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Selling Labor Low: Wage Responses to Productivity Shocks in Developing Countries

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Seema Jayachandran

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Abstract

Productivity risk is pervasive in underdeveloped countries. This paper highlights a way in which underdevelopment exacerbates productivity risk. Productivity shocks cause larger changes in the wage when workers are poorer, less able to migrate, and more credit-constrained because of such workers' inelastic labor supply. This equilibrium wage effect hurts workers. In contrast, it acts as insurance for landowners. Agricultural wage data for 257 districts in India for 1956–87 are used to test the predictions, with rainfall as an instrument for agricultural productivity. In districts with fewer banks or higher migration costs, the wage is much more responsive to fluctuations in productivity.

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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 114 (2006)
Issue (Month): 3 (June)
Pages: 538-575
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Handle: RePEc:ucp:jpolec:v:114:y:2006:i:3:p:538-575

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  1. Elizabeth Frankenberg & James P. Smith & Duncan Thomas, 2004. "Economic Shocks, Wealth and Welfare," Labor and Demography 0403030, EconWPA. [Downloadable!]
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  2. Rose, Elaina, 2001. "Ex ante and ex post labor supply response to risk in a low-income area," Journal of Development Economics, Elsevier, vol. 64(2), pages 371-388, April. [Downloadable!] (restricted)
  3. Rosenzweig, Mark R & Wolpin, Kenneth I, 1993. "Credit Market Constraints, Consumption Smoothing, and the Accumulation of Durable Production Assets in Low-Income Countries: Investment in Bullocks in India," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 223-44, April. [Downloadable!] (restricted)
  4. Richard B. Freeman & Remco Oostendorp, 2000. "Wages Around the World: Pay Across Occupations and Countries," NBER Working Papers 8058, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Attanasio, Orazio & Rios-Rull, Jose-Victor, 2000. "Consumption smoothing in island economies: Can public insurance reduce welfare?," European Economic Review, Elsevier, vol. 44(7), pages 1225-1258, June. [Downloadable!] (restricted)
  6. Dasgupta, Partha & Ray, Debraj, 1986. "Inequality as a Determinant of Malnutrition and Unemployment: Theory," Economic Journal, Royal Economic Society, vol. 96(384), pages 1011-34, December. [Downloadable!] (restricted)
  7. Martin Ravallion & Shubham Chaudhuri, 1997. "Risk and Insurance in Village India: Comment," Econometrica, Econometric Society, vol. 65(1), pages 171-184, January.
  8. Morduch, Jonathan, 2002. "Consumption Smoothing Across Space: Testing Theories of Risk-Sharing in the ICRISAT Study Region of South India," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  9. Jacoby, Hanan G & Skoufias, Emmanuel, 1997. "Risk, Financial Markets, and Human Capital in a Developing Country," Review of Economic Studies, Blackwell Publishing, vol. 64(3), pages 311-35, July. [Downloadable!] (restricted)
  10. Newbery, David M G & Stiglitz, Joseph E, 1984. "Pareto Inferior Trade," Review of Economic Studies, Blackwell Publishing, vol. 51(1), pages 1-12, January. [Downloadable!] (restricted)
  11. Rosenzweig, Mark R, 1980. "Neoclassical Theory and the Optimizing Peasant: An Econometric Analysis of Market Family Labor Supply in a Developing Country," The Quarterly Journal of Economics, MIT Press, vol. 94(1), pages 31-55, February. [Downloadable!] (restricted)
  12. Agenor, Pierre-Richard & McDermott, C John & Prasad, Eswar S, 2000. "Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts," World Bank Economic Review, Oxford University Press, vol. 14(2), pages 251-85, May. [Downloadable!]
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  13. Townsend, Robert M, 1994. "Risk and Insurance in Village India," Econometrica, Econometric Society, vol. 62(3), pages 539-91, May. [Downloadable!] (restricted)
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  14. King, Robert G. & Rebelo, Sergio T., 1999. "Resuscitating real business cycles," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 14, pages 927-1007 Elsevier. [Downloadable!] (restricted)
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  15. Robert Jensen, 2000. "Agricultural Volatility and Investments in Children," American Economic Review, American Economic Association, vol. 90(2), pages 399-404, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Benjamin A. Olken, 2008. "Direct Democracy and Local Public Goods: Evidence from a Field Experiment in Indonesia," NBER Working Papers 14123, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Kartik B. Athreya, 2008. "Credit access, labor supply, and consumer welfare," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 17-44. [Downloadable!]
  3. Sen, Debapriya, 2009. "A theory of sharecropping: the role of price behavior and imperfect competition," MPRA Paper 14898, University Library of Munich, Germany. [Downloadable!]
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