Data and codes for: Labor Supply Shocks and Capital Accumulation: The Short and Long Run Effects of the Refugee Crisis in Europe

European countries experienced an exogenous and once and for all increase in labor supply as a consequence of the influx of Ukrainian refugees due to the 2022 Russia invasion. More than 7 million refugees from Ukraine, with more than 4 million being working-age refugees of different skills, located geographically dispersed in Europe, with the Ukraine neighboring European countries experiencing the largest inflow of refugees. We study the economic effects of this unexpected increase in labor supply that varies across skill groups.

To quantify the general equilibrium effects, we extend the dynamic trade and migration model developed in Caliendo et al. (2021) and consider an endogenous process of capital accumulation as in Kleinman et al. (2022). The model comprises 23 European countries and a constructed rest of the world. Production of goods requires high-skilled and low-skilled labor, and capital structures, and countries trade goods subject to bilateral trade costs. Households, who might be employed or non-employed, make forward-looking migration decisions, and decide optimally where to locate each period subject to mobility frictions and idiosyncratic taste shocks. Immobile landowners (who we also refer as capitalists) have an investment technology to build capital structures (who they rent to local firms) in each country and decide the optimal stock of capital each period to maximize their present discounted value of their consumption. In the short run, an increase in the supply of labor strains the use of capital structures that takes time to build and impact the return to capital and price index, which affects the real return to accumulate capital across countries. Over time, countries that build capital structures can take advantage of the increase in labor supply and are able to increase output, resulting in potential long-run benefits.

We find that the labor supply shock as a consequence of the inflow of Ukrainian refugees increases aggregate real GDP in Europe in the long term. However, we find large distributional effects across countries, skill groups, and between households and capitalists. High-skilled households are worse off with the increased competition from a labor supply shock that is relatively high-skilled intensive. Low-skilled households tend to benefit from the relatively larger increase in high-skilled labor and from the accumulation of capital structures over time, and household income inequality declines across European countries as a result. As expected, the labor supply shock benefits the owners of capital, which has implications on the design of redistributive policies to absorb the shock. Our findings suggest that the ability to build capital structures importantly shapes the aggregate and distributional effects of the labor supply shock. Capital accumulation across European countries in the response to the labor supply shock allows to increase output, which tends to reduce the welfare losses of high-skilled households and benefit low-skilled households, although it is not enough to turn them into gains for everyone.