—Afia Mubasshira Tiasha—

There have been many studies that show how remittances affect labour supply decisions and other labour market outcomes. By supporting consumption-led growth, remittances impact macroeconomic stability as well, but if productive investments don’t keep pace with the rising demand, they may potentially exacerbate inflationary pressures. Therefore, it can be said that remittances might have a mixed effect on the labour force.

In recent years, remittances have also contributed to substantial capital transfers in various developing countries. According to the recent estimates of the World Bank, with around $23 billion of inflow, Bangladesh is among the world’s top recipients of remittances. Moreover, in 2023, personal remittances received in Bangladesh were estimated to be five percent of the GDP. These inflows help to lower poverty, boost household spending, and fund healthcare and education.

Empirical research illustrates that remittances reduce the likelihood of domestic labour market participation, indicating a disincentive impact (engaging in non-market activities) among those who don’t participate. Therefore, although remittances can raise living standards, they can also discourage domestic labour supply and lead to reliance on external income. Because the recipient households view the inflows as non-work money, it is anticipated that remittance payments will have a detrimental impact on labour force participation, highlighting the issue of moral hazard. In addition, remittances can lower labour supply and foster a culture of dependency, which limits economic expansion and increases inequality.

However, another study found that remittances do not significantly influence the labour force participation of men. Yet another study found that self-employment is increased by remittances. The increase in self-employment can be attributed to remittances directed towards entrepreneurial investment activity. Thus, it can be said that there might be a mixed effect of remittances.

Even though a lot of research has been done on the macroeconomic implications of remittances, few studies have used advanced econometric techniques like Vector Error Correction Models (VECM) to examine their direct effects on labour force participation in Bangladesh. Previous studies primarily focused on micro-level household survey data or cross-country analyses, which might overlook the short-term and long-term linkages between remittance inflows, labour force participation, and exchange rates. In the study titled “Analysing the Impact of Remittance on the Labour Force Participation Rate: Evidence from Bangladesh,” we identified this gap and looked into the short- and long-term relationships. Data for Bangladesh was taken from the World Development Indicators (WDI) database, which spans from 1991 to 2022.

The study revealed various key insights. Remittances had no substantial short-run impact on the labour force participation rate (LFPR). However, there was a positive and statistically significant effect of remittances on the LFPR in the long run. Specifically, every one-unit increase in remittances is associated with an increase of 0.00267 units in LFPR, implying that increased remittance inflows promote labour market participation over time. A possible explanation for this long-term positive effect is that remittances are channelled into productive investments that enhance employability and entrepreneurship. Households receiving remittances may use them to finance education, vocational training, and skill development, which in turn improves their ability to participate in the labour market. Additionally, remittances may serve as startup capital for small businesses, generating employment opportunities and encouraging labour force engagement.

Moreover, in the short run, the exchange rate has a significant impact on LFPR, meaning the fluctuations influence labour force participation. It also has a substantial effect over the long term. Labour force participation rises when the exchange rate depreciates, which occurs when the value of the domestic currency declines relative to other currencies. The result showed that one-unit depreciation is specifically linked to an LFPR increase of roughly 0.06890 units. The findings demonstrated the presence of a long-run relationship between the LFPR and its determinants, indicating that currency depreciation significantly boosts labour force participation, possibly due to enhanced export competitiveness, increased employment opportunities, or pressures on households to maintain real income levels amid rising prices.

Policymakers should take initiatives to establish supportive environments to facilitate the transformation of remittance inflows towards productive investments and human capital development to maximise the positive impact on labour market participation. These inflows may contribute to the creation of additional jobs through financial literacy initiatives, focused incentives for entrepreneurship supported by remittances, and easy access to financial services for households who receive remittances. Moreover, considering the vulnerability of the LFPR to changes in currencies, especially in the short run, the macroeconomic focus should be on guaranteeing exchange rate stability. Maintaining currency stabilisation could help to alleviate volatility-induced labour market distortions, especially in sectors that are highly responsive to trade and migration-related financial flows. Incorporating remittance and exchange rate management into wider labour market and development activities may result in more resilient and inclusive labour market outcomes in Bangladesh.

________________________________________

Afia Mubasshira Tiasha is senior research associate at the South Asian Network on Economic Modeling (SANEM). She can be reached at [email protected].