European Central Bank publishes working paper finding temporary migration amplifies output fluctuations in receiving economies and dampens them in sending economies

The European Central Bank has published Working Paper No 3226 by Katarzyna Budnik examining temporary cross-border labour migration in a two-country dynamic stochastic general equilibrium model calibrated to the old European Union Member States and the newer Central and Eastern European Member States. The paper finds that temporary migration can materially change business cycle dynamics, amplifying output and domestic demand fluctuations in receiving economies while dampening the macroeconomic effects of productivity shocks in sending economies by reallocating labour across regions. The paper is presented as research and does not represent the views of the ECB. The model makes migration endogenous and combines it with search-and-matching frictions in labour markets, remittances and capital accumulation. Results indicate that productivity shocks in the host economy attract temporary migrants, expand labour supply, strengthen output responses and employment volatility, and moderate wage pressures, while inflation dynamics are largely unchanged. In sending economies, migration reduces labour market pressure, can lower unemployment and raise wages for remaining workers, and supports consumption through remittances, while also increasing macroeconomic interdependence and the cross-border transmission of shocks within an integrated European labour market.