Migration and remittances have become increasingly important factors in the development of El Salvador, Guatemala, and Honduras over the past three decades. According to the most recent global estimates of international migration, an estimated 1.6 million Salvadorans, 1.1 million Guatemalans, and nearly 800,000 Hondurans lived outside their countries of birth in 2013.<sup>4</sup> These migrants represent 6 and 8 percent of all people born in Guatemala and Honduras, respectively, and 20 percent of all Salvadorans. These migrants, in turn, remitted over $17 billion in 2017. Remittances accounted for 18 percent of the national GDP in Honduras, 17 percent in El Salvador, and 11 percent in Guatemala in 2016; the world average is 0.8 percent.

What impact do remittances have on the labor markets of El Salvador, Guatemala, and Honduras, collectively referred to as the Northern Triangle of Central America? Out-migration can negatively impact labor supply through two channels – directly through outflows of labor and indirectly through labor substitution effects of remittances. Migration from the Northern Triangle has historically been biased towards young adults, disproportionately decreasing the size of the labor force. Due to positive selection into migration, migration also leads to a decrease in the skills composition of the labor force (Del Carmen and Sousa, 2018). However, through remittances migration can also reduce the labor supply of those who do not migrate. In per capita terms, El Salvador receives $724 per year in remittances, followed by Guatemala with $450 and Honduras with $424 - six times higher than the world average ($77) and representing a significant income source for the households receiving them. As with other income types, receiving remittances can raise reservation wages and reduce labor supply. This may be of particular concern in the countries of the Northern Triangle, where labor supply, particularly of women, is below the regional average.

In this paper, we analyze the impact of the receipt of remittances on the labor supply and employment outcomes of men and women in El Salvador, Guatemala, and Honduras. Using household surveys for the years 2006 and 2014, we analyze the extent to which remittances affect the labor decisions of recipients. There is a well-known problem of endogeneity in establishing causal links between non-random income (such as remittances) and household labor decisions. In short, the population of households that receive remittances differs from households that do not receive remittances in systematic yet unobserved ways. These differences may themselves explain differences in other outcomes, including labor supply. Hence, the crucial question – do remittances reduce labor supply? – requires addressing issues of selection. Given the data limitations in these three countries, the strategy undertaken in this study is propensity score matching.

# Background

Given the central role of labor markets as determinants of growth and poverty reduction, the impact of remittances on labor supply is an important factor to understand in countries with high remittance inflows. An increase in income (such as via remittances) increases the household budget which, as shown in the economics literature, affects the relative value of “leisure” (including home production) and market activities of household members.<sup>5</sup> The resulting income effect increases the reservation wage of recipients, altering the utility-maximizing allocation of time between leisure and market activities. That is, individuals are able to buy more leisure or home production time because of remittances, at the expense of time in the labor market. Simultaneously, the change in the demographic composition of the household resulting from migration can alter the value of home production. The returns to home production for households with migrating members may be higher than for households without migration if the individuals who do not

> 4 Migration and remittance estimates for 2013 are from the Migration and Remittances Factbook, World Bank. 5 For an overview of household decision models and their implications, see Killingsworth and Heckman (1986).

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