Labour Market and Investment Effects of Remittances

This paper examines the relationship between remittances from interna- tional migration and imperfections in labour and capital markets. We use a search-matching model of the labour market to show that remittances can have two opposing effects on the labour market of the source country. First, they raise the utility of the unemployed members back home and, if a worker's bargaining power is low, this causes the unemployment rate to rise. Second, remittances available for investment will relax credit constraints encountered by firms. If the `investment effect' outweighs the `search income' effect, then remittances will reduce the unemployment rate. Our empirical analysis sug- gests that remittances have a small negative effect on unemployment, but a positive and significant effect on investment.