for women and 1.8 percent for men.<sup>11</sup> Yet, underemployment rates are significantly higher, at 15 percent for El Salvador and 20 percent for Honduras.<sup>12</sup> While this statistic cannot be calculated for Guatemala, 12 percent of the working age population is either unemployed or would like to work more hours.<sup>13</sup> Across the three countries, adults who are working are less likely to live in households that receive remittances than those who are not working.<sup>14</sup> The difference is largest in El Salvador: in 2014, 18.7 percent of working-age adults versus 15.8 percent of employed adults lived in households that received remittances. The difference between the share of all adults who receive remittances and those who are employed and receive remittances is just over 1 percentage point in the other two countries. Among adults who are not working, in Guatemala and Honduras adults who are out of the labor force (inactive) and those who are unemployed receive remittances at about the same rate. In El Salvador, however, those who are inactive are significantly more likely to receive remittances than the unemployed, particularly in 2006. This table suggests that remittances in El Salvador may be more associated with labor supply effects than in the other two countries.

**Table 1 Percent of adults receiving remittances, overall and by employment status**

||<br>El Sal<br>|<br>vador<br>|<br>Guate<br>|<br>mala<br>|<br>Hon<br>|<br>duras<br>|
|---|---|---|---|---|---|---|
||2006|2014|2006|2014|2006|2014|
|Overall|22.4%|18.7%|15.4%|8.3%|18.2%|16.6%|
|Employed|17.9%|15.9%|13.8%|7.2%|16.3%|15.1%|
|Inactive|31.3%|24.6%|19.4%|10.5%|21.9%|20.1%|
|Unemployed|19.9%|19.3%|19.0%|10.9%|21.9%|20.4%|

_Source:_ Authors’ estimates based on SEDLAC and household surveys. The sample is limited to adults, ages 18-65.

# Methodology

The household models suggest that the decision for one or some household members to migrate may be made jointly with the labor supply of other household members. That is, the household decides that the utility-maximizing strategy is for some member to migrate and remit while another increases household production. In this case, the receipt of remittances and local labor supply are both the result of an earlier and unmeasured decision. The resulting analysis of the impact of remittances on labor supply should address this potential endogeneity, otherwise it may overestimate an effect.

Research on this topic that does not address endogeneity has typically found negative correlation between remittances and labor supply – that is, adults who receive remittances are also less likely to be working. For example, Funkhouser (1992) finds a negative relationship between remittances and labor participation and a positive relationship with self-employment for both men and women in Nicaragua.<sup>15</sup> Studies like Airola (2008) use Heckman selection to address selection into the labor force, but do not address selection into the

> 11 Rural unemployment rates are about half that of urban rates.

> 12 Source: ILOSTAT. Underemployment LU4 definition is calculated as the share of the working age population that is unemployed, plus those who are employed but want to work more hours, and potential labor force participants currently out of the labor force: discouraged workers (available but not seeking), and seeking yet unavailable.

> 13 Source: ILOSTAT. Underemployment LU2 definition is calculated as the share of the working age population that is unemployed, plus those who are employed but want to work more hours.

> 14 The share of households (and adults) that report having received remittances fell for the three countries between 2006 and 2014. However, macroeconomic estimates of remittances in 2006 and 2014 do not report such significant drops, suggesting that the 2014 household surveys may suffer from higher levels of underreporting. This is a larger concern in the case of Guatemala, which records the share of adults in recipient households falling from 15 percent to 8 percent.

> 15 An increase in remittances of $100 decreases the probability of labor force participation by 2.1 percentage points for men and 5 percentage points for women while it increases the probability of being self-employed (conditional on being in the labor force) by 1.2 and 1.1 percentage points respectively.

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