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<p>International remittances are one of the largest forms of global financial flow, exceeding $656 billion in 2023 and outpacing even foreign direct investment. Remittances influence both traditional and modern sectors, which this paper examines through a two-sector general equilibrium model. The model analyzes how remittances affect the skill distribution of labor across these sectors. Developing countries, characterized by primary and modern sectors, have an intersector skill threshold along a continuum of worker skills. Below this threshold, workers adopt traditional technologies, while above it, they choose modern technologies. Increased remittance inflows raise the relative demand for differentiated goods, thereby boosting the demand for high-skilled workers in the modern sector. This shift pushes the skill threshold leftward, expanding the modern sector while contracting the traditional sector. As workers transition from the traditional to the modern sector, wages face downward pressure, ultimately reducing the real wage for workers in this sector.</p>

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Modeling Remittance-Induced Modern Sector Expansion and Traditional Sector Contraction in Developing Economies

  • 期刊论文

  • 发表日期：

    2026年1月6日

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  • Dambar Uprety,
  • Hari Sitaula

摘要

International remittances are one of the largest forms of global financial flow, exceeding $656 billion in 2023 and outpacing even foreign direct investment. Remittances influence both traditional and modern sectors, which this paper examines through a two-sector general equilibrium model. The model analyzes how remittances affect the skill distribution of labor across these sectors. Developing countries, characterized by primary and modern sectors, have an intersector skill threshold along a continuum of worker skills. Below this threshold, workers adopt traditional technologies, while above it, they choose modern technologies. Increased remittance inflows raise the relative demand for differentiated goods, thereby boosting the demand for high-skilled workers in the modern sector. This shift pushes the skill threshold leftward, expanding the modern sector while contracting the traditional sector. As workers transition from the traditional to the modern sector, wages face downward pressure, ultimately reducing the real wage for workers in this sector.