By Ramses H Abul Naga, Reader in Economics, University of Aberdeen, IMéRA fellow in partnership with AMSE – Aix-Marseille School of Economics.
Cars are cars all over the world. But what about labour markets, are they broadly the same wherever you go?
Developing countries are indeed very different when it comes to the functioning of their labour markets. Agriculture remains to date a relatively important share of output in developing countries. Two central features of the developing country context are the role of the extend family in determining work related tasks, and the organisation of production employment and consumption around the family farm or firm.
The central mechanism of the process of economic development, as economists like to think about it, is the transfer of resources from low productivity areas of activity to high productivity hubs, often located in urban centres. Thus urban labour markets are dualistic with the informal and formal sectors co-existing. The informal sector (consisting of family firms) co-exists with the modern sector of urban labour markets. The informal sector is non-compliant to regulation, while the modern sector is variably (more or less) compliant. Though labour market segmentation is a central theme of many theories of economic development, in practice there are interlinkages between the formal and informal sectors, with workers transiting in and out of the rural labour market to the informal labour market and from the latter to the formal labour market.
For those not involved with agriculture, the family firmoften replaces the family farmas the dominant institution for determining jointly production, employment and consumption decisions. In the short term, the family plans its output in relation to the underlying level of economic activity. The family is a net demander of labour if its labour endowment is insufficient to meet its output target. Otherwise, the family firm is a net supplier of work. Whether the family can meet its labour demand is a complex issue related to its general level of assets, its demographic composition, and the labour intensity of the technology it adopts in its production process.
In turn, this means that depending on the regime the family is confronted to, its output, labour, and consumption responses to production price and wage changes are different. This makes the design of tax and benefit systems in developing countries a very complex and challenging task.
An equally important determinant of labour supply and demand decisions is the gender structure of the household. The presence of a large share of surviving female children is for instance associated with wealth reduction, and increased labour supply. In the longer term, the family attempts to adjust its demographic structure in order to organize its production process more efficiently, in order to smooth consumption and diversify its exposure to other risks (disease and mortality) to a larger extent. The change in family composition is achieved via a mix of fertility decisions, marriage choice and migration.
The complex structure of developing country labour markets and the role of the family as an institution of production and distribution of output leads to many other challenging questions from a policy perspective. It also leads us to question whether identical quick-fix policies can be equally effective when applied say in the tropics, the Sahara and the Andes.
Consider for instance the scope labour unions can have in bargaining for better wages and higher safety standards at work. The effect of unions on employment is well understood when employment relations function as long term contracts, as is the case in a majority of developed countries. But the reality of developing country labour markets is that daily, seasonal and long term contracts co-exist for various reasons related to the nature of economic activity.
We mention another example: the development of insurance markets. Their main role is to introduce tools to spread risks more efficiently across individuals and firms. But the effect of the introduction of insurance markets is likely to have far reaching consequences on the way households time and choose their marriage decisions, and also on the need and timing of their migration decisions.
A good understanding of the complex issues that govern local production, employment and consumption decisions is thus needed in order to assess the likely impact of the introduction of a specific policy that has been highly recommended by say, some consultant, expert or other in Washington or Paris.
Labour markets are not like cars: they vary all over the world, and in many subtle ways. And, as a matter of fact, just as societies have a right to write their own constitutions in order to meet their specific aspirations of freedom and social justice, economic policy should be articulated in developing countries through a participatory process that helps to meet these higher values its people are aspiring to.
Ramses Abul Naga