1989 Articles

Models of modern-sector labor market institutions in developing countries

Svejnar, Jan

The paper argues that policy conclusions derived from existing theories of economic development may be seriously flawed because the theories do not model correctly the modern-sector labor market. The paper first presents evidence that trade unions and governments frequently exert positive influence not only on firms' wages but also on their employment levels. It then presents models that capture this phenomenon and permit one to determine whether the observed levels of employment are insufficient, optimal, or excessive from the private and social standpoints. The paper concludes with a discussion of how the analysis could be implemented in empirical studies and in practical policy work.