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

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  • Bussolo, Maurizio
  • Medvedev, Denis

Abstract

Econometric analysis has established a negative relationship between labor supply and remittances in Jamaica. We incorporate this ex­post 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 import­competing sector. Within the narrow margins of maneuver of a highly indebted government, we show that a revenue­neutral policy response of a simultaneous reduction in payroll taxes and increase in sales taxes can effectively counteract these potentially negative effects of remittances.

Suggested Citation

  • Bussolo, Maurizio & Medvedev, Denis, 2007. "Do remittances have a flip side? A general equilibrium analysis of remittances, labor supply responses and policy options for Jamaica," Conference papers 331666, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:331666
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    Keywords

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    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • F24 - International Economics - - International Factor Movements and International Business - - - Remittances
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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