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Emigration, tax on remittances and export quality

Ganguly, Shrimoyee and Acharyya, Rajat (2019): Emigration, tax on remittances and export quality.

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We examine implications of emigration of unskilled workers for quality of a skill-based good exported by a small open economy. This issue is relevant in the context of quality constraint faced by the developing countries like China and India, in promoting their exports, on the one hand, and significantly large emigrations of workers, particularly unskilled workers, that lower their productive capacities, on the other hand. We show that even though unskilled workers are not directly used in production of the quality-differentiated export good, their emigration would lower export quality when quality upgrading requires more intensive use of skilled workers relative to capital. This result follows from the complementarity between skilled and unskilled wages in a competitive general equilibrium model. A quality-content production subsidy in such a case can mitigate the adverse effect of emigration. Significantly large remittances received from unskilled emigrants create scope for taxing such remittances to finance the subsidy.

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