Does a federal country need federal transfers when it has labor mobility?

Abstract

The United States is recognized as a country where labor mobility between states is high. Usually, when some states experience periods of economic difficulties, people move to other states that offer better perspectives, which may alleviate depressions. In spite of this flexibility in the labor market, the Federal Budget still grants some significative amount of aid to the states. Does this help to do any good or is it even necessary when labor mobility is significative? In this paper, we assess the efficiency of having federal transfers to states when workers’ mobility is high. We use data for the 50 states of the USA and perform panel data analysis. We reach positive effects of federal transfers and migration in the relative performance of each state and also in the convergence of the states’ income to the union’s average. However, we note that the positive effect of migration is seen in lagged differences (short-run effect) and the federal transfers’ effect is seen in lagged levels (long-run effect). Moreover, quantitatively, the federal transfers have more effects than outmigration.