Selling Labor Low: Wage Responses to Productivity Shocks in Developing Countries Seema Jayachandran, UC-Berkeley

Hypothesis High banking costs, low migratory capacity and near-subsistence income  Less elastic labor supply  More elastic wage response to TFP shocks (Bad for poor, but good insurance for landowners)

Theory Model of Agrarian Labor Market with Productivity Shocks Production:

Theory Model of Agrarian Labor Market with Productivity Shocks Utility:

Theory Model of Agrarian Labor Market with Productivity Shocks Labor Supply and Demand:

Theory Wage elasticity

Propositions Wage elasticity is increasing in 1.poverty 2.banking costs 3.migration costs Landowner welfare is increasing in landless- specific banking costs, and in banking costs in general for some parameter values

Comments If most productive migrate out, may create a countervailing effect on wages If c can increase, then A/c is a measure of relative poverty –Income growth that favors the rich may be a negative externality for the poor

Empirical model OLS IV