Institute for Research on Labor and Employment

In this paper we investigate income e®ects on education expenditures in Mexico. We use the Encuesta Nacional de Ingresos y Gastos de Hogares (ENIGH) from 1984 until 2004. Speci¯cally, we conduct a test of Friedman's Permanent Income Hypothesis by exploring the di®erence in the e®ects of remittances and other types of income on human capital investment in Mexico. In order to identify the permanent and transitory elements in the income of remittance-receiving households, we divide our analysis into four cases. We ¯rst divide households according to whether or not their regular income is primarily from agricultural activities, in which case we assume that their regular income has higher variance (and hence less permanence) than income to non-agricultural households. We then subdivide these two cases into households that receive more than half their total income from remittances and those that do not. In this study, remittance is considered to be permanent if it makes up more than half of the household's total income. We ¯nd that permanent income, whether in the form of remittances or non-remittance income, has a greater e®ect on human capital investment decisions than does transitory income in either form. Therefore, we con¯rm the applicability of Friedman's theory to Mexican data. Furthermore, we show that, for many remittance receivers, remittances are a signi¯cant determining factor in the education spending decisions of the Mexican household. Speci¯cally, when remittances function as permanent income, they have a strong positive relationship with education spending per school-age child. This brings new light to the debate on how remittances are spent in Mexico and whether policymakers should encourage remittances and the ease of transfer.