Abstract
High unemployment and fiscal austerity during the Great Recession have led to significant migration outfl ows in those European countries that suffered a deep deterioration of their economy, Greece being the most obvious case. This paper introduces endogenous migration in a small open economy DSGE model to analyze the business cycle effects from the interaction of fiscal consolidation instruments with migration. A tax-based consolidation induces the strongest increase in emigration, leading to the highest costs in terms of aggregate GDP and unemployment in the medium run. As a result, the unemployment gains from migration are only temporary. However, in terms of per capita GDP, cuts in the components of public spending that are either productive or utility-enhancing can lead to a deeper contraction than tax hikes or wasteful spending cuts. The introduction of potential migration by the employed implies even higher unemployment costs, a deeper demand contraction, and an increase in both the tax hike and the time required to achieve the same size of fiscal consolidation.
Highlights
Worsening labor market conditions and fiscal tightness in the aftermath of the recent crisis have led to increased migration outflows from peripheral countries of the euro area.1 The surge in unemployment rates and the lack of work opportunities, together with fiscal austerity involving tax hikes, cuts in social benefits and restrictions in new recruitment of public employees, have contributed to this notable increase in migration flows.2 For instance, Greece and Spain exhibited net migration outflows in 2013, representing 2.2% and 1.9% of the workforce, respectively (Lazaretou (2016))
Our paper is differentiated through the (i) focus on the sender economy which implements fiscal consolidation using a rich set of instruments, (ii) modelling of migration for both the employed and the unemployed members of the household, (iii) examination of TFP, monetary policy, and government spending shocks
This paper was motivated by the significant migration outflows from the periphery of the euro area in search of employment, better pay and better social and economic prospects in the aftermath of the crisis
Summary
Worsening labor market conditions and fiscal tightness in the aftermath of the recent crisis have led to increased migration outflows from peripheral countries of the euro area (see Figure 1). The surge in unemployment rates and the lack of work opportunities, together with fiscal austerity involving tax hikes, cuts in social benefits and restrictions in new recruitment of public employees, have contributed to this notable increase in migration flows. For instance, Greece and Spain exhibited net migration outflows in 2013, representing 2.2% and 1.9% of the workforce, respectively (Lazaretou (2016)). This is because the domestic wage adjusts downwards in this case, as the outside option of workers in the wage bargaining is weakened Both a tax-based consolidation and a consolidation through cuts in unemployment benefits significantly increase the intensity with which current workers look for jobs abroad, which mitigates the migration of the unemployed. Without unemployment and fiscal consolidation, are Farhi and Werning (2014), who study labor mobility and macroeconomic adjustment within a currency union, and Mandelman and Zlate (2012), who develop a two-country model with endogenous migration decisions. Our paper is differentiated through the (i) focus on the sender economy which implements fiscal consolidation using a rich set of instruments, (ii) modelling of migration for both the employed and the unemployed members of the household, (iii) examination of TFP, monetary policy, and government spending shocks..
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