Aggregate stability under a budget rule and labor mobility.
1RWI - Leibniz Institute for Economic Research, Hohenzollernstr. 1-3, 45128 Essen, Germany.
Economic Modelling
|September 9, 2020
Summary
Pro-cyclical labor mobility can destabilize economies by increasing per capita public debt and tax rates following negative shocks. This migration-induced effect can destabilize public finances at debt levels similar to those seen in the Euro area post-financial crisis.
Area of Science:
- Economics
- Macroeconomics
- Public Finance
Background:
- Balanced budget rules are common fiscal policies, but their impact on economic stability is debated.
- Existing literature often overlooks the role of migration in economic models with fiscal rules.
- Labor mobility's effect on public debt and economic equilibrium requires further investigation.
Purpose of the Study:
- To analyze the impact of pro-cyclical labor mobility on economic stability within a neoclassical growth model.
- To investigate how migration interacts with public debt and balanced budget requirements.
- To assess the potential destabilizing effects of migration on an economy.
Main Methods:
- Development of a neoclassical growth model incorporating public debt and a balanced budget rule.
- Modeling pro-cyclical labor mobility as a response to economic shocks.
- Analysis of equilibrium properties and the dynamics of per capita public debt and tax rates.
Main Results:
- Pro-cyclical labor mobility can destabilize the economy through external effects.
- Out-migration after negative shocks increases per capita public debt.
- Government responses to maintain balanced budgets (e.g., higher taxes) can exacerbate economic downturns and further increase out-migration.
- Destabilizing effects of public debt emerge at debt levels comparable to the Euro area's post-financial crisis levels.
Conclusions:
- Migration is a significant, often neglected, factor influencing the stability of economies under balanced budget rules.
- Pro-cyclical labor mobility can create feedback loops that amplify economic shocks and public debt burdens.
- The findings highlight potential risks for economies with high public debt and mobile labor forces, particularly in the context of fiscal consolidation.
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