Labour Markets In The Developing World Follow The Same Rules On Wages And Unemployment

The conventional wisdom on labour markets in the developing world, that wages in urban areas are unaffected by unemployment, is wrong. That is the conclusion of John Hoddinott in a study of Cote d”Ivoire published in the latest issue of the Economic Journal. He shows that urban wages fall when unemployment rises: specifically, a doubling of the local rate of unemployment causes wages to decline by about 12 per cent. Remarkably, unemployment has precisely the same effect on wages in Britain, the United States and other developed economies.

Hoddinott also shows that unemployment has a larger effect on the wages of young people and the less well-educated, and a smaller effect on those employed in the public sector. Again, such findings are similar to those reported in countries like Britain. Such results make sense: according to the economic theory of ”efficiency wages”, workers moderate their wage demands when they observe high levels of unemployment. The fear of losing their jobs acts as a disciplining device. Because young workers and the less welleducated are more easily laid-off, the threat of unemployment exerts a larger disciplining effect on their wage demands. By contrast, workers in the public sector may feel relatively immune from the threat of unemployment.

Hoddinott’s results have implications for both policy and future research on African economies. Many African countries are undergoing stabilisation and structural adjustment programmes at present. In the short term, these can entail reductions in aggregate demand as real interest rates are raised and government spending cut back. Should wages be difficult to cut (”downwards-sticky”), such demand reductions will lead to higher unemployment. These results indicate that such potential increases in unemployment may be mitigated by falling wages.

As for future research, there is a long tradition in development economics that claims that neoclassical economics fails in the context of developing countries. Hoddinott”s results suggest that such claims are false: urban African labour markets appear to behave in remarkably similar way to those in developed economies. In turn, this suggests that the rich existing body of neoclassical labour market theory can be applied to Africa.

”Wages and Unemployment in an Urban African Economy” by John
Hoddinott is published in the November 1996 issue of the Economic Journal. Hoddinott is
a researcher at the Economic and Social Research Council”s Centre for the Study of
African Economies at the University of Oxford, and a Fellow of Lady Margaret Hall.

John Hoddinott

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