Kwacha gonna do? Experimental evidence about labor supply in rural Malawi

Type Working Paper
Title Kwacha gonna do? Experimental evidence about labor supply in rural Malawi
Publication (Day/Month/Year) 2010
I estimate the wage elasticity of working in the day labor market in rural Malawi using panel data from a unique eld experiment. One third of adults in rural areas in Malawi participate in the casual wage labor market, and the government recently committed $40 million in a public sector employment scheme. Creating day labor jobs is also a prominent policy tool for governments in other developing countries seeking to simultaneously reduce poverty and promote infrastructure development. Despite the importance of this sector to individuals and governments, the existing evidence about the elasticity of labor supply in developing countries is scarce and often poorly identifed. My estimates are from a field experiment in which 529 adults from ten different villages are oered a day's work once per week for 12 consecutive weeks. Each village faces a different wage each week; wages range from MK 30 ($US 0.21) to MK 140 ($US 1.00) per day. I observe whether or not each individual works at each wage. The experimental design provides exogenous variation in wages, allows me to observe the full distribution of wage offers rather than the censored distribution of accepted wages, and permits the inclusion of time and village or time and individual fixed effects. I estimate that the elasticity of employment is between 0.15 and 0.17, with no signifcant differences between men and women. I use auxiliary data from a nationally representative survey to confirm that equal elasticities for men and women is typical of the Malawian labor market during the agricultural off-season, the time of year when my experiment takes place. I collapse my data into a censored cross section that mimics data used in the previous literature to demonstrate that my highly inelastic estimates are due to my improved identifcation strategy, rather than reecting inherent differences between Malawi and other developing countries. My results contradict previous findings that men in developing countries exhibit backward-bending labor supply curves, and suggest that labor supply is highly in exible along the relevant margin in poor, rural markets.

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