Productivity dispersion and dual labour markets : evidence from 14 Latin American Countries

Abstract

A key feature of developing economies is the coexistence of large pools of subsistence workers alongside workers employed in the modern sector of the economy. Traditional theories of dualism predict that in creases in the productivity of the modern sector willn eventually absorb the subsistence sector.I test this hypothesis by estimating the reduced-form correlation between productivity and the probability of belonging to the subsistence sector by merging measures of industry wide productivity from urban registered firm with labor market outcomes from 14 Latin American countries.My empirical strategy uses a finite mixture model which estimates jointly the wages corresponding to each sector and the segment to which the worker belongs,which is treated as a latent variable. Surprisingly,I find that my measure ofi ndustry wide productivity has a negligible influence on the probability that workers switch from the subsistence to the modern sector. Nevertheless,I find strong evidence of dualism and substantial hourly wage diferentials across sectors;the average treatment effect of switching to the modern sector is a 14% wage gain