Migration and Redistribution: Federal Governance of an Economic Union Matters

Abstract

Both the U.S. and the EU are an economic union: There is a single market for goods, capital, finance, and labor. That is, there is free mobility of goods and services, physical and financial capital, and labor among the member countries of the union. Nevertheless, there is much higher degree of economic policy coordination among the member states of the U.S than of the EU. For instance, the U.S. has a common (federal) income tax system which constitutes the major source of revenues in the union. Similarly, the social security system is more or less uniform across the U.S. There is also a single migration policy set up and enforced by the federal government. In contrast, there is very little coordination on these issues among the member countries of the EU. We argue by using a migration-based, fiscal-externality, model that the degree of coordination among the member states potentially contribute a great deal to our understanding of observed policy differences between the EU and the US as economic unions: the generosity of the welfare state and the skill composition of migration.