Janine Hart

Recently migration patterns in the euro area changed markedly in response to increasing unemployment disparities. This reinforced the interest in labor mobility as stabilization tool against the background of heterogeneous labor market conditions.  We propose a two-country DSGE model with price rigidities and migration that is able to replicate the empirical facts on business cycle migration in the euro area. In this model unemployment arises from search and matching frictions. We start by modeling migration as a proportional outflow from unemployed workers and in a second step endogenize migration via the unemployed workers’ choice on which labor market to search for a job. The framework allows to account for wage and unemployment gaps between natives and immigrants over the cycle as well as for factors such as language barriers that hinder the labor market integration of foreigners. We find that the impact of migration on country-specific average wages and unemployment depends crucially on the characteristics of immigrants and natives as well as the institutional characteristics of the total corridor, i.e. search efficiency. The model will be used to analyze the effects of different immigration and labor market policies on migration patterns and welfare.

In the recent European debt crisis, internal migration flows in the euro area reacted strongly to diverging labormarket conditions. This experience points towards the prominent role of short-term business cyclemigration in the euro area and the consequent need to understand themotives behind it. We start by an empirical investigation of the business cycle in 59 bilateral migration corridors in the Euro12 over the period 1980-2010 and find three noteworthy facts. First, unemployment differentials seem to be an important driving force of internal migration. Second, in a majority of corridors the relationship between real wage differentials and intra-euro area net migration is puzzling. Third, across migration corridors there is a considerable heterogeneity with respect to the correlation of net migration and the real wage respectively unemployment differential. In line with these findings, we develop a two-country Dynamic Stochastic General Equilibrium model of internal business cycle migration in the euro area and allow for unemployment that occurs as a consequence of labor market frictions and rigidities in both countries. Our model is able to replicate all three empirical observations and explains the heterogeneity of migration corridors by differences in the type of shock that hits an economy and the relative price/wage rigidity. Our paper is related to the existing literature that quantifies the effects of migration and unemployment and bridges it to DSGE models with unemployment. Further, we contribute to the recently growing literature that investigates the causes and consequences of temporary migration.

We develop an overlapping-generations model to analyze the effects of brain drain and brain gain on the current account dynamics in a country with net emigration. In our model the individual educational decision changes the human capital stock in the economy, thereby influencing the current account. The inclusion of endogenous educational dynamics provides new insights into the relation of migration and current account imbalances. We find that a country with a positive net emigration does not by necessity have a higher current account. Instead, two opposing effects lead to an ambiguous total effect. Emigrants carry the incorporated human capital and thereby decrease the capital need within the home country, resulting in a current account surplus (or a declining current account deficit). At the same time, the possibility to migrate poses an incentive for agents to invest in higher education and accumulate human capital. Consequently, the investment need within the economy increases and leads to a current account deficit (or reduces the current account surplus respectively). The sign of the total effect of net emigration on the current account thus depends on which effect dominates. If the first effect (brain drain) dominates the total effect is positive, if the second effect (brain gain) is larger the total effect is negative. Our analysis demonstrates that the migration policies of the destination country determine the sign of the total current account effect in the source country. In order to illustrate our argument, we investigate the impact of different migration policies. We consider three scenarios that allow for a) no migration, b) migration of skilled workers and c) migration of skilled and unskilled workers.