Migrant remittances and labor force participation in Costa Rica

The growth of remittance flows to developing countries has motivated multilateral organizations to frame remittances as a development tool. The mechanism is well known; remittances augment household income allowing receiving households to spend more on current consumption including health, education and some, albeit a small percentage, on small business creation. Key to understanding the role of remittances as a development tool is its effect on economic growth through household decision-making regarding economic variables. One of the most important household decisions that affect economic growth is in turn the household supply decision.

The impact of remittances on labor supply, is in principle, ambiguos. Some studies suggest that additional income (remittances) can lead to an income effect which increases the demand for leisure and the reservation wage with a consequent reduction in hours worked while other studies point out that emigration of people tend to reduce the size of the labor force thus increasing wages leading to a substitution effect away from leisure and towards more hours worked. This study proposes to shed some light on the correlation between remittance income and labor supply decisions at the household level in Costa Rica after controlling for various household characteristics such as education, experience, number of family members and remittance flows. We will use the 2007 National Household Survey in Costa Rica that includes a migration module to built a probit model that can measure the possible impact of remittances on labor force participation rate in the recieving country (Costa Rica). The expected result is to see if remittances have an impact on labor supply and if they do by how much. Preliminary results indicate that the impact is negative suggesting that the larger effect is the income effect at least in the case of Costa Rica. Policy suggestions will be discussed about the government support mechanism to encourage these flows.