Immigrants, Labor Market Dynamics and Adjustment to Shocks in the Euro Area

We analyse the role of inter-regional labor mobility in absorbing labor demand shocks in the Euro Area (EA). We find that mobility of foreign-born workers is strongly cyclical, while this is not the case for natives. Foreigners’ higher population-to-employment elasticity reduces the variation of overall employment rates over the business cycle: because of them, the impact of a one standard deviation change in employment on employment rates is six percent lower at the country level and seven percent lower at the regional level. Additionally, we compare Euro Area mobility to that of another currency union, the United States. We find that the population-to-employment elasticity estimated for foreign-born individuals is similar in the EA and the United States, while EA natives are significantly less mobile across countries than US natives are across states in response to labor demand shocks. This last result confirms that in the Euro Area there is room for improving country-specific shock absorption through higher labor mobility. It also suggests that immigration helps labor market adjustments.