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Effort Observability and Worker Productivity: Towards an Explanation of Economic Dualism

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  • Esfahani, Hadi S
  • Salehi-Isfahani, Djavad

Abstract

This paper suggests an explanation of the wage and productivity differentials between formal and informal sectors in developing countries. This explanation is based on differences in the observability of effort that arise from technological differences (such as size of operation). The authors argue that observability of effort is lower in the formal sector and then show that, under reasonable conditions, this leads to higher wages and higher effort (productivity). This is because with lower observability the marginal cost of effort is lower when existing employees are induced to work harder than when more workers are hired. Explanations for intersectoral differences in factor intensities and sector-specific unemployment rates also follow from the authors' basic assumptions. Copyright 1989 by Royal Economic Society.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 99 (1989)
Issue (Month): 397 (September)
Pages: 818-36

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Handle: RePEc:ecj:econjl:v:99:y:1989:i:397:p:818-36

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Cited by:
  1. Thomas Groll & Christopher J. Ellis, 2013. "Dynamic Commercial Lobbying," CESifo Working Paper Series 4114, CESifo Group Munich.
  2. Marjit, Sugata & Kar, Saibal & Maiti, Dibyendu, 2008. "Labor market reform and poverty – the role of informal sector," MPRA Paper 23999, University Library of Munich, Germany, revised 2009.
  3. Cunningham, Wendy V & Maloney, William F, 2001. "Heterogeneity among Mexico's Microenterprises: An Application of Factor and Cluster Analysis," Economic Development and Cultural Change, University of Chicago Press, vol. 50(1), pages 131-56, October.
  4. Carillo, Maria Rosaria & Pugno, Maurizio, 2004. "The underground economy and underdevelopment," Economic Systems, Elsevier, vol. 28(3), pages 257-279, September.
  5. Azam, Jean-Paul & Ris, Catherine, 2001. "Rent-sharing, hold-up, and manufacturing wages in Cote d'Ivoire," Policy Research Working Paper Series 2600, The World Bank.
  6. Levenson, Alec R. & Maloney, William F., 1998. "The informal sector, firm dynamics, and institutional participation," Policy Research Working Paper Series 1988, The World Bank.
  7. Arai, Kazuhiro, 1997. "Cooperation, job security, and wages in a dual labor market equilibrium," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 26(1), pages 39-57.
  8. Catalina Gutierrez & Pierella Paci & Marco Ranzani, 2008. "Making Work Pay in Nicaragua : Employment, Growth, and Poverty Reduction," World Bank Publications, The World Bank, number 6472, October.
  9. Maloney, William F., 1998. "The structure of labor markets in developing countries : time series evidence on competing views," Policy Research Working Paper Series 1940, The World Bank.
  10. Jackle, Annette E & Li, Carmen A, 2006. "Firm Dynamics and Institutional Participation: A Case Study on Informality of Micro Enterprises in Peru," Economic Development and Cultural Change, University of Chicago Press, vol. 54(3), pages 557-78, April.
  11. Bhattacharya, Prabir C., 2001. "Aspects of employment and unemployment in a model of the developed and the less developed economies," Economic Modelling, Elsevier, vol. 18(2), pages 297-311, April.
  12. Dibyendu Maiti & Sugata Marjit, 2011. "Subcontracting, R&D And Labour Productivity: A Theoretical Explanation," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 36(3), pages 1-24, September.
  13. Gutierrez, Catalina & Orecchia, Carlo & Paci, Pierella & Serneels, Pieter, 2007. "Does employment generation really matter for poverty reduction ?," Policy Research Working Paper Series 4432, The World Bank.
  14. Fábio Veras Soares, 2004. "Some Stylized Facts of The Informal Sector in Brazil in the 1980`s end 1990`s," Discussion Papers 1020, Instituto de Pesquisa Econômica Aplicada - IPEA.
  15. Maloney, William F., 1998. "Are labor markets in developing countries dualistic?," Policy Research Working Paper Series 1941, The World Bank.
  16. Alcaraz Carlo, 2009. "Informal and Formal Labour Flexibility in Mexico," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE.
  17. Frost, Jon, 2008. "Returns to Qualification in Informal Employment: A Study of Urban Youth in Egypt," MPRA Paper 12599, University Library of Munich, Germany.
  18. Mohamed, Issam A.W., 2011. "Challenges of formal social security systems in Sudan," MPRA Paper 31611, University Library of Munich, Germany.
  19. Djavad Salehi-Isfahani & Russell D. Murphy, 2006. "Labor market flexibility and investment in human capital," Working Papers e06-5, Virginia Polytechnic Institute and State University, Department of Economics.
  20. Esfahani, Hadi Salehi & Mookherjee, Dilip, 1995. "Productivity, contracting modes, and development," Journal of Development Economics, Elsevier, vol. 46(2), pages 203-231, April.
  21. Itay P. Fainmesser & David A. Goldberg, 2011. "Bilateral and Community Enforcement in a Networked Market with Simple Strategies," Working Papers 2011-2, Brown University, Department of Economics.
  22. Maloney, William F. & Pontual Ribeiro, Eduardo, 1999. "Efficiency wage and union effects in labor demand and wage structure in Mexico - An application of quantile analysis," Policy Research Working Paper Series 2131, The World Bank.

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