Working Paper: NBER ID: w25347
Authors: Christopher L. House; Christian Proebsting; Linda L. Tesar
Abstract: Unemployment differentials are bigger in Europe than in the United States. Migration responds to unemployment differentials, though the response is smaller in Europe. Mundell (1961) argued that factor mobility is a precondition for a successful currency union. We use a multi-country DSGE model with cross-border migration and search frictions to quantify the benefits of increased labor mobility in Europe and compare this outcome to a case of fully flexible exchange rates. Labor mobility and flexible exchange rates both work to reduce unemployment and per capita GDP differentials across countries provided that monetary policy is sufficiently responsive to national output.
Keywords: Labor Mobility; Currency Union; Unemployment Differentials; DSGE Model; Migration
JEL Codes: E24; E42; E52; E58; F15; F16; F22; F33; F45
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased labor mobility (J62) | reduced unemployment differentials (J69) |
| high unemployment (J64) | labor outflows (J69) |
| labor outflows (J69) | reduced unemployment (J68) |
| flexible exchange rates (F31) | reduced unemployment differentials (J69) |
| flexible exchange rates (F31) | changes in inflation rates (E31) |
| increased labor mobility (J62) | total production in economies with high unemployment (E23) |