Economic Modelling 75 (2018) 377–396

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Economic Modelling
journal homepage: www.journals.elsevier.com/economic-modelling

The impacts of workers’ remittances on human capital and labor supply in

developing countries
SeyedSoroosh Azizi
Department of Economics, Northern Illinois University (NIU), USA

A R T I C L E I N F O A B S T R A C T

JEL classification numbers: This study investigates the impacts of workers’ remittances on human capital and labor supply by using data
D64 for 122 developing countries from 1990 to 2015. This topic has not been explored thoroughly at the aggregate
F22 level, mainly due to endogeneity of remittances and the difficulty in finding instruments to resolve this issue.
F24
To address the endogeneity of remittances, I estimate bilateral remittances and use them to create weighted
O15
indicators of remittance-sending countries. These weighted indicators are used as instruments for remittance
inflow to remittance-receiving countries. Results obtained in this study indicate that remittances raise per capita
Keywords: health expenditures and reduce undernourishment prevalence, depth of food deficit, prevalence of stunting,
Migration
and child mortality rate. Remittances also raise school enrollment, school completion rate, and private school
Remittances
enrollment. Although there is no difference in the impact of remittances on the health outcome of boys and
Health
Education girls, remittances improve the educational outcome of girls more than the educational outcome of boys. Further,
Human capital remittances decrease the female labor force participation rate but do not affect the male labor force participation
Labor supply rate.
Developing countries

1. Introduction
Between 1990 and 2015, the number of individuals living outside
their countries of birth grew from 153 million people to 244 million
people, which corresponds to 2.87% of the world population in the
year 1990 and 3.32% of the world population in the year 2015 (United
Nations). The total amount of remittances received has risen from $68
billion in 1990 to $553 billion in 2015. The average amount of money
each migrant remitted (in 2011 constant dollars) has risen from $688
in 1990 to $2128 in 2015. These amounts include only remittances
that have been sent through official channels (the World Bank, United
Nations, author’s calculations).
This surge in the value of remittances has attracted the attention of
many researchers. During recent years, different aspects of remittances
have been under the scrutiny of researchers. One of the main aspects of
remittances is impacts of remittances on remittance-receiving countries.
The inflow of remittances can affect remittance-receiving countries in
a variety of subjects such as the growth impact of remittance (Rao and
Hassan, 2011; Gapen et al., 2009; Giuliano and Ruiz-Arranz, 2009;
Ziesemer, 2012); the impact of remittances on poverty and inequal-
ity (Acosta, 2006; Adams and Page, 2005; Li and Zhou, 2013; Bang et
al., 2016); remittances and financial development (Brown et al., 2013;
Aggarwal et al., 2011; Coulibaly, 2015; Chowdhury, 2011); environ-
mental effects of remittances (Li and Zhou, 2015); the impact of remit-
tances on labor productivity (Al Mamun et al., 2015); the impact of
remittances on political institutions (Williams, 2017). Although most
researchers have investigated the impacts of remittance inflows on
remittance-receiving countries, there are few studies on the impacts
of remittance outflows on remittance-sending countries (Hathroubi and
Aloui, 2016; Alkhathlan, 2013).
There is a clear distinction between the remittance inflow to devel-
oping countries and the remittance inflow to developed countries. In
the year 2015, the average workers’ remittances to GDP ratio for devel-
oping country was 2% and for developed countries was 0.6%. Remit-
tance to developed countries is not the primary interest of this paper;
instead, the impacts of remittances on human capital and labor supply
in developing countries is explored in this paper. In the past few years,
many researchers have examined the impact of remittances on human
capital or labor supply in a specific country or region. The primary
barrier in evaluating the impact of remittances on human capital, in
case of all developing countries, is endogeneity of remittances. Remit-

E-mail addresses: sazizi1@niu.edu, seyedsoroosh.azizi@gmail.com.

https://doi.org/10.1016/j.econmod.2018.07.011
Received 18 February 2018; Received in revised form 9 July 2018; Accepted 11 July 2018
Available online 25 July 2018
0264-9993/© 2018 The Author. Published by Elsevier B.V. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/).
S. Azizi
tances are endogenous to education, health outcomes, and labor supply
of those left behind. Reverse causality, common factors affecting both
remittances and human capital, and measurement error are among the
sources of endogeneity. Finding instruments to overcome endogeneity
of remittances in one country is easier than finding valid and strong
instruments for remittances in all developing countries.
To address the endogeneity of remittances, this research uses a
novel instrumental variable (IV) approach by incorporating three eco-
nomic indicators of the remittance-sending countries as instruments:
per capita Gross National Income (GNI), unemployment rate, and real
interest rate. Since each remittance-receiving country has many coun-
tries as the sources of remittances, building the instruments requires
knowing the bilateral remittances to calculate the weighted average
indicators of the remittance-sending countries. Because bilateral remit-
tances are not generally available, I estimate them and use them as
weights to build the instruments. This estimation strategy allows me
to utilize three valid and strong instruments, which are related to
remittance-sending countries, to investigate the impacts of workers’
remittances on human capital and labor supply in remittance-receiving
countries. I also use this IV approach to study gender-specific impacts
of remittances on health, education, and labor supply in developing
countries.
The results obtained in this paper indicate that remittances raise
per capita out-of-pocket health expenditures and per capita total health
expenditures and reduce undernourishment prevalence, depth of food
deficit, prevalence of stunting, and child mortality rate. Remittances
also raise school enrollment, school completion rate, and private school
enrollment. As a robustness check, this paper investigates the overall
impact of remittances on Human Development Index (HDI) and shows
that remittances increase HDI. Another contribution of this paper is
showing the gender-specific effects of remittances. Although there is no
difference in the impact of remittances on the health outcome of boys
and girls, remittances raise the education investment in girls more than
in boys. Further, remittances decrease the female labor force participa-
tion rate but do not affect the male labor force participation rate.
Remittances can lift budget constraints, thereby providing children
in remittance-receiving households the opportunity to go to school or
have better health outcomes. While remittances can benefit households
by lifting liquidity constraints, migration of a family member can have
a negative impact on the household’s well-being. Migration of a produc-
tive family member may have disruptive effects on the life of the house-
hold. These observations lead to a fundamental development question:
do remittances to developing countries contribute to higher investment
in human capital? This research examines this question by exploring the
major factors influencing education and health outcomes in developing
countries.
This paper addresses three main questions: To what extent can the
remittances to developing countries improve health and education out-
comes in terms of nutrition adequacy, mortality rates, school atten-
dance, and educational attainment? If the remittances can influence the
children’s health outcome, school attendance, and educational attain-
ment, is there any difference between the genders? What is the impact
of remittances on labor force participation for men and women? As
major components of human capital, health and education impact long-
run economic growth. Therefore, answering these questions is crucial to
evaluate the overall effect of workers’ remittances on developing coun-
tries.
The rest of the paper is arranged as follows. Background and litera-
ture review is provided in section 2. Section 3 discusses the data used
in this paper. Section 4 is devoted to the econometric model. Section 5
presents empirical results, and Section 6 some conclusions.
2. Background
Early studies on impacts of remittances on human capital (both
health and education), financial development, poverty and inequality,
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Economic Modelling 75 (2018) 377–396
and exchange rates did not consider the endogeneity of remittances.
However, most of the recent studies about the impact of remittances
on different aspects of remittance-receiving households and countries
recognize the endogeneity of remittances and include different method-
ologies to resolve the problem of endogeneity of remittances.
The traditional and most popular method of addressing the endo-
geneity of remittances is to use instrumental variables. While the instru-
ments must be strong, the bigger challenge to researchers is to find
valid (i.e. not correlated with the error term) instruments. Generally,
three categories of instruments are used by different authors: instru-
ments related to remittance-receiving countries, instruments related to
remittance-sending countries, and instruments related to the cost of
remittances.
Not many papers have addressed the endogeneity of remittances at
the aggregate level. Adams and Page (2005) is one of the first stud-
ies which addresses endogeneity of remittances in the country-level.
They use three instrumental variables to account for endogeneity of
the impact of remittances on poverty. The first instrument is the dis-
tance (miles) between the four major remittance-sending areas and
remittance-receiving countries. The second instrument used by them
is the percentage of the population over age 25 that has completed
secondary education. This variable is correlated with education, and
it is not a valid instrument in this research. The third variable used
by them is government stability. The effect of government stability on
remittances can be positive (if migrants have investment incentives,
they remit more if their home countries are more stable) or negative
(if migrants have altruistic incentives, they remit more if their home
countries are less stable). Government stability also can be correlated
with educational attainment and health outcome.
This section is divided into three parts. First, a summary of papers
which study the effects of remittances on health outcomes is provided.
Then, papers which investigate the impacts of remittances on educa-
tion are reviewed. Lastly, papers which examine the impacts of remit-
tances on labor supply are summarized. Due to the importance of the
endogeneity issue, special attention is paid to the instruments used by
different authors.
2.1. Remittances and health
Researchers who have studied the impact of remittances on health
outcome mainly focused on three health measurements: health expen-
ditures, nutrition status, and child mortality rates. In the following, I
briefly discuss papers who consider the impacts of remittances on these
three aspects of health outcome. Note that health expenditure is not an
aspect of health outcome per se, but it has a strong impact on health
outcome.
Ambrosius and Cuecuecha (2013) test the assumption that remit-
tances are a substitute for credit by comparing the response to health-
related shocks using Mexican household panel data. They find that the
occurrence of serious health shocks that required hospital treatment
doubled the average debt burden of households with a member having a
health shock compared to the control group. However, households with
a parent, child, or spouse in the US did not increase their debts due to
health shocks. The authors use weighted linear regression to address the
endogeneity problem. Therefore, in the case of Mexican families with
a member facing a health shock, it can be concluded that remittances
can play a substitute role for credit. Valero-Gil (2009) considers the
effect of remittances on the share of health expenditures in total house-
hold expenditure in Mexico and finds a positive and statistically signif-
icant effect of remittances on the household health expenditure shares.
The paper concludes that health expenditure is a target of remittances,
and a dollar from remittances is being devoted in part to health expen-
ditures. The author uses the percentage of return migration between
1995 and 2000 at the municipal level as an instrument for remittance.
Amuedo-Dorantes and Pozo (2011) find that international remittances
raise health care expenditures among remittance-receiving households
S. Azizi
in Mexico. They select two variables to be included as instruments:
the road distance to the US border (from the capital of the Mexican
state in which the household resides) and US wages in Mexican emi-
grant destination states. Their results suggest that 6 Pesos of every 100
Peso increment in remittance income are spent on health. Ponce et al.
(2011) study the impact of remittances on health outcomes in Ecuador,
and they do not find significant impacts on long-term child health vari-
ables. However, they find that remittances have an impact on health
expenditures. They use historic state-level migration rates as an instru-
ment for current migration shocks.
Some researchers have used a variety of measurements of nutrition
status as the factor representing health outcome. Food security level,
household food consumption, child nutritional status, and low birth
weight are some of the measurements of nutrition status. In the fol-
lowing, I introduce four of these papers.
Generoso (2015) analyzes the main determinants of household food
security using a survey conducted in Mali in 2005. The author uses a
partial proportional odds logit model and shows that the diversification
of income sources, through the reception of remittances, constitutes one
of the main ways of coping with the negative impact of climate haz-
ards on food security. Combes et al. (2014) explore the role of remit-
tances and foreign aid inflows during food price shocks. They conclude
remittance and aid inflows dampen the effect of the positive food price
shock and food price instability on household consumption in vulnera-
ble countries. Anton (2010) analyzes the impact of remittances on the
nutritional status of children under five years old in Ecuador in 2006.
Using an instrumental variables strategy, the study finds a positive and
significant effect of remittance income on short-term and middle-term
child nutritional status. The author uses the number of Western Union
offices per 100,000 people at the province level as the instrument. Frank
and Hummer (2002) find that membership in a migrant household pro-
vides protection from the risk of low birth weight among Mexican-born
infants largely through the receipt of remittances. They did not account
for endogeneity of remittances.
Many researchers have used child and infant mortality rates as the
factor representing health outcome. Reducing child mortality rate is
one of the United Nations Sustainable Development Goals (SDG). The
goal is by 2030 to end preventable deaths of newborns and children
under five years of age, with all countries aiming to reduce neonatal
mortality to less than 12 per 1000 live births and under-5 mortality to
less than 25 per 1000 live births. In the following, some of these studies
are discussed.
Terrelonge (2014) examines how remittances and government
health spending improve child mortality in developing countries and
concludes remittances reduce mortality through improved living stan-
dards from the relaxation of households’ budget constraints. Chauvet
et al. (2013) consider the respective impact of aid, remittances and
medical brain drain on the child mortality rate. Their results show that
remittances reduce child mortality while medical brain drain increases
it. Health aid also significantly reduces child mortality, but its impact is
less robust than the impact of remittances. Kanaiaupuni and Donato
(1999) consider the effects of village migration and remittances on
health outcomes in Mexico and conclude higher rates of infant mor-
tality in communities experiencing intense U.S. migration. On the other
hand, mortality risks are low when remittances are high. Zhunio et al.
(2012) study the effect of international remittances on aggregate edu-
cational and health outcomes using a sample of 69 low- and middle-
income countries. They find that remittances play an important role
in improving primary and secondary school attainment, increasing life
expectancy and reducing infant mortality.
2.2. Remittances and education
To investigate the impact of remittances on the education of those
left behind, most of the researchers rely on school attendance as the
main indicator of education. Many authors also examine the impact of
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Economic Modelling 75 (2018) 377–396
remittances on child labor. The common belief is that if remittances
decrease child labor, then they increase children’s education. While
school attendance frequently is used to measure investment on educa-
tion, it represents the quantity of education and fails to capture the
quality of education. Therefore, some researchers have used private
school enrollment to demonstrate the quality of education.
There are two theories about the impact of migration and remit-
tances on education. On the one hand, as Bouoiyour and Miftah (2016)
state, parents invest in the education of their children if they believe
such investment generates a higher rate of return than the return on
savings. Some parents in low-income households invest too little in the
education of their children because they cannot afford to finance educa-
tional investments regardless of such returns. Hence, it is expected that
the reduction of these liquidity constraints will make education more
accessible to children from poor families. Therefore, financial trans-
fers from family members can lift the budget constraints and allow
parents to invest in the education of their children to the extent that
is optimal for them. On the other hand, as Amuedo-Dorantes and
Pozo (2010) state, the presence of family members abroad may induce
changes in school attendance of children in migrants’ households for
a variety of reasons. Children may have less time to devote to school-
ing because they engage in market activities to earn income to defray
migration-related expenses of households. Alternatively, children may
leave school to perform necessary household chores that the absent
migrant no longer attends to. Finally, if children get encouraged to
migrate in the future, they may drop out of school if the origin country’s
education is not generally well-recognized in the destination.
Among researchers who consider the impact of remittances on edu-
cation and address the endogeneity of remittances, two instruments are
used frequently. Some studies that recognize the endogeneity of migra-
tion and remittances use migration networks as the instrument. Many
studies have used economic indicators of remittance-sender countries as
instruments for remittances. The following papers have used migration
networks as the instrument for remittances.
Bouoiyour and Miftah (2016) use the history of migration networks
and remittances costs as instruments to address the endogeneity of
remittances. They find that the receipt of remittances in rural areas
of southern Morocco has a significant positive effect on school atten-
dance, especially for boys. Acharya and Leon-Gonzalez (2014) explore
the effects of migration and remittance on the educational attainment of
Nepalese children. Their results indicate that remittances help severely
credit-constrained households enroll their children in school and pre-
vent dropouts. Also, remittances help households that face less severe
liquidity constraints increase their investment in the quality of educa-
tion. By using migration networks as instruments, the authors gain sim-
ilar results. Acosta (2011) studies the effects of remittance receipt on
child school attendance and child labor in El Salvador. The paper uses El
Salvadorian municipal-level migrant networks and the number of inter-
national migrants who returned two or more years ago as instruments to
address the endogeneity of remittances. The author concludes insignif-
icant overall impact of remittances on schooling; a strong reduction of
child wage labor in remittance recipient households; and an increase in
unpaid family work activities for children in those households. More-
over, while girls seem to increase school attendance after remittance
receipts by reducing labor activities, boys, on average, do not benefit
from higher education. Alcaraz et al. (2012) study the effects of remit-
tances from the U.S. on child labor and school attendance in recipient
Mexican households. They use distance to the U.S. border along the
1920 rail network as an instrument for the membership in the remit-
tance recipient group. By using the differences-in-differences method,
they find that the negative shock on remittance receipts in 2008–2009
caused a significant increase in child labor and a significant reduction
of school attendance.
As stated by Salas (2014) the common belief is that private schools
provide better education compared to that provided by public schools.
Besides increasing school enrollment, remittances can affect the choice
S. Azizi
of school type. The main limitation to access private education in devel-
oping countries is its cost. Remittances can lift the budget constraints
and allow parents to invest in the quality of education of their chil-
dren, as well as its quantity. Salas investigates the effect of international
migration on children left behind in Peru. Historical department-level
migration rate is used as an instrument for remittances. The model ana-
lyzes the role of international remittances on the investment decision
between sending children to a public school or to a private school and
finds that international remittances have a positive effect on the likeli-
hood to send children to private schools.
While using migration networks to address the endogeneity of
migration allows us to assess the impact of migration on educational
attainment, it is not the best possible instrument if we are interested
in impacts of remittances on educational attainment. Using economic
indicators of remittance-sending countries is more useful if we want to
evaluate the impacts of remittances on investment in education. The
following studies use economic indicators of remittance-sending coun-
tries to address the endogeneity of remittances.
Calero et al. (2009) investigate how remittances affect human cap-
ital investments through relaxing resource constraints. They use infor-
mation on source countries of remittances and regional variation in the
availability of bank offices that function as formal channels for receiv-
ing remittances. They show that remittances increase school enroll-
ment and decrease the incidence of child work, especially for girls
and in rural areas. Besides increasing school enrollment, remittances
affect the choice of school type. Remittances lead to a net substitu-
tion from the public to private schooling, hence increasing the quality
of human capital investments in children. Bargain and Boutin (2015)
explore the effects of remittance receipt on child labor in Burkina Faso.
They use economic conditions in remittance-sending countries as instru-
ments for remittances. The authors conclude while remittances have no
significant effect on child labor on average, they reduce child labor in
long-term migrant households, for whom the disruptive effect of migra-
tion is no longer felt. Fajnzylber and Lopez (2008) argue that in 11
Latin American countries with the exception of Mexico, children of
remittances-receiving families are more likely to remain in school. The
positive effect of remittances on education tends to be larger when par-
ents are less educated. The authors use two external instruments based
on the real output per capita of the countries where remittances origi-
nate. Amuedo-Dorantes et al. (2010) address the endogeneity of remit-
tance receipt and find that the receipt of remittances by the households
in Haiti lifts budget constraints and raises the children’s likelihood of
being schooled, and the disruptive effect of household out-migration
imposes an economic burden on the remaining household members and
reduces children’s school attendance. They use two variables as instru-
ments: weekly earnings of workers in the United States who are similar
to potential Haitian remitters, and unemployment in those geographic
areas in which the household is likely to have migrant networks.
Some other papers use other instrumental variables or do not
address the endogeneity of remittance. Bansak and Chezum (2009)
examine the impact of remittances on educational attainment of school-
age children in Nepal, focusing on differences between girls and boys.
They use past literacy rates and political unrest by the district as instru-
mental variables to address the endogeneity. Their results indicate that
positive net remittances increase the probability of young children
attending schools. Yang (2008) concludes that favorable shocks in the
migrants’ exchange rates (appreciation of the host counties’ currency
versus Philippine peso) lead to enhanced human capital accumulation
in origin households, a rise in child schooling and educational expendi-
ture, and a fall in child labor. Edwards and Ureta (2003) examine the
effect of remittances from abroad on households’ schooling decisions
using data for El Salvador. They examine the determinants of school
attendance and find that remittances have a large and significant effect
on school retention. The main issue with their paper is that they do not
recognize the problem of endogeneity. Acosta et al. (2007) explore the
impact of remittances on poverty, education, and health in eleven Latin
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Economic Modelling 75 (2018) 377–396
American countries. While remittances tend to have positive effects
on education for all Latin American countries with the exception of
Jamaica and the Dominican Republic, the impact is often restricted to
specific groups of the population (e.g. the positive effect of remittances
on education tends to be larger when parents are less educated).
2.3. Remittances and labor supply
Researchers who study the impact of remittances on labor supply
in remittance-receiving countries mainly focus on two aspects of labor
supply: labor force participation rate and hours worked per week.
As argued by Cox-Edwards and Rodriguez-Oreggia (2009), an
important concept underlying the labor force participation decision is
the notion of the reservation wage. The reservation wage is the lowest
wage rate at which a worker would be willing to accept a particular
type of job. A job offer involving the same type of work and the same
working conditions, but at a lower wage rate, would be rejected by the
worker. An increase in the reservation wage would reduce the prob-
ability that an individual participates in the labor force. One of the
determinants of the reservation wage is non-labor income, which for
an individual is a function of his or her own assets and the amount of
income of other household members. The higher the level of income of
the rest of the household (e.g. remittances), the higher the reservation
wage of the individual, and the lower the probability that he or she
participates in the labor force. Many researchers have looked at remit-
tances as an additional non-labor income for recipient households and
hypothesized that the presence of remittances would lead to a reduction
in labor force participation among recipient household members.
In studying the impact of migration and remittances on labor supply
in recipient-households and receiving-countries, migration and remit-
tances are endogenous. Migration and remittances are correlated with
the error term due to a variety of factors. Reverse causality, omitted
variable bias (uncontrolled common factors affecting both migration
and remittances and labor supply) and measurement errors are among
the potential sources of endogeneity. If the migrant’s decision on how
much to remit depends on whether the family members are looking for
a job or not, reverse causality exists. Omitted variable bias may exist
if remittances are related to the remittance-recipient family members’
wealth or ambition, which may be correlated to the labor supply by
the recipient. Many researchers use instrumental variables to address
the endogeneity of migration and remittances. Particularly, migration
networks are used frequently to address the endogeneity of migration
and remittances. In the following, I review some papers which used this
approach.
Nguyen and Purnamasari (2011) apply an instrumental variable esti-
mation method, using historical migration networks as instruments for
migration and remittance receipts and find that, in Indonesia, migration
reduces the working hours of remaining household members. Hanson
(2007), based on rural households in Mexico in 2000, concludes indi-
viduals are less likely to participate in the labor force if their household
either has sent migrants abroad or received remittances from abroad.
The author also finds that women from high-migration states become
less likely to work relative to women from low-migration states. The
author argues that the unobserved characteristics of households that
affect labor supply are also likely to affect whether households choose
to send migrants abroad, and uses historical emigration rates as one of
the approaches to address the endogeneity issue. Acosta (2006) con-
trols for household wealth and uses selection correction techniques and
concludes that, in El Salvador, remittances are negatively related to the
adult female labor supply. However, on average adult male labor force
participation remains unaffected. The author recognizes the endogene-
ity issue and uses the village migrant networks and the number of inter-
national migrants who returned two or more years ago as instruments
for remittance receipts.
Many authors use other instruments to address the endogeneity of
remittances. For example, Amuedo-Dorantes and Pozo (2006) assess the
S. Azizi
impact of remittances on Mexicans labor supply. They use per capita
count of Western Union offices in the state as an instrument for address-
ing the endogeneity of remittances. They conclude while overall male
labor supply does not vary because of changes in remittance income,
its composition by type of employment does. Unlike men, the over-
all female labor supply decrease due to changes in remittance income,
although only in rural areas. Acosta et al. (2008) conclude that in all 10
Latin American and Caribbean countries examined, remittances have a
reducing effect on the number of hours worked per week. This negative
effect is present both in urban and rural areas. Afterward, remittances
are instrumented with the share of remittance-receiving households in
the country interacted with household characteristics that affect their
likelihood to migrate. After instrumenting for endogeneity, their neg-
ative impact on labor force participation ceases to be significant in a
number of cases. They also find that the reductions in labor supply
caused by remittances tend to be much smaller among individuals with
higher levels of schooling.
Some researchers use other methods to address the endogeneity of
remittances, or they do not address this problem at all. Guha (2013)
states that with an increase in the non-wage income, such as remit-
tances, the households will work less and have more leisure, as the
loss in the wage income gets compensated by the remittance income.
The author uses international remittances to Bangladesh as the refer-
ence case, and applies Dynamic Stochastic General Equilibrium (DSGE)
model, to show that a sudden increase in foreign remittances results in a
fall in the labor supply to the traded sector and a decline in the output
in the traded sector. Cox-Edwards and Rodriguez-Oreggia (2009) use
propensity score matching to separate persistent from sporadic remit-
tances. They find limited evidence of labor force participation effects
of persistent remittances. This implies that remittances are an integral
part of remittance recipient households’ income generation strategy.
Acosta et al. (2009) find that in El Salvador an increase in remittance
flows leads to a decline in labor supply. Kim (2007) studies the reasons
for the coexistence of high unemployment rates with increasing real
wages in Jamaica. The author concludes that households with remit-
tance income have higher reservation wages and reduce labor supply
by moving out of the labor force. Funkhouser (2006) uses longitudinal
data from 1998 and 2001 in Nicaragua to examine the impact of the
emigration of household members on household labor market integra-
tion and poverty. The author concludes that households with emigrant
had a reduction in labor income compared to otherwise similar house-
holds.
3. Data
This study examines 122 developing (poor and middle-income)
countries1 from the six major developing world regions: Latin Amer-
ica and the Caribbean, sub-Saharan Africa, the Middle East and North
Africa, East Asia and the Pacific, South Asia, and Europe and Central
Asia. The income and regional classification in this paper follow the
conventions of the World Bank. This panel of countries is sufficiently
diverse, which means that these results are internationally applicable.
The annual data has a time span of 1990–2015. All dollar values in this
paper are constant 2011 US dollars.
Data on remittances come from the International Monetary Fund
(IMF), which has defined remittances as the sum of two components:
personal transfers (workers’ remittances) and compensation of employ-
ees. The World Bank has adopted the same definition. Compensa-
tion of employees refers to the income of border, seasonal, and other
short-term workers who are employed in an economy where they are
not resident and of residents employed by nonresident entities. Being
present for one year or more in a territory or intending to do so is suf-
ficient to qualify one as being a resident of that economy (IMF, 2009).
1
The list of countries is provided in Appendix II.
381
Economic Modelling 75 (2018) 377–396
Between 1990 and 2015, personal transfers constituted 66% of remit-
tances, and compensation of employees constituted 34% of remittances.
In the year 2015, these ratios were 65% and 35% respectively. As Chami
et al. (2009a) and Chami et al. (2009b) show, this aggregation is not
appropriate since the two different types of transfers have different
properties and respond differently to economic shocks. Thus, I follow
Combes et al. (2014) in using only workers’ remittances as the measure
of remittances. Therefore, the narrow definition of remittances (work-
ers’ remittances) is used in this paper to record remittances. Remit-
tances are divided by remittance-receiving countries’ populations and
converted in constant 2011 international dollars. The income variable
in equation (1) is per capita Gross Domestic Product (GDP) in constant
2011 international dollars adjusted for purchasing power parity (PPP).
In this paper, I report the impacts of remittances on two types
of human capital: health outcomes and educational attainment. After
investigating the impacts of remittances on health outcomes and edu-
cational attainment, as a robustness check, I examine the effect of remit-
tances on HDI. Finally, I estimate the impact of workers’ remittances on
labor force participation.
To fully investigate the impacts of workers’ remittances on all
aspects of health and education outcomes in developing countries, nine
health measurements and nine education indicators have been used
as dependent variables. Using different health and education measure-
ments is an excellent robustness check and ensures that demonstrated
positive impacts of remittances on health and education outcomes do
not happen by chance.
Nine health measurements are examined in this research: per capita
out-of-pocket health expenditure, per capita total health expenditure,
life expectancy at birth, undernourishment prevalence, depth of food
deficit, prevalence of stunting, neonatal mortality rate, infant mor-
tality rate, and under-five mortality rate. Although per capita out-of-
pocket health expenditure and per capita total health expenditure are
not measures of health, because they have direct effects on health out-
comes, they are included as two of the health outcome measurements.
Seven explanatory variables are employed in health regressions as the
covariates: per capita GDP, population over 65, urban population share,
health expenditure to GDP ratio, food production index, government
expenditure on education, and newborns protected against tetanus.
Nine educational measurements are chosen in this paper: pre-primary
gross enrollment rate, primary gross enrollment rate, secondary gross
enrollment rate, tertiary gross enrollment rate, percent of children out
of primary school, private primary enrollment rate, secondary compli-
ment rate, primary compliment rate, and gender parity index for pri-
mary education. Two new explanatory variables are employed in the
education section: Labor force participation and government expen-
ditures on education as a percentage of GDP. Table 1 describes all
dependent and explanatory variables alongside their descriptive statis-
tics. Table 2 provides descriptive statistics for gender-specific variables.
Except for remittances and HDI, data on all dependent and explana-
tory variables are from the World Development Indicators. HDI data
are from the United Nations Development Programme (UNDP).
This study uses three instruments to address the endogeneity of
workers’ remittances: weighted average per capita GNI, unemployment
rate, and real interest rate of remittance-sending countries. Data on GNI
and populations are from the United Nations. Data on unemployment
rates and real interest rates are from the World Development Indica-
tors. The real interest rate is defined as lending interest rate adjusted
for inflation as measured by the GDP deflator.
Data on out-of-pocket health expenditures and total health expen-
ditures cover the years between 1995 and 2014. The share of out-of-
pocket health expenditures in total health expenditure in developing
countries has fluctuated in recent years. In 1995 and 2014 it was 40.8%
and 36.2% respectively. However, there has been a stable increasing
trend in the amount of per capita total health expenditure and per
capita out-of-pocket health expenditure: they went up from $131.4 and
$53.6 in the year 1995 (expressed in constant 2011 US dollars adjusted
 S. Azizi
Table 1
Descriptive statistics.
Variable Description N Mean SD Min Max
Per capita GDP Per capita GDP (constant 2011 US$ adjusted for PPP) 3043 5896 4845 247 29630
Per capita Remittance Per capita remittance (constant 2011 US$ adjusted for PPP) 2243 108.3 174.8 0 1577
Per capita out of pocket health expenditure Any outlay by households to health practitioners divided by total population (constant 2011 US$ adjusted for PPP) 2372 112 115.6 0.1 841.6
Per capita total health expenditure Sum of public and private health expenditure divided by total population (constant 2011 US$ adjusted for PPP) 2372 322.2 304.4 12.4 1996
Life expectancy at birth The number of years a newborn infant would live if prevailing patterns of mortality stay the same throughout its life 3069 64.1 9 27.1 79.6
Prevalence of undernourishment The percentage of the population whose food intake is insufficient to meet dietary energy requirements 2350 21.1 14.2 5 80.8
Depth of food deficit Calories needed to lift the undernourished from their status. 2276 154.1 119.6 1 744
Prevalence of stunting The percentage of children under age 5 whose height for age is more than two standard deviations below the median 565 31.4 15.4 1.2 76.7
Neonatal mortality rate The number of neonates dying before reaching 28 days of age per 1000 live births in a given year. 3146 46.9 31.8 3.4 171.2
Infant mortality rate The number of infants dying before reaching one year, per 1000 live births in a given year. 3146 24.4 13.6 1.9 67.1
Under 5 mortality rate The number of newborns dying before reaching age five per 1000 live births in a given year. 3146 67.6 55 4.6 328.2
Population over 65 Population ages 65 and above as a percentage of the total population 3044 5.1 3.1 1.7 20
382

Urban total ratio The ratio of people living in urban areas to total population 3146 45.3 20.1 5.4 91.8
Food production index Food crops that are considered edible and contain nutrients 2825 95.5 25.1 16.8 301.4
Health exp to GDP ratio Total expenditure on health as a percentage of GDP 2372 6 2.6 0.4 30.8
Newborns protected against tetanus The percentage of births by women of child-bearing age who are immunized against tetanus. 2198 72.4 18.2 5 99
Gross enrollment ratio, pre-primary The ratio of total enrollment in pre-primary, regardless of age, to the population of the pre-primary age group. 1932 39.3 29.8 0.2 159.6
Gross enrollment ratio, primary The ratio of total enrollment in primary, regardless of age, to the population of the primary age group. 2510 100.6 20.6 21.7 165.6
Gross enrollment ratio, secondary The ratio of total enrollment in secondary, regardless of age, to the population of the secondary age group. 2008 60.7 28.2 5.1 129
Gross enrollment ratio, tertiary The ratio of total enrollment in tertiary, regardless of age, to the population of the tertiary age group. 1710 20.6 18.8 0 91.1
Out of school rate at primary age The percentage of primary-school-age children who are not enrolled in primary or secondary school 1612 15.2 16.9 0 80.8
Enrollment in private primary schools rate The ratio of enrollment in private primary schools to the total number of students enrolled in primary education. 1893 12.2 16.8 0 99.2
Primary completion rate The ratio of new entrants in the last grade of primary education to the population at the entrance age. 1836 79.7 24.8 13.9 185.3
Lower secondary completion rate Gross intake ratio to the last grade of lower secondary education. 1527 59.7 29.2 0 206.6
Primary gender parity index The ratio of girls to boys enrolled at primary level in public and private schools. 2421 0.9 0.1 0 1.3
Labor force participation The proportion of the population ages 15 and older that is economically active 2964 63.6 11.5 38.2 90.6
Gov expenditures on education General (local, regional, and central) government expenditure on education as a percentage of GDP. 1343 4.3 2.3 0.5 44.3
Human Development Index (HDI) Summary measure of average achievement in key dimensions of human development 2724 0.6 0.1 0.2 0.8

Economic Modelling 75 (2018) 377–396

S. Azizi Economic Modelling 75 (2018) 377–396

Table 2
Gender-specific descriptive statistics.
Variable N Mean SD Min Max
Male life expectancy 3069 61.9 8.4 24.3 77.9
Female life expectancy 3069 66.3 9.7 30 82.1
Male prevalence of stunting rate 430 33.4 15.6 1.4 76.1
Female prevalence of stunting rate 428 30.4 15.1 0.9 77.3
Male infant mortality rate 484 49.1 34.2 3.8 181.9
Female infant mortality rate 484 41.1 29.7 2.9 157.7
Male under 5 mortality rate 484 68.8 56.9 4.9 332.4
Female under 5 mortality rate 484 60.3 52.4 3.9 323.9
Male pre-primary enrollment rate 1786 39.1 30.2 0.3 158.8
Female pre-primary enrollment rate 1786 38.9 30.1 0.2 162
Male primary enrollment rate 2421 103.4 19.3 25.5 168.1
Female primary enrollment rate 2421 97.4 23 0 163
Male secondary enrollment rate 1841 61.2 26.4 5.6 132.6
Female secondary enrollment rate 1841 60 30.6 0 130.1
Male tertiary enrollment rate 1468 19.9 16.7 0 92.3
Female tertiary enrollment rate 1468 22.7 22.8 0 106
Male primary completion rate 1713 80.6 23.2 14.6 183.1
Female primary completion rate 1713 78.2 27.2 6.3 187.6
Male lower secondary completion rate 1414 59.2 27.5 0 206.9
Female lower secondary completion rate 1414 59.3 31.1 0 206.3
Male human development index 793 0.6 0.1 0.3 0.8
Female human development index 792 0.6 0.1 0.1 0.8
Male labor force participation rate 2964 76.6 8 43.8 92.4
Female labor force participation rate 2964 50.9 18.8 9.2 90.8
N indicates the number of country-year observations. The time span is from 1990 to 2015.

for PPP) to $530.3 and $191.9 in the year 2014 respectively.
In recent years there has been a remarkable decline in undernour-
ishment prevalence, depth of food deficit, and child mortality rates
across the developing world. Undernourishment prevalence data cover
years 1991–2015. Average undernourishment prevalence went down
from 23.7% in the year 1991 to 12.67% in the year 2015. Depth
of food deficit data cover years 1992–2015. Average depth of food
deficit decreased from 175.6 kilocalories in the year 1992 to 91.9
kilocalories in the year 2015. In 1990, average neonatal, infant, and
under-five mortality rates per 1000 live births were 39.3, 69.1, 99.7
respectively. In 2015, average neonatal, infant, and under-five mortal-
ity rates declined to 20.8, 34.6, and 46.4 respectively, in the developing
world.
As UNDP states, HDI is a summary measure of average achieve-
ment in key dimensions of human development: a long and healthy
life, being knowledgeable, and having a decent standard of living. The
HDI is the geometric mean of normalized indices for each of the three
dimensions. The health dimension is assessed by life expectancy at
birth, the education dimension is measured by the mean of years of
schooling for adults aged 25 years and more, and expected years of
schooling for children of school age. The standard of living dimension
is measured by gross national income per capita. The HDI uses the log-
arithm of income, to reflect the diminishing importance of income with
increasing GNI. The scores for the three HDI dimension indices are then
aggregated into a composite index using geometric mean. Data on HDI
are adopted from UNDP. While HDI data cover the years 1990–2015,
male and female HDI data cover the years 2000, 2005, and 2010 to
2015.
In recent years there has been a slight but smooth and stable
decreasing trend in labor force participation rates in developing coun-
tries. In 1990, total, male, and female average labor force participation
rates in developing countries were 68.1%, 82.7%, and 53.4% respec-
tively. In 2015, total, male, and female average labor force partici-
pation rates in developing countries were 63.5%, 77.9%, and 48.9%
respectively.
4. Econometric model
I use the panel data method to analyze how workers’ remittances
affect human capital or labor supply in the developing world. The rela-
tionship that I want to estimate can be written as
log(Hit ) = 𝛽0 + 𝛽1 log(Rit ) + 𝛽2 log(Iit ) + Xit′ 𝛾 + 𝛿i + eit (1)
for i = 1, … , N and t = 1, … , Ti where H is a measure of health,
education, HDI, or labor supply in country i at time t, 𝛽 0 is the intercept,
Rit is the per capita remittances received by country i at year t, Iit is the
mean per capita income of country i at year t, Xit is a vector of other
variables that potentially affect Hit , 𝛿 i is region dummy and eit is the
error term. Since all variables are in logarithm, 𝛽 1 can be interpreted
as the elasticity of human capital with respect to per capita remittances
and 𝛽 2 can be interpreted as the elasticity of human capital with respect
to per capita income.
The reason that region dummies are used in this research rather
than country dummies is that for many countries, there is just one year
of data available, and for using country-specific effects, those countries
had to be dropped from the regression. To avoid dropping those coun-
tries, I used region-specific fixed effects rather than country-specific
fixed effects. All six major developing world regions are included: Latin
America and the Caribbean, sub-Saharan Africa, the Middle East and
North Africa, East Asia and the Pacific, South Asia, and Europe and
Central Asia. The income and regional classification in this paper fol-
low the conventions of the World Bank. I followed Adams and Page
(2005) in using region-specific effects as fixed effects. However, in those
cases that more than one year of data were available for each coun-
try, as a robustness check, I also estimated the regressions by using
country-specific effects. The results were similar in terms of sign and
significance of the parameter estimates but magnitudes were slightly
different.
Correlation matrix between selected variables is provided in
Appendix I. Several correlation coefficients are high, therefore, in order
to avoid multicollinearity effect arising from that, as a general rule,
I try to not include highly correlated explanatory variables in a same
regression equation. For example, in regressions corresponding to the
impact of remittances on child mortality rate, rather than the dollar
value of health expenditures, the ratio of health expenditures to GDP
is used. Also, in all regression equations for the case of the impact of
remittances on education, rather than the dollar value of government

383
S. Azizi
expenditure on education, its ratio to GDP is used.2
Some of the variables used in the regression models, like per capita
GDP, are non-stationary in the level, but they are first-difference sta-
tionary. Since there are non-stationary variables in the regression mod-
els, the results of the regressions might be spurious. To check whether
the results of the regressions are spurious or not, for the regressions
with non-stationary dependent variables, I implement panel cointegra-
tion tests. If cointegrations exist, then it can be concluded that the
error term is stationary, which means the results of the regressions
are not spurious. Two tests are used to check whether panel cointegra-
tions exist: the Kao Residual Cointegration Test proposed by Kao (1999)
(also known as the residual-based Augmented Dicky Fuller test) and the
Johansen Fisher Panel Cointegration Test proposed by Johansen (1988).
In both tests, the null hypothesis is that cointegration does not exist. I
implemented both tests for all models with non-stationary dependent
variables and all p-values were less than 0.05. Therefore, based on the
results of both tests, the null hypothesis is rejected, which means that
a cointegration relationship exists among the variables. In other words,
the error terms are stationary, and the results of the regressions are not
spurious.
Another econometric issue that arises here is that the error terms
are autocorrelated and also they do not have constant variance, which
shows the existence of heteroskedasticity. To overcome autocorrelation
and heteroskedasticity, Newey-West Heteroskedasticity and Autocorre-
lation Consistent (HAC) standard errors are used. In other words, since
I worry that there might be some serial correlation in the error terms
even after controlling for fixed effects and endogeneity of remittances,
I adjust standard errors to account for heteroskedasticity and autocor-
relation by using autocorrelation HAC standard errors.
Another issue that needs to be addressed is that whether standard
errors should be adjusted for clustering. There is no cluster in the popu-
lation of interest that is not represented in the sample. Moreover, except
for the case of Ordinary Least Squares (OLS) results which are provided
in the tables only for comparison purposes, fixed effects are included
in the regressions and there is no need to adjust standard errors for
clustering. (Abadie et al., 2017)
Remittances may be endogenous to education or health outcomes
in the remittance-receiving countries. The endogenous relationship
between workers’ remittances received and schooling decisions or
health outcomes can be explained via three reasons. First, there exists
a reverse causality between human capital (education attainment and
health outcomes) and remittances. An individual may decide to migrate
and send remittances because he or she has school-age or sick and
undernourished children, and in turn, remittances affect educational
investment or health outcomes by loosening liquidity constraints. The
decision to live outside the country and send remittances is deter-
mined simultaneously with the decision regarding health and education
expenditures. Second, there exist unobserved characteristics included
in the error terms that may be correlated with both the decision to
send remittances and the decision to send children to a school, or how
much the household spends on their nutrition and health (e.g. ability
or ambition). Third, measurement error is another source of endogene-
ity. Officially recorded remittances do not include remittance in kind,
unofficial transfers through kinship or through informal means such as
hawala operators, friends, and family members. The negative impact of
transactions costs on remittances encourages migrants to remit through
informal channels when costs are high. Transfer costs are higher when
financial systems are less developed. Evidence from household surveys
2
While the correlation coefficient between “per capita health expenditure”
and per capita GDP is 0.91, the correlation coefficient between “the ratio of
health expenditure to GDP” and per capita GDP is only 0.04. Also, the correla-
tion coefficient between “dollar value of government expenditure on education”
and per capita GDP is 0.9 but the correlation coefficient between “the ratio of
government expenditure on education to GDP” and per capita GDP is only 0.16.
384
Economic Modelling 75 (2018) 377–396
also shows a sizable informal sector (Freund and Spatafora, 2008).
Since poor countries usually are less financially developed, migrants
from poor countries are more likely to remit through informal chan-
nels. Because income is also correlated with human capital investment,
measurement error is also one of the sources of endogeneity.
Therefore, the least squares estimates of the impact of remittances
may be biased as remittance is endogenous. The traditional way, which
is followed in this paper, is to resolve the endogeneity problem by using
instrumental variables. In the following, the instruments suggested by
other researchers are discussed and then I introduce the instruments
that are used in this paper. Three kinds of instruments are proposed
by scholars. The first category of variables is related to remittance-
receiving countries. The main problem with using these instruments
is that they can easily be correlated with education, health or labor
supply of the same country in a way other than through remittances or
covariates. Therefore, they can be invalid instruments. The second cate-
gory of variables is related to the cost of remittances (e.g. the number of
branches of Western Union). These instruments are usually strong and
valid, but data on these variables are mainly unavailable for most devel-
oping countries. The third category of variables is related to remittance-
sending countries. Since these variables are not related to remittance-
receiving countries, after controlling for some covariates, they are
valid and strong. However, the main problem is that each remittance-
receiving country receives remittances from many remittance-sending
countries, and due to lack of information on bilateral remittances, the
weights of remittance-sending countries are unknown.
Aggarwal et al. (2011) use economic conditions in the top
remittance-source countries as instruments for the remittances flows.
They argue economic conditions in the remittance-source countries are
likely to affect the volume of remittance flows that migrants are able
to send, but are not expected to affect the dependent variables in the
remittance receiving countries in ways other than through its impact on
remittances or covariates. However, because bilateral remittance data
are largely unavailable, they identify the top remittance-source coun-
tries for each country in the sample, using 2000 bilateral migration
data. The dataset identifies the top five OECD countries that receive the
most migrants from each remittance-recipient country. They construct
instruments by multiplying the per capita GDP, the real GDP growth,
and the unemployment rate, in each of the top five remittance-source
countries by the share of migration to each of these five countries.
The technique used in this paper is similar to Aggarwal et al. (2011).
However, I use an estimation of bilateral remittances and use them as
weights of remittance-sending countries.
In this research, I introduce three instruments that are correlated
with remittances and uncorrelated with the dependent variables unless
through explanatory variables. Workers’ remittances, by definition, are
money sent by migrants from host countries (remittance-sending coun-
tries) to their home countries (remittance-receiving countries). The
value of remittances hinges on both remittance-sending and remittance-
receiving countries economic variables. Since the dependent variables
belong to remittance-receiving countries, in order to ensure the instru-
ments are valid, we should select a number of economic variables from
remittance-sending countries. Three variables used in this research as
instruments are per capita GNI, unemployment rate, and real interest
rate. If the remittance-sending country’s per capita GNI increases, it
means migrants’ income has increased, which means they have more
money available to spend and remit. Therefore, it can be expected that
remittances increase in response to a rise in the remittance-sending
country’s per capita GNI. If the unemployment rate goes up in the
remittance-sending country, some migrants will lose their jobs, and the
total remittances sent by migrants will decrease. If the real interest rates
go up in the remittance-sending country, migrants have more incentive
to invest in the host country rather than the home country, and they
will remit less.
Table 3 shows the results of regressing per capita remittances
on these three instrumental variables while in each column different
S. Azizi
covariates have been used. Note that in all seven columns the param-
eter estimate for the impact of per capita GNI in remittance-sending
countries on remittances is significant and positive, the parameter esti-
mate for the impact of unemployment rate and real interest rates in
remittance-sending countries on remittances is significant and negative.
The IMF provides workers’ remittances data annually. Data are
available at the aggregate level for each country. Unfortunately, the
IMF does not provide bilateral remittance data. Bilateral remittance
means how much money a remittance-receiving country receives from
each specific remittance-sending country. Therefore, although we know
how much remittance each remittance-receiving country receives in any
year in total, we do not know how much of the received remittances
comes from a specific remittance-sending country.
The main challenge in constructing instruments is that each
remittance-receiving country has more than one remittance-sending
country. Therefore, rather than per capita GNI, unemployment rate,
and real interest rate in the remittance-sending country, weighted aver-
age of the remittance-sending countries’ indicators should be used as
instruments. For remittance-receiving country i, in year t, the weights
of each remittance-sending country j is
Remittances from country j to country i in year t
Wjit = (2)
Total remittances received by country i in year t
For example, if remittance-receiving country A has two remittance-
sender countries, B and C, and it receives 70% of the total remit-
tances from country B with $10,000 per capita GNI, and 30% of
the total remittances from country C with $20,000 per capita GNI,
then weighted average per capita GNI of the host countries would be
0.7∗10,000 + 0.3∗20,000 = 13,000. However, calculating these weights
entails knowing bilateral remittances (i.e. how much remittances each
remittance-receiving country receives from each remittance-sending
country). Although the value of remittances each country receives is
known, unfortunately, there is no comprehensive bilateral remittances
data, and we do not know the amount of remittances received from
each individual remittance-sending country. To overcome this problem,
a specific method developed by Ratha and Shaw (2007)3 and used in
Azizi (2017) and Azizi (2018) is used in this paper to estimate bilateral
remittances for all countries from 1990 to 2015.
Fortunately, the UN has provided a comprehensive bilateral migra-
tion data from 1990 to 2015. This means we know how many immi-
grants live in each host-country, and we also know how many of them
3
Ratha and Shaw (2007) proposes a method of “Calculating
Weights Based on Migrant Stocks, Per Capita Income in the Desti-
nation Countries, and Per Capita Income in the Source Countries”.
The average remittance sent by a migrant from host country j to home
country i (rij ) is modeled as a function of the per capita income of the home
country and the host country.
{
Yi if Yj < Y i
rij = f (Y i Yj ) =
Y i + (Yj − Y i )𝛽 otherwise
where Yj is the average per capita GNI of host country j, Y i is the per capita
GNI of the migrant’s home country, and 𝛽 is a parameter between 0 and 1.
The amount sent by an average migrant is assumed to be at least as much as
the per capita income of the home country, even when the individual migrates
to a lower-income country. The rationale is that the migration occurs in the
expectation of earning a higher level of income for the dependent household
than what the migrant would earn in his or her home country. To estimate
bilateral remittances for all countries, they use the average 𝛽 (equal to 0.75)
for the top 20 remittance-receiving countries. Then, for each home country i, rij
is used to build weights for each host country j as
rij Mij
Wij = ∑214
r M
j=1 ij ij
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Economic Modelling 75 (2018) 377–396
are from each specific home-country. I used this dataset,4 per capita
GNI of remittance-sending countries, and per capita GNI of remittance-
receiving countries to estimate bilateral remittances. I then use esti-
mated bilateral data to construct weighted averages of per capita GNI,
unemployment rate, and real interest rate of remittance-sending coun-
tries. These weighted average indicators are used as instruments to
address the endogeneity of remittances.
Before discussing the results of the regressions, I will provide some
evidence about the correctness of the estimated bilateral remittance
data. Data on bilateral remittances are mostly unavailable. Even where
bilateral remittances are reported, they may not be accurate, because
funds channeled through international banks may be attributed to a
country other than the actual source country (Ratha, 2005). One rea-
son why bilateral remittance data is inaccurate is that financial insti-
tutions that act as intermediaries often report funds as originating in
the most immediate source country. For example, the Philippines tends
to attribute a large part of its remittance receipts to the United States
because many banks route their fund transfers through the United States
(Ratha, 2005). Only a few papers have used bilateral remittances data.
and only for limited recipient-country sender-country pairs (Lueth and
Ruiz-Arranz, 2008; Frankel, 2011; Docquier et al., 2012). I compare
the estimated bilateral remittances used in this paper with the corre-
sponding part of the datasets they used in their studies. The actual data
consists of 12 receiving countries, 16 remittance-sending countries, and
1744 observations.5 The Pearson Correlation Coefficient between actual
data and estimated data is 0.666 and is statistically significant, indicat-
ing there is a strong positive linear correlation between actual data and
estimated data. This study uses Kolmogorov-Smirnov’s two-sample test
to check if the distribution of the two samples is the same or not. The
null hypothesis is that the two distributions are not statistically differ-
ent from each other. Using the panel data, the p-value for the test is
0.17, and I fail to reject the null.
For remittance-receiving country i at time t, we define
∑
214
Y it = wjit Yjt
j =1
where Y it is one of the following variables: weighted average per
capita GNI, unemployment rate, and real interest rate of the remittance-
sending countries. wjit is the weight as defined by equation (2) and Yjt
is one of the following: per capita GNI, unemployment rate, or real
interest rate of the remittance-sending country j at year t. Total number
of host countries is 214. Therefore, the following variables are used as
instruments:
Zit = (PCGNI it , Unemit , RIRit )
where PCGNI is the per capita GNI, Unemp is the unemployment rate,
and RIR is the real interest rate.
Two main concerns of using instrumental variables method, to
address the problem of endogeneity, are validity and strength of the
instruments. The reason that in this paper bilateral remittances are esti-
mated, and economic variables related to remittance-sending countries
are used is to guarantee the validity of the instruments. More specifi-
cally, selecting economic variables from remittance-sending countries,
rather than from remittance-receiving countries, as instruments is to
ensure the validity of instruments. My identifying assumption is that
per capita GNI, unemployment rate, and real interest rate in remittance-
sending countries do not affect health outcomes, educational attain-
ment, and labor force participation in remittance-receiving countries
4
The UN bilateral migration data includes just the following years: 1990,
1995, 2000, 2005, 2010, 2013, and 2015. I used linear interpolation to estimate
bilateral migration for the remaining years.
5
The estimated bilateral data consists of 214 remittance-receiving countries,
214 remittance-sending countries, and 1,190,696 observations.
 S. Azizi
Table 3
First stage regressions.
Dependent variable Per Capita Remittance
Corresponding dependent variable Per Capita Health Expenditure Education HDI Labor
in the original equations Supply
Column number (1) (2) (3) (4) (5) (6) (7)
Instruments Per capita GDP in remittance sending 5.57∗∗∗ 6.22∗∗∗ 5.18∗∗∗ 4.81∗∗∗ 4.59∗∗∗
countries (0.356) (0.336) (0.451) (0.46) (0.411)
Unemployment rate in remittance −0.03∗∗∗ −0.11∗∗∗ −0.03∗∗ −0.035∗∗ −0.04∗∗∗
sending countries (0.0119) (0.012) (0.017) (0.017) (0.013)
Real interest rate in remittance −0.02∗∗∗ −0.03∗∗∗ −0.01∗∗∗ −0.02∗∗∗ −0.02∗∗∗
sending countries (0.004) (0.004) (0.005) (0.005) (0.004)
Exogenous Variables Per capita GDP in remittance 0.17∗∗ 0.17∗∗ 0.53∗∗∗ 0.46∗∗∗ 0.6∗∗∗ 0.8∗∗∗ −0.11
receiving countries (0.075) (0.075) (0.077) (0.077) (0.064) (0.06) (0.089)
Population over 65 in remittance 0.96∗∗∗ 0.99∗∗∗ 0.77∗∗∗ 0.85∗∗∗
receiving countries (0.112) (0.113) (0.119) (0.119)
0.42∗∗∗ 0.43∗∗∗ 0.41∗∗∗ 0.33∗∗∗ 0.72∗∗∗
386

Urban ratio in remittance receiving

countries (0.108) (0.109) (0.114) (0.115) (0.131)
Labor force participation in −2.55∗∗∗
remittance receiving countries (0.328)
Gov expenditure on education in −0.13 −0.05
remittance receiving countries (0.116) (0.12)
Primary completion rate in 1.87∗∗∗
remittance receiving countries (0.168)
Number of countries 116 116 116 116 104 106 118
Number of obs 2184 2184 2184 2184 1094 1097 1433
R-squared 0.3 0.28 0.21 0.19 0.35 0.32 0.36
F-statistic for weak instruments 133 342 98 69 65 58 82

Results are first-stage estimates of the equation log(Hit ) = 𝛽0 + 𝛽1 log(Rit ) + 𝛽2 log(Iit ) + Xit′ 𝛾 + 𝛿i + eit where Hit refers to per capita health expenditures in columns (1) to
(4), education in column (5), HDI in column (6), and labor supply in column (7). First stage estimates are obtained by running log(Rit ) = 𝛽 0 + d1 (Zit ) + d2 log(Xit ) + uit
where Z is a matrix of instruments including weighted GDP per capita, unemployment rate, and real interest rate in remittance-sending countries where weights are
from estimated bilateral remittances and X is a matrix of exogeneous variable in remittance receiving countries. All parameter estimates and standard errors for per
capita GNI in remittance sending countries are scaled up by 105 .
∗∗∗ significant at 1% level. ∗∗ significant at 5% level. ∗ significant at 10% level.

Economic Modelling 75 (2018) 377–396

S. Azizi
other than through remittances, per capita GDP of remittance-receiving
countries, or other covariates included the regressions. The other con-
cern about the instruments is whether they are strong or not. The whole
process of estimating bilateral remittances and use them as the weights
of remittance-sending countries is to ensure that instruments are strong.
To investigate the strength of the instruments, first stage regressions
are examined. The results of the first stage regressions are provided in
Table 3. Note that all F-statistics for weak instruments are greater than
50, which indicates the instruments are very strong.
There is a clear advantage in using estimated bilateral remittances
to construct the instruments over using top 5 or 10 remittance-sending
countries (the method used by other researchers). This advantage can
be demonstrated by the substantial improvement in the F-statistic for
weak instruments of this paper and similar papers. For example, F-
statistic for two of the main instruments used in this paper, GNI per
capita and unemployment rate in remittance-sending countries, are 342
and 98 respectively. These two F-statistics are remarkably higher than
F-statistic in similar studies which use GNI per capita and unemploy-
ment rate in just top one or three or five remittance-sending countries
as instruments.
5. Results
This section is divided into four subsections. At first, I investi-
gate impacts of remittances on health outcomes in Tables 4–6 and
gender-specific impacts of remittances on health outcome in Tables 7
and 8. Then, I explore the impacts of remittances on education in
Tables 9–11 and gender-specific impacts of remittances on education
in Tables 12–14. Afterward, I look into the impact of remittances on
HDI in Table 15. Finally, I examine the impacts of remittances on labor
supply in Table 16.
In all regressions, the results of the IV approach are reported along-
side the results of the OLS model and Fixed Effect (FE) model. FE model
and OLS model are similar in all aspects except one. Unlike OLS model,
FE model includes region-specific effects and addresses time-invariant
cross-country effects. However, both OLS and FE results are inconsistent
and biased. They are presented in this paper for comparison purposes.
To address both endogeneity and time-invariant cross-country effects
simultaneously, all IV estimates also include region-specific effects.
5.1. Remittances and health
This study closely follows the literature on the choice of health
measurements. Four categories of health measurements are used here
as dependent variables: health expenditures, life expectancy at birth,
nutrition status, and child mortality rates. Per capita out-of-pocket
health expenditure and per capita total health expenditure are the vari-
ables representing health expenditures. Undernourishment prevalence,
depth of food deficit, and prevalence of stunting are three variables
representing nutrition measurements. Neonatal, infant, and under-five
mortality rates represent child mortality rates. The estimates for the
impacts of remittances on out-of-pocket per capita health expenditures,
per capita total health expenditures, and life expectancy are presented
in Table 4.
For many countries, just one year of data is available, and for using
country-specific effect, those countries had to be dropped from the
regression. Due to this data limitation, this study controls for region-
specific effect rather than country-specific effect. However, for those
cases where more data are available, at least two years of data for
each remittance-receiving country, it is possible to control for country-
specific effect. As a robustness check, I use country-specific effect in
those regressions and investigate the impact of remittances on health
outcomes. The results are the same as regressions with region-specific
dummies in terms of sign and significance of remittances, but the mag-
387
Economic Modelling 75 (2018) 377–396
nitudes are slightly different.6
In the first regression, per capita out-of-pocket health expenditure is
used as the dependent variable. Population over 65 and urban popula-
tion share are used as explanatory variables alongside per capita remit-
tances and per capita GDP. Both OLS and FE models underestimate the
impacts of remittances on health expenditures and the effect captured
by the IV is larger than the effects captured by the OLS or the FE. The
results of IV regression suggest that, on average, a 10% increase in per
capita remittances and per capita GDP will lead to a 1.5% and 6.4%
increase in per capita out-of-pocket health expenditure, respectively. In
the second regression, per capita total health expenditure is used as the
dependent variable. The results of IV regression suggest that, on aver-
age, a 10% increase in per capita remittances and per capita GDP will
lead to a 1.1% and 8.9% increase in per capita total health expendi-
ture, respectively. Note that the impact of per capita remittances on per
capita total health expenditure is smaller than the impact of per capita
remittances on per capita out-of-pocket health expenditure. The reason
is that total health expenditure is the sum of private and public health
expenditure and remittances have almost no effect on public health
expenditure. In the third regression, life expectancy at birth is used as
the dependent variable. The results of IV regression suggest that, on
average, a 10% increase in per capita remittances and per capita GDP
will lead to a 0.3% and 0.4% increase in life expectancy at birth respec-
tively.
The impacts of per capita remittances, per capita GDP, alongside
other variables, on nutrition variables are provided in Table 5.
Undernourishment prevalence, depth of food deficit, and prevalence
of stunting are used as the fourth, fifth, and sixth measurements of
health outcomes. Due to restrictions in the availability of data, the num-
ber of observations in each regression varies considerably. For example,
in the regression with undernourishment prevalence as the dependent
variable, the number of observations is 1629, but in the regression with
prevalence of stunting as the dependent variable, the number of obser-
vations is 412.
Food production index and urban population share are used as
explanatory variables alongside per capita remittances and per capita
GDP. The results of IV regressions suggest that, on average, a 10%
increase in per capita remittances and per capita GDP will lead to,
respectively, a 1.5% and 4.3% decline in undernourishment prevalence,
a 1.9% and 5.9% decline in depth of food deficit, and a 1% and 2.7%
decline in prevalence of stunting. Note that the magnitude of IV coef-
ficients for per capita remittances are substantially larger than those
from the OLS and FE estimations in all three regressions which means
OLS and FE models underestimate the impacts of workers’ remittances
on undernourishment prevalence, depth of food deficit, and prevalence
of stunting.
The impacts of per capita remittances, per capita GDP, alongside
other variables, on child mortality rates are provided in Table 6.
In order to investigate the impact of remittances on child mortal-
ity rate, health expenditure to GDP ratio, urban ratio, and newborns
protected against tetanus are chosen as control variables. Since high-
income countries are primary funders of the World Health Organization
(WHO), their economic conditions can affect WHO’s budget, which in
turn affects child mortality rates in developing countries through differ-
ent global vaccination programs implemented by WHO. Controlling for
the variable newborns protected against tetanus can assure the validity
of the instruments used in the IV regressions.
Both OLS and FE models underestimate the impacts of remittances
on reducing child mortality rates. Remittance has negative and sta-
6
For example the parameter estimate for the impacts of remittances on out-
of-pocket health expenditure is 0.15 for the regression with region-specific
effects and 0.17 for the regression with country-specific effects. Also, the param-
eter estimate for the impacts of remittances on undernourishment prevalence is
−0.15 for the regression with region-specific effects and −0.13 for the regres-
sion with country-specific effects.
S. Azizi Economic Modelling 75 (2018) 377–396

Table 4
Impact of remittances on health outcomes (1).
Dependent OOP health expenditure Total health expenditure Life expectancy at birth
Method OLS FE IV OLS FE IV OLS FE IV
Per capita remittance 0.09∗∗∗ 0.09∗∗∗ 0.15∗∗∗ 0.05∗∗∗ 0.05∗∗∗ 0.11∗∗∗ 0.03∗∗∗ 0.02∗∗∗ 0.03∗∗∗
(0.011) (0.011) (0.033) (0.006) (0.006) (0.018) (0.002) (0.002) (0.004)
Per capita GDP 0.64∗∗∗ 0.69∗∗∗ 0.64∗∗∗ 0.89∗∗∗ 0.92∗∗∗ 0.89∗∗∗ 0.09∗∗∗ 0.04∗∗∗ 0.04∗∗∗
(0.048) (0.052) (0.054) (0.024) (0.026) (0.027) (0.005) (0.005) (0.006)
Population over 65 0.29∗∗∗ 0.08 −0.06 0.09∗∗∗ 0.1∗∗ 0.08
(0.054) (0.077) (0.081) (0.033) (0.047) (0.05)
Urban ratio 0.32∗∗∗ 0.071 0.2∗∗ 0.091∗∗ −0.07∗ −0.05
(0.073) (0.083) (0.084) (0.036) (0.038) (0.038)
Gov expenditure on education −0.01 −0.002 0.006
(0.009) (0.007) (0.006)
Number of countries 114 114 114 114 114 114 105 105 105
Observations 1811 1811 1811 1811 1811 1818 1095 1095 1095
R-squared 0.59 0.67 0.65 0.84 0.86 0.85 0.64 0.77 0.74

HAC standard errors are in parentheses. FE and IV models include region dummies.
∗∗∗ significant at 1% level. ∗∗ significant at 5% level. ∗ significant at 10% level.

Table 5
Impact of remittances on health outcomes (2).
Dependent Undernourishment Prevalence Depth of food deficit Prevalence of stunting
Method OLS FE IV OLS FE IV OLS FE IV
Per capita remittance −0.07∗∗∗ −0.08∗∗∗ −0.15∗∗∗ −0.07∗∗∗ −0.08∗∗∗ −0.19∗∗∗ −0.06∗∗∗ −0.05∗∗∗ −0.1∗∗
(0.01) (0.01) (0.034) (0.015) (0.015) (0.049) (0.015) (0.015) (0.043)
Per capita GDP −0.41∗∗∗ −0.44∗∗∗ −0.43∗∗∗ −0.58∗∗∗ −0.63∗∗∗ −0.59∗∗∗ −0.34∗∗∗ −0.29∗∗∗ −0.27∗∗∗
(0.035) (0.041) (0.041) (0.051) (0.058) (0.05) (0.046) (0.051) (0.045)
Food production index −0.21∗∗∗ −0.17∗∗ −0.06 −0.16 −0.11 0.05 −0.114 −0.14 −0.05
(0.075) (0.073) (0.086) (0.106) (0.101) (0.116) (0.1) (0.095) (0.12)
Urban ratio 0.005 0.07 0.09 −0.01 0.11 0.14 −0.25∗∗∗ −0.081 −0.07
(0.06) (0.066) (0.066) (0.081) (0.087) (0.087) (0.082) (0.099) (0.1)
Number of countries 94 94 94 95 95 95 107 107 107
Observations 1629 1629 1629 1605 1605 1605 412 412 412
R-squared 0.4 0.45 0.42 0.35 0.43 0.39 0.49 0.55 0.48
HAC standard errors are in parentheses. FE and IV models include region dummies.
∗∗∗ significant at 1% level. ∗∗ significant at 5% level. ∗ significant at 10% level.

tistically significant effects on child mortality rates. Based on the IV
results, on average, a 10% increase in per capita remittances causes a
1% decrease in neonatal mortality rate, a 1.7% decrease in infant mor-
tality rates, and a 1.9% decrease in under five mortality rates. Also, on
average, a 10% increase in per capita GDP leads to a 3.9% decrease in
neonatal mortality rates, a 4.2% decrease in infant mortality rates, and
a 4.7% increase in under five mortality rates.
Gender-specific data are available only for four health outcome vari-
ables: life expectancy at birth, prevalence of stunting, infant mortality
rate, and under-five mortality rate. Table 7 provides the gender-specific
impacts of per capita remittances on life expectancy at birth and preva-
lence of stunting.
Remittance has positive, statistically significant, and almost similar
effects on male and female life expectancy. On average, a 10% increase

Table 6
Impact of remittances on health outcomes (3).
Dependent Neonatal mortality rate Infant mortality rate Under 5 mortality rate
Method OLS FE IV OLS FE IV OLS FE IV
Per capita remittance −0.05∗∗∗ −0.05∗∗∗ −0.1∗∗∗ −0.09∗∗∗ −0.07∗∗∗ −0.17∗∗∗ −0.11∗∗∗ −0.08∗∗∗ −0.19∗∗∗
(0.007) (0.007) (0.019) (0.007) (0.007) (0.023) (0.009) (0.008) (0.026)
Per capita GDP −0.44∗∗∗ −0.39∗∗∗ −0.39∗∗∗ −0.51∗∗∗ −0.42∗∗∗ −0.42∗∗∗ −0.61∗∗∗ −0.46∗∗∗ −0.47∗∗∗
(0.02) (0.022) (0.022) (0.02) (0.024) (0.025) (0.028) (0.027) (0.028)
Health expenditure to GDP ratio −0.2∗∗∗ −0.22∗∗∗ −0.22∗∗∗ −0.1∗∗∗ −0.14∗∗∗ −0.12∗∗∗ −0.1∗∗∗ −0.17∗∗∗ −0.14∗∗∗
(0.038) (0.031) (0.035) (0.036) (0.031) (0.038) (0.045) (0.035) (0.043)
Urban ratio 0.21∗∗∗ 0.23∗∗∗ 0.28∗∗∗ 0.22∗∗∗ 0.2∗∗∗ 0.32∗∗∗ 0.24∗∗∗ 0.19∗∗∗ 0.33∗∗∗
(0.034) (0.04) (0.048) (0.039) (0.043) (0.054) (0.046) (0.046) (0.061)
Newborns protected against tetanus −0.35∗∗∗ −0.43∗∗∗ −0.35∗∗∗ −0.4∗∗∗ −0.47∗∗∗ −0.34∗∗∗ −0.48∗∗∗ −0.56∗∗∗ −0.42∗∗∗
(0.054) (0.065) (0.059) (0.057) (0.055) (0.069) (0.071) (0.065) (0.079)
Number of countries 85 85 85 85 85 85 85 85 85
Observations 1354 1354 1354 1354 1354 1354 1354 1354 1354
R-squared 0.6 0.69 0.66 0.68 0.75 0.66 0.69 0.79 0.7
HAC standard errors are in parentheses. FE and IV models include region dummies.
∗∗∗ significant at 1% level. ∗∗ significant at 5% level. ∗ significant at 10% level.

388
S. Azizi Economic Modelling 75 (2018) 377–396

Table 7
Gender-specific impact of remittances on health outcomes (1).
Dependent Life expectancy Prevalence of stunting
Gender Male Female Male Female
Per capita remittance 0.02∗∗∗ 0.03∗∗∗ 0.02∗∗∗ 0.03∗∗∗ −0.05∗∗∗ −0.13∗∗∗ −0.05∗∗∗ −0.12∗∗
(0.002) (0.004) (0.002) (0.005) (0.016) (0.047) (0.017) (0.048)
Per capita GDP 0.04∗∗∗ 0.03∗∗∗ 0.04∗∗∗ 0.04∗∗∗ −0.28∗∗∗ −0.25∗∗∗ −0.3∗∗∗ −0.27∗∗∗
(0.005) (0.006) (0.005) (0.006) (0.045) (0.038) (0.047) (0.039)
Gov expenditure on education −0.003 0.003 −0.002 0.007
(0.007) (0.006) (0.007) (0.006)
Food production index −0.154 −0.008 −0.17 −0.04
(0.095) (0.13) (0.103) (0.134)
Urban ratio −0.128∗ −0.11 −0.13 −0.11
(0.075) (0.077) (0.08) (0.081)
Number of countries 105 105 105 105 100 100 99 99
Observations 1095 1095 1095 1095 338 338 337 337
R-squared 0.73 0.7 0.78 0.76 0.58 0.53 0.56 0.53
Method FE IV FE IV FE IV FE IV
HAC standard errors are in parentheses. Both FE and IV models include region dummies.
∗∗∗ significant at 1% level. ∗∗ significant at 5% level. ∗ significant at 10% level.

Table 8
Gender-specific impact of remittances on health outcomes (2).
Dependent Infant mortality rate Under 5 mortality rate
Gender Male Female Male Female
Per capita remittance −0.07∗∗∗ −0.131∗∗ −0.08∗∗∗ −0.135∗∗ −0.08∗∗∗ −0.143∗∗ −0.08∗∗∗ −0.149∗∗
(0.019) (0.057) (0.019) (0.057) (0.022) (0.064) (0.023) (0.066)
Per capita GDP −0.41∗∗∗ −0.42∗∗∗ −0.43∗∗∗ −0.43∗∗∗ −0.46∗∗∗ −0.48∗∗ −0.49∗∗ −0.5∗∗∗
(0.066) (0.07) (0.07) (0.074) (0.076) (0.081) (0.082) (0.087)
Health expenditure to GDP ratio −0.16∗∗ −0.15∗ −0.16∗∗ −0.14∗ −0.166∗∗ −0.17∗ −0.19∗∗ −0.176∗
(0.074) (0.078) (0.075) (0.079) (0.073) (0.088) (0.084) (0.09)
Urban ratio 0.15 0.2 0.17 0.21 0.15 0.2 0.16 0.22
(0.119) (0.127) (0.123) (0.13) (0.131) (0.143) (0.137) (0.149)
Newborns protected against tetanus −0.55∗∗∗ −0.49∗∗∗ −0.55∗∗∗ −0.5∗∗∗ −0.65∗∗∗ −0.58∗∗∗ −0.67∗∗∗ −0.61∗∗∗
(0.127) (0.143) (0.132) (0.148) (0.11) (0.162) (0.154) (0.17)
Number of countries 84 84 84 84 84 84 84 84
Observations 136 136 136 136 136 136 136 136
R-squared 0.76 0.73 0.76 0.73 0.79 0.76 0.79 0.77
Method FE IV FE IV FE IV FE IV

HAC standard errors are in parentheses. Both FE and IV models include region dummies.
∗∗∗ significant at 1% level. ∗∗ significant at 5% level. ∗ significant at 10% level.

in per capita remittances causes a 0.3% increase in male and female life
expectancy at birth. Also, on average, a 10% increase in remittances
leads to a 1.3% decrease in male and 1.2% decrease in female preva-
lence of stunting.
Table 8 provides the gender-specific impacts of per capita remit-
tances alongside per capita GDP, per capita health expenditure, urban
population share, and newborns protected against tetanus on infant
mortality rates and under-five mortality rates.
There are negligible differences on impacts of remittances on child
mortality rates between two genders: on average, a 10% increase in the
amount of per capita remittances leads to a 1.31% and 1.35% reduction
in infant mortality rates for males and females, respectively. Also, on
average, a 10% increase in the amount of per capita remittances leads
to a 1.43% and 1.49% reduction in under 5 mortality rate for males
and females, respectively. These results show that when households in
developing countries receive remittances from their family members
living abroad, they spend the received money almost equally on the
health status of their boys and girls. As we will see, this is not the case
for the impact of remittances on education as remittances increase the
female education more than male education.
5.2. Remittances and education
In all regressions with education measurements as dependent vari-
ables, per capita remittances, per capita GDP, labor force participation
rate, and government expenditure on education are used as explana-
tory variables. Pre-primary enrollment rate, primary enrollment rate,
and secondary enrollment rate are the first three education measure-
ments. The impacts of per capita remittances on these three variables
are displayed in Table 9.
A rise in workers’ remittances (which is represented by per capita
remittances) or in income measurement (which is represented by per
capita GDP) can loosen the budget constraints for households in devel-
oping countries and motivate them to invest more in their children’s
education. The results provided in Table 9 show how worker’ remit-
tances can increase children’s school attendance in developing coun-
tries. On average, a 10% rise in per capita remittance increases pre-
primary and secondary enrollment by 3.5% and 0.6%, respectively.
However, based on the IV model, while a 10% rise in per capita remit-
tance increases primary enrollment by 0.16%, this impact is not sta-
tistically significant. Also, on average, a 10% rise in per capita GDP
increases pre-primary, primary, and secondary enrollment by 6.6%,
0.7%, and 3.2%, respectively.
When labor force participation increases, parents have more incen-
tive to invest in their children’s education. If parents predict that their
children, especially their girls, will not enter the job market, then they
will have less incentive to spend on their children’s education. There-
fore, it is expected that the labor force participation rate has a positive
impact on education. On average, a 10% rise in the labor force par-
ticipation rate increases pre-primary, primary, and secondary enroll-

389
S. Azizi Economic Modelling 75 (2018) 377–396

Table 9
Impact of remittances on education (1).
Dependent Pre-primary enrollment rate Primary enrollment rate Secondary enrollment rate
Method OLS FE IV OLS FE IV OLS FE IV
Per capita remittance 0.16∗∗∗ 0.15∗∗∗ 0.35∗∗∗ 0.02∗∗∗ 0.02∗∗∗ 0.016 0.07∗∗∗ 0.06∗∗∗ 0.07∗∗∗
(0.023) (0.024) (0.064) (0.005) (0.006) (0.012) (0.01) (0.009) (0.018)
Per capita GDP 0.83∗∗∗ 0.70∗∗∗ 0.66∗∗∗ 0.10∗∗∗ 0.10∗∗∗ 0.07∗∗∗ 0.42∗∗∗ 0.33∗∗∗ 0.32∗∗∗
(0.05) (0.073) (0.078) (0.015) (0.02) (0.019) (0.025) (0.029) (0.029)
Labor force participation 1.46∗∗∗ 0.98∗∗∗ 1.59∗∗∗ 0.64∗∗∗ 0.63∗∗∗ 0.48∗∗∗ 0.25∗ 0.41∗∗∗ 0.35∗∗
(0.333) (0.348) (0.374) (0.091) (0.102) (0.098) (0.13) (0.137) (0.141)
Gov expenditure on education 0.28∗∗∗ 0.35∗∗∗ 0.38∗∗∗ 0.06∗∗∗ 0.08∗∗∗ 0.06∗∗∗ 0.18 0.24∗∗∗ 0.25∗∗∗
(0.087) (0.093) (0.092) (0.019) (0.02) (0.02) (0.036) (0.037) (0.037)
Number of countries 96 96 96 104 104 104 98 98 98
Observations 859 859 859 990 990 990 858 858 858
R-squared 0.52 0.54 0.45 0.26 0.29 0.27 0.63 0.72 0.72
HAC standard errors are in parentheses. FE and IV models include region dummies.
∗∗∗ significant at 1% level. ∗∗ significant at 5% level. ∗ significant at 10% level.

Table 10
Impact of remittances on education (2).
Dependent Tertiary enrollment rate Out of school rate-primary age Enrollment in private primary
Method OLS FE IV OLS FE IV OLS FE IV
Per capita remittance 0.10∗∗∗ 0.09∗∗∗ 0.11∗∗∗ −0.09∗∗∗ −0.07∗∗ −0.1 0.17∗∗∗ 0.13∗∗∗ 0.23∗∗∗
(0.022) (0.02) (0.037) (0.03) (0.031) (0.063) (0.045) (0.036) (0.078)
Per capita GDP 0.85∗∗∗ 0.61∗∗∗ 0.59∗∗∗ −0.78∗∗∗ −0.47∗∗∗ −0.44∗∗∗ −0.26∗∗ −0.16 −0.2∗∗
(0.046) (0.055) (0.056) (0.069) (0.078) (0.08) (0.1) (0.096) (0.1)
Labor force participation −0.09 0.111 0.2 −1.14∗∗∗ −1.07∗∗ −1.19∗∗∗ 1.52∗∗∗ −0.32 −0.06
(0.282) (0.249) (0.268) (0.38) (0.422) (0.422) (0.457) (0.423) (0.42)
Gov expenditure on education −0.038 0.04 0.02 −0.18∗ −0.25∗∗ −0.25∗∗ −0.68∗∗∗ −0.83∗∗∗ −0.76∗∗∗
(0.084) (0.081) (0.081) (0.101) (0.01) (0.1) (0.171) (0.147) (0.13)
Number of countries 98 98 98 97 97 97 99 99 99
Observations 779 779 779 754 754 754 818 818 818
R-squared 0.6 0.71 0.71 0.33 0.39 0.39 0.10 0.51 0.5
HAC standard errors are in parentheses. FE and IV models include region dummies.
∗∗∗ significant at 1% level. ∗∗ significant at 5% level. ∗ significant at 10% level.

ment by 15.9%, 4.8%, and 3.5%, respectively. Also, when the govern-
ment expenditure on education increases, the marginal rate of return on
households’ investment in education increases. The increased marginal
rates of returns, in turn, promote households to spend more on their
children’s education. On average, a 10% rise in government expen-
ditures on education increases pre-primary, primary, and secondary
enrollment by 3.8%, 0.6%, and 2.5%, respectively.
The substantial difference between the impacts of per capita remit-
tances on pre-primary enrollment rate, primary enrollment rate, and
secondary enrollment rate can be explained by considering the mean
these variables: 39.3%, 100.6%,7 and 60.7%, respectively. House-
holds in developing countries consider pre-primary education as a lux-
ury commodity. However, they consider primary education, which is
required in many countries, as a necessity. Therefore, the elasticity of
pre-primary enrollment rate with respect to per capita remittances or
per capita GDP is expected to be higher than the elasticity of primary
enrollment rate. However secondary education is less of a necessity in
comparison with primary education, and tertiary education is less of
a necessity in comparison with secondary education. Therefore, it is
reasonable that secondary enrollment rate has a higher elasticity than
primary enrollment rate, and tertiary enrollment rate has a higher elas-
ticity than secondary enrollment rate.
The impacts of per capita remittances on tertiary enrollment rate,
primary age out of school rate, and private primary enrollment rate are
shown in Table 10.
The results presented in Table 10 show that, on average, a 10%
rise in remittance per capita increases tertiary enrollment rate by 1.1%.
However, based on the IV model, while a 10% rise in per capita remit-
tance decreases out of school rate of primary age children by 1%, this
impact is not statistically significant. The last dependent variable used
in Table 10 presents the impact of workers’ remittances on the qual-
ity of children’s education rather than the quantity. On average, a 10%
rise in per capita remittances increases enrollment in private primary
schools by 2.8% which means that a rise in remittances leads to a net
substitution from public to private primary schools, hence increasing
the quality of children’s education. In contrast, a rise in per capita GDP
leads to a net substitution from private to public primary schools. One
explanation is that as per capita GDP of developing countries increase,
the quality of public schools also increase and parents will have less
incentive to send their children to private schools.
As Table 11 shows, on average, a 10% rise in per capita remittance
increases primary completion rate by 0.6% and secondary completion
rate by 0.9%. Once again, the difference in the impacts of per capita
remittances on these two measurements of education can be explained
by taking into account the average primary completion rate and lower
secondary completion rate: 80% and 60%, respectively. Households in
developing countries consider primary education a necessity and sec-
ondary education as less of a necessity than a luxury commodity. There-
fore, it is reasonable that secondary completion rate has higher elastic-
ity than primary completion rate with respect to per capita remittances

7
Since this is a gross rate, which is defined as “the ratio of total enrollment
in primary, regardless of age, to the population of the primary age group”, it
can be over 100%.

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S. Azizi Economic Modelling 75 (2018) 377–396

Table 11
Impact of remittances on education (3).
Dependent Primary completion rate Secondary completion rate Gender parity index-primary
Method OLS FE IV OLS FE IV OLS FE IV
Per capita remittance 0.05∗∗∗ 0.05∗∗∗ 0.06∗∗∗ 0.09∗∗∗ 0.08∗∗∗ 0.09∗∗∗ 0.01∗∗∗ 0.01∗∗∗ 0.02∗∗∗
(0.007) (0.007) (0.015) (0.013) (0.011) (0.026) (0.002) (0.002) (0.006)
Per capita GDP 0.26∗∗∗ 0.21∗∗∗ 0.19∗∗∗ 0.42∗∗∗ 0.28∗∗∗ 0.26∗∗∗ 0.05∗∗∗ 0.04∗∗∗ 0.04∗∗∗
(0.018) (0.022) (0.021) (0.032) (0.035) (0.033) (0.005) (0.006) (0.006)
Labor force participation 0.48∗∗∗ 0.56∗∗∗ 0.51∗∗∗ 0.24 0.46∗∗ 0.34∗ 0.19∗∗∗ 0.18∗∗∗ 0.19∗∗∗
(0.107) (0.106) (0.117) (0.177) (0.189) (0.2) (0.03) (0.035) (0.038)
Gov expenditure on education 0.09∗∗∗ 0.14∗∗∗ 0.14∗∗∗ 0.03 0.12∗∗ 0.12∗∗ 0.04∗∗∗ 0.04∗∗∗ 0.04∗∗∗
(0.026) (0.027) (0.028) (0.044) (0.05) (0.05) (0.009) (0.01) (0.009)
Number of countries 99 99 99 94 94 94 104 104 104
Observations 814 814 814 736 736 736 976 976 976
R-squared 0.55 0.64 0.63 0.53 0.67 0.66 0.3 0.35 0.31
HAC standard errors are in parentheses. FE and IV models include region dummies.
∗∗∗ significant at 1% level. ∗∗ significant at 5% level. ∗ significant at 10% level.

Table 12
Gender-specific impact of remittances on education (1).
Dependent Pre-primary enrollment rate Primary enrollment rate
Gender Male Female Male Female
Per capita remittance 0.13∗∗∗ 0.34∗∗∗ 0.15∗∗∗ 0.35∗∗∗ 0.009 0.004 0.03∗∗∗ 0.03∗∗
(0.026) (0.064) (0.023) (0.063) (0.006) (0.011) (0.007) (0.014)
Per capita GDP 0.62∗∗∗ 0.55∗∗∗ 0.71∗∗∗ 0.66∗∗∗ 0.05∗∗∗ 0.04∗∗ 0.11∗∗∗ 0.09∗∗∗
(0.074) (0.076) (0.071) (0.079) (0.015) (0.016) (0.02) (0.02)
Gender-specific labor participation rate −0.59 −0.21 0.58∗∗∗ 0.82∗∗∗ 0.07 0.14 0.38∗∗∗ 0.3∗∗∗
(0.527) (0.572) (0.168) (0.169) (0.109) (0.106) (0.057) (0.057)
Gov expenditure on education 0.33 0.35∗∗∗ 0.31∗∗∗ 0.31∗∗∗ 0.05∗∗∗ 0.04∗∗ 0.08∗∗∗ 0.06∗∗∗
(0.101) (0.1) (0.095) (0.094) (0.018) (0.018) (0.023) (0.022)
Number of countries 96 96 96 96 104 104 104 104
Observations 821 821 821 821 976 976 976 976
R-squared 0.52 0.43 0.55 0.47 0.14 0.13 0.36 0.34
Method FE IV FE IV FE IV FE IV

HAC standard errors are in parentheses. Both FE and IV models include region dummies.
∗∗∗ significant at 1% level. ∗∗ significant at 5% level. ∗ significant at 10% level.

and with respect to per capita GDP.
Based on the descriptive statistics, boys’ average primary enrollment
rate is 103.4%8 and girls’ average primary enrollment is 97.4%. This
means the average households’ investment in girls’ primary education
is less than their investment in boys’ primary education in developing
countries. Therefore, the marginal rate of return on primary education
is higher for girls than boys. Hence, the inflow of remittances, which
loosens the budget constraints for households in developing countries,
is invested more heavily in girls’ primary education than boys. This,
in turn, raises the primary gender parity index, though just by a small
amount. On average, a 10% rise in per capita remittance increases the
primary gender parity index by 0.2%. This impact is statistically signif-
icant in all three models: OLS, FE, and IV.
Workers’ remittances increase the gender parity index. The rise in
gender parity index means when households in developing countries
receive remittances from the migrants, they spend a higher propor-
tion of it on girls’ primary education than on boys. This is particu-
larly important because, as Bansak and Chezum (2009) state, if remit-
tances do affect human capital positively, then not only will remittances
affect long-run growth in developing countries, but the opportunities
for women should improve as the female population becomes more
educated in these countries. Table 12 provides gender-specific effects
of per capita remittances, per capita GDP, government expenditure on
education, and gender-specific labor force participation rate on male
and female pre-primary enrollment rates and primary enrollment rates.
On average, a 10% increase in per capita remittances increases male
and female pre-primary enrollment rates by 3.4% and 3.5%, respec-
tively. In contrast, while per capita remittance has no statistically sig-
nificant impact on male primary enrollment rate, on average, a 10%
increase in per capita remittances increases female primary enrollment
rate by 0.3%. This asymmetric impact of remittances on female and
male primary enrollment rate is in line with the positive impact of
remittances on the gender parity index of primary education.
There is a remarkable heterogeneity between the impact of the male
labor force participation rate on male education and the impact of the
female labor force participation rate on female education. While male
labor force participation has no effect on male education investment,
female labor force participation has a positive and significant effect on
female education investment. On average, a 10% increase in the female
labor force participation rate increases female pre-primary and primary
enrollment by 3.1% and 0.6%, respectively. The impacts of the same
explanatory variables on secondary and tertiary enrollment rates are
provided in Table 13.
Results provided in Table 13 show that per capita remittance has a
greater impact on the female secondary and tertiary enrollment rates
than on the male rates. On average, a 10% increase in per capita remit-
tances increases male and female secondary enrollment by 0.7% and
0.9%, respectively. On average, a 10% increase in per capita remit-
tances increases male and female tertiary enrollment by 0.6% and
1.3%, respectively. The impacts of the explanatory variables on male

8
Since it is a gross ratio and it includes the repeaters, it can be higher than
100%.

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S. Azizi Economic Modelling 75 (2018) 377–396

Table 13
Gender-specific impact of remittances on education (2).
Dependent Secondary enrollment rate Tertiary enrollment rate
Gender Male Female Male Female
Per capita remittance 0.05∗∗∗ 0.07∗∗∗ 0.08∗∗∗ 0.09∗∗∗ 0.07∗∗∗ 0.06 0.12∗∗∗ 0.13∗∗∗
(0.009) (0.0176) (0.01) (0.0227) (0.021) (0.038) (0.022) (0.045)
Per capita GDP 0.26∗∗∗ 0.24∗∗∗ 0.41∗∗∗ 0.41∗∗∗ 0.49∗∗∗ 0.48∗∗∗ 0.72∗∗∗ 0.73∗∗∗
(0.023) (0.023) (0.034) (0.033) (0.053) (0.06) (0.062) (0.0625)
Gender-specific labor participation rate −0.46∗∗∗ −0.39∗∗ 0.34∗∗∗ 0.29∗∗∗ −0.12 −0.13 0.1 0.11
(0.157) (0.154) (0.082) (0.085) (0.313) (0.32) (0.157) (0.17)
Gov expenditure on education 0.13∗∗∗ 0.13∗∗∗ 0.28∗∗∗ 0.3∗∗∗ −0.08 −0.1 0.14 0.17∗
(0.033) (0.033) (0.045) (0.044) (0.081) (0.09) (0.097) (0.098)
Number of countries 97 97 97 97 96 96 96 96
Observations 817 817 817 817 709 709 709 709
R-squared 0.71 0.71 0.74 0.74 0.64 0.64 0.76 0.76
Method FE IV FE IV FE IV FE IV

HAC standard errors are in parentheses. Both FE and IV models include region dummies.
∗∗∗ significant at 1% level. ∗∗ significant at 5% level. ∗ significant at 10% level.

Table 14
Gender-specific impact of remittances on education (3).
Dependent primary completion rate Secondary completion rate
Gender Male Female Male Female
Per capita remittance 0.04∗∗∗ 0.05∗∗∗ 0.06∗∗∗ 0.09∗∗∗ 0.07∗∗∗ 0.08∗∗∗ 0.1∗∗∗ 0.12∗∗∗
(0.007) (0.0134) (0.008) (0.019) (0.011) (0.025) (0.013) (0.031)
Per capita GDP 0.17∗∗∗ 0.15∗∗∗ 0.27∗∗∗ 0.25∗∗∗ 0.23∗∗∗ 0.22∗∗∗ 0.38∗∗∗ 0.35∗∗∗
(0.018) (0.017) (0.025) (0.025) (0.029) (0.028) (0.043) (0.041)
Gender-specific labor participation rate −0.04 0.03 0.37∗∗∗ 0.36∗∗∗ −0.52∗∗∗ −0.46∗∗ 0.39∗∗∗ 0.31∗∗
(0.105) (0.1) (0.065) (0.071) (0.198) (0.196) (0.116) (0.128)
Gov expenditure on education 0.06∗∗∗ 0.07∗∗∗ 0.17∗∗∗ 0.18∗∗∗ 0.01 0.02 0.17∗∗∗ 0.19∗∗∗
(0.023) (0.023) (0.033) (0.034) (0.045) (0.045) (0.056) (0.057)
Number of countries 96 96 96 96 92 92 92 92
Observations 774 774 774 774 701 701 701 701
R-squared 0.60 0.59 0.66 0.64 0.64 0.63 0.69 0.69
Method FE IV FE IV FE IV FE IV
HAC standard errors are in parentheses. Both FE and IV models include region dummies.
∗∗∗ significant at 1% level. ∗∗ significant at 5% level. ∗ significant at 10% level.

and female primary and secondary completion rates are provided in than boys’ education.
Table 14.
The results provided in Table 14, confirm that remittance has
5.3. Remittances and HDI
a greater effect on the female primary and secondary completion
rates than on male rates. On average, a 10% increase in per capita
As a robustness check for the impact of remittances on human cap-
remittances increases the male and female primary completion rates by
ital, I examine the effect of remittance on HDI in developing countries.
0.5% and 0.9%, respectively. On average, a 10% increase in per capita
Table 15 provides the impacts of per capita remittances, per capita GDP,
remittances increases the male and female lower secondary completion
government expenditures on education, and per capita health expendi-
rate by 0.8% and 1.2%, respectively. Comparing the elasticities
tures, on total, male, and female HDI.
obtained for male and female education with respect to per capita
As Table 15 shows, on average, a 10% rise in per capita remittances
remittances in Tables 12–14 shows that households in developing
increases total HDI, male HDI, and female HDI by 0.35%, 0.3%, and
countries, upon receiving remittances, invest in girls’ education more
0.4%, respectively. Note that only limited amounts of gender-specific

Table 15
Impacts of remittances on HDI.
Gender Total Male Female
Method OLS FE IV OLS FE IV OLS FE IV
Per capita remittances 0.02∗∗∗ 0.02∗∗∗ 0.035∗∗∗ 0.03∗∗∗ 0.02∗∗∗ 0.03∗∗∗ 0.036∗∗∗ 0.029∗∗∗ 0.04∗∗∗
(0.003) (0.002) (0.006) (0.003) (0.003) (0.007) (0.005) (0.005) (0.01)
Per capita GDP 0.23∗∗∗ 0.18∗∗∗ 0.17∗∗∗ 0.18∗∗∗ 0.14∗∗∗ 0.14∗∗∗ 0.24∗∗∗ 0.18∗∗∗ 0.18∗∗∗
(0.006) (0.007) (0.007) (0.006) (0.007) (0.007) (0.009) (0.011) (0.011)
Gov expenditures on education 0.03∗∗∗ 0.05∗∗∗ 0.05∗∗∗ 0.007 0.03∗∗∗ 0.035∗∗∗ 0.05∗∗∗ 0.06∗∗∗ 0.06∗∗∗
(0.01) (0.01) (0.01) (0.014) (0.011) (0.011) (0.019) (0.015) (0.015)
Number of countries 103 103 103 83 83 83 83 83 83
Observations 1069 1069 1069 394 394 394 393 393 393
R-squared 0.8 0.86 0.85 0.85 0.9 0.9 0.82 0.87 0.86
HAC standard errors are in parentheses. FE and IV models include region dummies.
∗∗∗ significant at 1% level. ∗∗ significant at 5% level. ∗ significant at 10% level.

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S. Azizi Economic Modelling 75 (2018) 377–396

HDI data are available. The number of observations in the first regres-
sion is 1069, and in the second and third regressions, 394 and 393,
respectively. The positive impact of remittance on HDI confirms pre-
vious findings in this paper. Workers’ remittances do improve human
capital in developing countries.
5.4. Remittances and labor force participation
This section examines the impact of workers’ remittances on the
labor force participation rate in the remittance-receiving countries.
Remittances can affect labor force participation in remittance-receiving
countries mainly through two channels: human capital and reservation
wages.
As stated by Amuedo-Dorantes and Pozo (2006) remittances and
the error term in equation (1) may be correlated. Remittances may be
endogenous and their coefficient estimates may be biased. There are
three potential sources for this endogeneity. Omitted variable bias may
exist if remittances are related to wealth which, in turn, may be cor-
related to the labor supply by the recipient. Additionally, there is the
potential of reverse causality as labor supply may influence migrants’
decisions to send remittances home. The third source of endogeneity
can be measurement errors. Therefore, in this section, I use the same
five instrumental variables to address the endogeneity of remittances.
So far, we have concluded remittances increase human capital, espe-
cially health and education outcomes, in developing countries. On the
one hand, increases in human capital can increase labor force participa-
tion. On the other hand, remittances, as a non-labor source of income,
increase reservation wages in developing countries. Increases in the
reservation wage can cause a reduction in the labor force participation
rate. Therefore, the net impact of remittances on labor supply (labor
force participation) is a priori unclear. The important question is: does
the rise in the reservation wage and its negative impact on labor force
participation outweigh the positive impact of remittances on labor force
participation through raising human capital? If so, are the impacts of
remittances on male and female labor force participation rates symmet-
ric? The impacts of remittances on total, male, and female labor supply
are provided in Table 16.
In the IV model provided in Table 16, I use instruments to address
the endogeneity of workers’ remittances and control for the level of
income, education, the ratio of the population living in urban areas,
and geographic region. The results of the impact of remittances on
labor force participation rate suggest that, on average, a 10% increase
in remittances leads to a 0.17% decline in total labor force participa-
tion rate, a 0.03% decline in the male labor force participation rate,
which is not statistically different than zero, and a 0.33% decline in
the female labor force participation rate. These results show that while
workers’ remittances have no impact on the male labor force partic-
ipation rate, they reduce the female labor force participation rate in
developing countries.
There is an enormous heterogeneity in labor force participation
between men and women in developing countries. This heterogeneity
is clearer when we review the descriptive statistics provided in Table 2.
While average labor force participation for men is 76.6% in develop-
ing countries, it is just 50.9% for women. Due to cultural features of
many developing countries, reservation wage for women is more sen-
sitive to non-labor income than reservation wage for men. Therefore,
upon receiving a greater amount of remittances some working-women
will stop working. This is not the case for men in developing countries.
6. Conclusion
Remittances can increase investment in human capital. This impact
is especially important since human capital is a crucial factor in the pro-
motion of growth in developing countries in the long-run. This paper
uses a dataset on workers’ remittances, health outcomes, and educa-
tional attainment of 122 developing countries from 1990 to 2015 and
an innovative instrumental variables estimation strategy to examine the
impact of workers’ remittances on human capital and labor supply in
the developing world. Also, the gender-specific effects of remittances on
health, education, HDI, and labor force participation are investigated.
The results obtained in this paper show that remittances have an
improving and statistically significant impact on health outcomes in
developing countries. I use instruments to address the possible endo-
geneity of workers’ remittances and control for level of income, some
covariates, and geographic region. The results of the impact of remit-
tances on health outcomes suggest that, on average, a 10% increase in
per capita remittances will lead to a 1.5% increase in out-of-pocket per
capita health expenditures, a 1.1% increase in total per capita health
expenditures, 0.3% increase in life expectancy at birth, 1.5% decline in
undernourishment prevalence, 1.9% decline in depth of food deficit,
and 1% decline in prevalence of stunting. Also, remittances have a
strong and statistically significant effect on reducing child mortality
rates in developing countries. On average, a 10% increase in per capita
remittances will lead to a 1% decline in neonatal mortality rate, 1.7%
decline in infant mortality rate, and 1.9% decline in under-five mor-
tality rate. The gender-specific results show that the effects of workers’
remittances on reducing infant and under-five mortality rates are almost
the same for male and female children.
Remittances also have a positive and statistically significant impact
on education in the developing countries. I use instrumental variables
to address endogeneity of workers’ remittances and control for the level
of income, government expenditures on education, labor force partic-
ipation, and geographic region. The results of the impact of remit-
tances on education outcomes suggest that, on average, a 10% increase
in per capita remittances will lead to a 3.5% increase in pre-primary
enrollment rate, 0.7% increase in secondary enrollment rate, and 1.1%

Table 16
Impacts of remittances on labor force participation.
Gender Total Male Female
Method OLS FE IV OLS FE IV OLS FE IV
Per capita remittance −0.024∗∗∗ −0.018∗∗∗ −0.017∗∗∗ −0.0001 −0.003 −0.003 −0.06∗∗∗ −0.04∗∗∗ −0.03∗∗
(0.003) (0.002) (0.006) (0.002) (0.002) (0.004) (0.007) (0.005) (0.013)
Per capita GDP −0.06∗∗∗ −0.06∗∗∗ −0.05∗∗∗ −0.01∗ −0.02∗∗∗ −0.02∗∗ −0.1∗∗∗ −0.1∗∗∗ −0.11∗∗∗
(0.014) (0.012) (0.012) (0.008) (0.008) (0.008) (0.037) (0.025) (0.025)
Primary completion rate 0.11∗∗∗ 0.1∗∗∗ 0.1∗∗∗ −0.04∗∗ −0.025∗∗ −0.02 0.32∗∗∗ 0.23∗∗∗ 0.22∗∗∗
(0.023) (0.021) (0.022) (0.014) (0.012) (0.013) (0.055) (0.055) (0.06)
Urban ratio −0.09∗∗∗ −0.05∗∗∗ −0.07∗∗∗ −0.04∗∗∗ −0.04∗∗∗ −0.05∗∗∗ −0.2∗∗∗ −0.07∗∗ −0.08∗∗
(0.021) (0.017) (0.016) (0.011) (0.011) (0.011) (0.05) (0.035) (0.035)
Number of countries 109 109 109 109 109 109 109 109 109
Observations 1386 1386 1386 1386 1386 1386 1386 1386 1386
R-squared 0.28 0.54 0.54 0.12 0.42 0.4156 0.24 0.61 0.6
HAC standard errors are in parentheses. FE and IV models include region dummies.
∗∗∗ significant at 1% level. ∗∗ significant at 5% level. ∗ significant at 10% level.

393
S. Azizi
increase in tertiary enrollment rate. Remittances not only have a pos-
itive effect on enrollment rates but also have a positive effect on qual-
ity of education: on average, a 10% increase in per capita remittances
will lead to a 2.3% increase in enrollment in private primary schools.
In addition to raising the enrollment rate, remittances increase school
completion rates: on average, a 10% increase in per capita remittances
will lead to a 0.6% increase in primary completion rates and 0.9%
increase in secondary completion rates.
Unlike the impacts of remittances on reducing child mortality rates
which were symmetric between genders, remittances improve girls’
education outcomes more than boys. On average, a 10% increase in per
capita remittances will lead to a 0.2% increase in the primary gender
parity index, the ratio of girls to boys enrolled at the primary level. On
average, a 10% increase in per capita remittances will lead to a 0.3%
increase in girls’ primary enrollment rate while it has no statistically
significant effect on boys’ primary enrollment rate. These results are
in compliance with the positive effect of remittances on primary gen-
der parity. Also, on average, a 10% increase in per capita remittances
will lead to a 1.3% increase in girls’ tertiary enrollment rate while it
has no statistically significant effect on boys’ tertiary enrollment rate.
The positive effect of remittances on girls’ education is greater than the
positive effect of remittances on boys’ education in all case of school
completion rates: 10% increase in per capita remittances rises male and
female primary completion rate by 0.5% and 0.9%, respectively and
rises male and female lower secondary completion rate by 0.8% and
1.2%, respectively.
Since remittances improve health and education outcomes in devel-
oping countries, it is expected to have a positive impact on HDI as well.
On average, a 10% increase in per capita remittances will lead to a
0.3% and 0.4% increase in male and female HDI, respectively.
The net impact of remittances on labor force participation is a pri-
ori unclear. On the one hand, workers’ remittances can increase human
capital investments of poor households, hence increasing the labor sup-
ply. On the other hand, remittances can loosen budget constraints,
raise reservation wages, and, through the income effects, reduce the
labor force participation of remittance-receiving individuals. The results
obtained in the last section of this paper show that remittances have a
negative and statistically significant impact on labor force participation
in developing countries.
I use instrumental variables to address the possible endogeneity of
workers’ remittances and control for the level of income, education, the
percentage of population living in urban area, and geographic region.
The results of the impact of remittances on labor force participation
suggest that, on average, a 10% increase in per capita remittances will
lead to a 0.17% decrease in labor force participation. The results of
gender-specific effects of remittances on labor force participation can
be more informative. While remittances have no statistically significant
Appendix I
Table A1
Correlation matrix between selected variables.
Per capita Per capita Per capita Life Expect
GDP remittance health exp
Per capita GDP 1 0.39 0.91 0.67
Per capita remittance 1 0.45 0.58
Per capita health exp 1 0.66
Life Expectancy 1 −0.55
Undernourish prevalence
Under 5 Mortality
Secondary enrollment
HDI
LFP
All correlations are significant in 0.01 level.
394
Economic Modelling 75 (2018) 377–396
effect on male labor force participation, they reduce female labor force
participation: on average, a 10% increase in per capita remittances will
lead to a 0.3% decline in female labor force participation.
This study contributes to the literature in a number of ways. First,
this paper uses data from 122 developing countries over the period from
1990 to 2015. I am not aware of any other studies which explore the
impact of remittances on human capital and labor supply and uses such
a large dataset. Second, this study uses an innovative new approach
for building instruments to address the endogeneity of remittances.
This study estimates bilateral remittances uses them to create weighted
indicators of remittance-sending countries. These weighted indicators
are used as instruments for remittance inflow to remittance-receiving
countries. selecting economic variables from remittance-sending coun-
tries, rather than from remittance-receiving countries, as instruments is
to ensure the validity of instruments. Using estimated bilateral remit-
tances and to construct the instruments is to ensure that instruments are
strong. This novel approach to instruments can be applied to address
the endogeneity problem while exploring the impact of remittances
on many socioeconomic variables such as education, health, labor sup-
ply, poverty, inequality, growth, and financial development. Moreover,
this approach can be used in both country-level studies and household-
level studies. Finally, this study, in addition to investigating the overall
impact of remittances on human capital and labor supply, explores the
impacts of remittances on male and female human capital and labor
supply using a wide range of gender-specific variables. This allows
researchers to compare the impacts of remittances by gender.
In terms of policy recommendation, the high-income countries
should take further steps to reduce the current transaction costs of
remitting money to remittance-receiving countries. Based on Remit-
tance Prices Worldwide (RPW) reports, the average global cost of remit-
tances went down from 9.12% in the first quarter of 2012 to 7.52%
in the third quarter of 2015. Unfortunately, since the third quarter of
2015, the cost of remittances has not been reduced any further. The
global cost of remittances in the first quarter of 2017 was 7.45%, stay-
ing 4.45 percentage point above the 3% UN SDG goal. The high trans-
action costs act as a type of tax on emigrants from developing countries
who are often poor and remit small amounts of money with each remit-
tance transaction. Lowering the transaction costs of remittances would
not only encourage a larger share of remittances to flow through formal
financial channels but will also help to improve health and education
outcomes in developing countries.
Acknowledgments
I would like to thank Dr. Virginia Wilcox, Dr. Maria Ponomareva,
Dr. Meg Cheng and two anonymous reviewers for their valuable com-
ments. All errors are solely my responsibility.
Undernourish Under 5 Secondary HDI LFP
prevalence Mortality enrollment
−0.63 −0.74 0.73 0.87 −0.44
−0.43 −0.56 0.50 0.50 −0.35
−0.65 −0.77 0.75 0.85 −0.46
−0.87 0.77 0.85 −0.39
1 0.60 −0.56 −0.62 0.44
1 −0.78 −0.87 0.36
1 0.92 −0.36
1 −0.38
1
S. Azizi Economic Modelling 75 (2018) 377–396

Appendix II

Table B1
List of countries.
Afghanistan Dominican Republic Libya Sao Tome and Principe
Albania Ecuador Macedonia, FYR Senegal
Algeria Egypt, Arab Rep. Madagascar Serbia
Angola El Salvador Malawi Sierra Leone
Argentina Ethiopia Mali Solomon Islands
Armenia Fiji Marshall Islands Sri Lanka
Azerbaijan Gabon Mauritania St. Lucia
Bangladesh Gambia, The Mexico St. Vincent and the Grenadines
Belarus Georgia Micronesia, Fed. Sts. Sudan
Belize Ghana Moldova Suriname
Benin Grenada Mongolia Swaziland
Bhutan Guatemala Montenegro Syrian Arab Republic
Bolivia Guinea Morocco Tajikistan
Bosnia and Herzegovina Guinea-Bissau Mozambique Tanzania
Botswana Guyana Myanmar Thailand
Brazil Haiti Namibia Timor-Leste
Bulgaria Honduras Nepal Togo
Burkina Faso India Nicaragua Tonga
Burundi Indonesia Niger Tunisia
Cabo Verde Iraq Nigeria Turkey
Cambodia Jamaica Pakistan Tuvalu
Cameroon Jordan Palau Uganda
Chad Kazakhstan Panama Ukraine
China Kenya Papua New Guinea Vanuatu
Colombia Kiribati Paraguay Venezuela, RB
Comoros Kosovo Peru West Bank and Gaza
Congo, Rep. Kyrgyz Republic Philippines Yemen, Rep.
Costa Rica Lao PDR Romania Zambia
Cote d’Ivoire Lebanon Russian Federation Zimbabwe
Djibouti Lesotho Rwanda
Dominica Liberia Samoa

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