Labor Markets in Transformation: Case Studies of Latin America

Abstract: This dissertation contains three independent studies that analyze labor markets in transformation. They focus on two central elements of labor markets in developing countries: non-agricultural employment in the rural economy and informal employment in the urban economy.

Rural non-agricultural employment (RNAE) is being increasingly emphasized as a potential pathway out of rural poverty for people who are unable to secure their income in agriculture. By paying particular attention to the local economic context, Chapter 2 analyzes the factors that influence rural non-agricultural employment and earnings. The empirical analysis is based on the Brazilian Demographic Census, allowing for disaggregated controls for the local economy. Education stands out as one of the key factors that shape employment outcome and earnings potential. However, failure to control for locational effects may lead to biased estimation of the importance of individual and household characteristics. The empirical results show that local market size, distance to population centers, and other proxies for transaction costs play an important role in shaping non-agricultural employment prospects and earnings.

Although average earnings in the rural non-agricultural sector are higher than in agriculture, it is unclear whether income prospects are systematically better in non-agricultural activities than in agriculture. Chapter 3 tests for the existence of earnings differentials between agricultural and rural non-agricultural employment, while controlling for worker and household characteristics. A proposed theoretical farm household model predicts that there will be no sectoral earnings differential for unskilled labor, whereas skilled labor will be better off in the non-agricultural sector. Based on Peruvian household data, the empirical findings support the notion that unskilled workers would not earn a higher income by switching from agriculture to RNAE. Instead it tends to be the relatively well educated who might benefit from higher returns to education in RNAE than in agriculture, which is consistent with the predictions of the theoretical model.

Informal economic activity across countries has been studied thoroughly in the empirical literature, but little is documented about sources of variation in informality on the sub-national level. Chapter 4 analyzes reasons for regional variation in informal employment. It develops a theoretical model, which predicts that worker skill endowment, quality of local governance, and social norms are important determinants of the degree of informal employment in a city. The empirical application draws on data from Brazil, where 45 percent of the urban labor force are employed informally, in the sense that they lack a valid work permit. The degree of such employment, however, varies substantially across regions, with some cities having 20 percent or less of informal employment, while others have 80 percent or more. The empirical evaluation supports the predictions of the model and shows that informal employment is lower in regions with better governance and with a stronger social norm for tax compliance and obedience to regulation. The analysis also supports the notion of a "skill threshold" for successful entry to the formal sector. Endogeneity concerns are raised and assessed along with other robustness checks of the empirical results.