Do remittances have a flip side? A general equilibrium analysis of remittances, labor supply responses and policy options for Jamaica

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Do remittances have a flip side? A general
equilibrium analysis of remittances, labor supply
responses and policy options for Jamaica

• Maurizio Bussolo and Denis Medvedev
• Development Prospects Group

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Outline

1. What is the flip side?
2. Effects of remittances
3. Model setup
4. Description of simulations
5. Main findings
6. Sensitivity analysis
7. Conclusions

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1. What is the flip side?
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1. What is the flip side?

• Average Weekly Real Wage (CPI, 1995100)

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1. What is the flip side?
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2. Effects of remittances

• Similar to aid flows? (Connell and Brown, 2005)
• What about labor supply?
• Endogeneity problems
• In Mexico, the sign varies (Amuedo-Dorantes and
  Pozo, 2005)
• In Nicaragua and Philippines negative sign
  (Funkhouser, 1992 Rodriguez and Tiongson, 2001)
• In Jamaica negative sign (Kim, 2006)

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3. Model setup

• Single-country CGE model
• Comparative statics
• Nested CES production structure
• Freely mobile factors
• Savings-driven investment
• Armington assumption
• Endogenous labor supply

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3. Model setup
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3. Model setup

• Single-country CGE model
• Comparative statics
• Nested CES production structure
• Inter-sectoral factor mobility
• Savings-driven investment
• Armington assumption
• Endogenous labor supply

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3. Model setup

• Maximize
• subject to

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3. Model setup
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4. Description of simulations

• Simulation a) 10 percent increase in the level
  of remittances with respect to their 2002 value
• Simulation b) simulation a) plus 25 percent
  reduction in payroll taxes
• Simulation c) simulation b) plus compensatory
  sales taxes to get a public revenue-neutral
  policy response

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5. Main results simulation a)
-3,822 -4,563
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5. Main results simulation a)
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5. Main results simulation b)
-3,822 -4,563
-1,061 -2,424
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5. Main results simulation b)
Simulation a
Simulation b
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5. Main results simulation c)
-3,814 -4,552
-808 -2,052
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5. Main results simulation c)
Simulation a
Simulation c
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6. Sensitivity analysis
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6. Sensitivity analysis
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6. Sensitivity analysis
-6,790 3,200
-11,048 1,848
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6. Sensitivity analysis
Simulation a
Simulation c
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7. Conclusions

• Remittances are not bad
• Flip side
• Competitiveness
• Dynamic consequences
• Policy may help
• Tax shift
• Distributional effects