Page 85 - Azerbaijan State University of Economics

Fadai Mardanli Mehman, Vildan Zahidkizi Rizayeva: Do Remittances Compensate for the
Labor Market Gaps Created by Emigration?

participation. There is limited evidence that remittances can stimulate self-employment
and entrepreneurship. Households may invest remittance income in self-employment or
entrepreneurship‚ including businesses and on-farm improvements. These investments
may create job opportunities for family members or within the community (Nguyen &
Purnamasari‚ 2019). However‚ they often have a smaller impact on formal sector
employment than is suggested‚ as investments are often made in informal or subsistence
businesses.

The relationship between remittances and unemployment is likewise heterogeneous‚
as labor market indicators are connected‚ intersecting with psychological insecurity
and sectoral shifts related to the multidimensional nature of unemployment dynamics
in transition countries like Azerbaijan (Kazimov‚ 2025; Niftiyev‚ 2020). Chami et al.
(2012) argue that remittances may reduce unemployment in labor-surplus countries‚
because of the ability to export unemployment through out-migration or the influence
on the growth of low-skill service sectors. They find that remittance flows into low
and middle income countries contribute positively to employment in non-tradeable
sectors (local services and construction). However there are negative effects on
employment in tradeable sectors‚ as labor shifts away from high-productivity
occupations to less productive jobs with lower barriers to entry to meet local demand.
On the other hand‚ in some studies‚ higher remittance flows were also associated with
higher unemployment‚ perhaps as the income from the remittances raises the
reservation wage‚ and as workers become more selective to only work if they can find
a very good job (Amuedo-Dorantes & Pozo‚ 2006). Jackman (2014) found‚ in Latin
America and Caribbean‚ that low remittances were associated with a slight increase
in unemployment (a slight disincentive to work) while higher remittances were
associated with lower unemployment‚ perhaps as a positive stimulus effect on labor
demand dominates the disincentive for workers‚ e.g. above 3-4% of GDP in Jackman
(2014). This suggests that remittance impacts may not be linear and may depend on
the scale of remittance inflows‚ as well as their usage.

The emigration process itself also changes the labor market in the home country‚
including lower unemployment as people who would have been unemployed leave
the country (the 'migration panacea' for unemployment during large outflows for some
Eastern European countries‚ which offset underemployment by out-migrating many
of their unemployed‚ particularly to Western Europe (Boubtane et al.‚ 2013)). Carare
et al. (2024)‚ in an IMF overview of labor migration in Latin America and the
Caribbean‚ find that emigration has a negative effect on labor force participation and
growth in origin countries and that labor force participation is lower in the origin
country at the time that emigration rises‚ potentially because of the outflows and the

85