Should I stay or should I go? Austerity, unemployment and migration

November 29, 2018

By Guilherme Bandeira, Jordi Caballé, and Eugenia Vella

High unemployment and fiscal austerity during the Great Recession have led to significant migration outflows in those European countries that suffered a deep deterioration of their economy, Greece being the most obvious case. This paper introduces endogenous migration in a small open economy DSGE model to analyze the business cycle effects from the interaction of fiscal consolidation instruments with migration. A tax-based consolidation induces the strongest increase in emigration, leading to the highest costs in terms of aggregate GDP and unemployment in the medium run. As a result, the unemployment gains from migration are only temporary. However, in terms of per capita GDP, cuts in the components of public spending that are either productive or utility-enhancing can lead to a deeper contraction than tax hikes or wasteful spending cuts. The introduction of potential migration by the employed implies even higher unemployment costs, a deeper demand contraction, and an increase in both the tax hike and the time required to achieve the same size of fiscal consolidation.

The same applies to internal migration and fiscal policy in a federal state. Important lessons here.


Unemployment Insurance Take-up Rates in an Equilibrium Search Model

November 16, 2018

By Stéphane Auray, David L. Fuller and Damba Lkhagvasuren

From 1989-2012; on average 23% of those eligible for unemployment insurance (UI) benefits in the US did not collect them. In a search model with matching frictions; private information associated with the UI non-collectors implies the market equilibrium is not Pareto optimal. The cause of the Pareto inefficiency is characterized along with the key features of collector vs. non-collector outcomes. Non-collectors transition to employment at a faster rate and a lower wage relative to the Pareto optimal arrival rates and wages. Quantitatively; this implies 1.71% welfare loss in consumption equivalent terms for the average worker; with a 3.85% loss conditional on non-collection. With an endogenous take-up rate; the unemployment rate and average duration of unemployment respond significantly slower to changes in the UI benefit level; relative to the standard model with a 100% take-up rate.

Why are people leave money on the sidewalk? There must be some sort of cost that people face in picking up that money. In the case on unemployment insurance, there is no clear and obvious cost, so the authors try it out with a heterogeneous utility cost to obtaining insurance benefits. Results are interesting and could lead the way to an identification strategy: try all the different potential reasons in a model and then check whether results make sense for observables.

Redistribution and Fiscal Uncertainty Shocks

November 8, 2018

By Hikaru Saijo

This paper studies the macroeconomic impact of an uncertainty shock about fiscal policy in a dynamic general equilibrium framework. Motivated by the observation that many fiscal policies are redistributive and that a sizable fraction of U.S. households do not own capital, I introduce household heterogeneity in the form of limited capital market participation. I show that household heterogeneity significantly magnifies the aggregate effect and induces co-movement of macroeconomic variables in a contraction that is generated by a fiscal uncertainty shock. This is because the limited capital market participation model captures individual uncertainty about redistribution that is absent in representative agent models. When agents are ambiguity averse, this uncertainty about redistribution has first-order effects because it shows up as heterogeneous worst-case scenarios. As a result, the model matches the empirical responses of macro variables to fiscal uncertainty shocks better than the representative agent counterpart.

Very simple point. And it is important as the quantitative exercise shows.