Migration, Search and Skill Heterogeneity

Cross-border migration can act as an important adjustment mechanism to country-specific shocks. Yet, depending on who moves, it can have unintended consequences for business cycle stability. This paper argues that the skill composition of migration plays a critical role. When migration flows become more concentrated in skilled labour an important trade-off arises: migration releases unemployment pressures for the origin countries but it also generates negative compositional effects which reduce supply capacity. This paper analyses the impact of cyclical migration in an open-economy DSGE model with endogenous migration flows, trade linkages, search frictions, and skill heterogeneity. I apply this framework to the Greek emigration wave following the European Debt Crisis. I find is that emigration flows implied strong negative effects for capital formation, leading to a more than 15% drop in investment. Rather than stabilising the Greek business cycle, labour mobility led to a deeper and more protracted recession