How emigration affects migrant-sending countries
When a national view is taken, the debate on migration and labour markets in the North tends to concentrate (negatively) on how the arrival of migrant workers impacts on other workers. Naturally, the focus is on the labour market wage and unemployment rate, as labour supply inherently changes with the influx of immigrants.
But the impact of emigration on the labour market adds an element that does not exist in the debate on immigration: remittances. As they constitute a feedback process from migration, remittances too affect labour markets in the home country - beyond the direct labour demand-supply effect. When emigrants leave and consequently have an effect on the entire labour market, remittances impact on the households that receive them directly - and consequently their labour supply. An interesting question is whether the household dynamic described in the first section translates to aggregate shifts of employment in the economy.
Remittances, moral hazard and unemployment
As seen earlier, remittances may decrease labour supply in the household for several reasons: a transition to informal types of employment, an increase in productivity or investment in human capital. There is yet another reason why household members may decrease their supply: leisure consumption. Because migrants do not directly observe the use of remittances, a "moral hazard" problem may develop between the remitter and the receiver(s): household members receiving remittances have an incentive to decrease their labour supply in order to remain eligible to receive future transfers. While lost labour might add pressure to work more, remittances reduce this pressure and may even lead household members not to work at all. In fact, the income effect of remittances on the reservation wage is often greater than the original cost of lost labour.
The moral hazard problem of remittances also plays an important role in the level of productivity of the household. Azam and Gubert (2005) found that in the Kayes region of Mali, the receipt of remittances led to a decrease in agricultural productivity, as remittance-receivers decreased their labour supply.
The mechanism behind remittances and labour markets explains why a simulation exercise (Decaluwe and Karam, 2008) found that the outflow of workers decreased unemployment in a simulation exercise on Morocco but why, by contrast, remittances keep unemployment high in Jamaica despite generally rising wages (Kim, 2007). Emigration decreases pressure on the labour market and thus more jobs are left in the home country for fewer people. Yet remittances, by decreasing labour supply in the households they are sent to, increase unemployment. In fact, in economic recessions, it is possible that the decrease in remittances arising from the downturn in the host country increases labour supply in the home country, and thus exacerbates problems of unemployment in the home country (see Box 4.3).
Box 4.3. Global economic crisis, remittances and unemployment
The recent global economic crisis is a good illustration of the moral hazard phenomenon. Many migrants affected by the crisis stopped sending money or at least reduced the amount remitted. As a result, remittances reduced in many developing countries, especially in 2009 (see Figure 4.1). To replace the lost income, many household members had to re-enter the labour market, hence contributing to increasing the labour supply and, eventually, unemployment, as the economy was unable to absorb the sudden inflow of jobseekers..
Figure 4.1. Remittance flows to developing countries
Source: Mohapatra et al. (2011).
Figure 4.2 features a simple correlation between changes in remittances and in unemployment, both measured as the annual growth rate (in percentage) between 2008 and 2009, for a total of 29 developing countries from Africa, Asia and Latin America. 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 (the coefficient of correlation is -0.53). In other words, the greater the drop in remittances, the higher is the increase in the unemployment rate.
While not necessarily free of endogeneity problems,2 it is an interesting correlation as it highlights the potential risk for households that rely heavily on remittances for their everyday activities. If remittances are a substitute for economic activities, they may create dependencies for households. Households that cannot or do not use remittances to create sustainable projects that generate income are bound to run into problems in times of crisis or when facing a shock, such as a positive re-evaluation of the home currency. While nothing in the table confirms causality, the relationship exposes the risks and sensitivity of a development model solely focused on migration.
A general recalibration of labour worldwide can also bring efficiencies to local labour markets. Migration regulates labour shortages and surpluses and arguably forms a natural part of the development process spurring economic and social mobility along with it. In other words, labour migration is linked to the economic convergence of poor countries to richer ones (Hatton and Williamson, 2005). In essence, the movement of workers can alter the equilibrium of the labour market.
Figure 4.2. Unemployment and remittances during the global economic crisis, 2009
Changes in remittances (%)
Tackling the Policy Challenges of Migration © OECD 2011