International remittances can have various effects on labor markets in developing countries.  On the one hand, remittances may allow recipients to overcome the type of liquidity constraints that prevent the creation of new entrepreneurial enterprises.  On the other hand, remittances can also reduce labor force participation by increasing the level of minimum wages at which members of migrant households are willing to work (the reservation wage).  In general, most studies have found that international migration and remittances tend to reduce household labor supply and participation, although these effects are sometimes influenced by gender.

In a study using panel data from two large surveys in Nicaragua, Funkhouser (2006) finds that international migration does indeed tend to reduce labor force participation.  The author finds that when compared to non-migrant households, households with migrants have fewer working members and less labor income. However, households with migrants are less likely to be poor, because migrant households receive more in remittance income than they do from work in the local markets.

In a similar study using panel data from El Salvador, Acosta (2007) finds that the effects of international remittances on labor force participation differ by gender.  Specifically, the author finds that with the receipt of international remittances, labor force participation falls much more for women than for men.  For example, urban females in remittance-receiving households are 42.2 percent more likely to quit the labor market, while urban males in remittance-receiving households are only 9 percent more likely to quit.  The author also finds both males and females reduce their total hours worked per week upon receiving remittances.

In a similar study from Mexico, Amuedo-Dorantes and Pozo (2006) examine the impact of international remittances on the male and female decision to work.  For males, the authors find that an increase in international remittances is associated with a decline in formal sector work and with an increase in informal sector work.  With the receipt of remittances Mexican males seem to prefer the flexibility of informal jobs.  For females, the authors find that the overall female labor supply tends to decline with the receipt of remittances, but only in rural areas.  Rural females in Mexico appear to use remittances as a means of escaping from low-paying types of employment in the informal sector. 

In a more theoretical study using data from Tunisia, Mesnard (2004) analyzes the impact of international migration and remittances on the occupational choice of return migrants.  The author finds that for return migrants the likelihood of self-employment increases significantly with the amount of savings from abroad.  For each additional 1000 Tunisian dinars in savings, the likelihood of a return migrant being self-employed increases by 18 percent.   However, education is also important:  having no schooling positively affects the probability of being self-employed upon return. 

Publication Details

Topic 16 – Remittances and Labor Force Supply and Participation
Social Science Research Council
Publish Date
March 2009
0, Topic 16 – Remittances and Labor Force Supply and Participation (Social Science Research Council, March 2009).