Are Remittances Good for Labor Markets in LICs, MICs and Fragile States?

Abstract

We present cross-country evidence on the impact of remittances on labor market outcomes.Remittances appear to have a strong impact on both labor supply and labor demand inrecipient countries. These effects are highly significant and greater in size than those offoreign direct investment or offcial development aid. On the supply side, remittances reducelabor force participation and increase informality of the labor market. In addition, male andfemale labor supply show significantly different sensitivities to remittances. On the demandside, remittances reduce overall unemployment but benefit mostly lower-wage, lowerproductivitynontradables industries at the expense of high-productivity, high-wage tradablessectors. As a consequence, even though inequality declines as a result of larger remittances,average wage and productivity growth declines, the latter more strongly than the formerleading to an increase in the labor income share. In fragile states, in contrast, remittancesimpose a positive externality, possibly because the tradables sector tends to beunderdeveloped. Our findings indicate that reforms to foster inclusive growth need to takeinto account the role of remittances in order to be successful.