Export price shocks and rural labor markets: The role of labor market distortions

Abstract

To what extent can workers in developing countries seize gains from trade? To answer this question we resort to a unique exogenous labor demand shock triggered by a surge in the world market price of cotton in 2010/11. By capitalizing on Tajikistan's geographic variation in the suitability for cotton production, we identify the effect of the export price hike on wages of rural workers. The shock induces agricultural firms to shift towards labor intensive cotton production. The subsequent greater labor demand doubles wages for female cotton pickers on small entrepreneurial private farms, but does not affect their wages on large parastatal farms. We present evidence that parastatal farms recruit workers for low wages based on monopsony power and expand employment based on labor coercion of children and public sector workers. Our results highlight the importance of accounting for competitive structures in local labor markets when assessing the wage pass-through of world market prices to workers in developing countries.