Wage and Fertility Gaps in Dual Economies

Virtually all developing economies, now and in the past, have large gaps in labor productivity across sectors. We argue the presence of a traditional sector of family-based production, where markets for land and labor are nonexistent or underdeveloped, is important in explaining the persistence of large wage gaps. In the absence of land markets, intergenerational links make it more likely that low-wage workers do not relocate because they are compensated by inheritance of the family “farm.” The use of family labor on relatively small plots of land reduces the incentive to work long hours further widening gaps in annual hours and wages. Greater fertility and larger families also serve to compensate low-wage workers in the traditional sector, another factor reducing the incentive to migrate. Copyright Eurasia Business and Economics Society 2013