High unemployment and fiscal austerity during the recent crisis have led to significant migration
outflows from the periphery of the euro area. This paper introduces endogenous migration both
for the unemployed and employed members of the household in a small open economy DSGE
model with search and matching frictions. The government can use public spending,
unemployment benefits, or labor income taxes as fiscal consolidation instruments. A tax-based
consolidation induces the highest migration ...
High unemployment and fiscal austerity during the recent crisis have led to significant migration
outflows from the periphery of the euro area. This paper introduces endogenous migration both
for the unemployed and employed members of the household in a small open economy DSGE
model with search and matching frictions. The government can use public spending,
unemployment benefits, or labor income taxes as fiscal consolidation instruments. A tax-based
consolidation induces the highest migration outflows in the short run, which exacerbates the
induced GDP contraction. Cuts in unemployment benefits induce the highest outflows of
jobseekers in the medium run, but with more favorable effects on GDP and unemployment as the
domestic wage adjusts downwards. The latter also leads to a very persistent increase in the
intensity with which current workers look for a job abroad. Government spending cuts, on the
other hand, have a small impact on migration. A repatriation policy, modelled as a higher utility
cost of migration, generates a return of migrants, leading to a boost in aggregate demand, a fall
in real wages and an increase in unemployment.
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