Outside Options, Coercion, and Wages: Removing the Sugar Coating

In economies with a large informal sector firms can increase profits by reducing workers’ outside options in that informal sector. We formalize this idea in a simple model of an agricultural economy with plantation owners who lobby the government to enact coercive policies—e.g. the eviction and incarceration of squatting small-hold farmers—that reduce the value to working outside the formal sector. Using unique data for 14 British West Indies ‘sugar islands’ from the year of slave emancipation in 1838 until 1913, we examine the impact of plantation owners’ power on wages and coercion-related incarceration. To gain identification, we utilize exogenous variation in the ease with which smallholders could evade the plantation system in the different islands over time. Where evading the plantation system became exogenously easier, planter power declined, incarceration rates dropped, and agricultural wages rose, accompanied by a decline in formal agricultural employment. Most of the wage increase can be statistically explained by the reduced coercion of smallholders.