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

Seema Jayachandran
Journal of Political Economy
Vol. 114, No. 3 (June 2006), pp. 538-575
DOI: 10.1086/503579
Stable URL: http://www.jstor.org/stable/10.1086/503579
Page Count: 38
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Selling Labor Low: Wage Responses to Productivity Shocks in Developing Countries
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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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