The Differential Effect of Internal and External Remittances on Labor Participation and Employment Choices in Pakistan

Abstract

This study scrutinizes the effect of external and internal remittances on the outcomes of the labor market of Pakistan. The study uses data from PSLM – HIES 2018-2019. The labor participation analysis used the IV Probit model, while the labor supply analysis utilized the IV technique. The Multinomial Logit model with endogenous covariates is employed for the employment choice. The results reveal that an individual from a remittance-receiving household is less likely to participate in labor vis-à-vis an individual from a non-receiving household. The external and internal remittance inflow increases the labor supply for the labor-participating individual. In addition, more external remittances increase the likelihood of participation in self-employment than wage employment, which supports the positive effect of remittance inflow on labor supply. The higher internal remittances are associated with an increase in the likelihood of participation in farming. In short, our analysis supports the fact that the effect of external remittance is more pronounced on labor market outcomes than internal remittances. The study’s findings assist the labor economist in observing the obstacles in the labor force participation and policymaker to understand the entrepreneurial level and economic activities in the remittance-receiving households to turn the effect of remittance into a job creator. JEL Classification: C39, C24, J22, F24.