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

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  • Suresh De Mel
  • David McKenzie
  • Christopher Woodruff

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

  • Suresh De Mel & David McKenzie & Christopher Woodruff, 2016. "Labor Drops: Experimental Evidence on the Return to Additional Labor in Microenterprises," NBER Working Papers 23005, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:23005
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    More about this item

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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