International Migration and Remittances: Assessing the Impact on Rural Households in El Salvador

1. International Migration and Remittances: Assessing the Impact on Rural Households in El Salvador by Amy Damon SSEF July, 2008

2. Regional Importance of Remittances Source: http://www.elsalvador.com/noticias/2006/01/12/portada/img/portada3.jpg Source: WDI, 2007

3. Percent of Households that Receive Remittances by Municipality, 2004 Source: EHPM 2001 – 2004, Chapter 5 UNDP Human Development Report El Salvador

4. Previous Literature: Migration Theory • Migration and development – the Harris-Todaro approach: • Two sector model where rural to urban labor migration is a result of expected income differences between two sectors. • Assumes migrants maximize their individual utility by migrating to labor market with highest expected income. • The new economics of labor migration (NELM): • Addressed assumption that migration is an individualistic process. • Migration is rational behavior of a group. • Migration is a response not just to wage differentials, but also relative deprivation. • Migration is a function of missing credit and capital markets.

5. Research Questions • Which households choose to migrate and what determines remittance amounts? • How are household labor decisions affected by migration and remittances? • How are agricultural production, crop choice, and agricultural assets affected by the receipt of remittances?

6. Data • Four year (1996, 1998, 2000, 2002) panel in El Salvador. • Collected by Ohio State University and FUSADES. • 450 households that have information for each year. • Information on migration, migrants, household characteristics, household production activities, and detailed individual time allocation data. • Cumulative attrition rate of 28 percent. • Also EHPM data for community level data and CPS data for US wages and unemployment

7. Empirical Model for Migration DecisionResearch Question 1 The equation used to predict migration is: xitis a set of exogenous community and household characteristics including: (1) % of households that receive remittances in community (2) distance of households from a paved road. (3) other household characteristics • Estimation Procedure: • Random effects probit

8. Empirical Results For Determinants of Migration

9. Explaining Remittances (with panel data) • Remittance Equation: • Jit = Xitα1 + Zitα1 + εit • Xit is a set of household characteristics that influence the level of remittances • Zitis the wage rate and the unemployment rate in the destination U.S.A. city • εitis a normally distributed error term • Estimation Procedures: • (1) Household Fixed Effects Model • (2) HeckmanModel

10. Empirical Results – Explaining Remittance Amounts

11. Explaining Remittances 2002 Cross-Section • Objective: to look at gender and relationship to the household head effects using 2002 data The Remittance equation is: Ji = α1wusai + α1Nusai + α2Xi + ui Xi is a set of household characteristics Estimation Procedure: • Heckman Selection Model

12. Cross-Sectional Remittance Results-2002

13. Intuition for Question 2:Work Hours and Remittances • If a household operates in a perfectly functioning market environment (complete credit and labor markets: • An increase in remittances will increase consumption • Separability holds (production and consumption decisions are independent of one another) • Remittances will not affect labor allocation outcomes. • But if a household is credit constrained: • Migration and remittances may substitute for missing credit or insurance markets. • Separability no longer holds and migration and remittances will impact on-farm and off-farm labor allocation decisions and investment decisions.

14. Labor and Migration: Theoretical Model Max subject to: In the credit constrained version

15. No Credit Constraint Consumption On-Farm Work Off-Farm Work Capital Credit Constrained Comparative Static ResultsHow choice variables change with an increase in remittances

16. Labor Supply Estimation The labor supply equation of interest is: Hit: measure of (change in) labor hours Xit: set of household demographic change variables Jit: (change in) predicted level of remittances a household receives Migr: (change in) predicted migration εi: aggregate error term assumed to be white noise But….. Mig and Jitis endogenous so we use an instrumental variable (2sls) approach. Instruments are: (1) % of hh that receive remittances in community (2) in USA wage rate (3) Unemployment rate in USA and (4) Household distance to a paved road Estimation Procedures: First Differences Model (also household fixed effects estimation - see paper)

17. Types of Labor Examined • Total Household Labor • Total Farm labor • On-Farm • Male, Female, Child, Hired • Off-Farm Wage Labor • Male, Female, Child • Non-agricultural Self-Employment • Male, Female • Household Work

18. Total Labor and On-Farm Labor

19. Off-Farm Work Results * significant at 10%; ** significant at 5%; *** significant at 1%

20. Other Work * significant at 10%; ** significant at 5%; *** significant at 1%

21. Question 3. How are agricultural production activities affected by migration and remittances?

22. Intuition and Literature • Many studies have examined the relationship between farm income safety nets (migration and remittances) and agricultural outcomes such as cropping patterns (Smith and Goodwin, 1996; and Babcock and Hennessey, 1996). • Chavas and Holt (1990) examine how farmers allocate acreage to different crops under risk and find that both risk and wealth are important in corn-soybean acreage decisions. • Since migration and remittances are a form of insurance (Stark and Lucas, 1988; Gubert, 2002; Stark and Lucas, 1988; Cox et al., 1998); do migration and remittances affect risk behavior or crop acreage decisions?

23. Theory Theoretical model suggests that the change in land use in response to wealth depends on the risk preferences of the household. • Constant absolute risk aversion implies no change in acreage with a change in wealth • Decreasing absolute risk aversion means they will move into riskier crops as wealth increases • Increasing absolute risk aversion households would move into less risky crops as wealth increases.

24. Empirical Approach • Risk is measured by coefficient of variation (CV) for crop and livestock revenue: • And explained using household characteristics and remittances (migration): σ is standard deviation of total farm revenue for farm j across four years of data μ is the mean of total farm revenue

25. IV Regression explaining agricultural revenue coefficient of variation

26. Explaining acreage decisions α is the household fixed effect, Xitis a vector of household demographic characteristics, Yitis total land area, Rit is remittances (replaced by the dichotomous variable, MIGRit, in the migration version of this regression), εtis an independently distributed error term Estimated using a household fixed effects model instrumenting for migration and remittances.

27. Fixed-effects instrumental variable regression explaining land use by migration status. * significant at 10%; ** significant at 5%; *** significant at 1%

28. Asset Holdings and Land Rental Markets * significant at 10%; ** significant at 5%; *** significant at 1%

29. Concluding Points • It is the act of migration rather than remittances that change household behavior. • Migrant households allocated their labor back to the farm when they send out a migrant. • When female migrants’ wages increase they send more money. Males appear to send less. • Migrant households allocated more land to “food security” crops rather than other crops or cash crops. • Migrant households do not appear to undertake riskier crops (in terms of revenue). • Migrant household have larger land holdings and have larger land areas involved in rental markets.