Labor mobility over the business cycle

Abstract:

This paper studies the macroeconomic effects of internal migration in an economy with labor market frictions and quantifies its role in mitigating asymmetric shocks. Labor mobility is viewed as a key mechanism to stabilize the economy from regional shocks in currency unions. However, this view does not consider the equilibrium effects of worker mobility in the presence of search frictions. First, I gather new evidence connecting individual migration decisions to aggregate economic outcomes over the business cycle. I show that during the Great Recession in the United States labor flows across states strongly responded to changes in economic conditions. Moreover, I show that job-to-job transitions account for most of the interstate movements, but during downturns, there is a significant increase in the relocation of unemployed workers across states. Then, I develop a general equilibrium model with local and aggregate business cycles in which search frictions are crucial to generating the observed patterns in the data. I calibrate the model to the U.S. economy and study the implications of labor mobility on local and aggregate labor markets.