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Journal of Economic Integration 2008 September;23(3) :734-764.
DOI: https://doi.org/10.11130/jei.2008.23.3.734
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 
The World Bank
Copyright ©2008 Journal of Economic Integration
ABSTRACT

Econometric analysis established a negative relationship between labor supply and remittances in Jamaica. We incorporate this ex-post evidence in a general equilibrium model to investigate economy-wide effects of increased remittance inflows. In this model, remittances reduce labor force participation by increasing 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 revenue-neutral policy response of a simultaneous reduction in payroll taxes and increase in sales taxes can effectively counteract these potentially worrisome effects of remittances.

JEL classification: D58, F24, J22, H24, H31

Keywords: Jamaica | remittances | labor supply | tax policy | general equilibrium
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