The importance of labour mobility in currency areas is well established (Mundell 1961). With a common monetary policy, negative region-specific shocks increasing unemployment in region A relative to region B would be more easily absorbed if part of the labour force moved from A to B.
However, the degree of labour mobility varies significantly around the world. In particular, the average response of the population to a local demand shock in Europe turns out to be much more limited and slower than in the US (Beyer and Smets 2015, Arpaia et al. 2016, and Dao et al. 2018). Mobility also differs significantly across individuals (e.g. by age group or migration status), which adds important details to the analysis of how labour demand shocks are absorbed across areas (Cadena and Kovak 2016).
In a recent paper, we provide fresh evidence on these issues (Basso et al. 2018). We first describe demand shocks and labour mobility in euro area countries and regions in the last decade and compare our findings with those of another currency area, namely, the US. We then focus on the heterogeneity in mobility responses across different segments of the population, comparing natives and foreign-born residents.
The average elasticity of population size to employment shocks is much lower in the euro area than in the US, with point estimates of 0.2 and 0.8, respectively. That is, following a shock lowering employment by 10%, only 2% of the population would move from the affected euro area country versus 8% in the US state, on average. Looking across regions within euro area countries, the elasticity increases (to about 0.3). Interestingly, it does not vary when estimated within US states. Not surprisingly, in the euro area mobility is higher for younger and more educated individuals – moreover, it does not differ between booms and busts or small and large employment shocks.
Inspired by the works of Borjas (2001) and Cadena and Kovak (2016), we then focus on differences between natives and foreign-born. In the euro area, foreign-born individuals (i.e. those born outside the country of analysis) have mobility rates comparable to those of the US and much higher than natives. The estimated elasticity to a shock to employment ranges between 0.7 and 0.8 and is robust to specification changes. Interestingly, the migration response is similar when distinguishing foreign-born in the EU and outside the EU. Replicating the analysis on US data does not yield the same patterns of heterogeneity – individuals born in a US state (‘natives’), in another US state, or abroad all have very similar propensities to move in response to a state-specific shock.
The fact that foreign-born individuals respond more to labour demand shocks can be observed also from aggregate statistics. Figure 1 shows the share of foreign-born in euro area countries in 2007 (left panel) and 2016 (right panel). Two main facts emerge. First, the average share has increased on average, both reflecting increased mobility due to the enlargement of the EU, and because of the migration and refugee inflows from Africa and the Middle East. Second, and most relevant, the countries that have been hit more harshly by the Great Recession, such as Greece, have a lower relative share of foreign-born in 2017 than in 2007. Countries that instead performed better, such as Germany, now have a higher share of foreign-born relative to other EU countries.
Figure 1 Foreign born share in euro area countries, 2007 (top panel) and 2016 (bottom panel)
Note: The figure shows the shares of foreign-born individuals over total population in 2007 and in 2016. In darker countries the share is higher.
Source: Authors’ calculations based on EU-LFS data.
What does this imply in terms of smoothing the labour market?
The higher mobility of migrants implies that they can act as a buffer and reduce the fluctuations of the employment rate in response to regional shocks to employment. A simple counterfactual exercise can help appreciate the magnitude of such contribution. We first simulate the impact of a 1.9% decrease in the level of employment on the employment rate in each euro area country using the elasticities estimated for natives and foreign-born (the value is equal to one standard deviation of the series of overall employment variations). In this status quo scenario, the employment rate falls in all countries by 13% on average (the green dots in Figure 2). We then focus on two alternative scenarios, and simulate the same impact assuming that all individuals had the natives’ (low) elasticity or the foreigners’ (high) elasticity.
Comparing the first (lower bound) scenario to the status quo informs us on the current contribution of mobile foreign-born individuals in absorbing the shock – our estimates suggest that they help reduce its impact on employment rates at the country level by around 7% (to 1.4% on average, see the blue dots). And if all individuals had the same propensity to move as foreigners (as in the second, upper bound scenario), the impact of the negative employment shock would be halved (orange dots). These patterns are common to all euro area countries.
Figure 2 The impact on the employment rate of a one standard deviation decrease in employment, three different scenarios
Note: The figure shows the impact of a decrease of one standard deviation of the variation of overall employment on employment rates in euro area countries after three different scenarios. The first scenario (actual response, in green) simulates the impact on the employment rate based on the group-specific elasticities estimated in the paper. In the upper bound scenario (orange), we assume that the population to employment elasticity for natives is as high as the one estimated for the foreigners. In a last scenario, that we call the lower bound (LB, blue) the opposite is true.
Further results show that in areas with a lower historical presence of immigrants, natives are more exposed to labour demand shocks and tend to migrate slightly more. This confirms that immigrants and their mobility partly substitute for natives’ mobility and attenuate the variation of native employment rates.
Taken together, these findings confirm that the lack of adequate labour mobility is one potentially relevant obstacle to labour market adjustments in the euro area (Blanchard and Katz 1992, Obstfeld and Peri 1998, Arpaia et al. 2016). At the same time, the long-term tendency towards more immigration in Europe, coupled with the fact that foreigners seem to be much more mobile than natives could reduce the ‘mobility gap’ between the two currency areas in the future.
Authors’ note: The views expressed in this column are those of the authors and do not necessarily reflect the position of the Bank of Italy. Any errors or omissions are the responsibility of the authors.
Arpaia, A, A Kiss, Palvolgyi, B and A Turrini (2016) “Labour mobility and labour market adjustment in the EU” IZA Journal of Migration, 5:1-21.
Basso, G, F D’Amuri and G Peri (2018) “Immigrants, labor market dynamics and adjustment to shocks in the Euro Area” NBER Working Paper 25091 (also published online as Banca d'Italia Temi di Discussione no. 1195).
Beyer, R C M and F Smets (2015) “Labour market adjustments and migration in Europe and the United States: how different?” Economic Policy, 30(84): 643–682.
Blanchard, O J and L F Katz (1992) “Regional Evolutions” Brookings Papers on Economic Activity, 1: 1-75.
Borjas, G J (2001) "Does Immigration Grease the Wheels of the Labor Market?," Brookings Papers on Economic Activity 32(1): 69-134.
Cadena, B and B Kovak (2016) “Immigrants Equilibrate Local Labor Markets: Evidence from the Great Recession” American Economic Journal: Applied Economics, 8(1): 257-90.
Dao, M, Furceri, D and P Loungani (2017) “Regional labor market adjustment in the United States: trend and cycle” The Review of Economics and Statistics, 99(2): 243–257.
Decressin, J and A Fatás (1995) “Regional labor market dynamics in Europe” European Economic Review, 39(9): 1627-1655
Obstfeld, M and G Peri (1998) “Regional non-adjustment and fiscal policy,” Economic Policy 13(26): 205-259.