Is International Labor Mobility Desirable? Welfare Gains, Fiscal Losses, and the Limits of Compensation

"We analyze how lower barriers to labor mobility affect tax competition, labor allocation, wages, public revenues, and welfare in a two-country model. Govern- ments compete for mobile workers through labor income taxation, and national welfare is evaluated on a residence basis, including the mobility burden borne by migrants. Greater mobility intensifies tax competition, raises workers’ net wages in both countries, and reallocates labor and output toward the advanced economy. As a result, global welfare rises, while national welfare increases in the advanced coun- try and decreases in the lagging country. Because the advanced country’s welfare gain exceeds the lagging country’s welfare loss, there is sufficient aggregate welfare to make both countries better off through compensation. This possibility does not, however, imply that such a transfer is fiscally feasible. Since mobility reduces tax revenues in both countries, the required compensation cannot be financed from additional fiscal resources generated by liberalization. Labor-market integration is therefore welfare-feasible but not fiscally self-financing. Its implementation thus requires broader fiscal coordination or external funding."