Abstract
Abstract This paper assesses the role of labour mobility in the adjustment to asymmetric economic shocks in the EU. After presenting a series of stylised facts of mobility in the EU, it assesses mobility as a channel of economic adjustment by means of a vector autoregression (VAR) analysis in the vein of Blanchard and Katz (BPEA 1:1–75, 1992). Results indicate that, over the period 1970–2013, mobility absorbed about a quarter of an asymmetric shock within 1 year. Movements in response to shocks have almost doubled since the introduction of the euro. In contrast to previous papers on the labour market adjustment in the EU, the response of wages is integrated to the analysis. It is found that real wages have also become more responsive to asymmetric shocks. JEL Classification: J61, J64
Highlights
Labour mobility1 received attention in the early debate on the Economic and Monetary Union (EMU)
It was stressed that the reduced room for absorbing asymmetric shocks via macroeconomic policy tools in a monetary union required a sufficient degree of labour mobility as an alternative adjustment channel
As compared with other monetary unions, notably the USA, EU countries participating in the EMU did not exhibit a comparable degree of mobility and mobility played a minor role in the process of adjustment (Blanchard and Katz 1992; Decressin and Fatás 1995)
Summary
Labour mobility received attention in the early debate on the Economic and Monetary Union (EMU). In the absence of an independent monetary policy, countries hit by persistent negative shocks would face high unemployment for protracted periods, with high economic and social costs, unless there is a sufficient degree of flexibility in real wages or a sufficiently mobile labour force These were seen among the conditions for the EMU countries to be part of an “optimal currency area”.2. The strongest case in favour of adjustment through labour mobility is provided by situations in which persistent asymmetric labour demand shocks lead to persistent unemployment differences due to the rigidity of real wages In such a context, labour mobility is likely to result in lower overall unemployment and relatively limited impact on the rest of the population in both the source and the destination country. While a caveat is in order in the sense that not all migration is related to labour market reasons, indirect evidence suggests that the link is close: most of migrants tend to be in prime working age, and their level of labour market integration is comparable to the population born in the country.
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