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Robertas Zubrickas is a Senior Research Associate at the University of Zurich.

Over the past decade, there has been an almost exponential rise in international remittances. We know from recent research that remittances are critical for the well-being of individual households in developing countries – helping them to emerge from poverty, send their children to school, and invest in small enterprises, health, education and housing. Yet not much is known about determinants of remittance flows within transnational households (those with one or more members working abroad), an increasingly important topic for policy makers with the sums involved.

The window washer

"The Window Washer", Qatar, ​Photo Credit: Flickr @ Omar Chatriwala

Given that the geographical separation might not allow the wife to be fully aware of her migrant husband’s earnings abroad, and given that a discrepancy in information matters for economic outcomes, the question arises:  Does awareness matter for remittances? In particular, will the husband remit less if his wife cannot observe his earnings? Our study “Asymmetric Information about Migrant Earnings and Remittance Flows” (done jointly with Ganesh Seshan), which focuses on Qatar and India, shows that the answer is “absolutely”, with higher earners benefiting more from the lack of awareness than lower earners.

From Qatar to Kerala

Migration into Qatar and other oil-producing countries of the Arabian Gulf took off in the 1970s with rising oil prices that subsequently fueled a large construction boom. In fact, in 2011 there were an estimated 17 million contract workers in the Arabian Gulf countries alone, mostly from developing countries. For our study, we decided to focus on Qatar, where about 90% of the 1.7 million population age 15 or older are foreign born, rendering it the nation with the highest share of immigrants in the world. And we picked the Indian state of Kerala, which until recently accounted for more than half of the Indian migrants to the Gulf.

To assess differences in information about overseas earnings, we collected migrants’ reports about their earnings and contrasted these reports with the reports about their earnings collected from the remittance recipients. To our knowledge, this is the first study using a matched household dataset that collects such cross-reports on remittance flows.  Our key findings are twofold:

Observation 1: More earnings, more discrepancy in information. Wives report on average only about 79% of their husbands' earnings, which signifies a substantial discrepancy in information. Moreover, underreporting is not uniform across households – it is more prevalent in households with higher earning migrants. In particular, we observe the gap between wives’ and husbands’ reports to widen in husbands’ earnings (see figure below).

Graph

Observation 2: More discrepancy in information, less remittance.  Underreporting is associated with lower remittances. In the sample, a wife who understates her husband’s earnings by the average amount receives 15 percent less in annual remittances than a wife who has perfect information about her husband’s earnings. Hypothetically, closing this information gap about foreign earnings would be associated in India with an increase in annual remittances of $432 – or nearly two months worth of monthly household expenses. Furthermore, data show that husbands remit on average 58 cents from every dollar of below-the-median income, but only 17 cents from every dollar above the median income.

Work Abroad as a Family Investment Project

What explains our observations? First, we are able to rule out the explanation that differences in information arise from subjective biases in reporting behavior. A more probable and natural explanation for differences in information – as also suggested by the evidence on remittance behavior of Tongan migrants to New Zealand – is that husbands tend to hide overseas earnings from their wives to reduce pressure to remit. But harder questions are why husbands are more truthful about their income when it is low and why they remit a larger share of a lower income. To answer these questions, we approach migration as a family investment project. A family sends its member abroad for work and expects the migrant to remit a share of earnings, which, however, are observable by the family only if it tries to verify the report (for example, by making inquiries in a migrant network).

 When verification costs are not trivial, the most efficient “expectation” for remittances that the family can impose on the migrant takes the form of a simple remittance threshold – which is what occurs in the most efficient loan contract if a costly audit is involved. Namely, if the migrant remits less than the remittance threshold on his account of low income, then the family can take the effort to verify his reported account of income (and punish him if he is found lying). On the other hand, no verification is undertaken if the migrant remits at least the threshold. Thus, it implies that the migrant, once capable of meeting the minimum expectation for remittances, may choose to be silent about any additional income earned and send no additional remittance thereof. As this implication is strongly supported by our empirical observations, it suggests that the same economic arguments that apply to investment contracting also apply to forming expectations for remittances and actual remittance behavior.

Our work signifies the role of information for remittance flows by demonstrating a direct connection between how much families receive in remittances and how much they know about foreign earnings. As more awareness benefits remittance recipients and, accordingly, their countries, a desirable policy is to improve it. Particular measures at the disposal of policy makers in remittance-receiving countries would be improving financial literacy and means of communication.

Adriana Kugler is a Full Professor at the McCourt School of Public Policy, Georgetown University. 


"My Medicaid Matters" rally on Capitol Hill, September 21, 2011. Photo credit: Flickr @SEIU

As the dust settles from the U.S. "Great Recession" and the ensuing global recession, many theories circulate about both the nature of the recessions and the success or failure of government economic policies to reinvigorate economies. A welcome perspective to this debate is Adriana Kugler, a Full Professor in Georgetown University’s McCourt School of Public Policy and the Chief Economist at the U.S. Department of Labor in 2011-2012.

On the U.S. policy side, she tells us that the package of policies aimed at boosting aggregate demand (including stimulus money, the Recovery Act, Work Opportunity Tax Credits, and even Medicaid) were effective in lowering unemployment. That said, a lesson learned is that some of these outlays at the state level could have been better targeted — for example, spent on education or income-support programs. As for the longer-term policies (including unemployment benefits, skills assessments, and job search and entrepreneurial training) they, too, worked well. But Kugler cautions that the long-term unemployment rate is still too high and the United States is "not out of the woods" (see figure below).

U.S. long-term unemployment still too high
 
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(See Part 1 for insights on the nature of the recession and the resulting high unemployment.)​

Adriana Kugler is a Full Professor at the McCourt School of Public Policy, Georgetown University.

 
A "sign of the times?", Arizona, November 19, 2009. Photo credit: Flickr @Nick Bastian


As the dust settles from the U.S. "Great Recession" and the ensuing global recession, many theories circulate about both the nature of the recessions and the success or failure of government economic policies to reinvigorate economies. A welcome perspective to this debate is Adriana Kugler, a Full Professor in Georgetown University's McCourt School of Public Policy and the Chief Economist at the U.S. Department of Labor in 2011-2012.

She tells us that the "Great Recession" (Dec. 2007 — June 2009) — compared to past U.S. recessions (dating back to the 1960s) — stands out in two key ways: (i) the depth of the crisis (a much bigger drop in aggregate demand) and (ii) the fact that government jobs didn't contribute to the jobs recovery (see figure below). As for the 5.5 percentage-point rise in the unemployment rate — a higher increase than even the 4.8-point-rise in the 1980s — Kugler estimates that two-thirds of this was cyclical (associated with business cycles) and one-third was structural (associated with issues like a skills or geographical mismatch). However, she plays down worries about a growing skills mismatch, citing recent employer surveys that show that this is a lesser problem than in the past. And she insists that it hasn't been a "jobless" recovery.

Government jobs not pulling their weight in U.S. recovery
 
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(Part 2 will examine policy issues and labor mobility.)

Carmen Pagés is Chief of the Labor Markets and Social Security Unit at the Inter-American Development Bank (IDB).


Photo Credit: Youth and Employment Program, Ministry of Labor.


Why do labor regulations matter and should they protect workers or jobs, especially in developing countries? Carmen Pagés — Chief of the Labor Markets and Social Security Unit at the Inter-American Development Bank (IDB) — tells the JKP that labor regulations matter for jobs and productivity, including which types of jobs get created (formal or informal) and in which sectors. But they also matter — and greatly — for social insurance and welfare, and thus for how inclusive growth is. For a while now, she says, the thinking has been that it's better to protect workers and let the markets decide freely whether to create or destroy jobs. But that thinking is starting to change a bit because of the high costs of unemployment on society. What is needed, she says, is a new model for labor regulations that takes into account both jobs and welfare. As for the informal sector, she emphasizes that these workers also need social protection, perhaps via universal social insurance, which would be funded through general government revenues. She also votes for a more humble and less dogmatic approach to policy making — one that takes a trial and error approach (as doctors do), ever mindful of possible adverse side-effects.

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Gordon Betcherman is a Professor in the School of International Development and Global Studies, University of Ottawa.

Man working inside a large reinforced steel tube
Man working inside a large reinforced steel tube, Phillippines.
Photo credit: Flickr @Nonie Reyes, World Bank Photo Collection

As governments debate labor market regulations — a highly controversial topic, sometimes for ideological reasons — it is vital to base decisions on empirical evidence. Thus, a welcome addition to the debate is the work of Gordon Betcherman — a Professor in the School of International Development and Global Studies, University of Ottawa — who contends that the key challenge for policy makers is to avoid the extremes of over- and under-regulation. As he tells the JKP, most countries are on a "plateau." That is, although society could still benefit from labor reforms aimed at greater efficiency or better work protection, labor regulations aren't the binding constraint on the country's number of jobs or overall productivity. Rather, he says, policy makers should be giving greater attention to developing human capital (better job skills), ensuring that cities function well, and adopting good trade policies. However, there are some countries on "cliffs," which means they are paying in economic and social terms. One cliff is over-regulation, where regulations exacerbate imperfections or create new ones; the other is under-regulation, where regulations don't address imperfections. Going forward he calls for more research on: (i) developing tools to assess whether a country's regulatory framework may be on a cliff or approaching the cliff; and (ii) developing tools to understand how labor regulations are redistributing income among different types of workers.

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(For more, see Betcherman's policy note "Developing labor market regulations in developing countries" for IZA's World of Labor; David A. Robalino's blog "Getting Labor Market Regulations Right"; and Carmen Pagés' upcoming blog on the topic.)

David A. Robalino is a Lead Economist and Labor and Youth Team Leader at the World Bank.
 

Most countries regulate the way minimum wages are set, whether workers can be dismissed and how, and the type of compensation that employers have to pay. But many critics of these regulations contend that such policies undercut job creation. While it is understood that labor regulations are important to protect workers and create good jobs, questions regarding what is the right policy mix and how best to design and implement them remain a source of debate. The most recent review of the research in the World Bank's 2013 World Development Report on Jobs shows that, in most cases, these regulations don't have much impact on employment. At the same time, not regulating labor markets at all can expose workers to abuse and inadequate working conditions. What does all this mean for policy makers? The answer appears to be first setting the right objectives for these regulations and then ensuring that they are appropriately designed.


A construction worker finishes sealing glass, Kuala Lumpur, Malaysia.
Photo credit: Flickr @World Bank Photo Collection

Implications for Minimum Wages

Minimum wages can be useful, for instance, when labor markets aren't competitive and employers can impose wages that are too low — what economists call the extreme of labor market "under-regulation" as opposed to "over-regulation." In those cases, minimum wages not only don't reduce employment but they also can increase it, and as Gordon Betcherman (University of Ottawa) tells the JKP, both workers and society as a whole stand to benefit.

At the same time, minimum wages aren't the best instrument to fight poverty or guarantee a given standard of living. Other targeted transfers are likely to be more effective, particularly given that a majority of the poor don't benefit from minimum wages (see T. H. Gindling's IZA World of Labor note on "Does increasing the minimum wage reduce poverty in developing countries?"). Thus, if minimum wages are regulated, it's important to have the right process to set their level over time. One alternative is to rely on independent technical bodies that, at predetermined dates, study what the level of the minimum wage should be in consultations with the relevant stakeholders.

Implications for Regulations on Dismissal Procedures

It's also a good policy to protect workers from the risk of job loss. But making dismissals illegal or asking employers to receive authorization from a third party and pay compensation (severance pay) might not be the way to go — neither for workers nor employers (see my article with Michael Weber on why severance pay isn't an efficient mechanism to protect workers).

A better option is giving employers the needed flexibility to manage their human resources in response to business needs while making sure that workers have sufficient time to plan the transition to a new job and receive adequate financial support and access to quality employment services. In this case, employers can be mandated to provide adequate advance notice before a dismissal and contribute to a fund that is used to pay unemployment benefits, along with services such as job search assistance, counseling, and retraining. Governments at the same time need to be able to ensure the appropriate management of the fund and find the right service providers.

Some of these measures and other practical ideas are discussed in a short manual on labor regulations that the World Bank’s Labor and Youth Team is putting together in collaboration with the International Labour Organization (ILO) and the International Trade Unions Confederation (ITUC). The latter just posted a blog with a list of the worst places to have a job. You don't have to agree with the list but it's clear that in some cases the problem isn't "over-regulation" but the lack of it. And as Carmen Pagés (Inter-American Development Bank) reminds us, we should start to think more like medical doctors, whose guiding principle is to "first, do no harm," and think carefully about the impacts that changes in labor regulations have on labor markets. Both extremes — "under-regulation" and "over-regulation" — are likely to be welfare decreasing.

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For more on this topic, see the upcoming JKP interviews with both Betcherman and Pagés and Betcherman"s IZA World of Labor policy note, "Designing labor market regulations in developing countries."

Hartmut Lehmann is a Professor of Economic Policy at University of Bologna

As transition and emerging economies continue to restructure their enterprises, worker displacement — that is, involuntary layoffs — is inevitable. But is the process random as to which types of workers suffer most? And how large are the costs to individual workers and the overall economy? These are questions that Hartmut Lehmann — Professor of Economic Policy at Bologna University and Program Director of the IZA research area Labor Markets in Emerging and Transition Countries — recently explored. He focused on the former communist transition countries of Central and Eastern Europe and the Commonwealth of Independent States, along with China.

VN-MD002 World Bank
Private company employees produce Vitamin C, Moldova.
Photo credit: Flickr @World Bank Photo Collection


Lehmann tells the JKP that studies show that displacement imposes large costs on the individual workers affected as well as on the economies at large, although better data on the topic is essential. For the individuals, he says, the costs typically take the form of foregone earnings stemming from long spells of non-employment, heightened job insecurity, reduced health for themselves and their children, and psychological costs (like depression). Those hardest hit are the less educated and less skilled. What can policy makers do? He says the key is to pinpoint which types of workers are being displaced and what are the constraints they face in trying to find new jobs. Then governments can devise the right equity — and efficiency-enhancing policies — such as income support, job search counseling, and retraining.

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Daniel Hamermesh is a Professor of Economics at University of Texas at Austin, and Royal Holloway, University of London.

A major topic of debate right now in many industrial countries — like France, Germany, Switzerland, the United Kingdom, and the United States — is whether to raise or even just introduce minimum wages. Advocates cite the need for better working conditions, while critics worry that higher labor costs will raise unemployment and possibly deter growth as businesses retrench. Who's right? Or are both sides right? To learn more, the JKP spoke with Daniel Hamermesh — a Professor of Economics at University of Texas at Austin, and Royal Holloway, University of London — who recently examined how labor costs affect companies' demand for labor.

Are you on board?
National minimum wage campaign, London, 2008.
Photo credit: Flickr @Nina Jean (https://www.flickr.com/photos/nicasaurusrex/)

He says that studies show, as economists would expect, that higher labor costs (like minimum wages, overtime pay, and health benefits) reduce employment and/or the hours worked by individual employees — meaning that this loss must be traded off against the benefits that higher earnings might provide to specific groups of workers. Thus, the key question becomes by how much employment falls when labor costs increase. The best estimate going, Hamermesh says, is that a 10% increase in labor costs generally will lead to a 3% decrease in the number of employees (or to a 3% reduction in the hours they work, or to some combination of both) — hence the oft-cited "3 for 10" rule. As for the United States, he says, any losses from higher minimum wages shouldn't be very big because minimum wages are so low compared to most other industrial countries (see table).

Some industrial countries have much higher minimum wages than others
Minimum wages compared to the average and median wages in selected countries, 2011
Country Minimum wage as a fraction of the:
Average wage Median wage
Australia
Canada
France
Japan
Netherlands
Spain
UK
US
0.45
0.40
0.48
0.33
0.42
0.35
0.38
0.28
0.54
0.45
0.60
0.38
0.47
0.44
0.47
0.38

Source: OECD data. http://stats.oecd.org/BrandedView.aspx?oecd_bv_id=lfs-data-en&doi=data-00313-en (data extracted June 3, 2013 from OECD iLibrary).


For more on the topic, see Hamermesh's policy note "Do labor costs affect companies' demand for labor?" for IZA's World of Labor.
 
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Solomon Polachek is a Distinguished Professor at Binghamton University (SUNY)

Despite equal pay legislation dating back 50 years, American women still earn 22 percent less than their male counterparts, although this figure is down from 40 percent in the 1960s-1970s. In the United Kingdom, the gap is still 21 percent, and in France and Australia, it is around 17 percent. What can be done to further narrow the gap in industrial countries? To learn more, the JKP recently spoke with Solomon Polachek, a Distinguished Professor at Binghamton University (SUNY) and an expert on the topic.

Sign in aiport 
Gatwick airport sign, 2010, United Kingdom.
Photo credit: Flickr @Kathy Dempsey


Polachek explains that an effective solution rests on a better understanding of the source of earnings differences. He takes issue with the commonly held belief that the culprit is corporate discrimination per se. Rather, he says, the differences stem from demographic differences. In particular, the gender wage gap is small for singles and young people, but higher for older people and married people — especially for those with children. Thus effective policies to speed up wage convergence should involve government actions to stimulate a further rise in women's lifetime work, such as eradicating taxes that decrease wives' incentives to work. Repealing marriage taxes would increase women's incentives to invest in education and training, and better enable women to climb the corporate job ladder. Promoting high-quality day care would do the same.
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Louise Fox is a Visiting Professor at the University of California at Berkeley, and Deon Filmer is a Lead Economist in the World Bank's Research Group.

As the world's youngest and poorest region, Sub-Saharan Africa faces a major jobs challenge. Half of the population is under 25, and every year 11 million people enter the labor force — mostly youth looking for work. After more than a decade of rapid growth and expansion of educational opportunities, youth have high aspirations and expectations, and African policy makers are concerned about how to meet them. Jobs and opportunity are at the top of the development agenda.


Youth empowerment in Liberia. Photo credit: Flickr @CAFOD

Most African governments are unprepared to meet this challenge, both because they don't have good data and analysis showing what the challenge actually is in their country and because they tend to focus on the complaints of urban, well-educated young males, who may be the most vocal but are actually a very small minority. The overwhelming majority of Africa's young people live in rural areas and towns. Rather than developing expensive enclave youth projects in capital cities, countries need national strategies focusing on all youth and all employment segments — family farming, household enterprises in rural and urban areas, and wage jobs created in labor-intensive private sector firms. Strategies need to focus on raising productivity in each of these segments and helping youth find and grab the opportunities that exist.

To help governments and stakeholders create customized national strategies, we worked with a team from across the World Bank to assemble evidence on how and where countries are creating jobs and how policy makers can help youth to find sustainable economic opportunities (see "Youth Employment in Sub-Saharan Africa"). We found a lot of innovation and some success, but we also uncovered a number of myths that hold countries back from effectively addressing the youth employment challenge. Until the discussion moves beyond these myths and faces up to reality, effective strategies will be illusive.

Six Myths About Youth Employment in Africa

Myth 1: Urban unemployment is the central problem. Unemployment in low- and lower-middle-income countries in Africa is actually very low because people can't afford to be unemployed. African youth work, often in the same activities as their parents — in household farms and firms. But they may be underemployed, meaning that they can't find enough hours of remunerative activity. In rural areas, they can't find off-season work, and in urban areas, they may spend too much time waiting for customers or for someone to hire them for the day or week. The challenge is to address this underemployment — to enable these working young people to be more productive so their earnings will increase (and they can therefore be more independent and, in time, support a family).

Myth 2: Past growth has been jobless, creating the youth employment problem. Not only was Africa's economic growth high over the past 15 years — averaging 5 percent per annum for the region as a whole — it also created lots of new jobs, with many in the higher productivity industrial and service sectors. Private sector wage employment expanded two to three times faster than the growth of the labor force. But the labor force has been growing so rapidly — over 3 percent per annum — that there was no way for a sector that started the decade employing less than 5 percent of the labor force to expand rapidly enough to absorb a substantial share of the new entrants. The biggest job creator in the past was the household enterprise sector (which includes very small businesses run by one person or their family, out of their home, on the streets, or in a simple marketplace), followed by agriculture (see Figure 1).

Figure 1: Where Africa works
(Estimated structure of employment in Africa by country type, 2010)

Source: "Africa's Got Work to Do: Employment Prospects in the New Century," IMF, WP/13/201.
Note: HE stands for household enterprises. 183 m stands for 183 million people.

Myth 3: Effective industrial policy will solve the youth employment challenge. One way East Asian tiger economies created new, more productive jobs was through expanding the manufacturing sectors. African countries haven't been able to duplicate this success, leading some to call for new industrial policies. As important as it is for African countries to transform their economies, even under the most optimistic policy scenarios, only about 25 percent of African youth can expect to get any kind of wage job in the near future — casual or formal — and most of these won't be in manufacturing (see Figure 2). The other 75 percent will have to make their own jobs in agriculture and household enterprises. These youth are the ones needing the most support to find a sustainable and rewarding livelihood. This is a particular challenge in the poorest countries, for youth growing up in the poorest families, and for young women.

Figure 2: Where the new jobs will be

Number of new jobs by sector
Distribution of new entrants by sector

Source: "Africa's Got Work to Do: Employment Prospects in the New Century," IMF, WP/13/201.

Myth 4: The problem is a lack of vocational training. Despite being the most educated generation of Africans ever, young people emerge from school lacking basic cognitive skills. In rural areas, 60 percent of African youth are entering the labor force without even completing primary education, and 50 percent of all females aged 15-24 don't complete primary education. Moreover, alarming proportions of those who complete primary school don't get beyond the most basic levels of numeracy and literacy (see Figure 3). Even the most effective vocational training program can't make up for missing cognitive skills, and African public vocational training programs don't have a track record of being highly effective. Public resources and attention need to focus on ensuring that basic education provides a solid foundation for skills development.

Figure 3: A low report card in math
(Percent of test-takers who do no better than "basic numeracy" on a math test)


Source: SACMEQ, 2007

Myth 5: Agriculture offers no hope for youth. Despite current low levels of productivity and earnings, Africa's family farm sector offers opportunities for young people. Africa still imports a lot of food, and prices are high. With the right policies and programs, Africa's agriculture sector can meet regional and global demand, as well as provide the inputs to a growing agribusiness sector. Youth can be part of this agriculture renaissance, but they need access to land, to inputs and know-how, to markets, and to finance. Customary land tenure systems tend to exclude youth, and this has to change for youth to be interested in farming.

Myth 6: The household enterprise sector is a dead-end; policies should focus on small- and medium-sized enterprises. In most low- and lower-middle-income countries outside of Africa, governments and society recognize that household enterprises supply affordable goods and services for low- and middle-class households and are an important source of income. These informal vendors, hairdressers, tailors, brickmakers, and small-scale manufacturers of custom items almost always stay small and informal, but they are often the best livelihood choice for many people without the education or skills to either run a larger business or get a wage job. Youth's entry into this sector by creating new independent businesses should be supported by national and local governments. But in Africa, governments too often do the opposite — they undermine household enterprises, by not providing the infrastructure, support, and security that would allow them to operate productively.

Related materials:
Africa's Got Work to Do: Employment Prospects in the New Century (IMF Working Paper)
Household Enterprises in Sub-Saharan Africa (Policy Research Working Paper)

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