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The remittance effect

Remittances help alleviate poverty through a pure income effect (Combes et al., 2011), but they also affect household labour decisions. Theoretically, the net impact of remittances on labour supply is somewhat unclear because they are sent for various reasons. First, they may be sent for purely self-interested motives, in cases where remitters expect a future transfer in return, such as land inheritance (Lambert et al., 2002). Second, the remitter's utility (in the economic literature sense) may be also linked with the household's utility in the home country, in which case altruism would explain the prevalence of transfers. Third, the theories behind the New Economics of Labour Migration (NELM) (Stark, 1991) argue that remittances act as an insurance mechanism and help smooth consumption in cases of idiosyncratic shocks to the household (Chami et al., 2005). Gubert (2002), for instance, provides evidence that insurance (for crops) is an important motivation for remittances for agricultural households in Mali.

The empirical literature on migration and labour supply generally concludes that labour supply actually drops in migrant households. Evidence of this can be found on El Salvador (Acosta, 2007), Mexico (Airola, 2008; Amuedo- Dorantes and Pozo, 2006a), Guatemala (Funkhouser, 1992), Haiti (Jadotte, 2009), Colombia (Mora, 2010), the Philippines (Rodriguez and Tiongson, 2001) and a mix of Caribbean countries (Itzigsohn, 1995). But the drop in labour supply in migrant households may actually be an indirect effect of the poverty-reducing effect of remittances for four reasons:

1. Self-employment and micro-enterprises: remittances help households create self-employment. As many of these micro-enterprises stay small (fewer than five people), they may be considered as informal employment in the ILO definition sense1 and the time people spend operating their own enterprises is often not properly captured in surveys. In Albania, for instance, the reduction of hours worked for wages in migrant households was directly linked to the increase in time spent in self-employment activities (Nazarani, 2009).

Indeed, investment in micro-enterprises is an important counterpart of the lost-labour effect and a fundamental dimension of the emigration and development link. Studies on El Salvador (Acosta, 2006), the Philippines (Cabegin, 2006), Nicaragua (Funkhouser, 1992) and Mexico (Massey and Parrado, 1998; Woodruff and Zenteno, 2007) for instance, show that remittances help generate entrepreneurial activity in migrant households.

  • 2. Unreported work: by decreasing financial constraints and increasing reservation wages (the lowest wage rate at which a worker would be willing to accept a particular type of job), remittances may lead household members to leave waged work for unreported work in the household. This type of informal employment is often not captured in standard surveys. The case of women in migrant households is discussed below.
  • 3. Productivity: micro-enterprises help reduce the time required to work because the time needed to commute to the place of employment is shorter and also because productivity increases. In fact, many migrant households may have already been running a micro-enterprise, and the remitted capital serves rather for re-investment in the activity and increases in its productivity and efficiency. The fall in time worked may also originate in the fact that households with micro-enterprises schedule their own work time, rather than having it dictated by an employer.

Existing informal activities in agricultural households provide a good example. In these cases, remittances help make pre-existing activities more productive and capital-intensive. For example, remittances may help agricultural households evolve from producing low-yielding crops to commercial crops and eventually to raising cattle. Empirically this has been shown in Burkina Faso (Taylor and Wouterse, 2008), Pakistan (Adams, 1998), the Philippines (Yang, 2008) and the region of Southern Africa (Lucas, 1987). While these studies focus on rural agriculturally based households, higher capital-output ratios among remittance-receiving micro-enterprises were also found in Mexican cities (Woodruff and Zenteno, 2007).

4. Education: many households choose to invest their remittances in increasing human capital - in effect taking away household members from the labour market and into education, thus lowering labour supply. But the investment also has a second impact on labour exerted, through productivity. Human capital leads to more efficient time management and activities requiring less time. This is often the case for children, who because of financial constraints were obliged to work before the household's receipt of remittances, but also for adults investing in vocational training.

Remittances, therefore, help lift the credit constraints that often push poor households to overwork, take on bad jobs, substitute work for education and remain poorly productive. By doing so, they change labour behaviour in various ways: time worked, exertion made and investment for longer-term benefits. It is also important to consider the relationship between remitter and recipient. Research shows that not all household members are treated similarly and benefit from remittances in the same way (De Vreyer et al., 2010). Because women are often those paying the price of financial constraints, their behaviour is particularly interesting.

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