Regional Stabilization Through Factor Mobility and Government Intervention

Abstract

The contribution of transfers, capital and labor mobility to consumption smoothing are much lower within the European Union than within the United States. This paper identifies the three major smoothing channels by using a structural model and analyzing micro and macro data. I show that, while capital market frictions are important in explaining the difference between the US and the EU, labor markets still play a non-negligible role in the within-US smoothing. Moreover, if inter-regional migration were halved, consumption smoothing would drop by 8 pp., of which a third would relate to capital mobility. However, I find that within-EU capital mobility is almost unaffected by the relatively low level of European labor mobility.