Labor Drops: Experimental Evidence on the Return to Additional Labor in Microenterprises

60 Pages Posted: 20 Dec 2016 Last revised: 27 Apr 2018

See all articles by Suresh de Mel

Suresh de Mel

University of Peradeniya

David J. McKenzie

World Bank - Development Research Group (DECRG); IZA Institute of Labor Economics

Christopher Woodruff

University of Oxford - Wolfson College

Multiple version iconThere are 2 versions of this paper

Date Written: December 19, 2016

Abstract

The majority of enterprises in many developing countries have no paid workers. This paper reports on a field experiment conducted in Sri Lanka that provided wage subsidies to randomly chosen microenterprises to test whether hiring additional labor would benefit such firms. In the presence of labor market frictions, a short-term subsidy could have a lasting impact on firm employment. Using 12 rounds of surveys to track dynamics four years after the end of the subsidy, the study finds that firms increased employment during the subsidy period, but there was no lasting impact on employment, profitability, or sales. Two supplementary interventions and treatment heterogeneity suggest the lack of impact is not due to complementarities with capital or management skills, and detailed survey data help rule out a number of theoretical mechanisms that could result in sub-optimally low employment. The study concludes that the urban labor market facing microenterprises does not have large frictions that would prevent own-account workers from becoming employers.

Keywords: Labor Markets, Rural Labor Markets, Educational Sciences, Labor Policies, Employment and Unemployment, Wholesale & Retail Trade Industry

Suggested Citation

de Mel, Suresh and McKenzie, David John and Woodruff, Christopher, Labor Drops: Experimental Evidence on the Return to Additional Labor in Microenterprises (December 19, 2016). World Bank Policy Research Working Paper No. 7924. Available at SSRN: https://ssrn.com/abstract=2887779

Suresh De Mel (Contact Author)

University of Peradeniya ( email )

University of Peradeniya
Dept of Economics & Statistics
Peradeniya
Sri Lanka
+94 81 2392622 (Phone)

David John McKenzie

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Christopher Woodruff

University of Oxford - Wolfson College ( email )

United Kingdom

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