Essays on Labor Markets in Developing Countries

Abstract

This dissertation consists of three essays on the causes and consequences of frictions in labor markets in developing countries.Chapter 1 studies the impact of unions in a labor market with widespread informality and incomplete enforcement of labor law, a prominent feature in many developing economies. I analyze the effects of a reform in Brazil that made previously mandatory union dues for workers optional; I find that the resulting loss of resources led unions to reduce staff, close offices, and cut back on collective bargaining activities. I estimate the causal effect of the policy using a difference-in-differences approach based on spatial variation in baseline union effectiveness. Consistent with weakening unions' bargaining power, I find that the policy reduced formal sector wages by 0.9% in treatment labor markets relative to the counterfactual. However, counter to the policy's stated goal, the policy led to a 2.5% decrease in formal employment in these markets. I find suggestive evidence that this was accompanied by an increase in the number of workers hired without a formal contract. While the reform aimed to boost formal employment by reducing labor market rigidities, it inadvertently weakened unions' role in guiding the targeting of inspections by regulatory agencies across local labor markets to curtail the use of informally-hired workers. This highlights intricate ways in which unions affect contracting in economies with weaker institutions and imperfect regulation of labor regulations.Chapter 2 (with with Elisabetta Gentile, Nivedhitha Subramanian, Zunia Tirmazee and Kate Vyborny) examines gender gaps in labor market outcomes in South Asia, and empirically investigates if supply or demand side constraints play a larger role in creating these gaps. We investigate this using matched data from three sources in Lahore, Pakistan: representative samples of jobseekers and employers; administrative data from a job matching platform; and an incentivized binary choice experiment. Employers’ gender restrictions are a larger constraint on women’s job opportunities than supply-side decisions. This demand-side gap in quantity of job opportunities closes as education levels increase and jobs become more ``white-collar". Chapter 3 studies the functioning of informal businesses in urban areas. Do they operate in frictionless markets, or do they face constraints that limit their ability to make optimal production decisions? To answer this, I use tests of market completeness to assess whether informal firms in urban Brazil make production decisions independently of household characteristics. I implement a test of recursivity, typically applied in rural agricultural settings, and extend it to informal businesses in an urban context using rich data from Brazil. Overall, I fail to reject recursivity, suggesting that urban informal businesses operate as if they participate in complete markets. However, this masks important heterogeneity. Low-asset households do not make recursive decisions, their businesses rely on household labor when faced with shocks, while high-asset households behave as though they operate in complete markets. These findings contribute to our understanding of how asset endowments shape firm behavior, even within the same market, and extend the agricultural household model to urban informal businesses.