Working Paper: NBER ID: w28558
Authors: Assaf Razin; Efraim Sadka
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. We argue, by using a model of a union exhibiting migration-based fiscal externality, 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.
Keywords: migration; redistribution; federal governance; economic union
JEL Codes: F02; H0; H77
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Welfare state in the EU (I38) | Attract low-skill migrants (J69) |
| Attract low-skill migrants (J69) | Imposes fiscal burden on native-born individuals (H22) |
| High generosity of the welfare state in the EU (H53) | Attract low-skill migrants (J69) |
| High redistributive taxes (H23) | Deter high-skill migration (J61) |
| Structural differences in federal governance between the EU and US (H77) | Affects migration policies (F22) |
| EU's loose federal system (H77) | Greater fiscal independence among member states (H69) |
| Higher proportion of high-skill migrants in the US (J61) | Boosts innovative capabilities (O36) |
| Skill composition of migrants in the US (J61) | Greater percentage of tertiary-educated migrants (F22) |