The contribution of OFW remittances to income inequality: a decomposition analysis

Abstract

The paper aims to determine whether remittances from overseas Filipino workers improve or worsen income inequality. Using decomposition equations, the paper divides total inequality into its four components, namely wages, entrepreneurial incomes, other income, and remittances from migrants. The decomposition exercise reveals that the contribution of remittances to overall income inequality depends on their share in total income, their distribution among the population, and their correlation with total income. Remittances are found to accrue mostly to higher-income classes, but they are seen to be gradually becoming less inequality-increasing over time. Therefore, policies that would aim to reduce income inequality should consider making migration-facilitating factors more accessible to those in the lower ends of the distribution, because remittances would only tend to contribute less to income inequality if the lower-income brackets were also able to migrate. Finally, further studies should look into the implications of the changes in inequality, especially with regard to welfare.

JEL classification: F22, D63