Selling labor low: Wage responses to productivity shocks in developing countries

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196 Scopus citations


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.

Original languageEnglish (US)
Pages (from-to)538-575
Number of pages38
JournalJournal of Political Economy
Issue number3
StatePublished - Jun 2006
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics


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