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Explore the effects of remittances on labor supply in Jamaica through a general equilibrium analysis. Discover implications, policy options, and the potential flip side of remittance flows.
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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
Outline • What is the “flip side”? • Effects of remittances • Model setup • Description of simulations • Main findings • Sensitivity analysis • Conclusions
1. What is the “flip side”? Average Weekly Real Wage (CPI, 1995=100)
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)
3. Model setup • Single-country CGE model • Comparative statics • Nested CES production structure • Freely mobile factors • Savings-driven investment • Armington assumption • Endogenous labor supply
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
3. Model setup Maximize subject to
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 taxesto get a public revenue-neutral policy response
5. Main results: simulation a) -3,822 -4,563
Simulation a Simulation b 5. Main results: simulation b) -3,822 -4,563 -1,061 -2,424
5. Main results: simulation b) Simulation a Simulation b
Simulation a Simulation c 5. Main results: simulation c) -3,814 -4,552 -808 -2,052
5. Main results: simulation c) Simulation a Simulation c
Simulation a Simulation c 6. Sensitivity analysis -6,7903,200 -11,048 1,848
6. Sensitivity analysis Simulation a Simulation c
7. Conclusions • Remittances are not “bad” • “Flip side” • Competitiveness • Dynamic consequences • Policy may help • Tax shift • Distributional effects