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

  • Seema Jayachandran

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. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," NBER Working Papers 7534, National Bureau of Economic Research, Inc.
  2. 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.
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  15. Russell L. Lamb, 1996. "Off-farm labor supply and fertilizer use," Finance and Economics Discussion Series 1996-49, Board of Governors of the Federal Reserve System (U.S.).
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