Academic journal article Journal of Economics and Economic Education Research

Evaluating the Effects of Taxing the Remittances of Skilled Workers on Capital Accumulation and Aggregate Income Using an Overlapping Generations Model

Academic journal article Journal of Economics and Economic Education Research

Evaluating the Effects of Taxing the Remittances of Skilled Workers on Capital Accumulation and Aggregate Income Using an Overlapping Generations Model

Article excerpt

INTRODUCTION

It has been established that labor migration has non-negligible economic impacts specifically to labor-sending countries such as the Philippines. It is because the labor-sending economy can be subjected to the incidence of brain drain and experience the ills and benefits of remittance flows. As explained by Mandelman & Zlate (2009), temporary labor migration varies over the business cycle due to the prevalence of cyclical unemployment brought about by booms and busts in both the labor-sending and labor-receiving economies. Mandelman & Zlate (2009) provided evidence that there are drastic declines in labor immigration flows during recession in most developed countries, which was supported by the findings of Tullao, Conchada & Rivera (2010) wherein there is evidence of changing demand for nursing graduates and other professional workers in the Philippines due to the global crisis that occurred for the past decade.

With more than 10 percent of the population stationed as either permanent residents, or temporary workers, or illegal migrants in more than 182 countries, the Philippines has emerged as one of the major exporters of labor services in the world (Collymore, 2003). According to Sjaastad (1962), labor migration is a household investment decision that depends on the incentive to migrate which is reliant on the expectations of future earnings at the destination country relative to the country of origin. As such, due to the lack of job opportunities and the unattractive compensation packages in the Philippine labor market, many have opted to seek employment abroad in the hopes of augmenting household domestic income. As the country continues to struggle with political and economic instabilitues, the continued exodus of Filipino labor, especially skilled labor, will continue to prevail.

According to the Philippine Overseas Employment Agency (POEA), there have been 1,470,826 deployed Overseas Filipino Workers (OFWs2) across the globe in 2010 with a 3.4 percent increase from 2009. It is vital to note that it is difficult to measure with any precision the exact number of Filipinos working abroad. Figures from the POEA only include those people who are working abroad with registered and official contracts, while the number of Filipinos working abroad on an irregular and unofficial basis is unknown but probably quite high. Nonetheless, these figures are likely to persist if there will be no major change within the country's economic policies.

As a consequence of temporary labor migration, the labor-sending country is able to receive remittance income. According to Adam & Page (2005), McKenzie & Sasin (2007), and Acosta, Lartey & Mandelman (2009), the magnitude and the growth rate of remittances received by various developing economies has exceeded the inflow of official aid and foreign direct investments (FDIs). In recent years, that the value of remittances in 2005 was approximately 2.5 percent of gross national income (GNI) in the developing world (Acosta, Lartey & Mandelman, 2009). Subsequently, according to the World Bank (2006) as cited by Acosta, Lartey & Mandelman (2009), the large magnitude of remittance income has contributed to the reduction of absolute poverty, the improvement of human capital indicators, and the reduction of income inequality. However, according to Stark (1988) and Barham & Boucher (1995), migration and remittances has worsened income inequality as compared to a no-migration counterfactual. Moreover, according to Tuano-Amador, Claveria, Delloro & Co (2008), remittances are countercyclical in nature that unlike FDIs and capital inflows, during times of crisis, the amount of remittance still increases. This is because migrant workers must send financial support for the survival of their families. Hence, this protects the economy from further recessions since remittances provide for the consumption expenditure of the recipient country. …

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