Macroeconomic Stability and the Single European Labor Market

In this paper, we analyze the impact of economic conditions on bilateral migration from Poland to Germany by estimating a two-country DSGE model using Bayesian methods. We build a simple two-country DSGE model that examines the business cycle fluctuations of labor. Households in the low-income country can choose to supply labor at home and abroad. Labor supply depends on the differential of real wages, but migrants and natives are imperfect substitutes. The migrants remit their income and increase the utility of the households in the country of origin. Prices are sticky according to Calvo price setting and, therefore, need time to adjust. With this setting, the model is parsimonious but reflects essential characteristics of intra-EU migration. We estimate the model using data from Poland and Germany, as both countries share a common border and migration is significantly large. We observe significant differences in real wages among both countries, migration costs are low and migration has a long tradition. It is an open question whether migration does follow business cycle pattern and to what extent business cycles of the host or the country of origin are more important. The results of our paper imply that a common labor market already exists, as, by comparing two DSGE models with and without the internal market, we can show, that migrants link labor markets of member states by choosing the optimum location for the provision of labor. The shock absorbing properties of the common market, however, benefits foremost the home rather than the host country of migrants.