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

60 Pages Posted: 3 Jan 2017

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 2016

Abstract

The majority of enterprises in developing countries have no paid workers. Is this optimal, or the result of frictions in labor markets? We conduct an experiment providing wage subsidies to randomly chosen microenterprises in Sri Lanka. In the presence of frictions, a short-term subsidy could have a lasting impact on employment. We find the subsidy induced firms to hire, but there was no lasting impact on employment, profitability, or sales. Analysis rules out several theoretical mechanisms that could result in sub-optimally low employment. We conclude that labor market frictions are not the reason own-account workers do not become employers.

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 2016). NBER Working Paper No. w23005, Available at SSRN: https://ssrn.com/abstract=2892429

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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