Endogenous labor migration and remittances: Macroeconomic and welfare consequences

This paper develops a macrodynamic model of two small economies – a host country and a labor-exporting developing country – to address the impact of migrant workers and remittances on the two economies. It endogenizes the migration decision as part of the intertemporal utility maximization of households in the developing economy. This setup captures the dynamic process of migration, in which evolving circumstances may lead to fundamental differences from those based on treating remittances as exogenous. Extensive numerical simulations consider two diverse sources of structural change that impinge directly on the migration-remittance relationship. In both cases the long-run impact on the remittance-GDP ratio differs markedly from the immediate response, primarily as a consequence of the impact on the evolving migration during the transition. The welfare consequences of the different constituents – domestic residents, migrant workers, and host economy native workers – are considered. Alternative tax policies to offset effects, deemed adverse, are also discussed. •Migration and remittances are studied from viewpoint of host and home economies.•Migrants' extensive and intensive marginal decisions have different effects.•Impact of remittances/migration on economy and welfare varies extensively over time.•Migrants and stayers are impacted differently by remittances.•Policy responses can compensate those adversely affected.