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Remittances, entrepreneurship, and employment dynamics over the business cycle

Author

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  • Federico S. Mandelman
  • Alan Finkelstein Shapiro
Abstract
We incorporate remittances and microentrepreneurship (self-employment) into a small open-economy business cycle model with capital and labor market frictions. Countercyclical remittances moderate the decline of households' consumption during recessions. These remittances also are used to finance the start-up costs of microenterprises that bolster households' income during economic downturns. However, the positive income effect from countercyclical remittances also leads to a decrease in salaried labor supply, which generates offsetting upward pressure on wages during recessions and adversely affects the recovery of the salaried sector. Therefore, the behavior of remittances decisively affects labor force participation and the composition of employment between nonsalaried and salaried employment over the business cycle. The model delivers labor market and aggregate cyclical dynamics that are consistent with the Mexican data.

Suggested Citation

  • Federico S. Mandelman & Alan Finkelstein Shapiro, 2014. "Remittances, entrepreneurship, and employment dynamics over the business cycle," FRB Atlanta Working Paper 2014-19, Federal Reserve Bank of Atlanta.
    • Handle: RePEc:fip:fedawp:2014-19
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    More about this item

    Keywords

    business cycles; search and matching frictions; remittances;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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