The Benefits of Labor Mobility in a Currency Union

Cyclical unemployment rates differ substantially more between countries in the euro area than between states in the United States. We find that net migration is responsive to unemployment differentials, but the response is smaller in Europe relative to the U.S. This paper explores to what extent the lack of labor mobility in Europe makes it more difficult for the euro area to adjust to shocks. We develop a multi-country DSGE model of a currency union with cross-border migration and search frictions in the labor market. The model is calibrated to the 50-state U.S. economy and to the 31-country European economy and replicates, for each region, the relationship between net migration and unemployment differentials. The model allows us to quantify the benefits if Europe had enjoyed levels of labor mobility as high as those in the U.S. during the most recent crisis.