Friday, October 9, 2009: 10:00 AM
Traditionally, growth theory in neoclassical tradition attributes poverty traps – the existence of multiple macroeconomic steady states featuring distinctly different, path-dependent levels of aggregate income – either to properties of the production function that violate Inada conditions, or to non-parametric savings or fertility rates that depend on the level of income. More recent models with explicit microfoundations have added further explanations to this list, such as imperfections in credit markets.
There is little work that has explored the role of the labor market as a potential cause of macroeconomic poverty traps, however. An exception is a line of research in development economics, originated by Basu and Van (1998) and Dessing (2000). The focus in this literature
is on issues related to child labor and human capital formation, however, and the existence of multiple equilibria in the labor market is simply assumed, but precise existence conditions
are not really explored. Without looking at existence conditions, however, it appears difficult
to fathom the macroeconomic consequences of wage traps, and to decide on whether they
may be responsible for poverty traps, in particular.
This paper takes a first step towards filling this gap. After a brief review of the literature
in section 2, section 3 proposes a classification of the conditions under which a labor
market may be confronted with the possibility of a wage trap. Section 4 transports these conditions into a textbook-style neoclassical growth model and discusses the interaction between
the labor market and the other markets. Section 5 conducts a similar exercise within an
endogenous growth model of the AK type. Section 6 looks at policy measures that countries
may resort to in an effort to escape from a poverty trap that derives from a wage-trapped
labor market. The arsenal of measures ranges from minimum wage laws to the opening of
borders for international investors. Section 7 sums up and offers conclusions.