CAN INTERNATIONAL TRANSFERS BE PROBLEMATIC? HONDURAN REMITTANCES AND LABOR SUPPLY DECISIONS

I. INTRODUCTION The financial flows associated with international migration ("remittances") have reached record levels. Honduras offers an important case study of remittance effects, since the flows represented 20% of GDP in 2007 and have remained around 16% in recent years (Endo et al. 2010; Pew Research Center 2013). Remittance flows to Honduras declined during the Great Recession but recovered to over $2.8 billion by 2011 and past post-recession levels in 2013 (MIN 2012; Pew Research Center 2013). Well over 10% of the workforce has left the country; most sources suggest between 200,000 and 700,000 Hondurans living in the United States (Endo et al. 2010). But the country is also highly dependent on exports, which represent almost 50% of GDP (World Bank 2013). The main products include coffee, apparel (assembled mainly in northern Honduras), shrimps (from the south), and bananas. The effects of financial flows on tradable sectors have become an important economic development topic (Lartey et al. 2009), and globalized countries such as Honduras are vulnerable to such interactions. In general (sending) developing countries have avoided activist policies around taxation and international labor mobility. Donor programs have focused on reducing the transaction costs of remittance transfers, under the assumption that such transfers are necessarily beneficial and reduce absolute poverty. Taylor and Adelman (1996) mention spending multipliers as a reason to expect economic growth from remittances. But brain drain, Dutch disease effects, and family dislocation are a few of the concerns about migration raised in the social science literatures. Labor reductions are another potential macroeconomic cost. In this article, we examine this labor question in Honduras using traditional and intra-household variations of the explanatory remittance variable. Other studies have linked remittances and national labor market outcomes using computable general equilibrium or elasticity approaches (Bussolo and Medvedev 2008; Gagnon 2012; Mishra 2007; Posso 2012). We aim to use the microeconomic story to complement the macroeconomics literature on remittances by considering if remittances create negative labor supply effects and, if so, which subgroups of the population are affected. We focus on working-age adults, given the established literature around remittances and reduced child labor. Although we cannot determine the person sending each transfer, we can identify the recipient within the household. Our methodological change of focusing on the individual reception of remittances contrasts the previous literature relying upon a household perspective. This semantic difference is important since it includes variation by scale and gender of the people impacted by remittances. (1) We suggest that a smaller subset of individuals (those actually receiving the money) could demonstrate different, and potentially stronger, labor supply changes than that of every member of the whole household. Other studies outside of Latin America (i.e., Binzel and Assaad 2011; Mendola and Carletto 2012) have focused on wives as recipients; here we consider all genders. We also take care to differentiate participation done by individuals across types of wage and nonwage work (i.e., self-employment and unpaid family labor). At first cut, the survey summary statistics and results assuming exogeneity suggest remittances lower labor force participation rates by 7 percentage points. But when controlling for the endogenous nature of remittance flows, reversals occur. Our main results suggest that each person within a remittance-receiving household is not significantly affected by the transfer; however, individual recipients are 23 percentage points more likely to work. If our identification strategy is valid, this outcome contrasts some previous findings. A focus on nonwage work (especially self-employment), rather than increased private sector employment, is likely behind our overall participation trends. …