Labor Market Integration and Fiscal Competition

This paper studies the long-run impact of international labor mobility on a union of countries with an integrated labor market. We build a multicountry model populated by overlapping generations of households with endogenous cross-country migration flows. Independent governments use fiscal measures to compete for labor. The model is calibrated to match the empirical economic and migration patterns in the European Union. We find that the fiscal-competition motive has a quantitatively significant impact on optimal fiscal policy, decreasing the average debt-to-GDP ratio by 12 percentage points (p.p.) and the average labor income tax by 1 p.p. relative to the no-competition scenario.