Fiscal austerity and greek migration: a missing link

This paper proposes a new channel through which scal austerity affects the macroeconomy.
We introduce endogenous migration for both the unemployed and the employed members of
the labour force in a small open economy New Keynesian model with labour market frictions
exposed to a rich scal policy. Our model-based simulations for the austerity mix during
the Greek Depression match both the total number and the composition in terms of labour
market status of emigrants. Fiscal austerity accounts for one third of the output drop and
11% of migration out ows, whereas the rest is attributed to the macroeconomic environment.
A counterfactual without migration underestimates the fall in output by one fth. Using this model, we also shed light on the two-way relation between emigration and austerity, and the role of migration as austerity shock absorber. On the one hand, scal austerity increases emigration with labour income tax hikes inducing prolonged out ows, while spending cuts exerting a hump-shaped effect due to the opposite demand and wealth effects. On the other hand, emigration leads to an increase in both the tax hike and time required for a given debt reduction due to an endogenous leakage in tax revenue. Unemployment gains from emigration during scal consolidation may be reversed over time due to the labour-reducing effect of the
higher tax hikes needed and of the higher wages sustained by emigration.