Migration , Unemployment and the Business Cycle - A Euro Area Perspective

In the recent European debt crisis, internal migration flows in the euro area reacted strongly to diverging labor market conditions. This experience points towards the prominent role of short-term business cycle migration in the euro area and the consequent need to understand the motives 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. Firstly, unemployment differentials seem to be an important driving force of internal migration. Secondly, in a majority of corridors the relationship between real wage differentials and intra-euro area net migration is puzzling. Thirdly, 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.