A puzzle in the recently stagnated economy of Jamaica is that high rates of unemployment have persisted even when real wages have been increasing. This paper examines aspects of the labor supply in an effort to understand why high rates of unemployment have existed with increasing real wages. This is a sign of a badly functioning labor market. The cross-sectional analysis suggests that remittances have some impact on labor supply, especially on labor market participation. The pseudo panel data analysis also confirms that remittances have a strong impact on labor participation but not on weekly working hours. Households with remittance income have a higher reservation wage and have reduced the supply of labor by moving out of the labor force.

Econometric analysis has established a negative relationship between labor supply and remittances in Jamaica. The authors 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 the reservation wages of recipients. This exacerbates the real exchange rate appreciation, hurting Jamaica's export base and small manufacturing import-competing sector. Within the narrow margins of maneuver of a highly indebted government, the authors show that a revenue-neutral policy response of a simultaneous reduction in payroll taxes and increase in sales taxes can effectively counteract these potentially negative effects of remittances.

Abstract: A puzzle in the recently stagnated economy of Jamaica is that high rates of unemployment have persisted even when real wages have been increasing. This paper examines aspects of the labor supply in an effort to understand why high rates of unemployment have existed with increasing real wages. This is a sign of a badly functioning labor market. The cross-sectional analysis suggests that remittances have some impact on labor supply, especially on labor market participation. The pseudo panel data analysis also confirms that remittances have a strong impact on labor participation but not on weekly working hours. Households with remittance income have a higher reservation wage and have reduced the supply of labor by moving out of the labor force.

Econometric analysis has established a negative relationship between labor supply and remittances in Jamaica. The authors incorporate this ex-post 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 import-competing sector. Within the narrow margins of maneuver of a highly indebted government, the authors show that a revenue-neutral policy response of a simultaneous reduction in payroll taxes and increase in sales taxes can effectively counteract these potentially negative effects of remittances.

We present cross-country evidence on the impact of remittances on labor market outcomes. Remittances appear to have a strong impact on both labor supply and labor demand in recipient countries. These effects are highly significant and greater in size than those of foreign direct investment or offcial development aid. On the supply side, remittances reduce labor force participation and increase informality of the labor market. In addition, male and female labor supply show significantly different sensitivities to remittances. On the demand side, remittances reduce overall unemployment but benefit mostly lower-wage, lowerproductivity nontradables industries at the expense of high-productivity, high-wage tradables sectors. As a consequence, even though inequality declines as a result of larger remittances, average wage and productivity growth declines, the latter more strongly than the former leading to an increase in the labor income share. In fragile states, in contrast, remittances impose a positive externality, possibly because the tradables sector tends to be underdeveloped. Our findings indicate that reforms to foster inclusive growth need to take into account the role of remittances in order to be successful.