or Should I Go? Austerity, Unemployment and Migration

Abstract

High unemployment and fiscal austerity during the recent crisis have led to significant migration outflows from the periphery of the euro area. This paper introduces endogenous migration both for the unemployed and employed members of the household in a small open economy DSGE model with search and matching frictions. The government can use public spending, unemployment benefits, or labor income taxes as fiscal consolidation instruments. A tax-based consolidation induces the highest migration outflows in the short run, which exacerbates the induced GDP contraction. Cuts in unemployment benefits induce the highest outflows of jobseekers in the medium run, but with more favorable effects on GDP and unemployment as the domestic wage adjusts downwards. The latter also leads to a very persistent increase in the intensity with which current workers look for a job abroad. Government spending cuts, on the other hand, have a small impact on migration. A repatriation policy, modelled as a higher utility cost of migration, generates a return of migrants, leading to a boost in aggregate demand, a fall in real wages and an increase in unemployment.

Labor Market Integration and Fiscal Competition

“…But, in contrast to those works, we concentrate more on the interplay between labor mobility and fiscal policies modeled as an optimal government's response to changes in economic environment. This paper is related to works studying labor mobility in currency unions (see Farhi and Werning 2014, Bandeira, Caballe, and Vella 2018, Hauser and Seneca 2019 but, instead of analyzing the short-run perspective, under which nominal rigidities are relevant for economic outcomes, we focus on the long run, which is necessary to investigate the intergenerational redistribution.…”

Labor mobility in a monetary union

“…More broadly, the paper relates to a growing literature on the role of migration in macroeconomic adjustments. Bandeira et al (2018), for example, investigate the interplay between fiscal consolidations, and migration, and Smith and Thoenissen (2018) analyze how relative human capital levels shape the business-cycle effects of migration flows on the economy.…”