The project first offered an overview of recent migration trends in European countries. Next, we studied the role of emigration in a deep recession when the government implements fiscal consolidation. We built a small open economy New Keynesian model with labour market frictions, emigration of the labour force and fiscal details. Simulations for the austerity mix during the Greek Depression showed that fiscal austerity accounted for one third of the output drop and more than 10% of migration outflows, whereas the rest is attributed to the macroeconomic environment. A counterfactual without migration underestimates the fall in output by one fifth. The model also shed light on the two-way relation between emigration and austerity. Labour income tax hikes induce prolonged migration outflows, while spending cuts exert only a small effect on emigration which can be positive or negative depending on opposite demand and wealth effects. On the flip side, emigration increases the required tax hike and time to meet a given debt target due to endogenous revenue leakage. For tax hikes, emigration acts as an absorber of the austerity shock by diluting the output costs per resident. Yet, in terms of unemployment, temporary gains are reversed over time due to the distortionary effects of taxes on employment. We also studied the effects of consumption tax hikes. We found that VAT hikes induce a fall in consumption, which reduces labour demand and increases emigration. The departure of emigrants reinforces the fall in internal demand and employment, and therefore unemployment costs of VAT hikes over time can be higher than without migration. However, these effects are significantly smaller than in the case of labour tax hikes.
We also examined the interaction of public sector downsizing and emigration in a New Keynesian model with labour market frictions and two sectors. In the absence of emigration, cuts in public sector vacancies lead to a labour reallocation towards the private sector, an internal devaluation from the resulting private wage decline, and a positive wealth effect from the reduction in the public wage bill. Due to workers reallocation across countries, rather than across sectors, emigration attenuates these mechanisms. The implications of emigration for the effect of public sector downsizing on aggregate unemployment become ambiguous: unemployment falls due to job seekers' emigration, but it also rises due to productivity losses in the private sector and a drag in domestic demand. Policymaking should actively support job creation in the private sector when reducing the size of the public sector.
With respect to receiving economies, we provided new evidence on the macroeconomic effects of net migration shocks in Germany, a major destination country, using monthly administrative data (2006-2019) in a structural vector autoregression. The results indicated that migration shocks are persistently expansionary for industrial production, per capita net exports and tax revenue. In the labour market, they boost job openings and, after a year and a half, hourly wages in manufacturing. Unemployment falls for natives (job-creation effect), driving a decline in total unemployment, while it rises for foreigners (job-competition effect). Using a mixed-frequency model, we further documented increases in per capita GDP, investment and hourly wages of the aggregate economy. The findings imply a need for redistributive policies to ensure natives and foreigners share the aggregate gains.
