The wage curve analysis for a developing country

The wage curve aims to demonstrate that labor conditions influence the wage determination. The unemployment is the indicator that serves as proxy to demonstrate such argument, and as explained before the results in many researches for many countries in different periods of time confirm such assertion. Even in few studied cases of developing countries, their results show that unemployment helps to shape the labor market conditions that influence negatively the wage determination.

However, the unemployment rate in developing countries such as Guatemala does not reveal properly the labor conditions of the country as the standard convention of the definition of unemployment contemplates two conditions: that people does not have a job, and they must be actively seeking for a job. The problem with such convention is that many people in developing countries are actually working in part time jobs that are characterized for having deplorable conditions, such as the informal sector. Fields (2011) confirms such argument by explaining that unemployment rates in developing countries are lower than in the developed ones, 4.4% and 8.4% in average respectively (International Labor Organization's –ILO-, 2011), and that such indicator is a poor measure of the labor market distress. For instance, as explained in Chapter 2, the unemployment rate in Guatemala is of about 3.4% in average during the last four years, but this indicator shows only one part of the labor conditions under which people is employed. In Guatemala the 69% of workers belongs to the informal sector, meaning that the worker benefits -such as steady and secure wage, social protection, and minimum labor standards- are not guaranteed. These are also undesirable labor market conditions as the unemployment, which may influence the wage determination. These conditions and the absence of public unemployment benefits in the country give people with no access to a decent job two options: to be unemployed (and receive zero income), or to be employed in the informal sector.

People that is already working may not want to leave their jobs if the outside labor conditions are deplorable. Those who have decent job may not want to bear the risk of losing it for an informal job, and people in the informal sector may not want to leave the current one for a worse job. Though in the latest scenario, workers are more prone to pursue a better options,

and hence are more inclined to bear a risk in case premium wages experiences a significantly decrease in their current job.

Although there is no consensus on a unique definition of the informal sector, one of the origins is explained by Harris and Todaro (1970), who explicate that the informal sector surges as a source of temporal employment for those people immigrating from the rural area and that do not find a decent job. Nowadays, some authors (Loayza, 1996; Ihrig and Moe, 2004; Prado, 2011) have approached the issue through fiscal analysis, in which people in the informal sector is part of an economy that is not taxed, others (Maloney, 2004) define it in a more broad framework by considering the informal sector as the part of the economy that escapes the government regulations in general; others define the sector in a simplistic and unclear way by defining the informality as the casual jobs, temporary jobs, unpaid jobs, subsistence agriculture, multiple job holding. However, the agreement is that the employment in the informal sector is often characterized by poor working conditions, poor pay and the absence of any labor standards for workers. ILO suggests that one way of measuring labor informality is through the underemployment, which comprises underutilized workers in terms of productivity capacity or duration of work. So, ILO defines two types of underemployment: the visible and non-visible underemployment. The visible underemployment is characterized by the insufficient hours of work (because he needs to work more hours) that an individual experiences during a specific period of reference. The non-visible underemployment is the insufficient hourly income of a worker, or is the misuse of occupational skills reflected in an inadequate productivity that causes imbalance between labor and other factors of production.

The intention in the present paper is not to measure the informal sector because it requires deeper understanding of other elements no considered here; however, to estimate a proxy by following the ILO’s suggestion allows providing a better picture of the labor conditions of Guatemala. Therefore, going back to the wage curve analysis in which the labor conditions influence the wage determination, it is important to consider in the analysis of a developing country an element such as the underemployment because it represents a threat against the status of the workers. As a consequence, it is expected to observe a higher wage curve than using the standard analysis since the levels of underemployment are considerable higher than the unemployment rate.

Finally, the shadow or hidden unemployment is another labor market condition that may influence the wage determination in the market. It is defined as the unemployed people with the desired of working but is not actively searching it. (Gastwirth, 1973; Mincer, 1973) The shadow unemployment include discouraged workers -individuals that wishes to work, but are not looking for one because they believe that is not available at a desired wage-, teenager, students, and homemakers. They will incorporate to the labor force only if someone offers a job position with a specific desired wage.

Under the wage curve rationale, shadow unemployment would represent a real threat against the workers only if people is visible within the labor market, i.e. if these people is not actively competing for a job position then firms would not be aware of their interest or existence. Also, shadow unemployment may not represent a good instrument for explaining the changes in wages because of the problem of causality between the explained and explanatory variables. Thus, one way of the causality is that wages respond to the influence of unemployment which in turn responds to the fluctuations of the shadow unemployment. The size of the labor force can be affected by the inclusion of new workers that were belonging to the economically inactive population or labor reserve, and hence affect the unemployment rates. The other way of causality refers the shadow unemployment definition per se. The wage rate is the responsible of encouraging people to go back to the labor force, and hence the size of the labor force will change only if wages change.