Unemployment and Remittances Nexus in Central, Eastern and Southeastern Europe

What the paper says

In existing empirical literature, the effect of remittances has most often been examined in relation to economic growth, poverty reduction, and employment in recipient countries. Unlike previous empirical studies, this paper focuses its analysis on the impact of remittances on unemployment in selected Central, Eastern, and Southeastern European (CESEE) countries from 1998 to 2021, using the New economics of labor migration framework. These countries, which underwent deep economic and political transitions during the 1990s, faced significant challenges associated with high unemployment, particularly among the working-age population who lost their jobs, and among young people who struggled to integrate into the labor markets of these economies. As a result, they became major sources of migration flows toward the more developed and wealthier Western European countries, which in turn led to a substantial increase in the inflow of remittances to the CESEE region. This study highlights two effects of remittances: they can reduce unemployment by alleviating financial constraints and promoting job creation through human capital investments, but they may also create short-term labor market distortions by leading to decreased labor force participation, known as the "dependency effect". Using an Autoregressive Distributed Lag (ARDL) model, the analysis reveals a negative relationship between remittances and unemployment; that is, in the long run, an increase in remittances reduces the unemployment rate by facilitating job creation. Conversely, in the short term, remittances correlate with increased unemployment due to temporary declines in labor force participation. Hence, the novelty and importance of this paper lie in its aim to explore the nexus between remittances and unemployment, and to underscore the need for policies that optimize the benefits of remittances while mitigating their potential adverse effects. However, the study is limited by the unavailability of data for certain countries, potential endogeneity between remittances and unemployment, and the omission of some institutional or structural factors that future research could address.