Dualistic Labour Market in Developing Countries

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Table of Contents

Executive Summary
Introduction
Dualistic Labour Market Views
Critique of Dualistic Labour Markets in Developing Countries
Conclusion
Reference List

Executive Summary

This analytical paper provides a comprehensive critique of the dualist approach to the labour market in the developing countries. It disapproves the dualistic labour market assumptions by reviewing the informal (secondary) and formal (primary) labour markets of the developing countries and the inefficiencies that operate in these markets.

Besides, the treatise examines the low labour productivity levels common in the developing countries that makes the informal employment sector an alternative desired by labour providers in developing countries.

In addition, the paper reviews the unique transitional features of the formal and informal labour markets of the developing countries that disapprove the assumptions made by dualistic view. Reflectively, the differentials in traditional earnings are indicated as unable to disapprove or approve the developing countries labour market segmentations within the unlimited mobility of the workforce that is non rigid and non proportional in the informal and formal segmentation.

Introduction

In the dualist market, there is a long traditional view that opines that a substantial proportion of the labour force in developing countries working in informal (secondary) sectors and are unprotected by legislations of labour are disadvantaged. However, the dynamics of the informal sector in the labour market have attracted different views. In the ideal dualistic labour market, increasing flexibility and efficiency of the labour market is an indispensable complement of the reforms that are market based.

In the ideal, the segmentation degree is controlled by union and government regulations that are designed to encourage rigidities and drive the costs of labour above the market clearing level. Therefore, the informal sector remains non proportional to reflect on the magnitude of the reforms required. Thus, this reflective treatise argues that the dualistic approach to the labour market is inappropriate in the developing countries.

As a matter of fact, the incentive drive to work in small firms is greater in developing countries than in developed countries. In developing countries, the rigidities and inefficiencies accompanying labour protection and taxation that are applied without factoring in a legal minimal wage often reduce formal (primary) employment attractiveness. Besides, the formal sector low productivity for the large number of poorly educated workers reduces independent employment opportunity cost developing countries.

Dualistic Labour Market Views

Dualistic labour market view envisages general patterns. The protagonists of this school of thought argue that dualism often exists between secondary and primary labour markets. In the primary labour market, jobs are well paid, there are good work environment conditions, job security and stability of employment is certain, formal and equitable work process is guaranteed, and certain advancement structures exist.

On the other hand, the secondary labour market is characterised by jobs that attract low wages, dismal working conditions, employment structure is variable, and they posses few opportunities for advancement (Harris and Todaro 1970).

Reflectively, “if formal sector work prefers to informal work, we would expect that workers would queue up for formal sector jobs and relinquish them only under the limited conditions permitted by the Constitution—egregious conduct or “acts of god” that induce firm downsizing” (Esfahani and Salehi‐Isfahani 1989, p. 824).

Moreover, a flow in an opposite direction is involuntary and far less in prosperous times. In addition, the dualistic view assumes that when there is an assigned probability of selection within a specific period of time, then the probability an ingression into formal employment should be a rising experience function in the salary earnings.

Thus, “in the dualistic labour market approach informal employment is an involuntary solution to unemployment. It is perceived by rural migrants as a temporary survival strategy while they wait for job opportunities to open up in the formal sector” (Dessy and Pallage 2003, p. 228).

Critique of Dualistic Labour Markets in Developing Countries

Several factors affect the labour supply in the developing countries. Reflectively, equilibrium and transitional wage differentials offer a valid explanation for the educe labour differential persistence in the labour markets of developing countries as part of the supply constraint.

Reflectively, homogeneous jobs and perfect competition within the labour markets in the dualistic labour markets rarely function in developing countries. Ideally, workers have unlimited options apart from changing jobs until optimal satisfaction is achieved through the creation of a theoretical balance characterized by identical wage payment across primary and secondary labour markets. In this process, the labour placement is not disrupted (Shapiro and Stiglitz 1984).

However, in reality labour wage rate variances are persistent in both empirical and casual rates despite the theoretical balance proposed by the dualistic labour market theory.

These variances are attributed to inconsistencies between casual and empirical wage rate reviews. Besides, nonwage factors, such as fringe benefits, job location, job status, wage advancement prospects, earnings regularity, and risk of death or injury in primary labour markets have substantial influence on positioning in either formal or informal employment since they form part of wage differentials in developing countries unlike in developed countries.

In developing countries, the primary sector is characterised by unstable wage differential determinants making a good number of workers to actual switch jobs from primary to secondary labour markets. Consequently, their intrinsic influence forms part of the overall wage differentials that are part of the generated labour placement effect (Ray 1998).

Market information placement is presented as another vital determinant of labour placement in the developing countries. Market information influences the behaviour of the labour market, its efficiency, and optimal operation. Thus, imperfect and costly market labour information is a major contributor towards persistent labour differentials at the micro and macro levels of the labour market in the developing countries. Besides, when their effect is long term, then the outcome may assume the form of long-lasting differential wage imbalances that are transitioning from a period to another in both the primary and secondary labour markets of such economies.

Consequently, wage structure immobilities such as institutional, geographic, and institutional often last longer than usual in developing countries. Reflectively, these immobilities are clear indicators of differences in wage rates within a similar industry for workers with the same educational level, skills, and experience as is the case in most labour markets of developing countries.

On the other hand, substitution and income effects also influence labour in the developing countries. In the process of changing occupation, the underlying decision science is the overall effect of the same on capital structure of a worker. Generally, the overall expected outcome is measured as a ratio of the total cost of investment on the relocation. For instance, transportation expenses, psychic costs, and forgone income during transition form part of the cost matrix in labour placement.

There is a consistent wage differential pattern in developing countries. Specifically, this is as a result of mobility and their influence on labour market variables and not just availability of primary jobs. The two major types of mobility are categorized as occupational geographical mobility. Reflectively, occupational mobility depends on labour units and the profession of the worker and mere existence of primary or secondary job opportunities.

As a variation of the market labour mobility in developing countries, efficiency in ‘allocative’ contributors is significant in balancing the distribution of labour units between low and high employment values as part of the wage differential matrix. Reflectively, the value of marginal product determines the regulatory effect on perfect competition and wage differential.

The two components often swing until the regulator balances for employments sharing self efficiency on ‘allocativeness’ as part of the wage differential. However, this interaction holds in a labour market with perfect knowledge of all determinant variables operating in a similar employment industry. However, the labour markets of developing countries are characterised by imperfect knowledge of the market dynamics and better terms in the informal labour sectors.

Due to similar experience, skills, and educational attainment, wage rates are expected to balance as the regulator moderates the two determining variables in a constant mobility parameter. Despite the perfect regulation, several interacting externalities are identified as determinants of efficiency ease in developing countries.

These externalities are associated with minimization of gains realized on efficiency metrics. The worst case occurs when pecuniary externalities interact with ‘allocative efficiency’ to minimize further these gains and actually push a good number of workers to the informal employment sector (Todaro and Smith 2011).

In different labour markets, wage differentials generate a recurring capital and product flows that interact concurrently to initiate an equalized balance on wages in the long term. However, the wage differentials are inconsequential, especially in the labour markets of developing countries.

Skills and experience are as important as the nonwage factors on wage differentials. In the ideal dualistic scenario, when there is a decisive crisis involving the review of wages in a production line, a rational employer would opt for increasing wages paid to highly skilled workers an employee retention strategy. The rate of wage increase will be higher for the highly skilled employers than what the low skilled counterparts eventually get (Thirlwall 2003). Efficiency of wage theories offers a better explanation of the above scenario.

These theories are based on the same notion that the higher turnover of labour units translates into higher wages paid, even though the ratio may not be proportional in the imperfect labour markets of developing countries. Besides, the secondary labour environments of developing countries with limited quantifiable variables for reviewing performance are a recipe for high wages given to employees in this sector since the principal may not be in a position to measure efficiency of each labour unit against wage compensation.

In the labour markets of developing countries, heterogeneous workers are responsible for the continuous wage disparities for the group to compete on the ‘nonwage’ aspects of work within varying stock capitals that are of human nature. Consequently, the quantifiable result would be unbalanced labour preferences within differing market consistency on every unit of labour.

This is explained by the hedonic theory of wages to classify this form of interaction between workers that have wage preference variances when interacted with ideal job amenities of nonwage nature. The most likely effect would be the standard labour market’s inability to churn wage differentials that are sustainable for employees sharing similar capital stocks of human nature and counterparts with varying capital stocks of human nature as opposed to the dualistic view (Porter and Phillips 1997).

As a result, wage differential is skewed towards market demand rather than skills and labour placement. Besides, wage differences exist across formal and informal employment due to job characteristics, such as compensating wage differentials, human capital, labour market discrimination and labour union.

Fringe benefits and wage earnings are identified as the main components of compensation summation in the dualistic view. However, fringe benefits are apportioned a larger share in the total compensation matrix due to the fact that their influence experiences a consistent growth over the last decade in the labour markets of developing countries.

These fringe benefits are classified as social security, unemployment compensation and employee’s compensation for every unit of labour given as indicated in the human capital theory. In classification, these fringe benefits assume the form of insurance benefits, paid leave, and legally acquired benefits to a worker for every unit of labour delivered against the revenue realized.

Currently, the informal labour markets in developing countries are to some extent structured and offer these services to the secondary workers who form the bulwark of their labour force (Keijiro and Yujiro 1988). Besides these, retirement benefits and savings are included in the summation of the fringe benefits accrued by a worker in the informal sectors as internalised in the labour laws.

Type and form of fringe benefits are never universal. Rather, they are influenced by the type of industry in which labour operates, ration and occupational groups as indicated in the labour market discrimination theory, rather than just by primary or secondary labour placement. This is due to the fact that governments and other agencies have introduced laws and regulations aimed at pushing for higher and reliable compensation.

In most instances, the blue collar employees have a larger share of the legalities, construed benefits than their counterparts in white collar jobs in developing countries as tax and labour redistribution policies. For instance, in Kenya, the government has balanced the labour indifference curve to be a product of various fringe benefits and wage rates that interact simultaneously to yield same utility level for each worker, irrespective of their sector of work (International Labour Organization (ILO) 2002).

When all other factors are held constant, higher swing of the indifference curve indicates higher levels of utility. Irrespective of the inclination of the indifference curve, it is apparent that levels of tax advantage determine the resultant fringe benefit accrued in the formal and informal labour markets. On average, jobs that demand higher skills attracts more wages than those that demand low skills irrespective of the labour market sectors (Fafchamps 1997).

The need for intrinsic substitution as a component of the decision science aimed at managing the fringe benefits are peculiar in labour markets of developing countries’ economies. This matrix is dependent on homogeneous labour inputs wages at market-clearing parameters and external forces like labour unions rather than placement in primary or secondary labour markets (Stiglitz 1986).

Conclusion

Conclusively, from the above discussion, it is apparent that the dualistic labour market theory claiming that the secondary sector is a direct compliment of the primary in the labour markets of developing countries is unconvincing. In fact, the continued fragmentation of the formal and informal labour markets in developing countries,as characterised by high mobility, has ‘informalised’ the assumption that secondary labour market is a complement of primary labour markets such as the labour markets of Kenya and South Africa.

Reference List

Dessy, S. and Pallage, S 2003, “Taxes, inequality and the size of the informal sector,” Journal of Development Economics, vol.70, pp. 225-233

Esfahani, H, and Salehi‐Isfahani, D 1989, “Effort Observability and Worker Productivity: Towards and Explanation of Economic Dualism”, Economic Journal, vol. 99, pp. 818‐836.

Fafchamps, M 1997, “Introduction: Markets in Sub‐Saharan Africa”, World Development, vol. 25 no. 5, pp. 773‐734.

Harris, J, and Todaro, M 1970, “Migration, Unemployment, and Development: A Two‐ Device”, The American Economic Review, vol. 74 no. 3.

International Labour Organization (ILO) 2002, “Employment, Income and Equality: A Strategy for Increasing Productivity in Kenya,” ILO monograph, vol. 5, pp. 23-52

Keijiro, O, and Yujiro H 1988, “Theories of Share Tenancy: A Critical Survey”, Economic Development and Cultural Change, vol. 37 no. 1, pp. 31‐68.

Porter, T, and Phillips, H 1997, “Comparing contracts: an evaluation of contract farming schemes in Africa “, World Development, vol. 252, pp. 227‐238.

Ray, D 1998, Development Economics, Princeton University Press, Princeton.

Shapiro, C. and Stiglitz E 1984, “Equilibrium Unemployment as a Worker Discipline Sector Analysis”, American Economic Review, vol. 60, pp. 126‐142

Stiglitz J 1986, “The New Development Economics”, World Development, vol.14 no.2, pp. 257‐65

Thirlwall, A. P 2003, Economics of Development, 11^th edn, Palgrave Macmillan, London

Todaro, M., and Smith, C 2011, Economic Development, 4^th edn, Addison Wesley, London

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