Nexus between financial inclusion, workers’ remittances, and unemployment rate in Asian economies

Financial inclusion, the provision of affordable and accessible financial services to all segments of society, has gained significant attention from academics and policymakers. Research indicates a strong link between financial exclusion and poverty, underscoring the importance of expanding access to banking services, credit, and insurance. A robust financial sector facilitates resource allocation, economic growth, and development, particularly in emerging economies. While the benefits of financial inclusion are well-documented, its impact on unemployment remains an under-researched area. The COVID-19 pandemic further highlighted the urgent need to understand the interplay between financial inclusion, workers' remittances (a crucial source of income in many developing countries), and unemployment, given their relevance to the UN's Sustainable Development Goals. This study aims to fill this knowledge gap by rigorously examining the relationship between these three variables in Asian economies, considering regional variations and methodological limitations of previous research.

Existing literature predominantly focuses on the finance-growth nexus, but the impact of financial development on unemployment is less explored. While easier access to finance can stimulate investment, job creation, and economic growth, leading to lower unemployment, an excessively developed financial sector, characterized by financialization, can conversely harm growth and employment. Empirical studies show mixed results, with some suggesting a positive correlation between financial sector expansion and employment, while others highlight the potential negative consequences of excessive financialization. Regarding financial inclusion specifically, research emphasizes its role in promoting inclusive economic growth and poverty reduction, potentially impacting unemployment positively. However, empirical evidence directly linking financial inclusion to unemployment is scarce. Concerning remittances, theoretical and empirical research explores their effects on labor supply. While remittances could lead to reduced labor supply due to increased leisure preference, their positive impact on household consumption, investment, and human capital development can also stimulate job creation and reduce unemployment. The existing literature, however, lacks sufficient empirical investigation into the multifaceted relationship between financial inclusion, remittances, and unemployment, particularly across diverse Asian economies and utilizing advanced econometric techniques.

To investigate the relationship between financial inclusion, workers' remittances, and unemployment, the study employs panel data encompassing 39 Asian economies from 2004 to 2021. Financial inclusion is measured using ATMs per 100,000 adults (data from the Global Financial Development Database – GFDD), while remittances are measured as personal remittances received (% of GDP) from the World Development Indicators (WDI). Other control variables included are GDP per capita (constant 2015 US$), internet users (% of population), a financial globalization index (from the KOF Swiss Economic Institute), and inflation (annual %). The study uses two primary econometric methods: Two-Stage Least Squares (2SLS) and Generalized Method of Moments (GMM). 2SLS addresses potential endogeneity issues by using instrumental variables, while GMM is employed to handle potential heteroscedasticity, endogeneity, and serial correlation, particularly suitable for panel data with more cross-sections than time periods. The baseline GMM model includes a lagged dependent variable to address endogeneity. To enhance the robustness of the findings and account for non-normality, the study also uses Panel Quantile Regression (PQR). The PQR model allows for the estimation of conditional quantile functions, providing a more detailed understanding of the impact of independent variables across different quantiles of the unemployment rate.

The 2SLS and GMM estimations consistently show that a higher number of ATMs, increased remittances, greater internet penetration, higher GDP per capita, and increased financial globalization are significantly and negatively associated with unemployment rates across all regions analyzed (Asia, Central Asia, East Asia, Southeast Asia, West & Middle East Asia, and South Asia). Specifically, a 1% increase in ATM density is associated with a statistically significant reduction in unemployment rates, ranging from 0.192% to 1.435% across regions in the 2SLS model and 0.120% to 0.263% in the GMM model. Similarly, increases in remittances, internet users, GDP, and financial globalization also show significant negative relationships with unemployment. The PQR analysis confirms these findings, showing consistently negative impacts of ATMs, remittances, internet usage, GDP, and financial globalization on unemployment across multiple quantiles. The impact of inflation, however, shows regional variation; it's positively correlated with unemployment in some regions and negatively in others. Table 4 presents the detailed 2SLS results, Table 5 shows the GMM results, and Table 6 displays the PQR results, all indicating consistent patterns across different econometric approaches.

The findings strongly support the hypothesis that financial inclusion and remittances play a significant role in reducing unemployment in Asian economies. Increased access to financial services, facilitated by ATMs and other digital financial services, empowers individuals and businesses to engage in productive activities, stimulating job creation and economic growth. Remittances provide additional income, increasing household consumption and investment, further boosting economic activity. Improved internet access enhances access to information, education, and financial services, improving labor market participation. The results highlight the importance of considering the inter-connectedness of financial development, technological advancement, and labor market outcomes. The regional variations observed in the effect of inflation underscore the importance of tailoring policies to specific country contexts. The consistent results across different econometric methods strengthen the credibility and robustness of the findings.

This study provides strong empirical evidence supporting the positive impact of financial inclusion and workers' remittances on reducing unemployment in Asian economies. The findings underscore the need for policies that promote financial inclusion, facilitate efficient remittance channels, and invest in human capital development to address unemployment challenges effectively. Future research should explore the heterogeneity across different Asian economies in more detail and investigate other potential contributing factors influencing the complex relationship between financial inclusion, remittances, and unemployment.

The study acknowledges that Asian economies differ significantly in their economic structures, policy environments, and levels of development. The impact of financial inclusion and remittances may therefore vary across countries. Furthermore, the study relies on aggregate data and may not fully capture the micro-level mechanisms through which these variables affect unemployment. Future studies should examine these regional variations and consider more detailed micro-level data to gain deeper insights. Finally, while the study uses multiple robust econometric techniques, unobserved factors and other omitted variables might affect the results.