Chapter 15 Labor markets in low-income countries

Abstract

Labor being by far the most abundant resource in low-income countries, the determination of the returns to labor plays a central role in models of development. The chapter discusses the operation of low-income labor markets with reference to the models that have been and continue to be influential in shaping the study of such markets. These models are evaluated in terms of their ability to shed light on the realities of the allocation, pricing, and employment of labor in low-income countries. The chapter discusses models directly concerned with and evidence on the employment and pricing of labor in the rural (agricultural) sector. The chapter also discusses the process of determining rural wages are and their rigidity, the social and private costs of reallocating labor from agriculture to other activities, labor supply behavior, labor market dualism, and unemployment determination. The chapter describes risk-mitigating and effort-eliciting contractual arrangements involving rural labor and the organization of the agricultural enterprise in an environment characterized by incomplete markets. The chapter discusses the issue of whether labor is efficiently allocated across sectors and across geographical areas and problems of barriers to mobility. Models of migration incorporating human capital investments, information and capital constraints, uncertainty with respect to employment, riskiness in annual incomes, temporary migration, remittances, and heterogeneity in preferences and abilities among workers are discussed. The chapter also discusses urban labor markets, and addresses issues concerning the duality of urban labor markets and unemployment determination. The chapter highlights issues of importance to the study of developing economies—in particular, life cycle and intergenerational labor market mobility.