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

IMF Working Papers, May 9, 2018

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Remittances have a strong impact on both labor supply and labor demand in recipient countries.
The effects of remittances on labor markets are highly significant and greater in size than those of foreign direct investment or offcial development aid.
Reforms to foster inclusive growth need to take into account the role of remittances in order to be successful.

Remittances reduce labor force participation.
Remittances increase informality of the labor market.
Male and female labor supply show significantly different sensitivities to remittances.

Remittances reduce overall unemployment.
The benefits of remittances accrue mostly to lower-wage, lower-productivity nontradables industries.
These benefits come at the expense of high-productivity, high-wage tradables sectors.
As a consequence:
- Inequality declines as a result of larger remittances.
- Average wage growth declines.
- Average productivity growth declines more strongly than average wage growth, leading to an increase in the labor income share.

In fragile states, remittances impose a positive externality.
This positive externality may be because the tradables sector tends to be underdeveloped in fragile states.

Policy reforms aimed at inclusive growth should explicitly account for remittances and their differential impacts across sectors and demographic groups.
Addressing the shift toward nontradables and informality is important to sustain productivity and wage growth despite reductions in inequality associated with remittance inflows.