Essays on Labor Markets in Developing Countries

Abstract

This dissertation consists of three empirical essays on distortions in labor market outcomes in developing countries. Chapter 1 tests for downward nominal wage rigidity in markets for casual daily agricultural labor. It examines responses to rainfall shocks in 500 Indian districts from 1956-2008. First, nominal wages rise in response to positive shocks but do not fall during droughts. Second, after transitory positive shocks have dissipated, nominal wages do not fall back down. Third, inflation moderates these effects. Fourth, rigidities lower employment: landless laborers experience a 6% reduction in employment in the year after positive shocks. Fifth, consistent with separation failures, rationing leads to increased labor supply to small farms. New survey evidence suggests that agricultural workers and employers view nominal wage cuts as unfair and believe that they reduce effort. Chapter 2 (with Michael Kremer and Sendhil Mullainathan) describes the results of a field experiment that tests for self-control problems in labor supply. First, we find that workers will choose dominated contracts—which pay less for every output level but have a steeper slope—to motivate themselves. Second, effort increases significantly as workers’ (randomly assigned) payday gets closer. Third, the demand for dominated contracts (and their benefits) is concentrated amongst those with the highest payday effects. Finally, as workers gain experience, they appear to learn about their self control problems: the correlation between the payday effect and the demand for the dominated contract grows with experience. These results together suggest that self-control, in this context at least, meaningfully alters the firm’s contracting problem. Chapter 3 empirically examines the impact of multiple market failures on allocative efficiency in farm production in poor countries. In years when labor rationing is more likely in villages (due to wage rigidity), there is a 63% increase in sharecropped and leased land by small farmers. This is consistent with the prediction that distortions from a failure in one market can be reduced by reallocating other factors of production. In areas with worse credit access, there is less land adjustment in response to labor rationing. These results provide evidence for separation failures resulting from multiple missing markets.