Remittance Income Volatility and Labor Supply in Mexico

[Author Affiliation]Catalina Amuedo-Dorantes, , , , camuedod@mail.sdsu.edu; corresponding authorSusan Pozo, , , , susan.pozo@wmich.edu[Acknowledgment]We would like to thank the anonymous referees and the editor for their comments and suggestions on how to improve the manuscript.1. Background and SignificanceA significant body of academic and policy research analyzes the impact of international remittances (the earnings that emigrants send home) in economies around the globe. Studies have been carried out to ascertain the effect of remittances on a wide range of economic outcomes, including household decisions concerning capital accumulation, health and housing expenditures, country exchange rates, economic growth, income distribution, poverty rates, and, as we do in this study, labor supply. Evidence of the impacts of remittances on the well-being of recipients and on economic progress is mixed. Some studies find that countries and households reap positive benefits from these resource transfers (e.g., Adam and Page 2005), while others find negative or ambiguous effects (e.g., Narayan, Narayan, and Mishra 2011). An overall consensus on the impacts of remittances is unlikely to emerge for some time given the complexity of this research topic, not to mention the varying characteristics of countries under analysis.1We propose to contribute to this important debate using an expanded approach for assessing the effects of remittances on individual and household decision making. Our contribution is to note that, while the level of resource transfers received by the household is likely to influence individual and household behaviors, volatility with regard to the stream of inflows is also likely to play an important role. To date, research on the impact of remittances on remittance-receiving households has tended to focus on the way in which the level of remittance inflows affects either individual or household behavior without considering the volatility surrounding these inflows. However, if the volatility that surrounds remittance inflows influences individual and household behaviors, a strategy that only examines the level of inflows is likely to miss out on a more complete understanding of the effects of remittances on individual and household decision making and, therefore, of their impacts on remittance-receiving economies (Amuedo-Dorantes and Pozo, 2010).In this study, we focus on the labor market and investigate how volatility of remittance inflows influences male and female labor supply--a crucial dimension in the influence of remittances on remittance-receiving countries. Limited numbers of studies have examined the impact of the incidence and level of remittance income on labor supply patterns. Although conclusions differ, owing, in part, to the various data sources and methodological approaches being used, a majority of the studies have concluded that the receipt of remittances results in labor supply reductions. For instance, Rodriguez and Tiongson (2001) report that remittances lower employment in the Philippines, while Funkhouser (1992) estimates that remittances reduce the employment likelihood of Nicaraguan men and women by 2 and 5 percentage points, respectively. Studies by Amuedo-Dorantes and Pozo (2006) and Hanson (2007) found that the impact of remittances on the labor supply of Mexicans is conditioned on gender. They conclude that Mexican women reduce labor supply on account of remittance inflows, whereas men do not. In contrast, limiting their study to Mexican households that receive persistent remittances, Cox-Edwards and Rodriguez-Oreggia (2009) conclude that remittances have no impact on the labor supply of household members remaining in Mexico, with the exception of urban women in traditionally low-migration states, for whom labor supply rises. However, we still lack an understanding of the ways in which the volatility in remittance inflows can impact labor supply in remittance-receiving countries. …