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Global Economic Crisis and the Remittance-Unemployment Riddle

Jason Gagnon's picture

As a consequence of the global economic crisis, 2009 marked a hiccup in the trend of increasing remittance flows to developing countries. In most parts of the world, the growth rate of remittances was indeed negative. But what is striking is that there was an inverse relationship between remittances and unemployment. In other words, the greater the drop in remittances, the higher was the increase in the unemployment rate. In Moldova, for instance, remittances decreased by 36% in 2009, while the unemployment rate increased by 61%. By contrast, in Fiji, remittances increased by 24% and unemployment dropped by 7%.

The scatter plot below illustrates the relationship between changes in remittances and changes in unemployment, both measured as the annual growth rate (in percentage) between 2008 and 2009, for 29 developing countries. The x-axis represents changes in remittances and the y-axis the change in unemployment. The figure shows a negative correlation between the two variables.

Unemployment and remittances during the global economic crisis
 

Source: World Bank Development Indicators, World Bank Remittances Data

While not necessarily free of endogeneity problems, it is an interesting correlation as it highlights the potential risk for households – but also countries – that rely heavily on remittances. In a recent OECD Development Centre book entitled Tackling the Policy Challenges of Migration: Regulation, Integration, Development, which focuses on the link between emigration and the labour market in the home country, we provide a potential answer to this riddle.

Remittances can in fact lead to a drop in labour supplied by the household members receiving them for four main reasons:

  • Remittances raise the reservation wage of household members. Because of a moral hazard mechanism, household members have then the incentive to reduce their labour supply;
  • Remittances also provide recipients the opportunity to leave bad formal jobs for better informal ones, such as when remittances are used for investment in micro-enterprises.
  • Households already relying on micro-entrepreneurial activities can use them to buy more productive assets, allowing members to work less, yet produce more.
  • By increasing the value placed on homework, remittances allow household members to realign the way how the household functions. Women, for instance, may leave bad jobs to tend to child rearing and housework.

At the aggregate level, we know that emigration may increase wages by decreasing the labour supply in sending countries. Remittances reinforce this mechanism and may thus contribute to lower unemployment. In reverse, a sudden drop in remittances, like in 2009, might force household members to re-enter the labour market, which cannot absorb this sudden influx of “new” workers.

While more work has to be done to confirm causality, the analysis illustrates the risks of a model relying on emigration as a tool for development. If remittances are not used in a sustainable way, the benefits they bring in good times may indeed quickly wash away in bad time. In “Tackling the Policy Challenges of Migration”, we discuss a few policy solutions around this problem.
 

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