Economic Migration and Business Cycles in a Small Open Economy with Matching Frictions

Business cycle fluctuations become stronger and more protracted in the presence of strong economic migration flows that have significant impact on the labour-supply. This occurs because, unlike in standard models, the wealth... [ view full abstract ]

Business cycle fluctuations become stronger and more protracted in the presence of strong economic migration flows that have significant impact on the labour-supply. This occurs because, unlike in standard models, the wealth effect on labour supply is dominated by migration. Worsening of home economic conditions therefore causes an increase in net emigration and can lead to a reduction in labour supply. The latter attenuates wage adjustment, which exacerbates fluctuations in vacancies and (un)employment. Weaker wage adjustment also leads to flatter Phillips curve, and to procyclical fluctuations in competitiveness, which amplifies the business cycle. The size of the pool of potential immigrants matters. Small open economies with open labour markets and a large pool of potential migrants are more susceptible to such developments. Shocks that cause a symmetric response in the small open economy and in the region from which potential migrants come from have no effects on economic migration.