Aggregate Fluctuations and International Migration

• Author: Jean‐Charles Bricongne,Pauline Bourgeon,Michel Beine
• Date: 01 January 2019
• Published date: 01 January 2019
• DOI: http://doi.org/10.1111/sjoe.12258

Scand. J. of Economics 121(1), 117–152, 2019

DOI: 10.1111/sjoe.12258

Aggregate Fluctuations and International

Migration*

Michel Beine

University of Luxembourg, L-1511 Luxembourg,Luxembourg

michel.beine@uni.lu

Pauline Bourgeon

LISER, L-4366 Esch-sur-Alzette, Luxembourg

pauline.bourgeon@liser.lu

Jean-Charles Bricongne

Banque de France, DGEI, FR-75001 Paris, France

jean-charles.bricongne@ec.europa.eu

Abstract

In this paper, we study the role of short-run factors such as business cycles or changes in

employmentrates in explaining inter national migration flows.First, we derive a model of optimal

migration choice predicting that short-run economic fluctuations trigger migration flows on top

of the impact exerted by long-run factors. Second, we empirically test the magnitude of the

effect of these short-run factors on migration flows. Our results indicate that both aggregate

fluctuations and employment rates affect migration flows. Third, we provide evidence that the

Schengen Agreement and the euro significantly increased the international mobility of workers

between the member countries.uuu

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Keywords: Business cycles; income maximization; migration choice; migration flows

JEL classification:F22; O15

I. Introduction

International movements of workers between Organisation for Economic

Co-operation and Development (OECD) countries have steadily increased

over the last 50 years. According to OECD data, this trend clearly intensified

as of the early 1980s (see OECD, 2007). Historically, migration has always

been a labour-market alternative strategy for economic agents. In the face

of adverse economic developments, households or workers might choose

*This research has been entirely financed by Banque de France. In particular,we thank Simone

Bertoli, Jean-Fran¸cois Carpantier, Xavier Chojnicki, Nicolas Coeurdacier, Fr´ed´eric Docquier,

Lionel Fontagn´e, Jean Imbs, Daniel Mirza, Henri Pag`es, Chris Parsons, Gilles Saint-Paul, and

WesselVermeulen for helpful comments on a previous version of this paper. The help of Jean-

Marc Thomassin is gratefully acknowledged.

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118 Aggregate fluctuations and international migration

to migrate to a particular external country (from a set of alternative

destinations) on the basis of considerations that are essentially related to

expectations regarding future income. Such decisions are generally based

on their perceptions of current and future economic conditions both within

their country of origin and in a number of potential destinations. Although

many other factors are relevant for migration decisions, in this paper, we

focus on the role of short-run economic factors in shaping the migration

choice, and in particular on the role of business-cycle fluctuations and

employment prospects.

For many years, economists have considered labour mobility as an

important macroeconomic adjustment mechanism. The body of literature on

optimum currency areas (OCAs) pioneered by Robert Mundell (Mundell,

1961) has underscored the role of labour mobility as an adjustment

mechanism within a currency union in the face of asymmetric shocks

between the participating countries or regions. The criterion of labour

mobility has been used as a key measure in assessing whether or not

a particular area represents a so-called OCA. Indeed, during the 1990s,

numerous studies disqualified Europe as an OCA because of its lack of

labour mobility.1In contrast, Blanchard and Katz (1992) argued that labour

mobility could be seen as a dominant adjustment mechanism in response

to transitory fluctuations in the United States. However, in the absence of

reliable data on labour movements, the supporting evidence was obtained

via an indirect analysis based on a VAR (vector autoregressive model)

approach involving price, wage, and unemployment dynamics. One of the

underlying assumptions used to infer the degree of labour mobility is that

mobility of workers will induce wage and employment adjustment. This

is a debatable assumption in the light of recent studies on the impact

of immigration on wages (see, among others, Borjas et al, 1996; Card,

2001; Ottaviano and Peri, 2012; Docquier et al., 2014). As an alternative

to this indirect approach, in this paper, we propose a direct analysis of

the relationship between labour mobility and business-cycle fluctuations,

taking advantage of new data on migration flows and building on recent

developments in microfounded gravity models that can be estimated. In

other words, our aim is to tackle an old problem with a fresh approach.

1The absolute importance of labour mobility for defining an OCA has nevertheless been mitigated

recently, in the light of the European monetary crisis, by some authors such as Paul Krugman.

Following Krugman (2013), “nobody foresaw that countries hit by adverse asymmetric shocks

would face fiscal burdens so large as to call governmentsolvency into question. As it turned out,

the adjustment problems of the euro area quickly turned into a series of fiscal emergencies as

well. In this sense, Kenen has turned out to dominate Mundell: lack of labour mobility has not

played a major role in euro’s difficulties, at least so far, but lack of fiscal integration has had

an enormous impact[...].”Nevertheless, our view stillsupports an important role for labour

mobility, especiallygiven the fiscal constraints most European countries face nowadays.

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M. Beine, P. Bourgeon, and J.-C. Bricongne 119

In particular, we test how international migration flows react to

economic fluctuations at the destination in a sample of mostly OECD

countries. To do so, we build and use data on annual migration flows

between about 30 countries over the 1980–2010 period. We also focus on

the European Monetary Union (EMU) and on the impact of the Schengen

Agreement on the degree of labour mobility between European Union (EU)

countries. Such an investigation is useful in assessing whether Europe might

be more an OCA ex post rather than ex ante.2If the integration process

itself leads to a change in the sensitivity of labour mobility to business-

cycle shocks, this in turn lowers the need to rely on alternative adjustment

mechanisms within a monetary union.

Our analysis belongs to the extensive body of literature on the

determinants of migration. Up to now, this literature has mostly focused

on long-run factors of economic, geographic, cultural, and demographic

natures.3We build on this extensive literature and extend it by looking at

the specific marginal role of short-run factors such as the business cycle

and the employment rate. In doing so, we integrate the traditional impact

of long-run factors identified in the previous literature in order to isolate

the specific role of the short-run variables.

There is, however, a body of recent literature acknowledging the

importance of short-run factors. Coulombe (2006) empirically investigates

the determinants of internal labour mobility in Canada. He finds an

important role for the wage differentials between Canadian provinces but

finds no impact from business-cycle fluctuations. Simpson and Sparber

(2013) disentangle the reaction of immigrant inflows to short-run and

long-run factors between US states. Other papers also consider these

short-run factors from an international perspective. McKenzie et al. (2014)

focus on the impact of economic fluctuations in destinations on the

intensity of emigration from the Philippines. Bertoli et al. (2016) analyse

the reaction of German immigration flows to the onset of the economic

crisis in Europe. We contribute to this literature by generalizing this

type of approach to a large set of origin and destination countries over

a period including various episodes of macroeconomic fluctuations. In

2Work in this area was primarily conducted in the 1990s, but using different criteria. See, for

instance, Frankel and Rose (1998) relating trade integration to the asymmetry in business-cycle

fluctuations.

3Since the early work of Mayda(2010), the empirical literature on the determinants of mig ration

has developedrapidly. Forinstance, among many others, Chiquiar and Hanson (2005) focus on the

role of education. Grogger and Hanson (2011) look at the role of wages whileRosenzweig (2006)

focuses on skill prices. Other papers (e.g., McKenzie and Rapoport, 2010; Beine et al., 2011)

look at the role of networks. Clark et al. (2007) investigate the role of distance in a broad sense.

Beine and Parsons (2015) focus on push factors such as climatic shocks and natural disasters.

Bertoli and Fern´andez-Huerta Moraga (2013b) investigatethe role of bilateral mig ration policies.

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