August 14, 2015
Paul Krugman had a nice blogpost outlining some of the key issues in the literature on optimal currency unions. The question is what happens in a currency union like the euro zone, which is not optimal for many reasons, if there is free mobility of labor.
Krugman points to the experience of Portugal and argues that mobility of labor actually makes the situation worse, not better. The story is that much of Portugal’s prime age labor force is emigrating to other countries in the European Union, leaving behind a population of retirees, without a working age population to pay their benefits. This is similar to the story with Puerto Rico, although as Krugman points out, due to the fiscal union with the rest of the United States, retirees in Puerto Rico can still count on their Social Security and Medicare, as well as other payments that flow from Washington.
It is worth taking another step with this one to think about Detroit. There we have a situation where the the downturn in the auto industry is a big hit to the city and the region. However, white workers were able to escape many of the bad effects by stepping over the city lines and move to the suburbs. Due to discrimination in housing and lending, African Americans find the move to the suburbs much more difficult, therefore leaving many of them stuck dealing with the effects of the loss of much of the city’s employment base.
This picture is clearly somewhat exaggerated. People can move to other cities and many African Americans have moved to Detroit’s suburbs, but the reality of discrimination, certainly in the very recent past and which undoubtedly continues to some extent into the present, has made it considerably more difficult for African Americans in Detroit to escape the fallout from the collapse of the auto industry than for its white population.
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