Common elements of efficiency wage theories: What relevance for developing countries?

Conventional labour economics argues that wages are determined by supply and demand and that the typical firm is a wage taker. Efficiency wage theories state that wages are endogenous to a firm's own optimising behaviour and that the wage rate determines the labour productivity. These theories raise questions regarding the effectiveness of expenditure‐reducing and expenditure‐switching adjustment policies. This article reviews the theoretical and empirical literature on efficiency wages. It examines alternative models, highlights the emphasis of empirical research towards industrial countries, and points out the need for a test based on the major implications of the theory.     

Do Smaller Firms Pay Less in the Caribbean? The Case of Trinidad and Tobago

This article constitutes the first study of the employer size wage effect for a Caribbean country, namely the Republic of Trinidad and Tobago. Using a rich micro-level data set we estimate the firm size wage premium in an empirical model of wage determination. Despite exploring a variety of theories, samples, estimation techniques and tests, we find that, consistent with the empirical literature, larger firms in Trinidad and Tobago pay higher wages than smaller firms, for equally productive workers.     

Wage determination in Brazil: The growth of union bargaining power and informal employment

This article examines wage determination in Brazilian manufacturing during the 1980s and early 1990s. It presents evidence to show that the reduction in state regulation of collective bargaining has led to the development of a system of wage determination which is increasingly characterised by rent sharing and insider trade union bargaining power. Real wages appear increasingly inflexible with respect to movements in open unemployment, with a large informal sector disciplining formal sector wage bargaining and cushioning the impact of broader labour market conditions. An important consequence of this is that the employment costs of a successful counter‐inflationary strategy may be very severe.     

Regional wages and economic development: A case study of manufacturing wages in India, 1950–1960

This paper examines some hypotheses with respect to the interregional wage variations in Indian manufacturing from 1950 to 1960. The choice of this period was determined by the availability of relevant data. It was found in an earlier study that the regional wage structure tended to be flexible during the period under consideration. In this paper, an attempt has been made to explain the inter‐regional wage differentials by analysing the data on trade unionism, per capita income, productivity, capital intensity, non‐primary employment and consumer prices. It is argued that the level of regional wage differentials can be explained by relative differentials in productivity and in trade unionism, but the change in wage differentials depends upon the changing capital intensity in respective regions.     

Pakistan's informal sector

This study reviews the main features of Pakistan's informal sector. The data on the informal sector, compiled from censuses and sample surveys in one major city (Rawalpindi), suggest that both real wages and employment have grown in the informal sector. The seeming paradox of real wage growth in a labor surplus economy is explained by real wage growth in both agriculture and large‐scale manufacturing, both of which were made possible by Pakistan's growth performance during the 1960s. The differences in wages between the formal and informal sector, after adjusting for age and education, are quite small, a reflection of high labor mobility between the two sectors.     

Inter‐industrial wage differentials: Evidence from Latin American countries

The recent literature on inter‐industrial wage differentials for the United States suggests that the labour market equilibrium features non‐competitive elements. However, the lessons from the United States need not carry over to other countries, especially developing economies. This article analyses the wage differentials in selected Latin American countries. Despite the sharp contrasts between the Latin American and the US economies, our results show more similarities than differences with those reported in past studies. Wage differentials are substantial and persist over time; the differentials are also correlated across occupations and, to a lesser extent, across establishment sizes.     

Sector choice,multiple job holding and wage differentials: Evidence from Poland

This article uses data from Poland to investigate the role played by wage differentials, between the public and private sectors, in influencing sector choice and the decision to moonlight. Standardising for worker characteristics and allowing for sector selection effects, we find (i) a substantial private sector wage premium, (ii) wage differentials are a significant determinant of sector choice, and (iii) the desire to moonlight is particularly strong among those who face the greatest wage gap, that is, university educated employees.     

Gender wage inequality and export‐led growth in South Korea

This article investigates the relationship between gender, wage inequality, and export‐led growth in South Korea. The persistent gender wage gap in Korea's manufacturing sector is found to be linked to women's segregation in the country's major export industries where real wage growth has lagged productivity growth, despite favorable market conditions that might drive up women's wages relative to those of men. The interaction of state‐ and firm‐level hiring, training, and promotion practices that structure women's and men's employment opportunities differently appear to have resulted in a relatively weaker fall‐back position for women in labour markets. Econometric results are consistent with the hypothesis that women's weaker fall‐back position limits their ability to bargain for wage increases commensurate with productivity growth. Further, evidence is presented which links gender wage inequality to the growth of Korean exports.     

Earnings and Caste: An Evaluation of Caste Wage Differentials in the Nepalese Labour Market

This paper examines the sources of wage differentials among castes in Nepal, a country which had, until 1963, an age-old caste-based social division of labour. We use an extended Oaxaca decomposition model with occupation and firm size augmenting the conventionally used measures of human capital endowments. Our results indicate that caste wage differentials in Nepal are large and that human capital endowments and lack of access to better paying occupations and larger firms have a significant impact. Furthermore, we find mixed evidence that the government policy of affirmative action has narrowed down the caste wage differential.     

Capital and Labour Mobility and their Impacts on Mexico's Regional Labour Markets

Abstract

This paper studies the effects of capital and labor mobility on real wages across Mexican states for the period 1997–2006. Employing dynamic panel data methods, we find: (1) strong positive effects on real wages from foreign direct investment (FDI) and from migration; (2) domestic and foreign migration provide similar wage effects; and (3) alternative partitions indicate that real wages are more sensitive to FDI-related fluctuations across states with relatively lower wages and migration levels. Overall, these results provide support that real wages respond positively to fluctuations in capital flows and labour movements as predicted from the theory.     

Agricultural wages in Bangladesh: What do the figures really show?

Using new data and a different model, Palmer‐Jones [1993] has questioned the conclusions of Boyce and Ravallion [1991] concerning the evolution over time of agricultural wages in Bangladesh. I argue that Palmer‐Jones's model is unconvincing and that the main conclusions of Boyce and Ravallion are far more robust than he suggests. Wages respond sluggishly to rice prices. Bangladesh's (limited) agricultural growth has not raised the real wage rate, which was on a downward trend for most of the 1960s and 1970s. The mid‐1980s saw higher real wages, though this cannot yet be deemed a reversal of the previous trend.     

Economic Crisis,Income Gaps,Uncertainty, and Inter-regional Migration Responses: Kazakhstan 2000–2014

There is ample empirical evidence that internal migration occurs in response to wage differentials; recently, evidence has emerged that international migration is deterred by rising destination uncertainty. However, to our knowledge, there has been no analysis of how internal migration responds to differing incentives during good times and bad. This paper provides insight into this issue using detailed regional economic and migration data for Kazakhstan during boom (2000–2007) and crisis (2008–2014) periods. While conventional forces are affirmed, we find that the crisis deters migration and weakens the effect of wage differentials – while also reducing the deterrent effect of relative uncertainty.     

Population growth and real wages of agricultural labourers in Bangladesh

A long‐run negative impact of population growth upon real wages is neither theoretically self‐evident nor, in the case of rural Bangladesh, empirically clear‐cut. In addition to its negative ‘labour supply effect’, population growth may have a positive ‘labour demand effect’ upon wages. The latter may help to explain why Bangladeshi districts with higher rural population densities have higher agricultural wages, and why districts with more rapid population growth in the first half of this century subsequently experienced slower‐than‐average real wage declines. An investigation of agricultural growth and agrarian structure as mediating variables in the population‐wage relation indicates that changes in average operational holding size, inequality of landholdings, and the extent and nature of tenancy contributed to this result.     

How Accurate is Food-for-Work Self-Targeting in the Presence of Imperfect Factor Markets? Evidence from Ethiopia

Effective targeting of transfers is a key issue in public policy to combat poverty. Much faith is presently placed in self-targeting mechanisms such as public employment schemes supported by food-for-work transfers. Where targeting errors have been observed, these are usually attributed to mismanagement of key operational details, such as the project's wage rate. Using a unique data set from rural Ethiopia, we demonstrate that targeting errors may also have structural causes in some low-income countries. We hypothesise that imperfect factor markets generate a predictable dispersion across households in reservation wage rates that breaks down the unconditionally positive relation between income and shadow wages on which the theory of self-targeting public employment programmes rests. Our results confirm that the inaccuracy of FFW targeting stems from the fact that, in rural Ethiopia, higher income households are endowed with more labour per unit of land or animal. Due to poor factor markets in land and livestock these labour-abundant households have lower marginal labour productivity on farm, thereby depressing the reservation wage rates they find acceptable for FFW participation.     

Money matters: The role of public sector wages in corruption prevention

Economic theory as well as conventional wisdom from corruption-ridden countries suggest that low wages among public employees lead to corruption, but cross-sectional empirical research has largely failed to confirm this relationship. In this article, we investigate the relationship between experiences of corruption and wage levels for public sector employees, utilizing both objective and expert survey data, with global coverage. The statistical analysis shows that higher wages, as compared to the average wage in the country, is associated with less corruption. There is also some support, but weaker, for the hypothesis that corruption increases when wages fall below subsistence levels.     

Minimum wage effects across the private and public sectors in Brazil

Most of the available evidence on the effect of minimum wages concerns the private sector of developed countries. In this paper, we examine minimum wage effects in both private and public sectors for a key developing country. We use monthly data from a Brazilian household survey from 1982 to 2000. We find a strong compression effect in the wage distribution for both the private and public sectors. However, we find no evidence of adverse employment effects in either sector at the aggregate level or for vulnerable groups such as teenagers, women and the low educated. Hence, minimum wage policies in Brazil appear to be a potentially viable anti-poverty instrument.     

The Evolution of the Racial Wage Hierarchy in Post-Apartheid South Africa

This article develops a multilateral decomposition procedure for the analysis of wage differentials and applies this to the evolution of the racial wage hierarchy in South Africa over the period 1993–2001. We find evidence that the wage position of the majority African workforce improved relative to all other racial groups immediately following the transition to democratic rule in 1994, but that these gains have been largely eroded in the ensuing years of the post-apartheid era. We review the range of policy initiatives that have been taken by the government since 1994 in the light of our empirical findings.     

Urban Wage Behaviour and Food Price Inflation in Ethiopia

Theoretically, increases in food prices could benefit the poor by increasing the demand for unskilled labour, and hence their wages. This paper tests this hypothesis in urban Ethiopia. We exploit a unique panel of monthly price and wage data from 111 urban markets to first construct welfare-relevant measures of real wages, before employing various panel estimators to formally test wage-food price integration. We find moderate rates of long-run adjustment to increases in food prices, but that adjustment is very slow. This implies highly adverse short-run welfare impacts of higher food prices on the urban poor.     

Raising wages in the controlled sector: A general equilibrium analysis

The likelihood of the possibility pointed out by Stewart and Weeks, that a rise in wages in the ‘controlled’ sector of an underdeveloped country might raise total employment, is reexamined using an alternative model which facilitates consideration of the impact of such a wage rise on output and potential welfare as well as on employment. It is argued that Stewart and Weeks may have been overly sanguine in their appraisal of the impact of a controlled sector wage rise: the impact of this on real income and employment looks more likely to be adverse than not.