Labor Markets in Developing Countries

The process of development is accompanied by marked changes in the structure of the labor market. We lay out a broad set of stylized features that distinguish labor markets in developing countries from those in richer countries. We organize our review around one particularly striking difference: In poor countries, working-age individuals are employed in wage work only 20–50% of the time. There is evidence that this low wage employment reflects high levels of involuntary unemployment (often masked by self-employment) along with frictions such as wage rigidity, market power, and search-and-matching frictions. At the same time, there is growing documentation that workers prefer self-employment or unemployment to many of the wage jobs that are available to them, especially low-skill work in the formal sector. We offer evidence on several ways in which poverty itself can dampen labor supply, so that low labor supply may be an outcome of underdevelopment. Throughout our review, we highlight three core aspects of poverty—missing markets, the importance of social ties, and institutional irregularity—that are relevant for understanding how labor markets change in response to, and help facilitate, the process of development.