EU Mobile Workers: A challenge to public finances?

Abstract:

This contribution analyses recent trends in labour mobility within the EU and considers the challenges it generates in sending countries. It finds that mobile workers abroad can make a significant contribution to the GDP of their host countries and that the incomes of mobile citizens abroad can be of considerable benefit to those who stayed at home. However, large-scale (net) emigration could have negative effects on the source country. Negative effects of outward mobility can arise through brain drain and when emigration erodes the tax base, making it more difficult for governments to finance current expenditure and to service (a large) public debt. Within the EU, the evidence of brain drain appears limited to southern euro area countries. The negative impact of the erosion of the tax base through emigration is mitigated by lower expenditure needs and additional VAT revenues on the expenditure financed by remittances. For high debt countries, population ageing exacerbated by mobility, rather than mobility alone, is the main issue for debt sustainability. A key finding is that with ongoing reductions in wage gaps, in the future, differences in structural factors may be more important than (after-tax) income in the decision to emigrate. States which struggle the most to enhance the quality of the life of their citizens, through effective public spending and provision of high quality public goods, may experience the largest outflows of workers.