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Remittances and Inequality Oded Stark; J. Edward Taylor; Shlomo Yitzhaki The Economic Journal, Vol. 96, No.

383. (Sep., 1986), pp. 722-740.


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The Economic Journal, 96 (September I g86), 722-740 Printed in Great Britain

R E M I T T A N C E S AND INEQUALITY*
Oded Stark, J. Edward Taylor and Shlomo Yitzhaki The impact of rural out-migration upon the distribution of household income by size in rural areas is central to the relationship between economic growth and equity in Less Developed Countries (LDCs). As long as a large proportion of the population resides in rural areas, rural income inequalities must constitute an important source of overall income inequality. Changes in rural income inequalities therefore can have important implications for both social welfare and economic development. T o the extent that rural incom es are lower than incomes in other sectors, concern for issues of poverty highlight the importance of the rural component of national income distribution. I n addition, a deterioration in the national income distribution caused by an increase in inequalities a t the low (i.e, rural) end may have very different economic implications, particularly with regard to investment and consumption patterns, than a deterioration caused by either an increase in inequality at the high (i.e. urban) end or a rise in inequality between sectors. A focus on the rural income distribution is also a prerequisite for understanding which households, at which segments of the rural income spectrum, would be most affected by changes in migration policy, migrant labour market conditions, or the rural employment and production environment. Despite these considerations and the number of studies they have generated, there is still no consensus about the general or typical effect of migration from rural areas on the distribution of rural income by size. Lipton (1977; 1980) has argued that rural out-migration is likely to lead to a worsening ofvillage income distribution (and implicitly, to a loss in rural welfare). His analysis of migrants' characteristics leads him to believe that migrants' absence from rural areas generates negative externalities of various types; these externalities are responsible for a worsening distribution. I n Lipton's view, migrants' remittances do not compensate for this adverse impact because, in net terms, the remittances are either very small or go disproportionately to those better off. Stark (1978) and Stark and Yitzhaki (1982) present a case where the reverse result obtains. They emphasise equality-enhancing considerations associated with migration such as risk diversification, alleviation of credit constraints and various sharing and filtering-down mechanisms pertaining to migrants' remittances. They also note that an increase in income inequalities does not necessarily imply a social welfare loss, and may be consistent with a situation that is preferred under both general social welfare and Pareto criteria. Three major reasons appear to account for the opposing views regarding

* This paper is a revised version of Harvard University Migration and Development Programme, Discussion Paper No. 16. I t was presented at the Fifth World Congress of the Econometric Society, Cambridge, Massachusetts, August I 7-24, 1985. We are indebted to an associate editor of JOU JOURNAL, to Charles H. Feinstein, to an anonymous referee and to Michael Lipton whose most helpful comments and advice have facilitated improvements of earlier versions of this paper.
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migration and the distribution of rural income: lack of techniques for properly assessing the contribution of out-migration to village income inequality, use of analytical frameworks which preclude unambiguous welfare judgments about , ~ lack of systematic empirical studies focusing changes in income d i s t r i b u t i ~ nand on the appropriate income-earning entities. In the present study a framework is proposed and techniques are developed for analysing the role of net remittances in village income inequalities and village welfare, which in turn constitute important components of rural income inequalities and rural elfa are.^ While we are fully aware of the wide range cf effects other than remittances which migration has upon village incomes and their distribution (see, for example, Stark, 1980), we confine the present study to the remittance element. Related work deals with other effects, e.g., the risk-reducing insurance-enhancing impacts of migration upon production and investment decisions (see Stark and Levhari (1982) and Taylor (1986).) The present study also redresses the paucity of empirical research in this area. Our findings indicate that the distributional impact of migration is not the same for all types of migration or a t all points in a village's migration history. Migration can be conceived of as a diffusion process (Stark and Bloom, 1985): the level of migration a t any point in time is likely to be positively related to past migration by village members. The role of contacts at prospective migrant destinations in encouraging rural out-migration is well documented (see, for example, the survey by Todaro (1980)), and the differential impact of contacts a t different prospective migrant destinations has also been explored (Taylor, 1986). At the beginning of a village's migration history, when few households have established contacts a t a migration destination, the distribution of remittances is necessarily unequal. The role of remittances in the overall household income distribution a t this initial stage depends upon the magnitude of remittances in relation to income from other sources, as well as upon the rankings in terms of total income of remittance-receiving households. When information is costly and scarce, migration is subject to a significant degree of uncertainty. The first households to adopt a migration 'investment' are likely to be from the upper end of the village income distribution, since they are the ones best equipped to assume a high-risk, high-return 'investment'. If remittances to these households are significant, they can have a notable negative effect on the village income distribution by size. However, villagers who have successfully migrated provide valuable information which alters the parameters characterising the subjective distribution of returns to migration for other villagers. The early migrants may also provide direct assistance to new ones which enables the latter to adopt a
However, Stark and Yitzhaki (1982) have proposed a social welfare measure with desirable properties for assessing the effect of changes in income and inequality upon social welfare. This study focuses upon the impact of migrant remittances on income inequalities at the margin, and the role of remittances in overall inequality when migration decisions are taken as given. We do not, therefore, attempt to assess the whole impact of migration (through remittances and other means) on the village income distribution. Such a task would require estimating migration and remittance functions (including within-village remittance functions) in order to predict what migrants' income contributions would have been had they not migrated - adjusting, of course, for sample selection. While we are aware of the usefulness of such an exercise, we have chosen to limit our current scope in order not to add additional complications to a n already somewhat complex analysis.

724 THE ECONOMIC J O U R N A L [SEPTEMBER strategy resulting in a shift of the distribution of returns in their favour (Taylor, 1986). Thus, as the stock ofvillage migrants grows a t a particular location, so too does the propensity of migration by other villagers. The effect of remittances on inequalities over time depends critically upon how migration-facilitating information and contacts become diffused through the village population. If contacts and information are not household-specific, that is, if there is a tendency for them to spread across household units, then migration and receipt of remittances by households at the lower end of the income distribution is likely to occur. This would erode and possibly reverse any initially unfavourable effects of remittances on income inequality. Analysis of remittances is a promising means for studying an important impact of migration upon rural income distribution. If remittances represent a very small part of income for village households, then the distribution of income by size will be altered by them only slightly. If, at the other extreme, remittances comprise a very large share of household income, then the distribution of remittances in large part will determine the distribution ofvillage income. Most likely, perhaps, remittances may be sufficiently large not to be ignored, yet must be viewed in the context of other household income sources. I n this paper numerical coefficients are assigned to the role of net remittances in village income inequality using household data from two Mexican villages. The data afford a unique opportunity to compare the effects of remittances from both internal and international migrants on income inequality in villages that are at different stages of their migration histories. One village has relatively little Mexico-to-United States migration experience and few Mexico-to-United States migrants per household, and possesses significant migration experience at Mexican destinations. The other village has a long history of migration into the undocumented labour markets of Southern California. The current study gives rise to some quite interesting policy considerations. If remittances do not have a neutral impact upon the distribution of income by size, a government with a stand in favour of reducing inequalities may wish to alter their magnitude. While political and institutional considerations may render interference amounting to a major alteration impractical, modifications a t the margin are feasible. Implications for migration and rural development policy arise as well. For example, a change in United States-to-Mexico remittances might result from changes in U.S. immigration laws. Agricultural price supports and subsidies can have not only a direct bearing on the non-remittance component of farm incomes, but also an indirect effect on the remittance component to the extent they influence migration and remittance behaviour. And labour market policies which alter the earnings profile- and hence, the potential remittances - of internal migrants are likely to affect the domestic remittance component of village incomes. The methodology developed and tested here deals precisely with these issues. I t will be used to explore the effect of a small change in each income category, including remittances from both internal and Mexicoto-United States migrants, upon village indices of inequality. The remainder of this paper is organised as follows. Section I presents the framework which will be used to analyse the role of remittances in the distri-

I 9861 REMITTANCES AND INEQUALITY 725 bution of village income. The effect of remittances upon income inequality as measured by the Gini index will be shown to depend upon three terms: the magnitude of remittances relative to total village income; the inequality of remittances; and the (Gini) correlation between remittances and total income. I n Section 11, Mexican village household data are utilised to derive Gini indices empirically and to highlight the role of remittances from both internal and international migrants in the level and distribution of village income. Section I11 assesses the effect of small changes in remittances upon rural income inequality and social welfare. Section I V summarises our main findings and offers some conclusions. I. A N A L Y T I C A L F R A M E W O R K

Let y,, ..., y, represent K components of household income and yo represent total household income such that yo = C yk. Since the income-receiving unit of analysis in this paper is the household, in the discussion that follows 'income' will refer to household income, and 'income component k' will refer to household income component k. The components of income may be positive (e.g. migrantto-household remittances, regular income) or negative (household-to-migrant remittances, taxes). We follow Stuart (1954) and, more recently, Pyatt, Chen and Fei (1980) and Lerman and Yitzhaki (1985) by writing the Gini coefficient for village incomes as a function of the covariance between income and its cumulative distribution, that is,

a,

where Go is the Gini coefficient of total village incomes, po denotes village mean income and F(yo)is the cumulative distribution of total incomes in the village. Utilising the properties of the covariance, equation ( I ) can be written as

where Sk is the share of component k of village incomes in total village income, i.e. Sk = Gk is the Gini index corresponding to income component k; and

R, is the Gini correlation of component k with total inc0me.l As shown by


Schechtman and Yitzhaki (1985), the properties of the Gini correlation are a mixture of the properties of Pearson's and Spearman's correlation coefficients. Especially note the following: (a) - I < Rk < I . R, is equal to zero if yk and yo are independent, and is equal to I ( - I ) if yk is an increasing (decreasing) function of total income. (This is similar to Spearman's rank correlation.)
1 Note that R, is a correlation coefficient between two variables y, and yo. For simplicity of exposition, we have omitted the subscript zero. 2I

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( b ) If yk and yo are normally distributed variables, then Rk = p, the Pearson's correlation coefficient. Hence Rk is appropriately termed the Gini correlation.
Equation (2) enables us to decompose the role of remittances in inequality into three easily-interpretable terms: ( a ) the magnitude of remittances relative to total income; ( b ) the inequality of remittances; and ( c ) the correlation of remittances with total income. Using this formulation, the effect of a small percentage change in any one component on the Gini of total income can be calculated. Taking household labour and production decisions as given, consider an exogenous change in each household's income component j by a factor of e, such that y j ( e ) = ( I + e ) yj. Then1

where Sj, Gj, Go and Rj denote thejth income share, Gini coefficients and Gini correlation before the marginal income change. Dividing by Go, we obtain

Equation ( 5 ) states that the relative effect of a marginal percentage change in component j upon inequality equals-the relative contribution of component j to overall inequality minus the relative contribution to total income. I t is easy to see that as long as remittances play some role in village income, then ( I ) If the Gini correlation between remittances and total income, Rj, is negative or zero, an increase in remittances necessarily decreases inequality. ( 2 ) If the Gini correlation is positive, then the impact on inequality depends upon the sign of Rj Gj - Go. A necessary condition for inequality to increase is that the inequality of remittances must exceed the inequality of total household income: Gj > Go (since Rj < I ) . Further insight into the meaning of equation ( 5 ) can be gained by rewriting (5) as2

where MR is a weighted average of the marginal importance of income from source j in households' total income, calculated over all possible pairs of households and weighted by income differences; while AR is the average importance of income from source j in households' total income. Equation ( 6 ) states that the effect of a small percentage change in income from sourcej on inequality depends on the difference between the importance of this income in households' total income at the margin and its average importance in households' total income. The actual estimation of equations ( 2 ) - ( 6 ) is done by estimating the cumua

For the derivation of (4), see the Appendix. See Appendix for derivation of equation (6).

I 9861 REMITTANCES A N D INEQUALITY 727 lative distribution by the rank divided by the number of observations, and calculating the relevant covariances using TSP.

11. M I G R A T I O N A N D I N C O M E D I S T R I B U T I O N I N

TWO MEXICAN VILLAGES

The stage is now set for empirically deriving decomposed Gini indices. This will be accomplished using data from two Mexican villages. Three components of village income and hence of income inequality are considered; remittances from internal migrants; remittances from international (Mexico-to-United States) migrants; and non-remittance income. Data for constructing the decomposed Gini indices for the two villages were collected in a survey carried out in the PBtzcuaro region of the state of MichoacBn, Mexico, approximately 2,000 kilometres south of the Mexico-Arizona border. The sample consists of 425 adults 13 years of age or older representing the total adult population in 61 households, approximately 10 O/b of the total number of households in each village. Detailed data were collected on each individual's characteristics, labour allocations, and contributions to household income in 1982. Data were also gathered on income from household-farm production (farming, handicrafts, fishing, livestock, commerce, etc.) and rental inc0me.l Income contributions in the form of remittances from household members who migrated, either within Mexico or to the United States, are all net of reverse (household-to-migrant) flows and of direct migration costs. A 'migrant ' is defined as an individual who left the village at any time during 1982 for the purpose of working. The shortest term of migration in our sample is approximately three weeks. Selected characteristics of households in the two village samples are summarised in Table I . Although the villages are only two kilometres apart and are statistically similar in terms of family size, the differences in their migration patterns are significant. Only 26 % of Village I households had at least one family member working in the United States in 1982. By contrast, Village 2 households show evidence of a long-standing tradition of Mexico-to-United States migration. 70 % of households in this village had family members who were Mexico-to-United States migrants in 1982, and these households had an average of 2.8 Mexico-to-United States migrants each, compared to an average of I -7 per Mexico-to-United States migrants per household in Village I . As a result, Mexico-to-United States migrant remittances constituted a much larger share of total income in Village 2 households (27 %) than in Village I households (9 %). This difference is significant at the 0.005 level. Differences in the roles played by Mexico-to-United States migration in the two villages are also evident in the experience and in certain personal characAgricultural income is calculated as the total value of crops produced, minus the cost of all material inputs, physical capital inputs (mechanical services, animal services, land) and hired labour inputs. Rental income includes land rents and payments for capital services received by the household. Income from livestock includes the value of net additions to animal stocks as well as sales of animals and animal products. Net revenues from handicrafts, wood gathering, fishing and other household-farm activities is calculated in a manner analogous to agricultural income.

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Table I Selected 1982 Household and Migrant Characteristics


Household averages Adult family size Share of families with at least I Mexico-to-United States migrant (%)** Average number of Mexico-to-United States migrants per Mexico-to-United States migrant family** Share of Mexico-to-United States migrant remittances in total household income (%)** Share of families with at least I internal migrant (%)* Number of internal migrants per internal migrant family** Share of internal migrant remittances in total household income (%) 1982 Mexico-to-United States migrant averages Average U.S. experience**t Share of year spent in United States (%)** Sex (male = 100, female = o)** Age Years of completed schooling Remittances 1982 Internal migrant averages Internal migration experience*? Share of year outside village (%) Sex (male = loo, female = o) Age Years of completed schooling Remittances Village 6.8 25.8 1'7 9' 1 71'0 1'9
22.0
I

Village

2'4 65.8 92'9 32.0 4'2 472'0

5'6 95.8 55'4 27'9 4'0 354'7

* **

Difference between villages is significant at the 0.10 level. Difference between villages is significant at the 0.05 level.

t Migration experience is measured as the number of years in a person's adult life inwhich he or she has spent all or part of the year as a labour migrant.
teristics of the migrants themselves. Mexico-to-United States migrants from Village 2 are significantly more experienced in Mexico-to-United States migration than their Village I counterparts, having worked in the United States in each of an average of 5.6 years of their adult life, compared with 2.4 years for Village I Mexico-to-United States migrants. Village 2 hlexico-to-United States migrants also spent a larger share of the year in the United States during 1982 (96 %, compared with 66 % for Village I). The average Mexico-to-United States migrant from Village I is predominantly male; however, males are not significantly more likely to migrate to the United States than females in thevillage which is more experienced in Mexico-to-United States migration. Mexico-toUnited States migrants in both villages are young, averaging 28 to 32 years of age, and they have little formal education, averaging slightly more than 4 years of completed schooling. Average 1982 remittances per Mexico-to-United States migrant to households in Village I are somewhat higher than those to Village 2 households (US$472 and US$355, respectively), but this difference is not statistically significant.

729 Internal migration plays an important role in labour allocations in both villages. A significantly larger share of households participates in internal migration in Village I (71 %) than in Village 2 (46.7 %). However, the average number of internal migrants per internal migrant family is significantly larger in Village 2. Thus, the difference between the shares of internal migrant remittances in households' total income in the two villages is not statistically significant. Village 2 internal migrants, like Village 2 international migrants, are significantly more experienced than their Village I counterparts. The average I 982 internal migrant from Village 2 had migrated internally in 6 years of his or her adult life, compared to 3.6 years for Village I internal migrants. Village 2 internal migrants spent an average of 89 % of the year outside the village, compared with 75 % for internal migrants from Village I . Internal migrants, like Mexico-to-United States migrants, are young, averaging 28 to 29 years of age. They are no more likely to be males than females in either village. They are significantly better schooled than their Mexico-to-United States counterparts, averaging at least some post-primary schooling. The average internal migrant contributed US$24g to Village I households and US$446 to Village 2 households; as with Mexico-to-United States migrant remittances, however, this difference is not statistically significant. We now turn to an analysis of the composition of household income inequality in each of the two villages, and then explore the effect of small changes in the magnitude of income from each source upon the village income distributi0ns.l The three terms comprising the effect on inequality as per equation ( 2 ) of (a) remittances, both internal and foreign, and (b) other household income were estimated for each of the two villages. All income denominated in Mexican currency was converted to U.S. dollars using the average 1982 exchange rate of 55 pesos to the dollar.
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11.I . The Composition o f Income Inequality A decomposition of income inequality in the two villages is provided in
Table 2. The Table presents an ex-post, 'snapshot view' of the components of village income inequalities. The first column (S) presents the share of each income source in the total income of each village. Non-remittance income comprises well over halfof all income in the two villages (67 % and 60 %, respectively). The contribution of migrant remittances to household income, however, is significant. I t ranges from 33 % of total income in the first village to 40 % in the second. The Gini coefficient (G) in the first row for each village captures the distribution of village income by size if migrant remittances are ignored. By comparing these to the Ginis corresponding to total income (bottom row for each village), we obtain a measure of the overall impact of remittances upon village income inequality. I n each village, income inequalities decrease when migrant remitAlthough the computations that follow are based on income per household, at a referee's request we also experimented with using a measure of per capita household income (household income divided by the number of household members 1 3 years of age or older who spent any part of the year 'at home'). There was no change worth noting, however, in any aspect of our results. This illustrates the robustness of the analysis with respect to the choice of income-receiving unit.

730 THE ECONOMIC JOURNAL [SEPTEMBER tances are considered. The Village I Gini drops three percentage points when migrant remittances are included (from 0.43 to 0.40)) while the Village 2 Gini declines 7 percentage points (from 0.53 to 0.46). In the introduction we argued that the impact of migrant remittances upon income inequalities tends to become more favourable (or less unfavourable) as migration opportunities spread throughout the village. A comparison of the impact of overall remittances upon inequalities in the two villages provides support for such a relationship. The decline in inequality due to migrant remittances is higher in Village 2, where the frequency of labour migration by persons I 3 years of age and older is higher both in terms of the probability of migrating in 1982 (0.44, compared with 0.26 for Village I ) and in terms of the average share of the year spent in migration (0.41, compared with 0.19 for Village I ) . Table 2 1982 Village Income Inequality
Gini Contribution Gini correlation to Gini Percentage coefficient with total coefficient share in for income income of total Gini of source rankings income total (G) (R) (SGR) income

Composition

of

Village and income source Village I : Non-remittance income Domestic remittances United States-to-Mexico remittances Total income Village 2: Non-remittance income Domestic remittances United States-to-Mexico remittances Total income

Share in total household income

(s)

A richer analysis of the distributional impact of remittances as migration 'spreads' across village households can be carried out by considering separately the effect of United States-to-Mexico remittances and internal remittances on income inequality. Income shares and Gini indices of inequality corresponding to the migration income components- domestic remittances and remittances by Mexico-to-United States migrants- appear in the columns labelled S and G, respectively, in Table 2. In Village I , slightly more than half of all remittances originate from internal migrants, while in Village 2 most remittances accrue from Mexico-to-United States migrants. The distribution of each type ofmigrant remittance is considerably more skewed than the distribution of non-remittance income in each of the two villages. However, the distributions vary considerably between villages. I n Village I , where relatively few households send migrants to the United States, the distribution of remittances from Mexico-to-United

I 9861 REMITTANCES A N D INEQUALITY 73' States migrants is most highly skewed (Gini = 0.90). The distribution of remittances from internal migrants in this village is also unequal, though considerably less so than United States-to-Mexico remittances (0.71). I n contrast, Village 2 United States-to-Mexico remittances are more equally distributed than internal migrant remittances (Gini values of 0.68 and 0.86, respectively). However, as equation (2) shows, the distribution of income from a particular source and the share of that source in total income reflect only part of the contribution of the income source to overall income inequality. The remaining contribution depends on where the recipients of different categories of income are located in the overall village income distribution. Column R of Table 2 presents the (Gini) correlations between each income category and total income. The variation in these correlations in the two villages is striking. In Village I , where United States-to-Mexico remittance inequality is high, these remittances are also highly correlated with total income (R = 0.86). Thus, it is primarily households at the upper end of the income distribution that receive remittances from Mexico-to-United States migrants in this village. Internal migrant remittances, in contrast, have a low correlation with total income in Village I (0.33)) indicating that internal migration is widely accessible across income groups. The importance of the (Gini) correlation is evident when we compare the percentage contribution of each income category to village income inequality. Although the two types of remittances represent similar shares of total income in Village I , internal migrant remittances account for only a small part of total inequality (10.2 %) compared to United States-to-Mexico remittances (29.9 % ) . I The story is entirely different for Village 2, with its well-developed migrant networks to the United States. Here, not only are United States-to-Mexico remittances distributed more equally than internal migrant remittances; their correlation with total income is small as well (0.36). Apparently, even households at the lower end of the income spectrum in this village have obtained access to United States labour markets. As a result, United States-to-Mexico remittances account for only I 1.2 % of total income inequality. Furthermore, remittances from internal migrants now play a relatively unequalising role. Even though they are slightly more evenly distributed than United States-to-Mexico remittances, they are highly correlated with total income in this village. Thus, internal migrant remittances contribute a relatively large amount to overall income The apparent explanation for this finding is that internal inequality (29.2 migrant remittances contain a large returns-to-schooling component, and the distribution of education across income groups varies significantly between the two villages. Remittances by internal migrants with secondary and postsecondary schooling are more than 5 times greater, on average, than remittances by internal migrants with only primary schooling. This difference is significant

x).

The finding that migrant remittances account for a positive share of total inequality in the two villages is perfectly consistent with our earlier finding that remittances on the whole reduced income inequalities. When mixed with non-remittance income total remittances dilute the inequalities associated with the former. Yet, unless the correlation between remittances and household total income is negative, remittances must account for a non-negative share of total income inequality. This is analogous to a simple chemical experiment in which a highly concentrated solution is mixed with a less (but still positively) concentrated one. The resulting mixture is less concentrated than the original, but there is no doubt that the added solution is responsible for part of the concentration of this final mix.

[SEPTEMBER 732 THE ECONOMIC JOURNAL a t the 0.005 level. By contrast, rewards to schooling are small for Mexicoto-United States migrants who, typically, must work illegally in low-skill, labour-intensive jobs. The latter is evidenced by the average education levels of Mexico-to-United States migrants reported in Table I , which are significantly lower than average schooling levels of internal migrants. I n fact, of 34 migrants in the sample with post-primary schooling, only six were observed as Mexicoto-United States migrants in 1982, and these actually remitted less, on average, than less-educated Mexico-to-United States migrants. Because of the large returns-to-schooling component in internal migrant remittances, the distribution of education across household income groups has an important influence on the distribution of internal migrant remittances as well as on the latter's impact on income inequalities. I n Village 2, education is concentrated significantly in high-income households: the average income of households in which a t least one family member has secondary or post-secondary schooling is 2-97 times that of less-educated households, and this difference is significant at the o-OOIlevel. By contrast, there is no significant difference in income between educated and less-educated households in Village I . This latter result is particularly strong when one considers the large returns to schooling that are included in the income of educated households. A still clearer picture of the differences in education distribution between the two villages can be gleaned by considering 1982 schooling investments. In Village 2, where the distribution of schooling was already skewed in favour of high-income households, the latter were significantly more likely to send family members to secondary and postsecondary schools in 1982 than were households at lower income levels. The average income of Village 2 households that supported secondary or postsecondary students in 1982 was 57.4 percent higher than the average income of households that did not invest in such schooling. By contrast, there was no statistically significant relationship between household income and schooling investments in Village I households. I t is likely that in Village 2 the presence of attractive Mexico-to-United States migration opportunities, which increase the opportunity cost of sending a family member to school, discourage all but relatively high-income households from investing in schooling for family members. I n Village I , however, the scarcity of Mexico-to-United States migration opportunities means that the opportunity cost of sending a child to school is relatively low. Thus, given the high joint return to schooling and internal migration, investment in schooling appears to be perceived by middle- and lower-income households in Village I as a relatively effective vehicle for achieving long-term income gains.

11.2. The Impact o f Changes in Remittances on Inequality The preceding sub-section focused on the contribution of remittances to income inequalities. The present sub-section takes the analysis a step further and asks what effect a small percentage change in specific categoriesof income would have on inequality in the two villages. Quite often, sober realism compels policy makers to stop short of attempting to bring about dramatic changes.

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The impact of a small change in each of the three income components in the two villages is given in Table 3.l I n each village a I % increase in farm (nonremittance) income for all households reduces income inequalities, although the improvement is small in Village 2 compared to Village I ( - 0.006 % and - 0.07 %, respectively). The difference between the impacts of small changes in the remittance income components upon inequalities in the two villages is large. A I % increase in remittances by Mexico-to-United States migrants increases inequalities in Village I (by 0.14 %) but reduces inequalities in Village 2 (by -0.10 %). Conversely, a I % increase in remittances from internal migrants reduces inequalities in Village I (by - 0.07 %) while enhancing inequalities in Village 2 (by 0.1 I %). Thus, the impact of marginal changes in remittances upon inequality as captured by the Gini coefficient is not unequivocal. I t depends Table 3 % Increase in Household Income from Dzxerent Sources on Income Inequalities
Absolute change in Gini coefficient* Percentage change in Gini coefficient

Efects of a

Village and income source Village I : Non-remittance income Domestic remittances United States-to-Mexico remittances Village 2: Non-remittance Domestic remittances United States-to-Mexico remittances

- 0.28 -0.29 0.57 - 0.03 - 0.48


0.50

critically upon where the recipients of remittances are situated in an overall village income distribution, the share of remittances in village incomes, and the distribution of the remittances themselves. These considerations, in turn, are closely tied to the way in which opportunities for different types of migration are distributed across village households, as well as to the distribution of human capital (education and skills), which can significantly influence the distribution of remittances from particular destinations.
The derivatives reported in Table 3 represent the initial impact of changes in income from particular sources upon village income inequalities, i.e. before any possible adjustments in household labour and production plans in response to these income changes occur. If labour and ~roduction decisions adjust to a marginal change in income from a particular source, the magnitude of aG,,/ae might be affected somewhat; however, we consider it unlikely that the sign of this derivative would be altered. I n fact, if part of income gains are invested in productivity enhancing, income-generating activities, the secondary effects of income changes would tend to strengthen the conclusions drawn below. For some evidence in support of this possibility, see Lucas and Stark (1985). In this case, the results reported below would represent the minimum impact of marginal percentage income changes on inequality. Only in the extreme case where total household income declines in response to a marginal increase in income from a particular source would the signs of our results be altered.

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111. R E M I T T A N C E S A N D S O C I A L W E L F A R E

[SEPTEMBER

Changes in inequality do not have unambiguous implications with regard to social welfare. For example, a small increase in the income of any member of society, leaving all other members' incomes unchanged, may result in a worsening of inequalities, depending upon the recipient's initial relative income position. Yet, if we rule out envy as an argument in utility, this event is associated with an unambiguous welfare gain according to social welfare and Pareto criteria. I n this section we ask what effect a small change in income from source k (e.g. remittances, or remittances from a particular destination) will have on social welfare in each of the two villages. A social welfare function for invoking direct welfarejudgements in this type ofsituation has been proposed by Yitzhaki (1982) and Stark and Yitzhaki (1982). It is of the form:

W = F(I -Go),

(7)

where F is mean village income. This function has the properties that either an increase in the income of any one member of society or a transfer of income from a rich person to a less rich person will result in an increase in W, independent of the shape of the initial income distribution. Using this measure of social welfare, we can assess the impact of a small percentage change in income from source k on village welfare by taking the derivative of W with respect to e where, as before, the new income from source k, yk(e),is defined as yk(e) = ( I i-e) yk, e > o, and yk denotes actual income from source k. That is The derivative of mean income with respect to e is E?,, the mean income from source k, while the derivative of Go is given by equation (4). By substituting these derivatives into (8) and rearranging terms we get

where Rk is the Gini correlation of income from source k with total income, and Gk is the Gini index of income component k. Equation (9) states that the effect on W of a small percentage increase in yk consists of two components: a positive income effect equal to Fk,and a distributional effect, FkRkGk, whose sign depends on the effect of income from source k on inequality, which is given by the sign of Rk. Since Rk and Gk are less than one, the income effect is always larger than the distributional effect. The intuitive explanation for this result is that the welfare function (7) increases if the income of one (or several) members of society increases leaving other incomes unchanged. The importance of the distributional effect is that it can significantly enhance or weaken the income effect. Table 4 summarises the net welfare changes in the two villages corresponding to a I % change in each category of income. The welfare impacts vary greatly among income categories and between the two villages. The most dramatic improvements in welfare come as a result of an increase in non-remittance income (0.72 % and 0.61 %, respectively, for the two villages). Welfare gains from a marginal increase in remittances from internal migrants in Village I and

I 9861 REMITTANCES AND INEQUALITY 735 from Mexico-to-United States migrants in Village 2 are also large (0.22 % and 0.30 %, respectively). Smaller gains result from a marginal increase in remittances from Mexico-to-United States migrants in Village I (0.06 %) and from internal migrants in Village 2 (0.09 %). The relative magnitudes of these welfare changes are not surprising in light of the findings reported in Section 11. Increases in non-remittance income are negatively related to inequality, and this category occupies the largest share of total household income in both villages. Although changes in internal migrant remittances in Village I and Mexico-to-United States migrant remittances in Village 2 are also negatively related to inequality, these categories claim smaller shares of village income. The magnitude of their marginal effect on village welfare stems primarily from their role as income-equalisers in the respective

Table 4

Village Welfare Effects of a I % Increase in Household Income from Dzfferent Sources


Percentage change in Stark-Yitzhaki welfare index* 0.72
022

Village and income source Village I : Non-remittance income Domestic remittances United States-to-Mexicoremittances Village 2: Non-remittance income Domestic remittances United States-to-Mexicoremittances

0.06 061 0.09 030

The figures reported in the Table are derived by setting e equal to 0-01.

villages. Finally, we observed in Table 3 that United States-to-Mexico remittances and internal migrant remittances have unfavourable distributional impacts on income in Villages I and 2, respectively. This adverse distributional effect is just offset by the positive mean income effect, resulting in only a modest welfare gain in each case. We are aware of the possibility that some of our welfare oriented empirical results are likely to be quite sensitive to the choice of the welfare function. We believe that in terms of both social welfare and Pareto-optimality considerations, the desirable properties of the welfare criterion used in the present study make this criterion a reasonable candidate for assessing the impacts of policy changes on village welfare. Moreover, of the six marginal welfare changes reported in Table 4, four are consistent with quite a number of social welfare functions, i.e., those changes for which income increases are both positively related to mean income and negatively related to inequality. (See Yitzhaki ( I 983).) With regard

736

THE ECONOMIC JOURNAL

[SEPTEMBER

to the remaining two changes (United States-to-Mexico remittances in Village I and internal migrant remittances in Village r), the impact upon welfare clearly depends on the weight attached to equity versus mean income considerations. It can be shown1 that the welfare effect of an increase in Mexico-to-United States migrant remittances to Village I and in internal migrant remittances to Village 2 is positive as long as the weight attached to equity is no more than 4.3 times the weight attached to mean income, and negative for equity weights greater than 4.3. If, as pointed out above, envy is ruled out as an argument in the household utility function, the reasons for selecting such a large equity weight may not be too compelling.
IV. C O N C L U S I O N S

The impact of migrant remittances on the rural income distribution by size appears to depend critically on a village's migration history and on the degree to which migration opportunities are diffused across village households. I t also depends on the returns to human capital embodied in remittances, and the distribution of potentially remittance-enhancing skills and education. Our empirical findings demonstrate that in a village where many households contain internal migrants but few have experienced migration to the United States, remittances from Mexico-to-United States migrants have a profound unequalising impact on village incomes, while remittances from internal migrants have a favourable effect on the village income distribution. By contrast, United States-to-Mexico remittances have an equalising impact on incomes in a village with a long history of sending migrants to the United States and hence a more ready access to United States labour markets. Remittances from internal migrants, however, embody a large returns-to-schooling component, and education is highly correlated with household income in Village 2. Hence, internal migrant remittances account for a comparatively large share of inequality in this village. Where returns to schooling constitute a large part of remittances, as in the case of internal migration, the influence of remittances on the village income distribution depends crucially on the distribution of human capital investments across household income groups. The welfare implications of remittances depend on the weight attached to distributional versus mean income objectives. For the welfare function used in the present study, an unambiguous welfare gain is associated with both types of remittances in the two villages. Nevertheless, the inequalising impact of United States-to-Mexico remittances in Village I and internal migrant remittances in
If we let a represent the weight attached to equity versus mean income, the welfare function (7) becomes : W = q~-a~,). The percentage change in W with respect to a marginal change in e, is now:

Setting this equal to zero, we can solve for the level of for which a change in el, begins to have a nonpositive impact on welfare: & = x/R,G,. Substituting in the values of R, and G, corresponding to United States-to-Mexico remittances in Village I and domestic remittances in Village 2, we find that equals 4.3 and 4 . 1 , respectively, for the two villages.

19861

REMITTANCES AND INEQUALITY

737

Village 2 significantly dampen welfare gains associated with these income sources, while income-equalising internal remittances in Village I and Mexicoto-United States migrant remittances in Village 2 are associated with considerably larger welfare gains. The high human capital content of internal migrant remittances, together with the high correlation between income and human capital investments in Village 2, highlight the importance of the uses of remittances and other household income in shaping the future profile of household incomes. While in the short to medium run the distributional impact of migrant remittances is closely linked to the rate of diffusion of migration opportunities, the long-term effect of remittances on village income inequalities depends on how remittance-generated income gains are allocated among productive and non-productive ends. Yet in real life, the short run always matters. And, by definition, the long run is the integral of short runs. Harvard University and Bar-Ilan University The Urban Institute The Hebrew University f receipt ofjnal typescript: February 1986 Bate o APPENDIX

A. Derivation o f Equation (4)


The purpose of this part of the Appendix is to prove that the derivative of the overall Gini with respect to a uniform percentage change in income source j is equation (4) in the text. Let Go be the Gini before multiplying each household's income from source j by ( I +e), and let G(e) be the Gini after the multiplication. From (2), we know that:
K

The mu1tiplication ofincome sourcej by ( I + e) does not affect Gk (k = I , ...,K). However, Rk is a function of the ranks of total income. The rank function is not well defined for incomes that are equal. I n order to avoid the problem created in this case, we assume that incomes vary slightly across households (aside from households whose income from source j is zero). Then, Rk does not change for k = I , ..., K. Hence, G(e) = By definition,
luk
k+i

k=l

x S d e ) Rk Gk.
luk
K k=l

for k

+j

while for source j,


= K
(1

+e)luj

k=l

2 pk+epj

738 Let us now evaluate:

THE ECONOMIC J O U R N A L

k= 1

z[Sk(e)-Ski RkGk.
Sk(4 -Sk
= K
k=l

For k

Pj,
Pk

-- Pk
K k=l

C ~ c k + ~2 ~ ~k j
=

This simplifies to: Sk(e)-Sk Now for k


=j

- eSkSj I +eSje

eSj - eSj2 Sj(e)-Sj = I +eSj. Substituting ( A2 ) and ( A3) into ( A I ) , we have:

Using ( A4 ) , we can examine the derivative:

S. + e-to lim Rj Gj I + exj


----2_

Hence,

aGo/aej = Sj(Ri G j - G o ) .

( A5)

Subject to the required modification, equation ( A 5 ) appears in the text as equation ( 4 ) .When the component is a decreasing function of total income, as for example with a progressive or proportional tax paid by all units, then as pointed out previously Rj will equal - I , making the derivative ( A5 ) negative.l When yj is constant across households, Rj will equal o, implying that the share of source j in the total Gini is o. In this case, as yj rises as a share of total income, overall inequality will fall.
Although the absolute value of taxes rises with income, viewing taxes as negative income leads to a negative correlation between taxes and total income.

I 9861

REMITTANCES AND INEQUALITY

739

B. Derivation o f Equation 6
" ... < yn be incomes ordered in increasing order and let yk(y;) be Let y1 < y income from source k associated with income yk. Note that the yk(y:) are ordered according to y : and that yi = yLk +yi, where yLk denotes income from sources other than k. Rewriting equation (5) in the text, we have:

where e > o is defined by yk(e) = ( I +e) yk. Using the definitions of#,, Gk and Rk, that is 8-- k

- YLIYO
=
COV

Gk

CYL,

F ( ~ k )/gk, l F(~k)]~

and

Rk

= COV [YLY F ( ~ O ) ] / c O v [ ~ k ,

substituting into (A 6) and rearranging we get

But

Cov [yo,F(yo)] can be written in a similar form. Substituting into (A 7) we get

where

and

Let is the marginal importance of income from source k in total household Then < I . I t is income calculated using incomes y; and y;. Its magnitude is - I < easy to check that it is equal to I if all the differences y;- y; are composed of income from source k, it is equal to zero ifyk(y;) = yk(y;), and it is equal to - I if yk(y;) -yk(y;) = yi-y;. Therefore, the first term in (A8) is the marginal importance of income from source k in total household income weighted by income differences and calculated by using all possible pairs of incomes. If we let b, = y,(y;)/y;, then bi is the share of income from source k in the total income of

household i, and the second term is an average of this share across households, weighted by household incomes.

Lerman, R. and Yitzhaki, S. (1985). 'Income inequality effects by income sources: a new approach and applications to the U.S.' The Review of Economics and Statistics (February), vol. 67, no. I , pp. 151-56. Lipton, M. (1977). W h y Poor People Stay Poor: A Study of Urban Bias in World Development. London: Temple Smith. (1980). 'Migration from rural areas of poor countries: the impact on rural productivity and income distribution.' World Development, vol. 8, no. I, pp. 1-24. Lucas, R. E. B. and Stark, 0. (1985). 'Motivations to remit.' Journal of Political Economy, vol. 93, no. 5, pp. 901-18. Pyatt, G., Chen, C. and Fei, J. (1980). 'The distribution of income by factor components'. Quarterly Journal of Economics, vol. 95, no. 3, pp. 451-73. Schechtman, E. and Yitzhaki, S. (1985). 'A measure of association based on Gini's mean difference.' Hebrew University, .. The Center for Agricultural Economic Research, Working - Paper - Number 8503 (February). Stark, 0. (1978). Economic-Demographic Interaction in the Course of Agricultural Development: The Case of Rural-to-Urban Mipration. Rome: Food and Agriculture Organisation of the United Nations. (1980). 'On the ;ole of urban-to-rural remittances in rural development.' Journal o f Development Studies, vol. 16, no. 3, pp. 369-74. (1982). 'Research on rural-to-urban migration in LDCs: The confusion frontier and why we should pause to rethink afresh.' World Development, vol. 10, no. I, pp. 63-70. and Bloom, D. (1985).'The new economics of labor migration.' American Economic Review, vol. 75, PP. 173-8. and Levhari, D. (1982).'On migration and risk in LDCs.' Economic Development and Cultural Change, vol. 31, pp. 191-6. and Yitzhaki, S. (1982). 'Migration, growth, distribution and welfare.' Economics Letters, vol. 10, PP. 243-9. Stuart, A. (1954). 'The correlation between variate-values and ranks in samples from a continuous distribution.' British Journal of Statistical Psychologti, vol. 12, pp. 37-44. Taylor, J. E. (1986).'Differential migration, networks, information and risk.' Forthcoming in 0. Stark (ed.), Migration, Human Capital and Development. Greenwich: JAI Press. Todaro, M. ( I980). ' International migration in developing countries: a survey.' In R. A. Easterlin (ed.), Population and Economic Change in Developing Countries. Chicago: University of Chicago Press. Yitzhaki, S. (1982). 'Stochastic dominance, mean variance and Gini's mean difference.' American Economic Review, vol. 12, UP. 178-85. . (1983). 'On an extension of the Gini inequality index.' International Economic Review, vol. 24, no. 3, pp. 61 7-28.

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[Footnotes]
1

Motivations to Remit: Evidence from Botswana Robert E. B. Lucas; Oded Stark The Journal of Political Economy, Vol. 93, No. 5. (Oct., 1985), pp. 901-918.
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References
Income Inequality Effects by Income Source: A New Approach and Applications to the United States Robert I. Lerman; Shlomo Yitzhaki The Review of Economics and Statistics, Vol. 67, No. 1. (Feb., 1985), pp. 151-156.
Stable URL:
http://links.jstor.org/sici?sici=0034-6535%28198502%2967%3A1%3C151%3AIIEBIS%3E2.0.CO%3B2-Q

Motivations to Remit: Evidence from Botswana Robert E. B. Lucas; Oded Stark The Journal of Political Economy, Vol. 93, No. 5. (Oct., 1985), pp. 901-918.
Stable URL:
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The Distribution of Income by Factor Components Graham Pyatt; Chau-nan Chen; John Fei The Quarterly Journal of Economics, Vol. 95, No. 3. (Nov., 1980), pp. 451-473.
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The New Economics of Labor Migration Oded Stark; David E. Bloom The American Economic Review, Vol. 75, No. 2, Papers and Proceedings of the Ninety-Seventh Annual Meeting of the American Economic Association. (May, 1985), pp. 173-178.
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On Migration and Risk in LDCs Oded Stark; David Levhari Economic Development and Cultural Change, Vol. 31, No. 1. (Oct., 1982), pp. 191-196.
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Stochastic Dominance, Mean Variance, and Gini's Mean Difference Shlomo Yitzhaki The American Economic Review, Vol. 72, No. 1. (Mar., 1982), pp. 178-185.
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On an Extension of the Gini Inequality Index Shlomo Yitzhaki International Economic Review, Vol. 24, No. 3. (Oct., 1983), pp. 617-628.
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