## Online Annex 1. Leaving but Sending Money Back Home: The Joint Effect of Migration and Remittances on Growth and Labor Force

## Source details

**Canonical URL:** [Online Annex 1. Leaving but Sending Money Back Home: The Joint Effect of Migration and Remittances on Growth and Labor Force](https://www.imf.org/-/media/files/publications/reo/whd/2024/october/english/onlineannex1.pdf)

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### Main findings
- Emigration is found to have a negative and statistically significant impact on contemporaneous economic growth in countries of origin.
- Remittances sent by emigrants support contemporaneous economic activity in countries of origin by boosting demand of the remaining population.
- Remittances only partially mitigate the adverse effect of outflow migration, producing a negative net joint effect on output growth.
- Outflow migration is associated with a negative impact on labor force participation; the impact of remittances on labor force participation is insignificant.
- The largest negative net effects are observed in the Caribbean, consistent with a relatively more acute “brain drain” from outward migration of high-skill workers.

### Regional and subgroup differences
- Migration flows to OECD countries from LAC quadrupled in the period 1995–2020.
- Remittances to LAC countries increased almost five times over the same period.
- Subregional heterogeneity:
  - Caribbean shows the largest negative effects on growth and labor force participation.
  - Countries in Central America and the Caribbean face the most significant losses from emigration.

### Quantitative estimates and key statistics
- Impact of a common shock of a 10 percent increase in income in migrants’ destination countries (2SLS shift-share IV results):
  - Emigration rate increase (average across LAC): 0.028 percentage point.
  - Increase in average remittances per capita (average across LAC): US$10.
  - Caribbean-specific effects: emigration rate increase by 0.066 percentage point on average; remittances per capita go up by about $20 on average.
- Numeric results illustrated in Online Annex Figure 1.2 (Impact on real GDP growth; percent) by region (remittance effect / emigration effect / net effect; 95% CI):
  - LAC: -0.093 / -0.049 / -0.189 / -0.021 / -0.009 (as shown in figure)
- Numeric results illustrated in Online Annex Figure 1.3 (Impact on youth LFP change; percent) by region (remittance effect / emigration effect / net effect; 95% CI):
  - LAC (youth 15–24): -0.267 / -0.196 / -0.599 / -0.082 / -0.036 (as shown in figure)

### Effects on youth labor force participation (LFP 15–24)
- The negative impact of outflow migration and remittances on labor force participation is especially important for the youth cohort (15–24).
- The relatively more active segment of the youth workforce is more likely to migrate, contributing to a drop in youth LFP.
- A drop in youth labor participation may not necessarily be negative if it reflects extended education supported by remittances; however, the results suggest the drop is due to outward migration and thus represents loss of productive capacity in origin countries.

### Methodology and robustness
- Estimation approach: novel “shift-share” instrumental variables approach implemented via 2SLS to address endogeneity.
- First-stage instruments: income, unemployment rate, and manufacturing unit labor costs in migrants’ destination countries.
- Instruments are weighted by historical shares of emigration from each country of origin to strengthen exogeneity of the pull-instrumental variables (“shifts”).
- Set of tests support validity of these instruments.

### Policy implications
- Prioritize policies that:
  - Enhance the business environment.
  - Improve security.
  - Lead to the creation of high-quality jobs, particularly for the younger workforce.
- Such policies are especially urgent in countries in the Caribbean and Central America that face the most significant losses from emigration.

*Prepared by Metodij Hadzi-Vaskov, based on Carare and others (2024), “The Joint Effect of Emigration and Remittances on Economic Growth and Labor Force Participation in Latin America and the Caribbean,” IMF Working Paper 24/175.*

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_Source: https://www.imf.org/-/media/files/publications/reo/whd/2024/october/english/onlineannex1.pdf_