How do economies with open labour markets work? The role of temporary migration in the European Union

This paper studies how temporary migration affects macroeconomic fluctuations and the conduct of stabilisation policies using a two-country DSGE model with search-and-matching frictions and endogenous cross-border labour mobility. The analysis shows that migration responds endogenously to both labour market conditions and exchange rate movements, making it an important channel of cross-country adjustment. Labour mobility alters the transmission of shocks in three main ways. First, it redistributes adjustment to productivity shocks across regions, smoothing output fluctuations in receiving economies while producing more nuanced effects in sending economies. Second, it favorably affects policy trade-offs: migration reduces the output costs of monetary tightening, and it mitigates the crowdingout effects of fiscal expansions. Third, it strengthens cross-country spillovers by transmitting labour market shocks across regions and reshaping their domestic propagation. Overall, temporary migration emerges as a powerful but non-neutral adjustment mechanism that affects both the effectiveness of stabilization policies and the distribution of macroeconomic outcomes across integrated economies.