Influence of Labour Migration on the Economy of Ukraine

1

Studying the impact of migration on the economy is a challenging task. In this article we assess the impact of remittances from abroad on GDP and balance of payments of Ukraine. Also we analyse the consequences of migration for the labour market in Ukraine.

The impact of income growth on GDP

According to the Keynesian economic growth model, remittances can be seen as an increase in income which is not due to increased production (as might happen, for example, as a result of increase in export prices while maintaining the physical volume of exports). This increase in income causes an increase in production in two ways: (1) higher consumption of goods and services of domestic production (in the short-run) and (2) higher investment (in the long-run).

In Ukraine, the main channel of the impact of remittances on GDP is consumption. The scope of impact depends on two factors – the marginal propensity to save and the propensity to purchase imported goods and services.1 Marginal propensity to save in Ukraine is not high. According to calculations based on Ukrstat data, the share of savings in Ukrainian households in 2006-2012 ranged from 8.2% to 12.2% (the only exception was the year 2010 – the first year of economic recovery after the deep crisis of 2008-2009 when the share of savings reached almost 17% owing to the need to repay bank loans that have grown rapidly in previous years). The results of OTM-2012 also testify that most of the transfers of migrants were spent on consumption. This is primarily explained by the level of income of households receiving remittances. Thus, 88.4% of such households had incomes below the average in Ukraine, and for 53.8% of all households the remittances amounted to more than half of the total revenue.

However, transfers from migrants stimulate imports since the propensity to consume imported goods and services is high in Ukraine. According to the Ukrstat data, in 2006-2012, the share of consumer goods produced outside Ukraine in sales of commercial enterprises ranged from 32.6% to 41.1%.

Given the estimates of the marginal propensity to consume and propensity to purchase imported goods and services, the contribution of remittances from abroad to Ukraine’s GDP (through consumption) ranged from 2.1% to 4.0%.2 It should be noted that, according to the National Bank of Ukraine, in 2010-2012, the share of remittances in GDP remained constant at about 4%. Thus, the rate of growth of remittances corresponded to the growth rate of GDP.

Assessing the impact of remittances on GDP through investments is more difficult because investments affect output in the long-run. However, data on the low marginal propensity to save suggest that this effect is negligible. In addition, migrant workers tend to spend money earned abroad on investments in their own houses (as well as into construction and purchase of real estate). This could be explained by the desire of migrants to provide housing for themselves or their children and by the choice of real estate as an object of investments. There are some cases when Ukrainians who returned from abroad opened a small business at home, but this phenomenon is not common for two main reasons. First, to start a business one usually needs more start-up capital than savings of migrant workers. Second, the overall investment climate in Ukraine is unfavourable. According to the World Bank Doing Business – 2014 rating, Ukraine holds the 112th place on the ease of doing business among 189 countries.

Impact of remittances on the balance of payments

The role of remittances from migrant workers on the balance of payments is visible. According to the NBU data, during 2009-2012 the amount of remittances was comparable to the amount of gross foreign direct investment and exceeded it in 2013 (Figure 1). An important feature of remittances is stability: although the value of remittances is usually pro-cyclical (due to the close economic relationship between donor countries and migrants’ recipient countries), the oscillations are smaller than in other elements of the balance of payments, especially in investment.

However, remittances are not a major part of the balance of payments. They comprise 10-15% of the value of imports or exports. In particular, in 2011 and 2012, remittances were not enough to cover the trade deficit which stood at USD 10.2 bn and USD 14.3 bn respectively. It should also be noted that the net contribution of remittances to the balance of payments is less than the gross contribution as remittances stimulate the growth of imports. The above data on the propensity to consume imported goods and services suggest that imported goods and services account for about a third of remittances received by Ukraine.

Figure 1. Foreign direct investment and private remittances to Ukraine in 2008-2013 (bn USD)

Source: National Bank of Ukraine

Impact of changes on the labour market and GDP

Analysing the role of remittances on the production levels on should be aware that external labour migration reduces the supply of one of production factors in the domestic market such as labour. The result may be a reduction in production. However, in the case of Ukraine the impact of this factor is not essential. The scale of labour migration is relatively small (migrant workers comprise 6.8-9.1% of the economically active population). Labour migration from Ukraine is characterised by its distinct regionality. According to OTM-2012 data, over 70% of Ukrainian migrant workers are residents of the Western Ukraine. In this region, ​​10.8% of the population aged 15-70 became labour migrants, while in the south of Ukraine the corresponding figure was 1.9%, in the north – 1.3%, in the east – 1%, and in the centre – less than 1% (Figure 2). However, the unemployment rates in all regions of Ukraine are similar. In 2012, in Western Ukraine it equalled 8.4%, in southern Ukraine – 6.6%, in the east – 7.1%, in the north – 7.3%, and in the centre – 8.7% (according to ILO methodology).

It is worth noting that one of the consequences of labour migration on the labour market is the reduction of skilled workers supply. A significant part of Ukrainian labour migrants works abroad in positions that do not match their training received in Ukraine. Specifically, 25.1% of migrants that in Ukraine belonged to the group of “professionals, experts, technical officials” work in other countries on basic jobs, other 14.5% of migrants in this group work abroad in trade and services sphere. 70.3% of those who were skilled agricultural workers in Ukraine also work on basic jobs. Assessment of this effect’s impact scale on the labour market is a different research topic that is not discussed in this article.

Given that wages are higher abroad than in Ukraine, the social consequences of labour migration are positive in the short term, because migration is a factor of increasing incomes, especially of the poorest part of population. However, it also raises the question of social security of Ukrainian migrants today and in the future when they reach the retirement age, as most workers do not participate in social (including pension) insurance.

Figure 2. Intensity of labour migration by region of Ukraine (5 – highest, 1 – Lowest)

Source: Own depiction based on Report on the methodology, organization and results of the modular sample survey on labour migration in Ukraine / International Labour Organization. Technical support for the Decent Work Agenda and the ILO Bureau for Central and Eastern Europe – Budapest ILO, 2013.

Conclusions

Comparison of the results of a household survey in Ukraine with statistical and sociological data obtained in the EU and Russia suggests that the number of migrant workers from Ukraine can be estimated at 1.5-2 million people (4.3-5.8% of the population aged 15-70 years, or 6.8-9.1% of economically active population). Thus, migrants send to Ukraine between USD 6 bn and USD 10 bn per year or 4.0-6.5% of GDP.

The contribution of migration to GDP growth is small. Given the estimates of the marginal propensity to consume and propensity to purchase imported goods and services, the contribution of migration remittances to GDP of Ukraine can be assessed at 2.1-4.0%. This estimate does not take into account the impact of remittances on increased investment as well as the effects of the reduction in labour supply in the domestic market, which can be assessed as negligible. The main effect of migration is poverty reduction in Ukraine. In conclusion, foreign labour migration in Ukraine shouldn’t be considered as a tool for accelerating economic development.

1 Kireyev, A. (2006). The Macroeconomics of Remittances: The Case of Tajikistan. International Monetary Fund, Washington, DC. http://russian.doingbusiness.org/data/exploreeconomies/ukraine/

2 This assessment is the result of simplified calculations because it does not take into account, in particular, the multiplier effect (additional production growth due to increased revenues of Ukrainian enterprises associated with the costs of recipients of remittances). However, such analysis is sufficient to assess the scale of the impact of remittances on GDP.

Kostyantyn Kravchuk