Many studies have shown how remittances affect labour supply decisions and other labour market outcomes. Furthermore, by supporting consumption-led growth, remittances have an impact on macroeconomic stability; but if productive investments do not keep pace with rising demand, they may potentially exacerbate inflationary pressures. Therefore, there might be a mixed effect of remittances on the labour force.
Moreover, in recent years, remittances have contributed to substantial capital transfers in various developing countries. According to the recent estimates of the World Bank, with more than $26 billion in remittances, Bangladesh is among the world’s top recipients of remittances. Moreover, in 2023, personal remittances received in Bangladesh were estimated to be 5.1% of GDP, according to the recent World Development Indicators (WDI).
Empirical research illustrates the fact that remittances reduce the likelihood of labour market participation, indicating a disincentive impact (engaging in non-market activities) among those who do not participate. Therefore, although remittances can raise living standards, they can also discourage labour supply and lead to reliance on external income. It is anticipated that remittance payments will have a detrimental impact on labour force participation, addressing the moral hazard issue. Remittances have the possibility to lower the labour supply and foster a culture of dependency, which limits economic expansion and increases inequality. However, in another study it was found that remittances do not significantly influence the labour force participation of men. In another study it was found that self-employment is increased by remittances. The increase in self-employment can be attributed to remittances directed towards entrepreneurial investment activity. Thus, 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 have primarily focused on micro-level household survey data or cross-country analyses, which might overlook the short-term and long-term linkages between remittances, labour force participation, and exchange rates. In one of my studies 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 the years 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, influencing LFPR changes over time. 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 a 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 in order to maximize 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 stabilization, it 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.
This article was first published in the April, 2025 edition of the Thinking Aloud
