Currency Unions with Differential Labor Mobility

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,...