Labour mobility and labour market adjustment in the EU

This paper assesses the role of labour mobility in the EU as an adjustment mechanism. It presents stylised facts on mobility and migration at national and sub-national level, analyses the determinants of mobility flows by means of gravity equations, and studies the dynamic response of mobility to asymmetric demand shocks by means of vector auto regression (VAR) analysis in the vein of Blanchard and Katz (1992). It is found that EU membership increases mobility significantly. Membership in the euro area, while not raising the magnitude of mobility flows per se, is associated with a stronger reaction of labour mobility to unemployment differences across countries. The dynamics of labour mobility in response to asymmetric demand shocks is analysed on country-level data on a panel of EU countries. Results indicate that mobility absorbs about a quarter of the shock within 1 year and about 60 per cent after 10 years. The analysis also shows that the response of migration to shocks has been growing over time, becoming almost twice as important after EMU completion. A version of the VAR model allowing for the analysis of the response of wages indicates that the response of real wages to asymmetric demand shocks has also increased after EMU.