Advertisement

Productivity Shocks, VAT Hikes and Emigration

Chapter
  • 151 Downloads

Abstract

Motivated by fiscal austerity and the surge in emigration in Europe’s periphery during the Great Recession Bandeira, Caballé and Vella study a particular type of fiscal consolidation: the one carried out through an increase in consumption tax rates. Using a small open economy model with search and matching frictions, endogenous migration and sticky prices, they find that VAT hikes induce a fall in consumption, which reduces labour demand and increases emigration. The departure of emigrants reinforces the fall in internal demand and employment, and therefore unemployment costs of VAT hikes over time can be higher than in an economy without migration. However, these effects are significantly smaller than in the case of labour income tax hikes. The authors also study the output and unemployment effects of negative productivity shocks in the presence of labour mobility.

Keywords

Tax-based consolidation VAT hikes Productivity Emigration Matching frictions 

Notes

Acknowledgements

Caballé acknowledges financial support through the MICINN/FEDER grant PGC2018-094364-B-I00, and the grant 2017SGR1765 from the Generalitat de Catalunya. Vella acknowledges financial support through the EU Horizon 2020 Marie Sklodowska-Curie Grant 798015 (EuroCrisisMove). The views expressed here in no way reflect those of the NSW Treasury.

References

  1. Alesina, Alberto, and Paola Giuliano. “Family ties.” In Handbook of Economic Growth, vol. 2, pp. 177–215. Elsevier, 2014.Google Scholar
  2. Bandeira, Guilherme, Jordi Caballé, and Eugenia Vella. Fiscal austerity and Greek emigration: A missing link. Barcelona GSE Working Papers Series No 1075, 2019.Google Scholar
  3. Bandeira, Guilherme, Evi Pappa, Rana Sajedi, and Eugenia Vella. “Fiscal consolidation in a low-inflation environment: Pay cuts versus lost jobs.” International Journal of Central Banking 14 (2018): 7–53.Google Scholar
  4. Battisti, Michele, Gabriel Felbermayr, Giovanni Peri, and Panu Poutvaara. “Immigration, search and redistribution: A quantitative assessment of native welfare.” Journal of the European Economic Association 16, no. 4 (2018): 1137–1188.Google Scholar
  5. Bentolila, Samuel, Juan J. Dolado, and Juan F. Jimeno. “Does immigration affect the Phillips curve? Some evidence for Spain.” European Economic Review 52, no. 8 (2008): 1398–1423.CrossRefGoogle Scholar
  6. Canova, Fabio, and Morten O. Ravn. “The macroeconomic effects of German unification: Real adjustments and the welfare state.” Review of Economic Dynamics 3, no. 3 (2000): 423–460.Google Scholar
  7. Chassamboulli, Andri, and Theodore Palivos. “A search-equilibrium approach to the effects of immigration on labor market outcomes.” International Economic Review 55, no. 1 (2014): 111–129.CrossRefGoogle Scholar
  8. Chassamboulli, Andri, and Giovanni Peri. “The labor market effects of reducing the number of illegal immigrants.” Review of Economic Dynamics 18, no. 4 (2015): 792–821.CrossRefGoogle Scholar
  9. Chassamboulli, Andri, and Giovanni Peri. “The economic effect of immigration policies: Analyzing and simulating the US case.” Journal of Economic Dynamics and Control 114 (2020): 103898.Google Scholar
  10. d’Albis, Hippolyte, Ekrame Boubtane, and Dramane Coulibaly. “Immigration and public finances in OECD countries.” Journal of Economic Dynamics and Control 99 (2019): 116–151.CrossRefGoogle Scholar
  11. Desai, Mihir A., Devesh Kapur, John McHale, and Keith Rogers. “The fiscal impact of high-skilled emigration: Flows of Indians to the US.” Journal of Development Economics 88, no. 1 (2009): 32–44.CrossRefGoogle Scholar
  12. Docquier, Frédéric, and Zainab Iftikhar. “Brain drain, informality and inequality: a search-and-matching model for sub-Saharan Africa.” Journal of International Economics 120 (2019): 109–125.CrossRefGoogle Scholar
  13. Docquier, Frédéric, Çağlar Ozden, and Giovanni Peri. “The labour market effects of immigration and emigration in OECD countries.” The Economic Journal 124, no. 579 (2013): 1106–1145.CrossRefGoogle Scholar
  14. Dustmann, C. and Frattini, T., 2014. “The fiscal effects of immigration to the UK.” The Economic Journal, 124(580), pp.F593-F643.Google Scholar
  15. Erceg, Christopher J., and Jesper Lindé. “Fiscal consolidation in an open economy.” American Economic Review 102, no. 3 (2012): 186–91.CrossRefGoogle Scholar
  16. Erceg, Christopher J., and Jesper Lindé. “Fiscal consolidation in a currency union: Spending cuts vs. tax hikes.” Journal of Economic Dynamics and Control 37, no. 2 (2013): 422–445.CrossRefGoogle Scholar
  17. Farhi, Emmanuel, and Iván Werning. Labor mobility within currency unions. No. w20105. National Bureau of Economic Research, 2014.Google Scholar
  18. Furlanetto, Francesco, and Ørjan Robstad. “Immigration and the macroeconomy: Some new empirical evidence.” Review of Economic Dynamics 34 (2019): 1–19.CrossRefGoogle Scholar
  19. Galor, Oded, and Daniel Tsiddon. “Technological progress, mobility, and economic growth.” The American Economic Review (1997): 363–382.Google Scholar
  20. Giuliano, Paola. “Living arrangements in western Europe: Does cultural origin matter?.” Journal of the European Economic Association 5, no. 5 (2007): 927–952.Google Scholar
  21. Hauser, Daniela. “Technology shocks, labor mobility and business-cycle fluctuations.” No 4. Bank of Canada, 2017.Google Scholar
  22. Hauser, Daniela, and Martin Seneca. Labor Mobility in a Monetary Union. No. 19–15. Bank of Canada, 2019.Google Scholar
  23. House, Christopher L., Christian Proebsting, and Linda L. Tesar. “Austerity in the Aftermath of the Great Recession.” Journal of Monetary Economics (2019).Google Scholar
  24. House, Christopher L., Christian Proebsting, and Linda L. Tesar. Quantifying the benefits of labor mobility in a currency union. No. w25347. National Bureau of Economic Research, 2018.Google Scholar
  25. Iftikhar, Zainab, and Anna Zaharieva. “General equilibrium effects of immigration in Germany: Search and matching approach.” Review of Economic Dynamics 31 (2019): 245–276.CrossRefGoogle Scholar
  26. Izquierdo, Mario, Juan F. Jimeno, and Aitor Lacuesta. “Spain: from massive immigration to vast emigration?.” IZA Journal of Migration 5, no. 1 (2016): 10.CrossRefGoogle Scholar
  27. Kapur, Devesh, and John McHale. “Economic effects of emigration on sending countries.” In Oxford Handbook of the Politics of International Migration. 2012.Google Scholar
  28. Kiguchi, Takehiro, and Andrew Mountford. “Immigration and unemployment: A macroeconomic approach.” Macroeconomic Dynamics 23, no. 4 (2019): 1313–1339.CrossRefGoogle Scholar
  29. Labrianidis, Lois, and Manolis Pratsinakis. “Greece’s new emigration at times of crisis.” Technical report, Hellenic Observatory, LSE, 2016.Google Scholar
  30. Liu, Xiangbo. “On the macroeconomic and welfare effects of illegal immigration.” Journal of Economic Dynamics and Control 34, no. 12 (2010): 2547–2567.CrossRefGoogle Scholar
  31. Lozej, Matija. “Economic migration and business cycles in a small open economy with matching frictions.” Economic Modelling 81 (2019): 604–620.CrossRefGoogle Scholar
  32. Mandelman, Federico S., and Andrei Zlate. “Immigration, remittances and business cycles.” Journal of Monetary Economics 59, no. 2 (2012): 196–213.CrossRefGoogle Scholar
  33. Mishra, Prachi. “Emigration and wages in source countries: Evidence from Mexico.” Journal of Development Economics 82, no. 1 (2007): 180–199.Google Scholar
  34. Miyagiwa, Kaz. “Scale economies in education and the brain drain problem.” International Economic Review (1991): 743–759.Google Scholar
  35. Ortega, Javier. “Pareto-improving immigration in an economy with equilibrium unemployment.” The Economic Journal 110, no. 460 (2000): 92–112.CrossRefGoogle Scholar
  36. Pappa, Evi, Rana Sajedi, and Eugenia Vella. “Fiscal consolidation with tax evasion and corruption.” Journal of International Economics 96 (2015): S56-S75.CrossRefGoogle Scholar
  37. Philippopoulos, Apostolis, Petros Varthalitis, and Vanghelis Vassilatos. “Fiscal consolidation in an open economy with sovereign premia and without monetary policy independence.” International Journal of Central Banking 13, no. 4 (2017): 259–306.Google Scholar
  38. Smith, Christie, and Christoph Thoenissen. “Skilled migration and business cycle dynamics.” Journal of Economic Dynamics and Control 109 (2019): 103781.CrossRefGoogle Scholar
  39. Wilson, John Douglas. “A voluntary brain-drain tax.” Journal of Public Economics 92, no. 12 (2008): 2385–2391.CrossRefGoogle Scholar
  40. Wong, Kar-yiu, and Chong Kee Yip. “Education, economic growth, and brain drain.” Journal of Economic Dynamics and Control 23, no. 5–6 (1999): 699–726.CrossRefGoogle Scholar

Copyright information

© The Author(s) 2020

Authors and Affiliations

  1. 1.New South Wales TreasurySydneyAustralia
  2. 2.Universitat Autònoma de BarcelonaBarcelonaSpain
  3. 3.Barcelona GSEBarcelonaSpain
  4. 4.University of SheffieldSheffieldUK
  5. 5.MOVEBarcelonaSpain

Personalised recommendations