Should I stay or should I go? Austerity, unemployment and migration

High unemployment and fiscal austerity during the recent crisis have led to significant migration outflows from the periphery of the euro area. This paper introduces endogenous migration both for the unemployed and employed members of the household in a small open economy DSGE model with search and matching frictions. The government can use public spending, unemployment benefits, or labor income taxes as fiscal consolidation instruments. A tax-based consolidation induces the highest migration outflows in the short run, which exacerbates the induced GDP contraction. Cuts in unemployment benefits induce the highest outflows of jobseekers in the medium run, but with more favorable effects on GDP and unemployment as the domestic wage adjusts downwards. The latter also leads to a very persistent increase in the intensity with which current workers look for a job abroad. Government spending cuts, on the other hand, have a small impact on migration. A repatriation policy, modelled as a higher utility cost of migration, generates a return of migrants, leading to a boost in aggregate demand, a fall in real wages and an increase in unemployment. ; The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.