Do Remittances Have a Flip Side? A General Equilibrium Analysis of Remittances, Labor Supply Responses, and Policy Options for Jamaica

29 Pages Posted: 20 Apr 2016

See all articles by Maurizio Bussolo

Maurizio Bussolo

World Bank - Chief Economist Office for Europe and Central Asia

Denis Medvedev

World Bank; American University

Date Written: March 1, 2007

Abstract

Econometric analysis has established a negative relationship between labor supply and remittances in Jamaica. The authors incorporate this ex-post evidence in a general equilibrium model to investigate economywide effects of increased remittance inflows. In this model, remittances reduce labor force participation by increasing the reservation wages of recipients. This exacerbates the real exchange rate appreciation, hurting Jamaica's export base and small manufacturing import-competing sector. Within the narrow margins of maneuver of a highly indebted government, the authors show that a revenue-neutral policy response of a simultaneous reduction in payroll taxes and increase in sales taxes can effectively counteract these potentially negative effects of remittances.

Keywords: Labor Markets, Economic Theory & Research, Remittances, Markets and Market Access, Economic Growth

Suggested Citation

Bussolo, Maurizio and Medvedev, Denis, Do Remittances Have a Flip Side? A General Equilibrium Analysis of Remittances, Labor Supply Responses, and Policy Options for Jamaica (March 1, 2007). World Bank Policy Research Working Paper No. 4143. Available at SSRN: https://ssrn.com/abstract=964805

Maurizio Bussolo

World Bank - Chief Economist Office for Europe and Central Asia ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://https://blogs.worldbank.org/team/maurizio-bussolo

Denis Medvedev (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

American University

4400 Massachusetts Avenue N.W.
Washington, DC 20016-8029
United States

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