group of households receiving remittances. Airola (2008) finds a small negative correlation between remittances and labor supply in Mexico: the estimated elasticity suggests that, at the sample mean, male recipients of remittances worked 4.25 fewer hours per week.

Approaches used in the literature to address potential endogeneity range from limiting the sample to only some types of migrants, using panel or pseudo-panel data, using propensity score matching, to using instrumental variables. Instrumental variables (IV) are exogenous variables, often based on geographical variation, that are correlated with a household’s probability of receiving remittances but not correlated with its labor supply decisions. Amuedo-Dorantes and Pozo (2006b) use the location of Western Union offices in Mexico to estimate the effect of remittances on local labor supply. Similarly, Acosta (2006) uses outmigration rates at the county and village level in El Salvador as instrumental variables to predict receipt of remittances. Using a set of 11 countries in Latin America and the Caribbean, Acosta, Fajnzylber, Lopez (2009) build instrumental variables using the percentage of households that receive remittances in the country, and its interaction with household characteristics that are expected to affect the decision to migrate.<sup>16</sup> In each of these papers, addressing endogeneity through IV reduced the estimated negative impact of remittances on labor supply and in some cases, especially for men, erased it completely.

However, strong IVs are difficult to find in the context of limited data found in the Northern Triangle. Yang (2008) uses exchange rate shocks to instrument for changes in remittances, finding evidence of remittances leading to more entrepreneurship and more hours worked in self-employment in the Philippines. Taking advantage of the sampling strategy of the household survey, Kim (2007) builds pseudo-panels in Jamaica identified by sampling cluster and finds that remittances reduced labor force participation (but not hours worked). Funkhouser (2006) uses a 3-year panel from Nicaragua and finds no effect of migration or remittances on the labor supply of adults who did not migrate, but finds that young adults in remittancereceiving households are less likely to work. Rodriguez and Tiongson (2001) mitigate the bias from endogeneity by considering only households with temporary migrant members, arguing that in these cases household labor supply decisions and the decision to migrate are inseparable. They find a negative correlation between remittances and the number of hours worked and labor participation of recipients. CoxEdwards and Rodriguez-Oreggia (2009) use propensity score matching to limit the sample to recipient and non-recipient individuals who are similar across observable characteristics, mitigating but not fully addressing the endogeneity. They conclude that remittances have a neutral effect on participation rates, in essence replacing the income of the missing household member.

To better understand the causal impact of remittances on labor supply, suppose that a measure of labor supply of individual _i_ in household _h_ in region _r_ , Y�,�,�, is a function of a set of individual, household, and regional characteristics. This is written out as equation (I) where the key variable of interest is R�, a variable identifying households in which any member received remittances.<sup>17</sup> Beyond receipt of remittances, other characteristics that affect labor supply decisions include: a vector X� of individual-level characteristics; a vector Z� of household characteristics; and a vector R� of local and regional characteristics (such as urban status).

As discussed above, a significant challenge to address in this analysis is the selection on unobservables associated with both labor force participation and the receipt of remittances. Suppose the migration of one

> 16  In particular, the presence of young children and adult men in the household, and the educational level of adults in the household. 17 The variable R�could also be reported as a continuous measure of the average monthly amount of remittances received by the household.

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