Migrant Labor and Remittances: Macroeconomic Consequences and Policy Responses

Many developing countries experiencing poor domestic economic performance view migrant labor as an alternative. We employ a macrodynamic model of two small open economies—a host country and a labor-exporting developing country—to address this issue. We analyze how both economies are impacted by alternative tax policies, structural changes occurring in the two economies, and plausible fiscal policy responses. The most important feature of the model is that remittances are endogenized by being linked to the household members’ decisions to migrate. Extensive numerical simulations provide important implications for both fiscal and migration policies and address important questions regarding the current efforts put forward by governments of several developing countries to encourage migrant labor.