Labor market adjustment in small open economies: The case of Micronesia

Abstract

The paper uses the Bertram-Poirine four sector framework to examine the labor market effects of a decline in external aid in a small open island economy. It provides empirical evidence, drawn from the Federated States of Micronesia, to reject the notion that aid-supported public expenditure crowds out opportunities for indigenous private sector development. Instead, the paper argues that the future development of small island economies will depend on their access to overseas job markets and the continuation of aid inflows and remittances.