Three essays on labor markets and economic development

In this dissertation, I present three essays that explore how labor markets function in low-income countries. All three essays focus on the case of Tanzania which is unique in the context of sub-Saharan Africa for its data collection. In Chapter 1, I estimate the spatial distribution of labor market power to quantify its effect on aggregate income and spatial income inequality. To do so, I develop a spatial general equilibrium model of monopsony, and use Tanzania’s first-ever minimum wage law to estimate the labor supply elasticity. I find that on average workers are paid just 70% of their marginal product. Surprisingly, because urban areas have a higher share of wage employment, labor market power actually reduces spatial income inequality. In Chapter 2 (with Angelica Martinez Leyva), we consider how the minimum wage affects the location decision of workers. Motivated by the observation that migrants care about both their expected earnings at destination as well as the probability that they will find a wage-paying job, we develop a dynamic spatial general equilibrium search and matching model. We find that the minimum wage reduced total surplus by inducing workers to move to higher value locations and accepting fewer jobs. In Chapter 3, I consider the decision to comply with the minimum wage from the firm’s perspective. The government may choose to not enforce the minimum wage in small firms if it knows that they cannot afford to pay the minimum wage. However, if some firms comply, small firms will have to pay higher wages to retain their workers, albeit below the level of the minimum wage. To quantify the employment effects of the minimum wage, I extend the model in Chapter 1 to allow for firms to comply with the minimum wage or to shrink to avoid detection. I find substantial negative employment effects, largely driven by small firms, who can no longer afford to hire workers at prevailing market wages, exiting. Taken together, these results suggest that, contrary to recent findings in high- and middleincome countries that minimum wages increase employment, in low-income countries they are likely to have negative employment effects even with limited enforcement.