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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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File URL: http://www.econ.ucla.edu/people/papers/Jayachandran/Jayachandran370.pdf
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Paper provided by UCLA Department of Economics in its series UCLA Economics Online Papers with number 370.

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Date of creation: 01 Dec 2005
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Handle: RePEc:cla:uclaol:370
Contact details of provider: Web page: http://www.econ.ucla.edu/

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  1. Townsend, Robert M, 1994. "Risk and Insurance in Village India," Econometrica, Econometric Society, vol. 62(3), pages 539-91, May.
  2. 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.
  3. C. John McDermott & Eswar Prasad & Pierre-Richard Agénor, 1999. "Macroeconomic Fluctuations in Developing Countries; Some Stylized Facts," IMF Working Papers 99/35, International Monetary Fund.
  4. 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.
  5. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," RCER Working Papers 467, University of Rochester - Center for Economic Research (RCER).
  6. 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.).
  7. 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.
  8. Martin Ravallion & Shubham Chaudhuri, 1997. "Risk and Insurance in Village India: Comment," Econometrica, Econometric Society, vol. 65(1), pages 171-184, January.
  9. Elizabeth Frankenberg & James P. Smith & Duncan Thomas, 2004. "Economic Shocks, Wealth and Welfare," Labor and Demography 0403030, EconWPA.
  10. 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.
  11. 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.
  12. Bliss, Christopher & Stern, Nicholas, 1978. "Productivity, wages and nutrition : Part I: the theory," Journal of Development Economics, Elsevier, vol. 5(4), pages 331-362, December.
  13. Jacoby, Hanan G & Skoufias, Emmanuel, 1997. "Risk, Financial Markets, and Human Capital in a Developing Country," Review of Economic Studies, Wiley Blackwell, vol. 64(3), pages 311-35, July.
  14. Robert Jensen, 2000. "Agricultural Volatility and Investments in Children," American Economic Review, American Economic Association, vol. 90(2), pages 399-404, May.
  15. 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.
  16. Newbery, David M G & Stiglitz, Joseph E, 1984. "Pareto Inferior Trade," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 1-12, January.
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