The World Bank

Development Research Departmeqt

Discussior- Papers

No. 40

SEGNE:ITATION AND EARNINGS PROFILES IN LDC' S : X STUDY OF THE BOMBAY LABOR MARKET

Sager J. Bowden and Dipak Yazumdar

November 1982

- '3 NOTE: Discussion Papers are preliminbry materials circulated to stimulate - - discussion and critical comment. References in publication to, i Discussion Papers should be cleared with the authors to protect the - B tenative character of these papers. The papers express the views of

the authors and shoulci not be interpreted to reflect those c,f the .Jorld Sank.

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SEGXEYTXTION rLUD EAiLUINGS PROFILES IN LDC' s : A STUDY OF THE BOMBAY LABOR W ; F : T --

Roger J. Bowden and Dipak ,Yazumdar

November 1982

' i ri - -

Views expressed are those*£ the authors and do not necessarily reflect those of the World aank. \.re wourd like to thank Hee-chol Chang for his very able assistance with the computation.

Abstract

This paper is an enpirical study of the existence and nature of labour market segmentation in an LDC. A generalised Chow test iri developed and applied to earnings data from three sectors of the Bombay labour inzrket, the factory, small-scale and factory sectors. In addition to testing iifferent- intercepts for these markets, w? investigate the exist~ence of differential rates of return to such factors as age, education and experience. Some of the conclusions are at variance with the conventional wisdom on labour narket segmentation.

S s g n e n t a r i o n and E a r n i n g s k o f i l e s i n LDC8s: X Study of t h e Boabay Labor > h r k e t

Dipak ?lazumdar and 3oge r J. Bowden ldorld Bank

Yovember 1982

i. The P r o t l e n

1.1 The Urban Labor Flarket i n LPC8s

I n t h e d i s c u s s i o n of u r b a n l a b o r m a r k e t s i n LDC8s t h e d i s t i n c t i o n

between "fornaL" and " i n f q r n a l " s e c t o r s h a s p l ayed a c e n t r a l r o 1 e . l T h i s

d i s t i n c t i o n is i n p o r t a n t because - l i k e t h e p a r a l l e l d i s c u s s i o n of d u a l l a b o r

marke t s i n deve loped c o u n t r i e s * - many o b s e r v e r s have been s t r u c k by w i d e l y

d L f f e r e n t Levels of e a r n i n g s f o r l a b o r w i t h a p p a r e n t l y similar human c a p i t a l

endownents ( e q e r i e n c e and e d u c a t i o n ) i n t h e d i f f e r e n t s e c t o r s of t h e n a r k e t .

The f o r m a l P e c t o r i s g e n e r a l l y i d e n t i f i e d w i t h t h e use of node rn

t echno logy . I n aany c o u n t r i e s i t is t h e s e c t o r which i s more o r l e s s c l e a r l y

demarca ted by t h e i n f l u e n c e of government l a b o r l e g i s l a t i o n a n d / o r t h e impact

of t z a d e u n i o n s . I n I n d i a , f o r i n s t a n c e , t h e F a c t o r y Act which i n c l u d e s r u l e s

o n c o n d i t i o n s of enp loynen t o f l a b o r c o v e r s a l l e n t e r p r i s e s e n p l o y i n g 1 0 o r

more wcrke r s i f t hey use e l e c t r i c power o r 20 o r n o r e workers i f t h e y do n o t

u s e power. Al though t h e scope of t h e Fact .ory Act i s governea by t h e L

employment s i z e of p l a n t s , t h e r e l a t i o n s h i p between t h e s i z e of t h e e n t e r p r i s e . . - .*

f o r c e r t a i n c a t e g o r i e s of f r i n g e b e n e f i t s which employers have t o pay the i r : - - r e g u l a r w o r k e r s , and a 1 s o ) p r o v i d e s p r o c e d u r e s f o r wage d e t e r n i n ~ a t i o n thcou h . e,

I

c o l l e c t i v e b a r 2 a i n i n g between e g p l o y e r a s s o c i a t i o n s and Trade Linions. The

s c o p e f o r g o v e r n r e n t i n f l u e n c e on wage f o r m a t i o n is s t r o n g , becabuse t h e Act

e s t a b l i s h e s an e l a b o r a t e sys t em of a r b i t r a t i o n , c o n c i l i a t i o n and t h e o p t r a t i J n

o f i n d u s t r i a l c o u r t s i n t h e s e t t l e n e n t of d i s p u t e s .

O u t s i d e t h e s e c t o r c o v e r e d by t h e F a c t o r y Ac t , t h e i n s t i t u t i o n a l

i n f l u e n c e on l a b o r e a r n i n g s is weak. F i r s t , t h e r e i s a l a r g e amorphous s e c t 3 r

of househo ld e n t e r p r i s e s which make u s e of E a n i l y l a b o r e i t h e r e x c l u s i v e l y ,

o r w i t h o n l y l i n i t e d u s e of h i r e d l a b o r . S e c o n d l y , t h e r e a r e sn i a l l

e n t e r p r i s e s which do u s e wage l a b o r e x t e n s i v e l y f o r t h e i r o p e r a t i o n ( w i t h t h e

owner o f t e n p a r t i c i p a t i n g h i m s e l f zs a n a d d i t i o n a l w o r k e r ) , b u t t h e s e wage

worke r s a r e o c t s i d e t h e purv iew of t h e F a c t o r y Act . They a r e c o v e r e d by t h e -

l e g i s l a t i o n on l i n i r ~ u r n wages, b u t i t i s n o t o b v i o u s how e f f e c t i v e l y t h e

n i n i n u a wage is e n f o r c e d ; and i n any c a s e t h e l e v e l of t h e r n i n i n m wage i s

f a i r l y low.

R e g u l a r w o r k e r s used b o t h by f a c t o r i e s and s m a l l e s t a b l i s h m e n t s a r e

t o a l a r g e e x t e n t employed on r e a s o n a b l y l ong c o n t r a c t s , and a r e p a i d on a

month ly o r a t l e a s t weekly b a s i s . But i n t h e l a b o r marke t s of rnany c i t i e s i n

LDC's t h e r e i s a l a r g e c? . ego ry of wage l a b o r which i s h i r e d by employe r s 3s

and when needed on d a i l y c o n t r a c t s . Such w o r k e r s who a r e c a l l e d i r r e g u l a r o r

more commonly c a s u a l w o r k e r s , o p e r a t e i n a v a r i e t y of o c c u p a t i o n s :

t r a n s p o r t a t i o n , p o r t e r a g e , c o n s t r u c t i o n , shops and r e s t a u r a n t s , and even i n . t i lo.4 s k i l l jobs i n m a n u f a c t u r i n g e s t ; i b l i s h m e n t s . C a s u a l worke r s do n o t g e t

! a r e n o t f u l l y :~nenp loyed o v e r any ex t ended p e r i o d of t ime . T y p i c a l l y ; t h e i r - 1 - , - C

x o r k s i t u a t i o n can be d e s c r i b e d a s underemploynent - w i t h t h e number of d a y s 8 I

of ;rork s e c u r e d o v e r t h e month b e i n g l e s s t han what a r e g u l a r worke r would

g e t . .Also a c a s u a l worker would n o t be pa id t h e f r i n g e b e n e f i t s which a

r e g u l a r worker i n t h e F a c t o r y s e c t o r , and t o a lesser e x t e n t i n t h e s m a l l -

s c a l e e n t e r p r i s e s v o u l d g e t .

I n t h e Bombay ~ ! , , l r :?arket S t u d y , t h e :Jorld Bank i n a s s o c i a t i o n w i t h

t h e Economics Department < s f Aonbay U n i v e r s i t y , u n d e r t o o k a s p e c i a l s u r v e y o f

x o r k e r s i n 3ombay c i t y , t o a n a l y s e among o t h e r t h i n g s , t ' s l e v e ' l and p a t t e r n

of e a r n i n g s of wage l a b o r i n t h e t h r e e s e c t o r s of t h e n a r k e t n e n t i o n e d above -

t h e f a c t o r y , t h e s n a l l - s c a l e e n t e r p r i s e s , and t h e c a s u a l s e c t o r . 3 e f o r e

d e s c r i 5 i n g t h e s a n p l e on which t h i s s t u d y is b a s e d , i t would be u s e f u l t o

o u t l i n e t h e h y p o t h e s e s we s p e c i f i c a l l y w i sh t o t e s t , and a l s o i n d i c a t e t h e

l i m i t s t o t h e q u e s t i o n s which a r e b e i n g i n v e s t i g a t e d i n t h i s p a p e r .

1.2 The Hypotheses

( A ) H y p o t h e s i s 1. Tlie h y p o t h e s i s t o be t e s t e d is t h a t t h e l e v e l of e a r n i n g s

of l a b o r v a r y s i g n i f i c a n t l y be tweel l t h e t h r e e s e c t o r s , a f t e r a l l o w i n g f o r

d i f f e r e n c e s i n t h e human c a p i t a l endowments of t h e worke r s i n e a c h s e c t o r .

Th ree comments need t o be made i n n e d i a t e l y on t h i s f o r m u l a t i o n of t h e

i h y p o t h e s i s .

( i ) The measu rab le human c a p i t a l v a r i a b l e s which w e a r e a b l e t o

I t a k e c a r e of i n t h i s e x e r c i s e a r e l i m i t e d t o e d u c a t i o n , e x p e r i e n c e and

knowledge of E n g l i s h . The re a r e some o t h e r v a r i a b l e s which migh t be i n c l u d e d . I

i n t h e bund le of human c a p i t a l endowments and which a r e i n p r i n c i p l e ,

-2 some nea'isure of 10, o r g r a d e s a t t a i n e d i n e x a m i n a t i o n . There a r e o t h e r

I C - va r i ab l t ? , which cou ld a f f e c t t h e q u a l i t y of l a b o r b u t a r e no t n e a s u r a b l e a s ,

I

f o r e x ~ x p l e , a t t i t u d e Lo wor'c.

( i i ) The h i g h e r wages i n some s e c t o r of t h e l a b o r ~ m r k e t s might be - - - - - . -

e s t a b l i s h e d t o a t t r a c t " s u p e r i o r" workers i n t e r n s of ou r measured huilan

c a p i t a l a t t r i b u t e s . A l t e r n a t i v e l y , i f h i g h e r wages a r e s e t i n s t i t u t i o n a l l y

t h e r e would b2 a tendency f a r e n p l o y e r s i n t h i s s e c t o r t o i n c r e a s e t h e

p r o p o r t i o n of " s u p e r i o r" l a b o r i n t h e i r w o r k f o r c e , s o t h a t s u c h f i r n s n i g h t

end up w i t h worke r s b e t t e t endowed w i t h ou r human c a p i t a l measures . I f such

a d j u s t n e n t s of measured l a b o r q u a l i t i e ~ t o wage d i f f e r e n c e s are c o n p l e t e t h a n

no n e t s e c t o r - s p e c i f i c vage d i f f e r e n t i a l can e x i s t .

3 u t even i f such " net" d i f f e r e n t i a l s a r e s u b s t a n t i a l no c l e a r c u t

economic i c t e r p r e t a t i o n i s p o s s i b l e . So3e e c o n o m i s t s might m a i n t a i n t h a t t h e

n e t d i f f e r e n t i a l s s t i l l r e f l e c t d i f f e r e n c e s i n q u a l i t y of l a b o r which are

d i f f i c u l t t o q u a n t i f y . It is e q u a l l y p l a u s i b l e , on t h e o t h e r hand, t o a r g u e

t h a t t h e r e t u r n s t o e d u c a t i o n and e x p e r i e n c e which have been " n e t t e d ou t" a r e

themse lves , i n p a r t , r e f l e c t i o n s of l a b o r n a r k e t s e g n e n c a t i o n r a t h e r t h a n

n e a s u r e s of a a r g i n a l p r o d u c t i v i t i e s of d i f f e r e n t q u a l i t i e s of l a b o r . 4

The u p s h o t of t h e s e c o n s i d e r a t i o n s i s t h a t t h e i d e t i t i f i c a t i o n of a

" net" wage d i f f e r e n t i a l between s e c t o r s is s u g g e s t i v e b u t s h o u l i n o t be

i n t e r p r e t e d a s a c o n c l u s i v e e v i d e n c e of t h e e x t e n t of d i f f e r e n t r e t u r n s t o

l a b o r of e q u i v a l e n t q u a l i t y .

( i i i ) !Je have ment ioned e a r l i e r t h a t i n I n d i a a t t h e p r e s e n t t i m e % . r

(and indeed o v e r t h e l a s t two d e c a d e s ) t h e f o r n a l s e c t o r of t h e l a b o r n a r k e t

*

t h i s i t n i g h t be t empt ing t o c g c l u d e t h a t i f a " net" wage d i f f e r e n t i a l e x i s t s - i n f avor of t h i s s e c t o r i t i s &cause of t h e i n f l u e n c e of i n s t i t u t i o n s . But * - such a c o n c l u s i o n can on ly be s u s t a i n e d i f c a r e f u l h i s t o r i c a l e x a n i n a t i o n

shows t h a t s i g n i f i c a n t xaqe d i f f e r e n t i a l s were c r e a t e d a f t e r t h e F a c t o r y Act

jecame e f f e c t i v e i n t h e l a t e f i f t i e s o r a l t e r n a t i v e l y a f t e r t r a d e un ions

jecame powerfu l i n t h i s s e c t o r . I n f a c t , one of t h e a u t h o r s h a s shown t h a t

h i s t o r i c a l l y s p e a k i n g , wage l e v e l s i n t h e f a c t o r y s e c t o r seemed t o have been

h i g h conpared w i t h a l t e r n a t i v e e a r n i n g s of l a b o r a t t r a c t e d t o f a c t o r i e s w e l l

b e f o r e t h e e r a of t r a d e un ions o r government l e g i s l a t i o n . h E l sewhere Yazuadar

h a s s u g g e s t e d s o c e t h e o r i e s a s t o why wages i n t h e node rn f a c t o r y s e c t o r n i g h t

be n a i n t a i n e d a t a r e l a t i v e l y h i g h l e v e l even unde r " f r e e" l a b o r n a r k e t

c o n d i t i o n s . ' I n any e v e n t , t h e q u e s t i o n a s t o how much of t h e d i f f e r e n t i a l -

i f i t e x i s t s - can be a t t r i b u t e d t o i n s t i t u t i o n a l i n f l u e n c e i s o u t s i d e t h e

scope of t h i s p a p e r .

( B ) W e have s o f a r been t a l k i n g abou t wage d i f f e r e n t i a l s between s e c t o r s of

t h e l a b o r market a f t e r c o n t r o l l i n g f o r human c a p i t a l f a c t o r s . But a p a r t from

t h e problem of "ilet" d i f f e r e n t i a l s t h e r e is t h e q u e s t i o n of d i f f e r e n t r e t u r n s

t o t h e hunan c a p i t a l f a c t o r s t h e n s e l v e s i n t h e t h r e e s e c t o r s of t h e l a b o r

n a r k e t . T h i s i s a second i n t e r p r e t a t i o n of l a b o r n a r k e t s egmen ta t ion . A

s p e c i f i c l o c a t i o n i n t h e l a b o r n a r k e t - a p a r t f r o n s h i f t i n g t h e e a r n i n g s

f u n c t i o n f o r a t y p i c a l v o r k e r - a l t e r s t h e s l o p e w i t h r e s p e c t t o t h e hunan

c a p i t a l f a c t o r s ( e d u c a t i o n and e x p e r i e n c e ) used i n t h e f u n c t i o n . 7

S e v e r a l p o s s i b l y c ~ m p e t i n g hypo theses can be s u g g e s t e d a b o u t t h e

r e l a t i v e r e t u r n s t o e d u c a t i o n and e x p e r i e n c e i n d i f f e r e n t s e c t o r s of t h e l a b o r a r e

n a r k e t . For e x a n p l e :

.* t o f o r n a l e d u c a t i o n a l q u a l i f i c a t i o n i n e v a l u a t i n g t h e P r o d u c t i v i t y of a - - o r . Thus i f r e t u r n s t o ? d u c a t i o n i n a g i v e n segnen't of t h e market were

I e - h i g h the r e t u r n s t o e x p e r i e n c e would he low, and v i c e v e r s a .

Hypothes is 3 : A t t h e h i g h e r l e v e l s of t h e 1abc.r market , r e t u r n s t o e d u c a t i o n

nay be g r e a t e r e i t h e r because of the e f f e c t of " c r e d e n t i a l i s m" o r because

employers a r e a b l e t o use educa ted l a b o r nore p r o d u c t i v e l y .

S y p o t h e s i s 4 : O p p o r t u n i t i e s f o r s k i l l fo rmat ion d u r i n g the worker ' s c a r e e r

may be smal l a t t h e lower end of t h e l a b o r market . Thus t h e expeyience- -

e a r n i n g s p r o f i l e i n t h e s e s e c t o r s w i l l be r e l a t i v e l y f l a t .

( C ) The t e s t of some of t h e hypotheses mentioned i n t h e l a s t s u b s e c t i o n

invo lves comparison of t h e c o e f f i c i e n t s of e d u c a t i o n and e x p e r i e n c e i n t h e

e a r n i n g s f u n c t i o n of workers i n t h e t h r e e s e c t o r s of the l a b o r n a r k e t . There

is however, an a d d i t i o n a l i s s u e about what v a r i a b l e we should use t o c a p t u r e

t h e r o l e of e x p e r i e n c e i n a p a r t i c u l a r l a b o r market .

I n our Survey, we have in fo rmat ion on t h e l e n g t h of e x p e r i e n c e i n

jobs i n Bombay C i t y s i n c e t h e e n t r y of t h e worker i n t o t h e j'ob n a r k e t i n t h e

c i t y . Me a l s o have i n f o r m a t i o n on the l e n g t h of e x p e r i e ~ c e i n t h e c u r r e n t

job. T o t a l ~ x p e r i e n c e , which f o r a migrant t o t h e c i t y i n c l u d e s job

exper ience i n t h e r u r a l a r e a s of o r i g i n a s w e l l , is b e s t approximated by age

s i n c e f o r nany workers i n our sample t h e age of e n t r y i n t o t h e l a b o r f o r c e i n

a r u r a l ( o r a g r i c u l t u r a l ) s e t t i n g is u n c e r t a i n .

Labor markets can be expected t o d i f f e r i n t h e way they va lue t h e s e

, t h r e e d i f f e r e n t measures of exper ience . We s h a l l be i n t e r e s t e d i n t e s t i n g one Q

important h y p o t h e s i s in p a r t i c u l a r :

' ? more than i n t h e o t h e r s e c t o r s . Hence t h e response of e a r n i n g s t o c u r r e n t - - exper ience i n t h e f i r n ( r n t b r than t o g e n e r a l xork e x p e r i e n c e ) vou ld be nore

I s 6 I

i n p o r t a n t i n t h i s s e c t o r than i n the s m a l l- s c a l e o r c a s u a l l a b o r markets .

1 . 3 The Sample -

It was d e c i d e d t o c o v e r t h r e e s e c t o r s of t h e market : ( a ) t h e s i n g l e

workers aqd t h e c a s u a l s a s w e have d e s c r i b e d t h e n above; ( b ) t h e worke r s i n

t h 2 s m a l l - s c a l e s e c t o r ; and ( c ) t h e workers i n f a c t o r i e s . We a l s o d e c i d e d t o

e x c l u d e from t h e sample owner /vo rke r s and f a m i l y worke r s who c c ~ n s t i t u t e a n

i n p o r t a n t p r o p o r t i o n of t h e c i t y ' s " in fo rma l" s e c t o r . The studly was

d e l i b e r a t e l y l i m i t e d t o wage e a r n e r s .

The s a n p l e f ranework was p rov ided by l i s t s of establi.shme:lts i n t h e

c i t y- - f o r f a c t o r i e s , t h e l i s t m a i n t a i n e d by t h e Chief I n s p e c t o r o f F a c t o r i e s ,

and f o r s m a l l e s t a b l i s h m e n t s , t h e r e g i s t e r s m a i n t a i n e d by t h e Munic ipa l Ward

O f f i c e s . The sample s i z e of worke r s t o be i n t e r v i e w e d was p r e d e t e r m i n e d f o r

each of t h e t h r e e s e c t o r s of t h e l a b o r marke t , and t h e t o t a l f o r each s e c t o r

was d i s t r i b u t e d among e s t a b l i s h m e n t s b e l o n g i n g t o d i f f e r e n t i n d u s t r i a l g r o u p s ,

s o a s t o e n s u r e t h a t f o r each s e c t o r of t h e market t h e sample of e s t a b l i s h

n e n t s r e f l e c t e d t h e i n d u s t r i a l d i s t r i b u t i o n of t h e wage e a r n e r s . For each o f

t h e f a c t o r i e s s e l e c t e d , t h e q u o t a of workers t o be i n t e r v i e w e d was s e l e c t e d a t

random from t h e employee : o l l s , w h i l e f o r t h e s m a l l- s c a l e s e c t o r , whose

a v e r a g e employment was 2.9 worke r s p e r e s t a b l i s h m e n t , a l l t h e wage e a r n e r s i n

each of t h e sample e s t a b l i s h m e n t s were su rveyed . The s i z e of t:he sample was

' a b o u t 2 ,700 worke r s i n f a c t o r i e s and 2 ,000 worke r s i n s m a l l - s c a l e unit$,.

The c a s u a l workers a r e no t a t t a c h e d t o any e s t a b l i s h m e n t s . Thus w e

d o n o t have a s a r n p i e r r a rne Lo r a11 r 5 i c i ~ l l b l l l ~ l ~ L ~ ~ - O d s c ~ sui 9 ~ ) . - L wda dLL.,dLb

t o su rvey 1 ,100 c a s u a l workers randoml;: s e l e c t e d f r o n J h o s e who g a t h e r e d f o r

vork i n t h e ell-known n a r k e t p l a c e s f o r c a s u a l w o r k e e , b u t t a k i n g c a r e t o

e n s u r e t h a t t h e i n d u s t r i a l compos i t i on of t h e s a n p l e r e f l e c t e d t h e i n d u s t r i a l

d i s t r i b u t i o n of t h e p o p u l a t i o n of s i n g l e worke r s i n t h e c i t y , a s d e r i v e d f r o n

census d a t a .

T a b l e 1 s e t s o u t t h e summary s t a t i s t i c s f o r some key v a r i a b l e s i n

t h e t h r e e s e c t o r s . It w i l l b e se n t h a t t h e r e is a b a s i c d i f f e r e n c e be tween

t h e f a c t o r y s e c t o r on t: e one hand, r e g a r d i n g t h e age o r e x p e r i e n c e of T a b l e 1

!4ean Vlaues o r P r o p o r t i o n s of S e l e c t e d V a r i a b l e s i n t h e Three S e c t o r s

worke r s . The r e a n age of f a c t o r y workers is c o n s i d e r a b l y h i g h e r , a s is t h e i r

e x p e r i e n c e i n Sombay, and e x p e r i e n c e i n t h e i r c u r r e n t job. C u r r e n t j o b

e x p e r i e n c e f o r a f a c t o r y worker w a s more t h a n t w i c e t h a t of a worker i n s m a l l

e s t a b l i s h m e n t s , and t h r e e t i m e s t h a t of a c a s u a l worke r . E v i d e n t l y w o r k e r s

t y p i c a l l y have a more s u s t a i n e d c a r e e r i n t h e f a c t o r y s e c t o r of fiombay t h a n

t h o s e i n t h e s m a l l s c a l e c r c a s u a l s e c t o r s . T h i s might s u g g e s t t-o some

r e a d e r s t h a t work i n t h e s m a l l - s c a l e o r c a s u a l s e c t o r s might be t h e p o i n t of

e n t r y i n t o t h e u r b a n l a b o r m a r k e t , and worke r s s u b s e q u e n t l y " g r a d u a t e ' t o t h e

f a c t o r y s e c t o r s . A c t u a l l y t h e lower age and e x p e r i e n c e of non- fhc to ry w o r k e r s

seems t o be n o r e t h e r e s u l t of r e t u r n m i g r a t i o n t o t h e r u r a l a r e a s t h a n

movements w i t h i n t h e urbn- l a b o r market . T h i s i s s u e h a s been e x p l o r e d i n

d e t a i l i n a n o t h e r p a p e r . ' We ment ion t h i s p o i n t i n p a s s i n g b e c a u s e it is o f

some impor t ance f o r t h e methodology a p p l i e d i n t h i s p a p e r , as w e w i l l see

s h o r t l y . . r

The e d u c a t i o n a l d i s t r i h t i o n s of worke r s i n t h e t h r e e s e c t o r s d i f f e r

* - - 1 - * - ' i

f a c c o r F e s a d s m a l l e s t a b l i s h m e n t s . Casua l worke r s do have a g r e a t e r - - - c o n c e n m a t i o n i n e d u c a t i o n a l l e v e l s below t h e 6 t h s t a n d a r d . T h i s g r o u p has -

II E *

a l s o a markea ly s m a l l e r p r o p o r t i o n knowing E n g l i s ; , .

A word shou ld be s a i d abou t t h e e a r n i n g s v a r i a b l e u sed i n t h e

a n a l y s i s . For a l l v o r k e r s i n E a c t o r i e s , and i n s m a l l - s c a l e e s t a b l i s h m e n t s ,

Tab le 1: %an P a l a e s o r ?ro?orr=ions of Se l ec t ed Var i ab l e s i n t're--%re= S e c t o r s of t h e aombay ?!!7ke=

Log of M o n ~ h l y 3rnLngs 6.16 !0.36) 5.37 (0.45) 5.16 (C -G3)

hg e 36.6 (9.6) 28.0 (1O.d) 26.8 ( 8 . h )

Tocal Exper ience 17.5 (9.5) 9.5 (9.1) 6.6 (6.5)

Zxper iecce i n Current Job 1 3 - 5 (9.1) 5.6 (6.8) 4.5 (5.1)

Percentage D i s t r i b u t i o n by Age group:

50 & over .13 .@7 .03

?ercen>ape D i s t r i b u t i o n by Zduca t iona l Levels :

I l l i t e r a t e ~0

I L i t e r a t e 1-3 S:1. E l

6-6 Std. 7-9 Std . E3

Incer aa3 above E j

S (San~le Size) 71rijh 1581 S O 0

t h e S u ~ v e y c o l l e c t e d d a t a s e p a r a t e l y on r e g u l a r mon th ly wages, o v e r t i m e and

bonus payments f o r t h e month, t i p s and any c a s h a l l o w a n c e s . The s u n of t h e s e

items g i v i n g t h e t o t 2 1 n o n t h l y c a s h e a r n i n g s were added t o t h e imputed v a l u e

of payments i n k i n d ( food and a c c o m o d a ~ i o n ) - an i t e m of p a r t i c u l a r i m p o r t z n c e

i n s m a l l e n t e r p r i s e s - t o g i v e t o t a l n o n t h l y e a r n i n g s from t h e main

employment. I t was t h i s v a r i a b l e which was u sed f o r f a c t o r y and s m a l l

e s t a b l i s h m e n t worke r s ( n o t e t h a t e a r n i n g s from s e c o n d a r y employment , i f a n y ,

were e x c l u d e d ) . Casua l worke r s do n o t have mon th ly c o n t r a c t s . T h e i r n o n t h l y

e a r n i n g s were computed by a u l t i p l y i n g t h e a v e r a g e d a i l y wage r e c e i v e d by t h e

number of d a y s o f work s e c u r e d d u r i n g t h e month.

1 . 4 The He thodo logy --

The ne thodo logy oF t h e pape r is based on t h e e s t i m a t i o n of e a r n i n g s

f u q c t i o n s i n e a c h of t h e t h r e e s e c t o r s of t h e Bombay l a b o r m a r k e t , and t h e

c o ~ n p a r i s o n of t h e s e 5 - n c t i o c s a c r o s s s e c t o r s . X q u e s t i o n i m m e d i a t e l y a r i s e s

ahou t t h e u s e f u l n e s s of s e c t o r a l ear : i ings f u n c t i o n s . The re i s l i k e l y t o be a

c e t novenent o v e r t h e l i f e t i m e of worke r s f r am t h e s m a l l - s c a l e o r c a s u a l t o

t h e l a r g e s c a l e s e c t o r s . Both h i g h e r e d u c a t i o n and l o n g e r e x p e r i e n c e might

f a v o r such a movement. A l e g i t i m a t e c o n c e r n might be t h a t a n e a r n i n g s

f u n c t i o n f i t t e d t o t h e sample i , ~ t h e s m a l l- s c a l e o r c a s u a l s e c t o r s e x c l u d e t h e e , t

sub- sample which e n j o y h i g h e r e a r c i n g s t h r o u g h s u c h i n t e r s e c t o r a l m o b i l i t y .

. ' - ~ , > - > L 1

- i n t e r p r e t e d a s t h e r e t u r n s t o human c a p i t a l of t h o s e who s t ' z r t e d t h e i r 1:fe i n - - a p a ~ t i c u g r s e c t o r . They d o , however, r e p r e s e n t t h e a v e r a c e x p e r i e n c e of

I B - t h o s e who d i d n o t make a t r a n s i t i o n t o t h e b e t t e r p a i d sector.s, and t h e i r

u s e f u l n e s s d e r i - ~ e s e n t i r e l y irom t h e e m p i r i c a l o b s e r v a t i o n of t h e p r o p o r t i o n

of worke r s who d i d c o t aake such a t r a n s i t i o n .

The Bombay Survey c o l l e c t e d d a t a on job m o b i l i t y of workers . Of

those found i n t h e urban l a b o r market a t t h e t i n e of the s u r v e y , job m o b i l i t y

w i t h i n 3ombh-: cl : j was q u i t e low. Thus even i n t h e a ~ e - g r o u p 35-4G t h e

pe rcen tage w i t h no more than one job ( t h e "non-movers") v a s 42 p e r c e n t i n

f a c t o r i e s and 33 p e r c e n t i n t h e s m a l l s c a l e s e c t o r . Fr- a l l age g roups and -

f o r both s e c t o r s taken t o g e t h e r , n e a r l y h a l f t h e sample were "'non-movers". Of

c o u r s e , f o r even t h o s e who had noved, o n l y a f r a c t i o n would b~ noving o u t s i d e

t h e s e c t o r . Our Survey r e v e a l e d t h a t m i g r a n t s w i t h r e g u l a r jobs now ( b o t h i n

t h e smal l- sca le s e c t o r and 5 a c t o r y s e c t o r s ) who had i n i t i a l l y worked a t c a s u a l

jobs were o n l y 11 p e r c e n t of t h e t o t a l who had changed jobs a t l e a s t once. Of

t h e sanp le of f a c t o r y worker s , o u r e s t i m a t e v a s t h a t perhaps 25 p e r c e n t came

from the s m a l l- s c a l e s e c t o r . 8

These d a t a u n d e r l i n e t h e p o i n t made e a r l i e r t h a t t h e ~ u c h lower age

of the s ~ m p l e found i n t h e 3mal l - sca le and c a s u a l s e c t o r s , c m p a r e d t o

f a c t o r i e s , is nore t h e r e s u l t of r e t u r n m i g r a t i o n t o r u r a l a r e a s t h a n

" graduat ion" t o f a c t o r y jobs . They l end s u p p o r t t o t h e nethodology of u s i n g

s e c t o r a l e a r n i n g s f u n c t i o n s a s t o o l s of a n a l y s i s .

1.5 Plan of the paper - Apart f r o n t h e t e s t i n g of hypo theses abou t , the o p e r a t i o n of urban

L

l a b o r markets a l r e a d y d i s c u s s e d , two i s s u e s of methodological . i n t e r e s t a r e

-

s t r u c t u r a l s t a b i l i t y a c r o s s s e c t o r : o r regimes . The 'chow t e s t f o r s t r u c t u r a l - s t a b i l i t y w i l l be f a n i l l a r t o n o s t r sade rn . The p r e s e n t s t u d y g e n e r a l i s p s

I

t h i s t e s t t o cover s i t u a t i o n s where one is i n t e r e s t e d i n t e s t i n g t h e s t a b i l i t y

of on ly a s u b s e t of t h e r e g r e s s i o n c o c f f i c i e n ~ s and where t h e s e c t o r a l

d i s t u r b a n c e v a r i a n c e s nay be unequa l . The c o n p u t a t i o n s , which c l o s e l y

p a r a l l e l t h o s e f o r t h e Chow t e s t , a r e s t r a i g h t f o r w a r d and can be e x e c u t e d

u s i n g s t a n d a r d O.L.S. packages a However t h e h y p o t h e s i s t e s t i n g is a s y m p t o t i c

and f i n i t e sample a p p r o x i m a t i o n s have y e t t o be deve loped f o r t h e r e l e v a n t

t e s t s t a t i s t i c . I n t h e p r e s e n t a p p l i c a t i o n , which u t i l i s e s a v e r y l a r g e

sample , t h e d i s t i n c t i o n is n o t of any p r a c t i c a l impor t ance . X second

r ~ e t h o d o l o g ' c a l i s s u e c o n c c r n s t h e shape and r e p r e s e n t a t i o n of e a r n i n g s

p r o f i l e s . The p r o c e d u r e fo l lvwed h e r e i s t o r e p r e s e n t p r o f i l e s i n r e s p o n s e t o

age o r e x p e r i e n c e a s a s e n i l o g a r i t h m i c f u n c t i o n of q u a d r a t i c o r d e r . Once t h e

e f f e c t s of o t h e r v a r i z b l e s such a s e d u c a t i o n >r m i g r a n t s t a t u s . 3ve been

removed, t h e s h a p e s of t h e p r o f i l e s can be conpa red a c r o s s s e c t o r s . A s e t of

summary measu res a r e computed t o f a c i l i t a t e such compar isons . These measu res

a r e d i s c u s s e d i n S e c t i o n 111, which c o n t a i n s a l s o t h e body olf e m p i r i c a l

r e s u l t s f r o n t e s t i n g t h e v a r i o u s h y p o t h e s e s r e f e r r e d t o above. S e c t i o n I V

draws some c o n c l u s i o n s f r o n t h e r e s u l t s of t h e s t u d y .

11. TEST STATISTICS

Al though t h e a p p l i c a t i o n t o be c o n s i d e r e d i n c o r p a r a t e s t h r e e

s e c t o r s , i t w i l l be c o n v e n i e n t t o i n i t i a l l y e x p l o r e t h e s t a t i s t i c a l

ne thodo logy f o r j u s t w o . E x t e n s i o n t o t h r e e o r n o r e s e c t o r s w i l l t h e n be

a lmos t i t m e d i a t e .

The ~ r o b l e n may be f o r n a l i s e d a s f o l l o w s . Denote t h e two s e c t o r s 3y

s u b s c r i p t s "a" and "b". We may write two r e g r e s s i o n s :

Two s o r t s of v a r i a b l e s occu r on t h e r i g h t hand s i d e of t h e s e e q u a t i o n s . The

v a r i a b l e s forming t h e d a t a m a t r i c e s GI and W a r e s p e c i f i c t o each s e c t o r : a b

we s h a l l c a l l t h e s e concomi tan t v a r i a b l e s , f o l l o w i n g e s t a b l i s h e d s t a t i s t i c a l

te rminology ( e . g . Rao (1973) , p.288). The v a r i a b l e s i n t h e d a t a m a t r i c e s

X and X a r e communal t o t h e two s e c t o r s . I n te rms of t h e p r e s e n t a b

D c o n t e x t , v a r i a b l e s r e p r e s e n t i n g f a c t o r y s i z e c l a s s e s would , c l e a r l y n o t a p p e a r

i n a r e g r e s s i o n r e l a t i n g t o t h e c a s u a l s e c t o r , s o t h a t f a c t o r y s i z e is a

L u I I C O I ' L L ~ ~ L ~ L V d L l d L + i C . IILJII'LVLI , I L I L A L l ~ L ~ ~ J < I L L . L Y - U C , - - - - . , u .r L

s t a t u s o r l a n g u a g e c a p a b i l i t i e s a r e c l e a r l y comnunal. From t h e t ~ s t i n g p o t n t - of v i e v we a r e i n e r e s t e d i n t e s t i n g whether t h e c o e f f i c i e n t s of t h e comnunal

v a r i a b l e s , o r a d e s i g n a t e d s u b s e t t h e r e o f , a r e t h e same a c r o s s s e c t o r s . Fron

chis p o i n t of v iew, t h e c o n c o n i t a n t v a r i a b l e s have t h e s t a t u s of n u i s a n c e

v a r i a b l e s t o be e l i n i n a t e d ; a l t h o u g h t h i s does not mean t h a t such v a r i a b l e s

possess no i n t r i n s i c i n t e r e s t .

I t w i l l be a p p a r e n t t h a t i f t h e r e a r e no concomitant v a r i a b l e s

7 (9 = W = 0) and i f u2 = u- = u2 , i . e . t h e v a r i a n c e s of t h e s e c t o r a l

a b a b

d i s t u r b a , l c e s u and u a r e e q u a l , than a t e s t f o r b t 3, = 8, r e 3uces t o

a t

a co r l ren t iona l Chow test of p a r a n e t e r s t a b i l i t y between s e c t o r s . There a r e

tvo compl ica t ing f a c t o r s i n t h e p r e s e n t a p p l i c a t i o n , t h e p resence of s e c t o r -

s p e c i f i c ( concomi tan t ) v a r i a b l e s and t h e l a c k of any reason t o s p e c i f y

3 d = u2 . It w i l l be conven ien t t o t a k e t h e s e compl ica t ions i n t u r n . Thus a b

2 2 we assume i n i t i a l l y t h a t a = u = a

2 a b

s a y , and c o n s i d e r f i r s t t h e t e s t i n g

procedure i n t h e presence of concomitant v a r i a b l e s .

2.1 Common Disturbance Var iances

We nay combine e q u a t i o n s ( l a ) and ( l b ) i n t o t h e f o l t o w i n g pooled

model:

L . e

.I n a t u r a l t e s t of the h y p o t h e s i s pa = pb i s theil t o t e s t 6 = O i n t h e N w

m - r - . I , ., , 1 I , , , I , , T\,Q c n l l n . : 2 m - - n , - , J ~ q <.- t - h ? ~ - ~ n , ~ n ~ + i - n TV-0

- e i t h e r s t a n d a r d theory o r e l s e a r i s e a s simpl! a p p l i c a t i o n s of the p a r t i t i o n e d

- - i n v e r s e : - E I - - i

( i ) Denote by Y3

and X t h e r e s i d u a l s i; t h e r e g r e s s i o n of m

3

I ;la and X on !G the d a t a n a t r i x of c o n c o n i t a n t v a r i a b 1 e s . l ' n ~ e l e a s t - a a '

squares c s t i n a t e s of 3 and from e q u a t i o n s ( l a ) and (15) a r e g iven by m a - b

2.2 Unequal Disturbance Variances

The F statistic given above is not appropriate if a2 P a2 and a b

to allow for such an eventuality, we derive a testing procedure vith

asynptotic validity which can be easily implemented w-ith standard 0.L.S

packages. Let us consider maxinising the likelihood function of the model (1)

subject to 'a

= pb assuming Normal disturbances. Introducing a vector - - of Lagrange n*llti~liers and z~ncentrating out the concomitant parameters

(a and ab) , the log likelihood function may be written: - a - N 2

N T = - - a L1 ( S + log 2n - 3 log a - - log cr

b 2 2 a a 2 b

- A' (Pa - - Bb) ( 5 ) N N

Differentlnting with respect to Pa and Pb we obtai?: - N

- - 8

I I - a' ?a)-1 A a N (6a)

- t -1 N -

xhere it will be recalled chat (e.g.) ba =- (?a'?a) X' y . Imposing the

?. - a -a

requirement 3 = pS = 2 yields: - a -

7 The naxinum-likelihood estimate of a- is given by

a A - 1 - - ^

''a- x 9 )'(ya- Ya 9 ) . However, estimates which are in any event a - a - - - -

consistent, but efficient only under the null hypothesis, nay be defined in

terns of the O.L.S. residuals resulting from equation (la) and (lb):

L = e ' e / (xa - din a -dim 8,) , "here a -a -a - a

U

A - - e = -

'a - IJ a - Xa ba - ya - Xa ba , with a corresponding - a w a - - -

definition for st . Given such consistent estimates of a2 and a

a define

b '

Suppose Lhat N and N tend to infinity in such a way that the a b

Na ratio - N

becones a constant. It is then straightforward to show that under b 1

the null hypothesis pa = Bb , the variable X has a limiting - - J N + N a b

Normal distribytion:

- - Y* 5i - - a a w e r e !I = lim ( :J ) , Gb is siinilarly defined,

I a E S + m a a

- N a r = lin ,, a;~d r = 1 - r . a . + Nb b a

a

C o n s i d e r now t h e s t a t i s t i c :

It f o l l o w s from ( 9 ) t h a t h a s a s y m p t o t i c a l l y a 2 ? A 'din( 6 )

d i s t r i b u t i o n

7 u n d e r t h e n u l l h y p o t h e s i s ( w i t h a n o n c e n t r a l X' under t h e a l t e r n a t i v e ) .

T h i s Lagrange m u l t i p l i e r - t y p e t e s t is c l e a r l y a p p r o p r i a t e f o r a test t h a t

pa = pb ; under t h e a l t e r n a t i v e w e shou ld e x p e c t t h a t t h e l i k e l i h o o d v a l u e

o f r e l a x i n g t h e c o n s t r a i n t (measured by t h e m u l t i p l i e r h ) would be l a r g e , s o

t h a t t h e r e j e c t i o n r e g i o n is d e f i n e d by h i g h v a l u e s of Q A . It remains t o

p r e s e n t t h e test s t a t i s t i c (10) i n more immedia t e ly r e c o g n i z a b ? e forms.

Combining e q u a t i o n s (8) and ( l o ) , we have t h e Wald ana logue :

-1 -1 q A = b - b b Y { S2(? a I-' + s 2 } (ba- bb; . a a a b ( 1 1 ) N N N N

t! more c o n v e n i e n t computing f o m - ,.-y be d e r i v e d from t h e a n a l o g y w i t h p o i n t

( i i ) o f s e c t i o n 2 .1 above , a s f o l l o w s :

1. Fron an i n i t i a l O.L.S. c a l c u l a t i o n based upon e q u a t i o n s ( l a ) and ( l b )

c a l c u l a t e s2 and s2 , t h e e s t i m a t e d s t a n d a r d e r r o r s of t h e e q u a t i c ~ ~ s . a b

r 2. R e s c a l e t h e d a t a m a t r i c e s of t h e pooled model ( 2 ) by a d j u s t i n g t b e

d i s t u r b a n c e v a r i a n c e s towards ( a sympto t i c ) . h o n o s c e d a s c i t y . Fo r n u m e r i c a l

3. Sow l e t S S R b e t h e i n c r e n e n t a l r e g r e s s i o n s u n of s q u a r e s r e s u l t i n g f rom

t h e comple t e p o o l e d n o d e l ( 1 2 ) r e l a t i v e t o t h a t w i t h u 6 = 0 u . Then i t i s

s t r a i g h t f o r w a r d 3 t o show t h a t :

, and t h i s i s d i s t r i b u t e d The test c r i t e r i o n i s t h e r e f o r e - S

2 2 a

a s y m p t o t i c a l l y as 'd in(5) u n d e r t h e n u l l h y p o t h e s i s .

2.3 Remarks

We c o n c l u d e t h e d i s c u s s i o n of t e s t i n g p r o c e d u r e s w i t h some f u r t h e r

comments on test s tat is t ' ics f o r t h e c a s e where d i s t u r b a n c e v a r i a n c e s a r e n o t

assumed t o be e q u a l .

( a ) S i n g l e pa rame te r tests can be c a r r i e d o u t on t h e b a s i s of t h e

a s y m p t o t i c N o r n a l i t y of t h e e s t i m a t e o b t a i n e d f rom t h e O.L.S. f i t of

e q u a t i o n ( 1 2 ) . Such a p r o c e d u r e amounts t o a g e n e r a l i s e d l e a s t s q u a r e s

2 e s t i m a t o r w i t h a2 and a e s t i m a t e d by s 2 and s b

I n d e e d , s i n c e t h e a a b '

l a t t e r a r e c o n s i s t e n t e s t i m a t e s , t h e r e s u l t i n g e s t i m a t o r of 6 c o r r e s p o n d s t o u

a s c o r i n g e s t i m a t o r a n d i h a s t h e s a n e a s y m p t o t i c d i s t r i b u t i o n a s t h e n,axtsun

2 l i k e l i h o o d s o l u t i o n i n which f u l l H.L. e s t i m a t e s of a2 and a a r e

a b

, .,, / L . C\' .- , ..

.r ( 5 ) S i m i l a r r e n n r k s a p p l y t o t h e t e s t s t a t i s t f c Q d e f i n e d - * - A

2 above.? The u s e of s2 a n d s w i l l r e s u l t i n no a s y m o t i c l o s s of power

a 5 - r e l a t i v e t o u s e of t h e f u l l Y.L. e s t i m a t e s f o r a2 and a

a The t e s t b .

( c ) The nethodology j u s t o u t l i n e d e x t e n d s innd ia t l e ly t o more t h a n

P.J s e c t o r s . Thus t e s t s of hypo theses such a s

= Bb = Pa ; PC - - PC - Pb 9 PC - Pa , c a n be c a r r i e d o u t i n an

a p p r o p r i a t e l y n e s t e d sequence and t h e r e l e v a n t t e s t s t a t i s t i c s can be o b t a i n e d -

i n terms of i n c r e m e n t a l r e g r e s s i o n sums of s q u a r e s a s s o c i a t e d w i t h t h e

5 1 g e n e r a l i s a t i o n of. e q u a t i o n ( 1 2 ) above.- . In z e n e r a l t h e t e s t i n g r e q u i r e m e n t s

a r e s i m p l i f i e d by t h e o r t h o g o n a l s t r u c t u r e of t h e d a t a m a t r i c e s a s s o c i a t e d

wi th the i n c r e m e n t a l p a r a n e t e r s .

111. R e s u l t s

3.1 G e n e r a l ne thodo logy

The r e g r e s s i o n r e s u l t s r e p o r t e d i n :his s e c t i o n r e l a t e t o t h r e e

s e c t o r s : s e c t o r I, t h e " s n a l l " s e c t o r , w i t h 1581 observat:onS; s e c t o r 11, t h e

" f a c t o r y" s e c t o r w i t h 2464 o b s e r v a t i o n ; and s e c t o r 111, t h e " 'casual ' ' s e c t o r ,

w i t h 900 o b s e r v a t i o n s A For t h e s e p a r a t e s e c t o r a l r e g r e s s i o ~ n s based upon t h e

v a r i a b l e s l i s t e d c o l l e = t i v e l y below i n T a b l e I , t h e computed e q u a t i o n s t a n i a r d

e r r o r s were s = 0 . 3 3 3 , s2 1

= 0.286 and s = 0.410 , as compared 3

w i t h a grouped s = 0.327. These d i f f e r e n c e s c a n be t a k e n t o i n d i c a t e non-

9 homogeneity i n d i s t u r b a n c e v a r i a n c e s * The d e t a i l e d r e s u l t s r e p o r t e d below

t h e r e f o r e r e f e r t o t h e t e s t i n g p r o c e d u r e s e s t a b l i s h e d t n s e c t i o n 2.2 above f o r

t h e c a s e s where t h e s e c t o r a l d i s t u r b a n c e s a r e unequal . We n o t e , however, t h a t

b r o a d l y s i m i l a r c o n c l u s i o n s were r eached w i t h t e s t i n g p r o c e d u r e s i n c o r p o r a t i n g

a ma in ta ined h y p o t h e s i s of d i s t u r b a n c e homogenei ty , a l t h o u g h t h e r e were some

d i f f e r e n c e s i n i n d i v i d u a l s i g n i f i c a n c e l e v e l s . F i n a l l y , w e n o t e t h a t s e c t o r

11, t h e f a c t o r y s e c t o r , h a s been chosen a s a r e f e r e n c e p o i n t o r benchmark, s o

t h a t t h e p a r a m e t e r d i f f e r e n c e s d i s c u s s e d i n s e c t i o n 2 above a r e d e f i n e d as

3 / PI - PI, and BIII - - , I The ~ a r i a b l e s u t l ! i s e d i n t h e r e g r e s s i o n s are l i s t e d i n t h e f a r

l e f t- h a n d column of T a b l e I , w i t h n comple t e key and d e s c r i p t i o n i n Appendix

v a r i a b l e s i n c l u d e s i z e c l a s s e s f o r t h e f a c t o r y s e c t o r 2nd d i f f e r e n t a c t i v i t y

1 . c l a s s e s i n t h e s m a l l s e c t o r , such a s r e s t a u r a n t s o r r e F i d e n t i a 1 h o t e l

e n p l o y n e n t . Communal v a r i a b l e s i n c l u d e age c l a s s e s , e d u c a t i o n a l l e v e l s (Ed1

t h e l o w e s t , t h e h ig*- ,es t ) and a d d i t i o n a l c a t e g o r i c a l v a r i a b l e s f o r w h e t h e r

t h e s u b j e c t s p e a k s E n g l i s h o r is m a r r i e d . A l t e r n a t i v e s t o age v a r i a b l e

t h a t a r e e x p l o r e d a r e t o t a l work e x p e r i e n c e (T'JE) and work e x p e r i e n c e i n t h e

c u r r e n t j ob (GG).

The c l a s s i f i c a t i o n of t h e c o n s t a n t ( i n t e r c e p t ) t e r n and t h e

a s s o c i a t e d s e c t o r a l i n t e r c e p t dummies, c a l l s f o r comment. I n term; of t h e

concomi tan t /communal d i s t i n c t i o n , ':he i n t e r c e p t s h o u l d be communal and o i \e

shou ld t e s t whe the r i t s c o e f f i c i e n t s a r e t h e same a c r o s s s e c t o r s ; t h u s t h e

s e c t o r I and 111 d i f f e r e n c e s of T a b l e I s h o u l d i n c l u d e t h e r e l e v a n t i n t e r c e p t

dummines. T h i s was i n d e e d o u r o r i g i n a l p r o c e d u t e . However, t h e v e r y h i g h

i n d i v i d u a l s i g n i f i c a n c e l e v e l s a s s o c i a t e d w i t h t i i e se i n t e r c e p t dummies ';ended

t o swamp t h e g roup s i g n i f i c a n c e t e s t s . S i n c e s e v e r a l of t h e h y p o t h r q e s

ment ioned i n S e c t i o n I r e q u i r e d t e s t i n g f o r d i f f e r e n c e s in t h e c o e f f i c i e n t s of

v a r i a b l e s , w e r e l e g a t e d ( a s i t were) t h e s e c t o r a l i n t e r c e p t dummies t o t h e

I - + c o n c o m i t a n t v a r i a b l e s . We comment on t h e d i f f e r e n c e s i n i n t e r c e p t s l a t e r i n

t h i s s e c t i o n .

I Two t y p e s of p o o l i n g p r o c e d u r e s were f o l l o w e d . I n t h e comple t e

p o o l i n g e x p e r i m e n t s , a l l t h r e e s e c t o r s were p o o l e d , s o t h a t t h e l i s t of

v a r i a b l e s i n T a b l e I would r e p r e s e n t a s i n g l e poo led r e g r e s s i o n . I n t h i s

framework, t o t e s t t h e h y p o t h e s i s t h a t PI - - BII , we would compare t h e - - r e g r e s s i o n sum of s q u a r e s , a s s c c i a t e d w i t h t h e comple t e model w i t h t h a t

o b t a i n e d by d e l e t i n g t h e s e c t o r I d i f f e r e n c e s ( i . e . , a l l t h e v a r i a b l e s Age I

, - .r

more 1ini t ' ;ed poo led model is employed i n which t h e i n f l u e n c e of on l , two - - - s e c t o r s , de r e f e r e n c e s e c t o r and t h e s e c t o r u n d e r c o n s i d e r a t i o n , is t a k e n - 8

I

into a c c o u n t . T h u s t o t e s t t h e d i f f e r e n t i a l e f f e c t s ui I w i t h r e s p e c t

t o s e c t o r 11. t h e r e f e r e q c e pooled n o d e l would no t c o n t a i n s e c t o r 111

Table I: Pooled RE-gression, 3 sectors

(Dependent Variable: Rn(wage))

Variable Coefficient Standard Error C.V.

Constant 5.006

(Concomitant)

Secdum 1 2.099 0.126 -16.659

Secdun 3 3.970 0.178 -16.685

Size 1 -0.355 0.016 -22.188

Size 2 -0.067 0.016 -4.188

Size 3 0.017 0.024 0.708

Shop 0.250 0.026 9.615

Cnestab 0.232 0.025 9.280

Res thtl 0.048 0.067 0.716

Theatre 0.692 0.053 13.057

Table I (continued)

(Sector 1 differences) f fiI - PI1 )

Edl, I 0.001 1 0.039

English, I -0.039 0.031 -1.258

(Sector 3 differences) ( PIII - P11

* Age, 111 0.002 0.010 0.2CO

Edl, I11 0.023 0.051 0.549

Married, I11 0.014 0.040 0.350

< >

English, I11 -0.060 m

E . 1 1 ~ = 0.931

* rUternative fornulntions embody T I E or CXJE in place of AGE

v a r i a b l e s . Not s u r p r i s f . n g l y , i n view of t h e o r t h o g o n a l i t y of t h e s e c t o r I and

III d i f f e r e n c e s , t h e comple t e and i n c o m p l e t e p o o l i n g p r o c e d u r e s y i e l d e d

c l o s e l y s i m i l a r r e s u l t s and w e r e p o r t o n l y f o r t h e c o n p l e t e p r o c e d u r e . Ue d i d

n o t p e r f o m e x p e r i m e n t s i n which t h e c o m p l e t e l y pooled model was compared wich

s e c t o r I1 a l o n e ; i . e . v e d i d n o t t e s t - PI = 911 - PI11

, s i m u l t a n e o u s l y , b u t

c o n f i n e d o u r t e s t s t o t h e s e p a r a t e e q u a l i t i e s

3.2 Group T e s t s

As ment ioned above , we r a n t h r e e a l t e r n a l i v e v e r s i o n s , w i t h t h e

v s r i a b l e AGE r e p l a c e d by TWE ( t o t a l work e x p e r i e n c e ) and CIJE ( c u r r e n t work

e x p e r i e n c e ) . The r e s u l t s of t h e group t e s t of s i g n i f i c a n c e f o r e a c h o f t h e s e

c a s e s i s shown i n T a b l e 11. R e g a r d l e s s of w h e t h e r age o r e x p e r i e n c e v a r i a b l e s

a r e u t i l i s e d , g roup t e s t s r e j e c t t h e n u l l h y p o t h e s i s t h a t t h e communal

c o e f f i c i e n t s a r e e q u a l a c r o s s s e c t o r s . I n g e n e r a l i t a p p e a r s t h a t s e c t n r 111

d i f f e r s more from t h e b a s e s e c t o r (11 ) t h a n d o e s s e c t o r I. I n d e e d , i f AGE is

u t i l i s e d , s e c t o r I ( t h e small s e c t o r ) i s n o t s i g n i f i c a n t l y d i f f e r e n t f r o m t h e

f a c t o r y s e c t o r , a l t h o u g h t h i s c o n c l u s i o n i s r e v e r s e d i f e x p e r i e n c e v a r i a b l e s

a r e u t i l i s e d . S i m i l a r c o n c l u s i o n s ho ld when a m a i n t a i n e d h y p o t h e s i s o f

homogeneobs d i s t u r b a n c e v a r i a n c e s is imposed. R e t u r n i e t o t h e e x t r a

g e n e r a l i t y of h e t e r o g e n e o u s d i s t u r b a n c e v a r i a n c e s , we s h o u l d p o i n t o u t t h a t i f

c u r r e n t work e x p e r i e n c e is u t i l i s e d i n s t e a d of age o r t o t a l work e x p e r i e n c e ,

t h e s e c o n c l u s i o n s a r e r e v e r s e d i n t h e s e n s e t h a t s e c t o r 111 d i f f e r s more t h a n

does s e c t o r I. I n ~ t h e r r e p e c t s , however, t h e v e r s i o n s w i t h Ci'E p e r f o r m l e s s

s a t i s f a c t o r l l y t h a n w i t h AGE o r TWE. T e n t a t i - ~ e l y , t h e r e f o r e , we may a c c e p t

t h e c o n c l u s i o n t h a t t h z r e s p o n s e p a r a m e t e r s of group 1 1 1 , t h e c a s u a l s e c t o r ,

Table 11: Group Significance Tests

7 7 (Critical values: X' = 18.307,

10,0.05 X ; ~ , ~ . ~ l = 23.209)

-

11A: Age utilised

>lode 1 SSE - (Test Statistic)

(error sum of squares)

Complete

E:rcl. group I 402.361 151.781

Excl.group III

IIB: utilised

Yodel SSE (Test Statistic) -

Conple te 391.637

Excl .group I 393.805 27'. 144

Excl .group III 395.023 42.482

. I 1

IIC' CIE utilised

L L 3

?lode 1 SSE - (Test Statistic) - Conplete 403.142 . Exl.group I 405.614 30.076

Excl. group 111 405.339 26.731

d i f f e r from t h o s e of g roup 11 more than do t h e p a r a m e t e r s of g roup I , t h e

s m a l l s e c t o r . The re is a f a i r n e a s u r e of p l a u s i b i l i t y a t t a c h e d t o such a

f i n d i n g .

3.3 I n d i v i d u a l C o n t r i b u t i o n s

S i n c e s e c t o r a l d i f f e r e n c e s i n wage r e s p o n s e s do e v i d e n t l y e x i s t , we

t u r n now t o e q l a n a t i o n s f o r t h e s e d i f f e r e n c e s i n t e r n s of i n d i v i d u a l

c o e f f i c i e n t s .

( a ) The v a r i a b l e s AGE o r AGE^, ED5 and - t o a much lower e x t e n t - EXGLISH

accoun t f o r d i f f e r e n c e s i n r e s p e c t of bo th s e c t o r s I and IIL from s e c t o r 11.

L e t u s f i r . y t d i s c u s s t 5 e e d u c a t i o n a l v a r i a b l e s . A s t r i k i n g c o n c l u s i o n from

t h e e s t i m a t e d f u n c t i o n s is t h a t t h e r e a r e s i g n i f i c a n t r e t u r n s t o e d u c a t i o n f o r

e v e r y s u c c e s s i v e l e v e l d i s t i n g u i s h e d , b u t t h a t d i f f e r e n c e s i n r e tu rp . t o

e d u c a t i o n a s between t h e t h r e e s e c t o r s a r e minimal . A s f a r a s t h e f a c t o r y and

t h e s m a l l - s c a l e s e c t o r s a r e conce rned , t hey c a n n o t be d i s t i n g , u i s h e d i n t e rms

of r e s p o n s e s of e a r n i n g s t o e d u c a t i o n a t any l e v e l . Taken i n c o n j u n c t i o n w i t h

t h e f i n d i n g from t h e Survey mentioned i n s e c t i o n I (and Table I ) , t h a t t h e

d i s t r i b u t i o n of worke r s by e d u c a t i o n a l l e v e l s i n t h e s e two s e c t o r s was

p r a c t i c a l l y i d e n t i c a l , w e a r e a b l e t o r e a c h t h e c o n c l u s i o n t h ~ a t e d u c a t i o n a l

L a t t a i n m e n t d o e s n o t p l a y any r o l e ' i r ! t h e d i f f e r e n t i a t i o n of t h e s e two l a b o r

n a r k e t s . T h s r e is no p r e f e r r e d s e l e c t i o n of b e t t e r educa ted worke r s i n t h e

f a c t o r i e s , no r is th$e any d i f f e r e n c e i n t h e r e t u r n s t o e d u c a t i o n . Thus - i

hypo theses 2 and 3 o k s e c t i o n I a r e bo th r e f u t e d .

!BP Co:paring the c a s u a l s e c t o r w i t h t h e f a c t o r i e s , t h e r e i s a

s i g n i f i c a n L d i f f e r e n c e i n t h e c o e f f i c i e n t of ED5 - t h e h i g h e s t l e v e l of

e d u c a t i o n used i n our a n a l y s i s , Grade 11 and above . The earnLngs of f a c t o r y

worke r s r e spond 3uch n o r e t o t h i s l e v e l of e d u c a t i o n . But i t w i l l be s e e n

from Tab le 1 t h a t w e a r e c o v e r i n g abou t o n l y 1 p e r - e n t of o u r s a s p l e o f

worke r s i n e i t h e r s e c t o r . The interesting f i n d i n g t o stress is t h a t a l t h o u g h

t h e r e i s a c o n c e n t r a t i o n of c a s u a l worke r s i n t h e lower e d u c a t i o n a l l e v e l s ,

t h o s e who have a h i g h e r e d u c a t i o n a l l e v e l ( e x c e p t i n g E D 5 ) have r e l a t i v e l y -

h i g h e r e a r n i n g s i n nuch t h e s a n e way a s f a c t o r y worke r s .

The d i f f e r e n c e s i n t h e c o e f f i c i e n t s of ENGLISH are i n t h e e x p e c t e d

d i r e c t i o n . V o r k e r s w i t h knowledge of E n g l i s h t e n d t o have r e l a t i v e l y h i g h e r

e a r n i n g s i n a l l s e c t o r s - b u t more s o i n f a c t o r i e s t h a n i n t h e o t h e r two

s e c t o r s . But t h e l e v e l of s i g n i f i c a n c e of t h e i n t e r s e c t o r a l d , i f f e r e n c e s i n

t h e c o e f f i c i e n t s of t h i s dummy is m a r g i n a l .

( b ) A s w e n o t e d i n s e c t i o n 3.2, s e c t o r 111 e x h i b i t s g r e a t e r c ~ i r e r a l l

d i f f e r e n c e s from t h e r e f e r e n c e s e c t o r t han d o e s s e c t o r 1. Some of t h i s

d i f f e p e n c e is accoun ted f o r by t h e M I G W T v a r i a b l e . A s Tab le I shows, t h e

s i g n i f i c a n c e l e v e l s of >ITGRXUT 1 and FlIGRANT 111 a r e s u b s t a n t . i a l l y

d i f f e r e n t . The c a s u a l s e c t o r e v i d e n t l y e x h i b i t s a s i g n i f i r a n t : l y p o s i t i v e

d i f f e r e n c e o v e r s e c t o r s 1 o r 11. T h i s c o i l c l u ~ i o n i s unchanged i f e i t h e r TJE

o r C!E is e m p l ~ y e d i n p l a c e of AGE; t h e s i g n i f i c a n c e l e v e l s of' ?lIGRANT 111 are

2 .757 and 2.108, r e s p e c t i v e l y . Other t h i n g s b e i n g e q u a l , r e c e n t m i g r a n t s t e n d

t o e a r n l e s s i n . t h e f a c t o r y and small s e c t o r s , b u t more i n the! c a s u a l 4 . m

s e c t o r s , r e l a t i v e t o o t h e r worke r s .

- '2

r e t u r n s t o age and e x p e r i e n c e i n t h e t h r e e s e c t o f s . With r e g a r d t o AGE t h e - - C

W d i f f e r e n c e b e t v e e n s e c t o r s a p p e a r most c l e a r l y ie t h e squa red term AGE2. T h i s - I I

was a l s o t r u e o f TIP s u b s t i t u t i n g f o r AGE; a s l i g h t d i f f e r e n c e was t h a t t h e

l i n e a r term i n nJE I and TivZ 111 a r e bo th i n s i g n i f i c a n t . Posj- t i=re

s i g n i f i c a n c e l e v e l s f o r b o t h OY'E I and GJF, 11 - a s w e l l a s n e g a t i v e

s i g n i f i c a n c e f o r t h e i r s q u a r e s - a r e o b t a i n e d f o r c u r r e n t ~ o r k e x p e r i e n c e .

The i m p l i c a t i o n s of t h e s e s t a t i s t i c s f o r t h e compar i son of e a r n i n g s p r o f i l e s

i n t h e t h r e e s e c t o r s a r e examined i n d e t a i l i n t h e n e x t s u b- s e c t i o n .

3.4 E a r n i n g s P r o f i l e s w i t h r e s p e c t t o Age o r E x p e r i e n c e

It is u s e f u l t o s t a r t by r emind ing o u r s e l v e s t h a t a l t h o u g h t h e

i n d e p e n d e n t v a r i a b l e s e n t e r q u ~ a d r a t i c a l l y t h e r e s p o n s e r e l a t i o n s h i p is n o t

q u a d r a t i c , s i n c e t h e dependen t v a r i a b l e i s t h e l o g a r i t h m of wa.ges. Thus t h e

g e n e r a l iorm is:

2 log (wage ) = a + a Age - a 2 Age , 1

. 0

.-

~ h e r e t h e " c o n s t a n t " a. i n c l u d e s t h e e f f e c t s of a l l o c h e r v a r i a b l e s and we

have dropped t h e d i s t u r b a n c e te rm. R e g a r d l e s s of w h e t h e r AG'E, T\X o r C\?E

i s u t i l i s e d on t h e r i g h t hand s i d e of t h i s r e l a t i o n s h i p , t h e p a r a m e t e r s

n and a a r e s t a t i s t i c a l l y s i g n i f i c a n t and p o s i t i v e ; s o t h . a t t h e l i n e a r 1 2

t e r n i s p o s i t i v e and t h e s q u a r e d te rm n e g a t i v e , a s i n d i c a t e d .

The g e n e r a l f o r n of t h i s r e l a t i o n s h i p is p o r t r a y e d i n f i g u r e 1 i n

t h e f o r n of a s k e t c h of t h e f u n c t i o n l o g w = a + a x - 1 a 2

x 2 , where x 0

r e p r e s e n t s y e a r s . I

A g e n e r a l o b s e r v a t i o n t h a t a r i s e s from t h e p a r a m e t e r v a l s e s

- t h e s a n e f o r e a c h , t h e n a t u r a l o r i g i n d i ' f f e r s a c c o r d i n g t o w h e t h e r one is'? - - a n a l y s i n g t h e r e s p o n s e v t t e r n i n r e s p e c t of AGE, T i l o r CIIE. Thus t h e f i c t e d * . .. r e s p o n s e p a t t e r n f o r CbJE is e n c a p t u r e d by a c u r v e of t h e f o r n O I R ; t h a t f o r

T!E by t h e e:tter.ded TC?IR; and t h a t f o r AGE by t h e x o r e o r l e s s c o m p l e t e c u r v e

2 F i g u r e 1: F u n c t i o n l o g w = a + a x - a2 x 0 I

t. STCXEt, w i t h o n l y m i n o r . v a r i a t i o n s a c c o r d i n g t o s e c t o r . These f i n d i q s c a n b e

s t y l i s e d by imag in ing t h a t t h e o r i g i n f o r Cl?E l i e s t o t h e r i g h t of t h a t f o r

s u g g e s t e d by F i g u r e 1. Thus a l t h o u g h t h e o b s e r v e d r e s p o n s e s t o AGE, TGjE o r - C:rT have a p p a r e n t l y d i f f e r e n t s h a p e s , t hey nay a l l F e subsumed unde r t h e

3 g e n e r a l f u n c t i o n a l f o r n l o g w = a + a x -

1 ' a 2 x- , f o r v a r y i n g v a l u e s of 0

t h e c o e f f i c i e n t s a a and 0' 1 a2

I n s u m a r i s i n g t h e s t a t i s t i c s of t h e e a r n i n g s r e s p o n s e t o AGE, T[W

o r C:E a c r o s s d i f f e r e n t s e c t o r s , s e v e r a l s u m a r y measu re s n a y be d e r i v e d f rom

t h e c u r v e of F i g u r e 1. 4

* ( a ) The naxirnun x = a / 2a

1 2 - T h i s i s a neasurle of t h e l e n g t h

of t h e e a r n i n g p r o f i l e . Thus some o c c u p a t i o n s w i l l r e a c h t h e i r peak e a r n i n g -

y e a r s s o o n e r t h a n o t h e r s .

- * ( 5 ) The p o i n t of i n f l e x i o n x = x - 1 . 'The p o s i t i o n of

L t h i s p o i n t is a g u i d e t o t h e c u r v a t u r e p r o p e r t i e s of t h e p r o f i l e .

* W

( c ) The growth f a c t o r g = , where

* * 0

w = w(x ) and w = ( 0 ) . For e a c h age o r e x p e r i e n c e v a r i a b l e t h i s 0

measurea t h e aaximurn wage a t t a i n e d i n r e l a t i o n t o t h e b a s e o r s t a r t i n g

)lZ o r - p o i n t . R a t i o s such a s -- i n F i g u r e 1 would r e p r e : s e n t g rowth COc T O ~ a 1 * f a c t o r s . I n t e r n s of t h e f i t t e d c o e f f i c i e n t s , l o g ( g ) = -

2 x '

The summary s t a t i s t i c s a r e p r e s e n t e d i n T a b l e 111, i n which a

d i a g o n a l l a y o u t h a s been a d a p t e d t o f a c i l i t a t e c o n p a r i s o n b o t h a c r o s s s e c t o r s

and between a l t e r n a t i v e v a r i a b l e s .

Our major i n t e r e s t i n t h e s e s t a t i s t i c s l i e s i n t h e l i g h t t h e y shed on t h e

e x p e r i e n c e- e a r n i n g s p r o f i l e s i n t h e s e c t o r s -- and i n particular o n

h y p h o t h e s e s 4 and 5 of s e c t i o n I.

The c u r v a t u r e p r o p e r t i e s of t h e p r o f i b e s depend on t h e c h o i c e of

v a r i a b l e s . IJe o b s e r v e t h a t t h e p o i n t s of i n f l e s i o n i n r e f e r e n c e t o Ci+E a r e

who l ly s o n c a v e downwards ( i . e . t h e y resemble CSR of f i g u r e 1 ) . With age o n - * * t h e o t h e r h a n d , a p r o p e r p o i n t of i n f l e x i o n e x i s t s - a g a i n f o r a l l t h r e e -

s e c t o r s - and t h e r e is n t endency f o r e a r n i n g s t o p i c k up g r a d u a l l y anong t h e

younger age g r o u p s . I t is i n t e r e s t i n g t o r,ote t h a t t h e p o i n t 'of i n f l e x i o n is

very n e a r l y t h e sane f o r a l l t h e s e c t o r s . The s e c t o r s d i f f e r w i t h r e s p e c t t o

t h e p o i n t of i n f l e x i o n dhen t h e v a r i a b l e Th?E -- t o t a l e x p e r i e n c e i n Bombay

c i t y - is c o n s i d e r e d . For f a c t o r y and c a s u a l workers t h e measure i s n e g a t i v e

sugges t ing concave p r o f i l e s l i k e those r e l a t e d t o CITE. The s m a l l s c s l e s e c t o r

s t a n d s a p a r t i n having a p o s i t i v e va lue f o r t h e p o i n t of i n f l e x i o n . E a r n i n g s

i n t h i s s e c t o r i n c r e a s e a t a slow r a t e i n t h e f i r s t f i v e y e a r s of t h e l i f e of

.I t y p i c a l worker i n Bomoay c i t y be fo re s t a r t i n g t o p i c k up.

The measure of t h e f l a t n e s s of t h e e a r n i n g s p r o f i l e is n o t

unambiguous. Comparing any two s e c t o r s , i f t h e p r o f i l e on t h e one hand had a

* l a r g e r v a l u e up to t h e p o i n t of maximum e a r n i n g s ( o u r s t a t i s t i c : x ) - and i t

had a h i g h e r growth f a c t o r ( l o g g ) , then i t could be c l e a r l y s a i d t h a t t h e

s e c t o r has a s t e e p e r e a r n i n g s p r o f i l e . The c o n c l u s i o n is n o t c l e a r c u t i f a

s h o r t e r pe r iod t o t h e naxinun i s combined w i t h a h i g h e r growth r a t e .

The t h r e e s e c t o r s can be ranked p r e t t y c l e a r l y when we c o n s i d e r t h e

v a r i a b l e TWE ( e x p e r i e n c e i n Bombay c i t y ) . The smal l- sca le s e c t o r has t h e

I s teepe: , t e a r n i n g s p r o f i l e ( a l t h o u g h a s we saw i n t h e l a s t pa ragraph i t h a s a

r e l a t i v e l y f l a t segment i n t h e f i r s t f i v e y e a r s o r s o ) . F a c t o r y workers come

nex t . Casual workers a r e q u i t e c l e a r l y faced w i t h a markedly f l a t p r o f i l e

w i t h t h e l e n g t h of t h e p r o f i l e t o maxinum ear- i ings being on ly h a l f of t h a t of

L f a c t o r y wor!<ers, and the growth f a c t o r on ly 60 l p e r c e n t of t h e l a t t e r ' s . ' The

F i n t ~ r n q n f T,-hlo T T T I n 7nt ni.10 qi1r11 3 r l ~ n r r n n k i n e f o r t h ~ ~ p r t o r ~ when we

- c o n s i d e r AGE. But i n t e r n s of '@cononlc theory a g r e a t e r c a ~ s i 3 1 s i g n i f i c a n c e i

a t t a c h e s t o t h e response of e a r a n g s t o e x p e r i e n c e than t o age , a l t h o u g h t h e * f o r n e r only n e a s u r e s exper ie t l ce ¶n urban work. Gle a r e , t h e r e f o r e , i n c l i n e d t o

accep t the L.-qking of s e c t o r s g iven by t h e v a r i a b l e TvT. Thus Hypothes i s 4

given i n s e c t i o n I i s only p a r t i 3 1 l y suppor ted . Within the infernal s e c t o r ,

only c a s u a l s have a f l a t t e r e a r n i n g s p r o f i l e ; t h o s e i n s n a l l e s t a b l i s h n e n t s

have a s t e e p e r p r o f i l e tha? even f a c t o r y workers .

The v a r i a b l e CJE has r e f e r e n c e t o Fiypothesis 5 , andl t h e r e l a t i v e

inc idence of t h e i n t e r n a l l a b o r n a r k e t mechanism. Casual workers a g a i n cone

ou t unanbiguously a t t h e bottom of t h e rank ing . But t h e r e s u l t is not s o

c l e a r c u t For t h e f a c t o r y - smal l e s t a b l i s h m e n t comparison. Fac to ry workers

have a s u b s t a n t i a l l y l o n g e r p r o f i l e t o t h e naxinurn, but a soclewhat lower

growth f a c t o r . Because the d i f f e r e n c e is more s u b s t a n t i a l i n t h e f o r n e r

s e c t o r we can probably conclude t h a t e a r n i n g s a r e r e l a t e d n o r e s t e e p l y t o

f i r m- s p e c i f i c c u r r e n r e x p e r i e n c e i n t h e f a c t o r y s e c t o r than i n s n a l l

e s t a b l i s h n e n t s . I n any e v e n t , t h e f a c t t h a t t h i s r e v e r s a l i n ranking i s

suggested f o r f a c t o r y workers when CITE is c o n s i d e r e d r a t h e r than TIE c l e a r l y

is a c o n f i r z a t i o n of Yypothes is 5. I n t e r n a l l a b o r n a r k e t s a r e more s t r o n g l y

e s t a b l i s h e d i n t h e f o r n a l , f a c t o r y s e c t o r .

3.5 D i f f e r e n c e i n i n t e r c e p t s

We have s o f a r d i s c u s s e d the d i f f e r e n c e s i n r e t u r n s t o e d u c a t i o n and

t o e x p e r i e n c e i n the t h r e e s e c t o r s . A s mentioned e a r l i e r t h e ve ry s t r o n g

d i f f e r e n c e s i n i n t e r c e p t dummies x e r e r e l e g a t e d t o c o n c o n i t a n t v a r i a b l e s t o

a i n c r e a s e t h e e f f i c i e n c y o the a n a l y s i s of d i E f e r e n c e s i n c o e f f i c i e n t s . ' $ut

. 3 - - ' -- - ' : c - - - , > - : t y . l - n t * . r r . n - . r ~ n p t . q r ~ n f o h t he n s i711~11 ( o r n o r e ) due t o

d i f f e r e n c e s between e n t r y wages ( d e f i n e d a s the e a r n i n g s $ workers w i t h l e a s t L -

e d u c a t i o n and zero e x p e r i e n c e ' a s t o d i f f e r e n c e s i n e a r n i e s p r o f i l e s . The E . s

e n t r y wage f o r each s e c t o r is xeasured by t h e c o n s t a n t t e r h of t h e e s t i m a t e d

e a r n i n g s f u n c t i o n f o r t h a t s e c t o r , a f t e r i t has been s u i t a b l y a d j u s t e d f o r t h e

nean va lues of v a r i a b l e s o t h e r thsn e d u c a t i o n and e x p e r i e n c e . 5

The f o l l o w i n g v a l u e s f o r t h e a d j u s t e d c o n s t a n t t e r n s were o b t a i n e d

f o r t h e t h r e e s e c t o r s . The e q u a t i o n s w i t h TIE were used.

F a c t o r Small- s c a l e Casual --

Log of E a r n i n g s (Yonthly) 5.7248 4.9864 4.9401

Earn ings i n Real Numbers (Rs) 306.38 146.41 139.78

The i n p o r t a n t r e s u l t i s o b t a i n e d t h a t w h i l e e n t r y wages i n t h e t

s m a l l- s c a l e s e c t o r s o r e on ly abou t 15 p e r c e n t h i g h e r than i n t h e c a s u a l

s e c t o r , f a c t o r y wages a r e n o r e than doub le -- 109 pe r c e n t above - t h o s e i n -

s m a l l e s t a b l i s h m e n t s . New e n t r a n t s t o t h e Bombay l a b o r market w i t h no

e d u c a t i o n have s u b s t a n t i a l l y lower e a r n i n g s i n t h e " i n f o r n a l " s e c t o r , b u t

t h e r e is l i t t l e d i f f e r e n c e between t h e two t y p e s cF i n f o r m a l s e c t o r wage

employment which have been d i s t i n g u i s h e d . On t h e o t h e r hand, i t w i i l be

r e c a l l e d from t h e c o n c l u s i o n s reached i n t h e p rev ious s e c t i o n t h a t t h e c a s u a l

I s e c t o r is d i f f e r e n t from t h e s m a l l- s c a l e i n having a much f l a t t e r exper i ence-

e a r n i n g s p r o t ; le. 0 I

R e s e a r c h e r s on l a b o r m a r k e ~ s i n LDC's have often! surrnized t h a t - * * * workers i n t h e "formal" s e c t o r of t h e u rban econony have a g u b s t a n t i a l l y I .

d i f f e r e n t reward f o r l a b o r than those i n t h e " informal" s e c t o r . T h i s paper

has s t u d i e d t h e e a r n i n g s of a sample of manual workers i n t h r e e s e c t o r s of t h e

I Bombay l a b o r market - f a c t o r i e s ( i . e . e n t e r p r i s e s caused by t h e Fac to ry .Act

e a r n e r s . The l a s t two a r e o f t e n lumped t o g e t h e r ( a l o n g wilt:^ f a m i l y u o r k e r s )

i n t h e " in fo rma l" s e c t o r , but i m p o r t a n t d i f f e r e n c e s e x i s t i n t h e wage

e x p e r i e n c e between t h e t v o g roup , a s w e l l a s between t h e n and f a c t o r w o r k e ~ s .

Ye have s t u d i e d t h e d i f f e r e n c e s i n e a r n i n g s between s e c t o r s a f t e r

c o n t r o l l i n g f o r hunan c a p i t a l v a r i a b l e s ( e x p e r i e n c e s , e d u c a t i o n and knowledge

of E n g l i s h ) . The l i n i t a t i o n of how one i n t e r p r e t s t h e " net" d i f f e l 2 n t i a l h a s

been d i s c u s s e d i n S e c t i o n I , b u t w i t h i n i t s l i m i t s i t is a n i n p o r t a n t p i e c e of

e m p i r i c a l i n f o r m a t i o n a b o u t u rban l a b o r n a r k e t s .

:{age d i f f e r e n c e s between s e c t o r s c o u l d e x i s t f o r worke r s w i t h o u t

e d u c a t i o n a t t h e i r p o i n t of e n t r y i n t o t h e l a b o r market (no e x p e r i e n c e ) , and

t h e y might be widened due t o d i f f e r e n t i a l r e t u r n s Lo e d u c a t i o n and e x p e r i e n c e

i n t he t h r e e s e c t o r s . Some economis t s have s p e c u l a t e d t h a t t h e r o l e of

e d u c a t i o n and e x p e r i e n c e i n t h e fo rma l s e c t o r i s j u s t t h i s . A major e f f o r t

h a s , t h e r e f o r e , been made i n t h e i r pape r t o s t u d y t h e d i f f e r e n c e s i n co-

e f f i c i e n t s t o e d u c a t i o n and e x p e r i e n c e i n t h e e a r n i n g s f u n c t i o n s f o r t h e t h r e e

s e c t o r s and a p p r o p r i a t e s t a t i s t i c a l methodology h a s been deve loped t o t e s t f o r

such d i f f e r e n c e s .

The p r i n c i p a l c o n c l u s i o n s can be summarized a s f o l l o w s :

1. The d i s t r i b u t i 6 n s of worke r s by l e v e l s of e d u c a t i o n a r e n o t v e r y

d i f f e r e n t i n t h e t h r e e s e c t o r s . There i s s u b s t a n t i a l d i f f e r e n c e

.gin age d i s t r i b u t i o n , w i t h younger worke r s domina t ing t n e s m a l l - 5

f s c a l e and c a s u a l s e c t o r s . But s u f f i c i e n t nurlbers o f o l d e r

r wor!cers e x i s t i n t h e l a t t e r t o e n a b l e u s t o e s t i m a t e e a r n i n g s

f u n c t i o n s f o r t hen .

2 . E n t r y wages , d e f i n e d as t h ~ e a r n i n g s of worke r s w i t h no

e d u c a t i o n o r e x p e r i e n c e , a r e tw ice a s h i g h i n f a c t o r i e s a s i n

s m a l l e s t a b l i s h m e n t s , b u t t h e y a r e o n l y s l i g h t l y h i g h e r i n t h e

s m a l l- s c a l e compared t o t h e c a s u a l s e c t o r . S i n c e f a c t o r i e s a r e

cove red by wage and l a b o r l e g i s l a t i o n , and u n i o n s a r e i n p o r t a n t

i n t h i s s e c t o r , one n i g h t be tempted t o a l sc r ibe t h i s

d i f f e r e n t i a l t o i n s t i t u t i o n a l i n f l u e n c e . But r e f e r e n c e h z s beer

nade t o o t h e r s t u d i e s by 1-lazumdar which showed t h a t wages were

m a i n t a i n e d a t a h i g h l e v e l b e f o r e tiia e r a of Trade Unions o r

l a b o r l e g i s l a t i o n . T h i s paper does - n o t u n d e r t a k e t h e h i s t o r i c a .

s t u d y t o s e e i f t h e d i f f e r e n t i a l has been widened.

3. Re tu rns t o e d u c a t i o n are n o t v e r y d i f f e r e n t i n t h e t h r e e

s e ~ t 3 r 5 , a l t h o u g h t h e y are s i g n i f i c a n t a t a l l t h e l e v e l s

d i s t i n g u i s h e d . There is s i g n i f i c a n t d i f f e r e n c e between t h e

f a c t o r y and c a s u a l s e c t o r s o n l y f o r t h e h i g h e s t l e v e l of

e d u c a t i o n (Grade 11 and above) which c o v e r s j u s t one p e r c e n t o

o u r sample. Taken i n c o n j u n c t i o n w i t h t h c f i n d i n g t h 5 t , , * a

c * d i s t r i b u t i o n of worke r s by e d u c a t i o n a l l e v e l s a r e n e a r l y

C . P

i d e n t i c a l i n t h e t h r e e s e c t c r s , we conclclde t h a t e d u c a t i o n a l

a t t a i n m e n t p l a v s no n a r t i n t h e s e r q e n r n t i o n of the SOPI-2v ??i-n

- - C

8 * . 4 . R e t u r n s t o e x p e r i e n c e do Vary between s e c t o r s . But t h e

t l ypo thes i s t h a t e x p e r i e n c e- e a r n i n g s p r o f i l e a r e f l a t i n t h e

i r ~ f o r n a l s e c t o r i s r e j e c t e d . Indeed workers ' e a r n i n g s i n c r e a s e

w i t h e x p e r i e n c e g e n e r a l l y more s t r o n g l y i n s m a l l e s t a b l i s h n e n t s

t h a n i n f a c t o r i e s . Only t h e c a s u a l w o r k e r s seem t o have a

s i g n i f i c a n t l y f l a t t e r e a r n i n g s p r o f i l e .

5. The h y p o t h e s i s t h a t i n t e r n a l l a b o r marke t s o p e r a t e more s t r o n g l y

, I f a c t o r i e s is s u p p o r t e d s i n c e when w e s u b s t i t n t e e x p e r i e n c e i n

t h e c u r r e n t f i r m ( C E ) t o t o t a l work e x p e r i e n c e i n Bombay (TWE)

t h e r a n k i n g of f a c t o r i e s and s m a l l e n t e r p r i s e s is r e v e r s e d :

f a c t o r y worke r s have a s t e e p e r e a r n i n g s p r o f i l e .

FOOTNOTES - SECTION I

1/ For a rev iew of some e a r l y d i s s c u s i o n s s e e ?lazumdar (1976) . - 2 1 See , f o r example. - 3 / P e r s o n a l i n v e s t i g a t i o n s by one of t h e a ~ ~ t h o r s s u g g e s t e d t h a t i n s e v e r a l -

Tndian c i t i e s mininun wages a r e s e t by l o o k i n g a t t y p i c a l wage r a t e s i n s m a l l e n t e r p r i s e s .

41 For a l u c i d d i s c u s s i o n , see da Cuah and Bonne l i (1970) . - 5/ Tn t h e l i t e r a t u r e f o r developed c o u n t r i e s a t t e m p t s a t measur ing wage -

d i f f e r e n t i a l s "net" of l a b o r q u a l i t y have been nade i n c o n n e c t i o n s w i t h i n t e r - i n d u s t r y d i f f e r e n t i a l s (Weiss) and w i t h p o v e r t y i s s u e s (\?anted and Be t sey ) . I n t h e a n a l y s i s of LDC l a b o r m r k e t s work a l o n g t h e r e l i v e s have been done f o r B r a z i l (de Cunha), Colombia Ofohan), Tanzan ia (Knight and S a b o t ) , Ma lays ia (Pazumdar) among o t h e r s .

61 See Xazumdar (1973). -

7 / The q u e s t i o n as t o whe the r i n t e r n a l l a b o r m r k e t s are due t o - i n s t i t u t i o n a l r u l e s of s e n i o r i t y o r r e p r e s e n t p ro f i t- maximiz ing behav iour on t h e p a r t of e n t r e p r e n e u r s is n o t posed base .

81 See Xazundar (1978) . -

91 I b i d . , pp. 33-4 -

FOOTNOTES - SECTION 2

- 1 - Wa(Wi Wb) W i t h e l e a s t sq1:iares p r o j e c t i o n 1. That is , deno t ing by ? - a #,, #,,

m a t r i x , ya = (I .- pa) Ya and Xa = ( I - Pa) Xa . #,, #,,

2. See e.g. Goldberger (1964) , pp.'73-77.

3. This i; a g a i n a n a p p l i c a t i o n of the p a r t i t i o n e d i n v e r s e . The r e l e v a n t secon<.-order mcnent m a t r i x Eor t h e pooled r e g r e s s i o n based upon e q u a t i o n (12) is:

The inc rementa l r e g r e s s i o n sum of s q u a r e s is d' Dd , where D - 1 - - is t h e

lower r ight- hand block of ( ) . I n f a c t

which reduces t o D = s2 ( s2 ?: < + s: $' , a s requ i red .

a 2

4 . The consequ,en$es - i n t e r n s of e f f i c i e n c y - of u t i l i s i n g e s t i m a t e s 7 .b*.

s2 and s2

f o r a2 a i n a G.L.S. c a l c u l a t i o n have been ana lysed by a b a ' b

r;uch a c ~ t \ i o r s a s Tnvlnr (1977, 1 9 7 Q ) T-..,--r 1" J \ f n l > L - f 1 Q - 0 ' '-

, . . . . . ,rc A cindi- . i ~ b o L n a L

.d the second o r d e r eEEiciency of l ikel ihood- based t e s t s t a t i s t i c s f o r a L c l a s s of problems which i n c l u d e s the pr?ser, t models is the s u b j e c t of a = p a p e r by T. Rothenberg (1982) . * C

5 . *We note t h a t the inc rementa l r e g r e s s o r m a t r i c e s invo lved , such a s

I n the c a s e of t h r e e s e c t o r s , e x h i b i t d e s i r a b l e

- iii -

orthogonality properties. This neans that the various i.ncrementa1

suns of squares can be decomposed additively into suns of squares due to

Xb , X ... . If the sample sizes are very large, this property can be C

made the basis of a convenient computational algorithm for the tzsting procedures. However, there is a convenience aspect, in term; of operations with standard packages, in sticking with the general pooled aodels (2) or ( I ? ) , in spite of the increased dimensionality. In our own vork the dimensionality problem was not binding and the pooled models were employed rather than utilising the essentially orthogonal properties of the testing procedure in the manner just suggested.

FOOTNOTZS - SECTION 111

11 A

S i n c e t h e a o t a t i o n a l bu rden is much l i g h t e r i n t h e present : s e c t i o n i n r e s p e c t of s u b s c r i p t s , we choose t o r e p r e s e n t d i f f e r e n t s e c t o r s i n roman numera l form ( I , 11, 111) r a t h e r t%an 5y l e t t e r s of t h e a l p h a S e t , a s i n t h e p r e c e d i n g s e c t i o n .

21 2 - Formal rests t h a t = a2 = a 2 3 c a n be d e s i g n e d sing t h e l i k e l i h o o d

r a t i o t e s t o r S a r t l e t t 's n o d i f i c a t i o n t h e r e o f ( s e e T.W. Anderson (1958) ) . I f t h e n u l l h y p o t h e s i s of homogenei ty were a c c e p t e d , one c o u l d t h e n a p p l y an F- t e s t , w i t h presumabably g r e a t e r power t h a n t h e

a s y m p t o t i c X2 used h e r e . It would indeed be of i n t e r e s t t o

i n v e s t i g a t e t h e power f u n c t i o n and t h e b i a s , i f a n y , of such a two-

s t a g e t e s t i n g p r o c e d u r e .

As w i t h a l l dummy v a r i a b l e f o r m u l a t i o n s , i t is p o s s i b l e tal

" r e p a r a m e t r i s e" t h e problem i n s u c h a way t h a t t h e e n t i r e , pooled g r o u p

c o n s t i t u t e s t h e benchmark a g a i n s t which t h e i n d i v i d u a l g r o u p s c a n be

s e p a r a t e l y compared. The re i s much t o be s a i d f o r a symmet r i c app roach

of t h i s k i n d . However, t e s t s of d i f f e r e n c e s between g r o u p s a r e n o t

e a s i l y h a n d l e d i n sl:ch a framework; moreover i n t h e p r e s e n t c o n t e x t ,

one of t h e g r o u p s forms a n a t u r a l b a s e .

4 / - One would d e s i g n a l t e r n a t i v e summary measu re s , f o r example by

e x p l o i t i n g t h e fo rma l i n d e n t i t y of t h e g i v e n f u n c t i o n a l form w i t h a

Normal d e n s i t y f u n c t i o n , h e r e x* become t h e mean and t h e l e n g t h of t h e

p r o f i l e is measured by t h e v a r i a n c e a s f a2 . However t h e s e t

( a ) - ( c ) a p p e a r b d e q u a t e arid mean ing fu l . , I

5 I - Thus t h e c o n s t a n t term i n each e q u a t i o n measu re s t h e e a r n i n g s o f r r n , - l , , r q .Jl+F. ,,q r , , ' l . . , L ! ^ . . .., 1 7 ,- , . . ' , 7 . - ..I,. . 1 ' . , 1 C .

. L - - > C> - &,.- q L L Y , . > V A L ~ L L L l L I L a A,. I>.=-* 3 ~ I d l L nc l , L..> i a i L

whole sample of f a c t o r y workers . *? i

Appendix

L i s t of V a r i a b l e s

Wage - - T o t a l monthly e a r n i n g s i n c a s h + income i n k i n d ( f o o d , accommodation) i n t h e main employment (Rs .) .

Secdum 1 = 1 i f small s e c t o r 0 o t h e r w i s e .

Secdum 3 = 1 i f c a s u a l s e c t o r 0 o t h e r ~ i s e .

S i z e 1 = 1 i f f a c t o r y s e c t o r and t h e s i z e o f f a c t o r y 10-99 worke r s ,

0 o t h e r w i s e .

S i z e 2 - - 1 i f f a c t o r y s e c t o r and t h e s i z e

of f a c t o r y 100-499 0 o t h e w i s e .

S i z e 3 - - 1 i f f a c t o r y s e c t o r and t h e s i z e of f a c t o r y 500-499

0 o t h e r - ~ i s e .

Shop 1 i f s m a l l s e c t o r and shops 0 o t h e r w i s e .

Cones t a b = 1 i f s m a l l s e c t o r and c o n m e r c i a l e s t a b l i s h m e n t

0 o t h e r w i s e .

R e a t h t l a 1 i f s m a l l s e c t o r and r e s i d e n t i a l h o t e l

0 o t h e r w i s e .

r T h e a t r e a 1 i' s m a l l s e c t o r and t h e a t r e

0 o t h e r w i s e .

' i Age 2 i

a g e squa red . - - * Ed 1 = l B i € e d u c a t i o n is " l i t e r a t e without: Formal r

s c h o o l i n g and u p t o 3rd s t a n d a r d I

0 o t h e r w i s e .

Ed 2 - - 1 i f educa t ion i s 6 t h s t anda rd o r L i t e r a t e wi thout formal school ing

0 otherwise .

Ed 3 - - 1 i f educa t ion i s 7 th t o 9 th s t anda rd 0 o therwise .

Ed 4 = 1 i f educa t ion is 10 th o r 11th s t a n d a r d 0 otherwise .

Ed 5

Married

Engl ish

- - 1 i f educa t ion is i n t e r m e d i a t e , diploma, degree o r h igher

0 otherwise .

- - 1 i f worker is married

o therwise .

= 1 i f worker is migrant 0 o therwise .

- - 1 i f worker speaks some Engl i sh 0 otherwise .

- - Tota l per iod worked i n Bombay C i t y ( i n yea r s ) .

- - Period worked i n c u r r e n t job ( i n yea r s ) .

- v i i -

REFE REXCE S

Anderson, T.W. .L\n I n t r o d u c t i o n t o u u l t i v a r i a t e S t a t i s t i c a l A n a l y s i s , - J. Wiley, Vew York, 1958.

da Chuna, P a u l o r a . and S o n e l l i 5 . "The s t r u c t u r e o f I n d u s t r i a l Vages i n 1970", X r a z i l i a n Economic S t u d i e s , IPEX, Ko.5, (1979) 33-65.

C o l d h e r g e r , A.S. Fconometr ic Theory , J. I J i l ey , Yew York, 1964.

K n i ~ h t , J .R . a ~d S a b o t , R.H. "!Jhy !Jages D i f f e r : E a r n i n g s F u n c t i o n Ln a Poor TTrban F.:onomv", World Rank n i s c u s s i o n P a p e r No. 81-39, August 1981.

yazumrlar, n ipak . "TTnemployrnent i n A g r i c u l t u r e and t h e I n d u s t r i a l !Jage-rate" Economics , (1959) .

. "The Urban I n f o m a 1 S e c t o r" , World Development, 'Wol. 4 , (1976) 655-679.

. "Labor Supply i n E a r l y I n d u s t r i a l i z a t i o n : t h e Case of t h e Romhay T e x t i l e Indus t ry" , Economic H i s t o r y Rev:ew, Vol . XYVI ( 1973) ,

477-496

. The TJrhan Labor Market and Income D i s t r i b u t i o n . Oxford TTniversi ty P r e s s , Oxfo rd , 19813.

'-'ohan, 9. "The De te rminan t s of Labor E a r n i n g s i n Developing Metro]pol rs" , 1Jorld Rank S t a f f Working P a p e r , October 1981.

Rao, C.R. L i n e a r S t a t i s t i c a l I n f e r e n c e and i t s A p p l i c a t i o n s , 2nd e ~ d i t i o n , J. v i l e v , Vew v o r k , 2976.

Rothenherg , T. "Hypo thes i s T e s t i n g i n L i n e a r Yodels when t h e E r r o r Covar i ance - ,q - m ,, 7 , -> 2 r. r. ,. . . , . - 7

( . d l 1 c ' r n l a ; clelrverti(1 to the I - u ~ o p e a n N e e c l n g o r cne r:con~omerrrc il SocieZv, n u h l i n , 1982.

Swanv, p.A.V.4; and J .S. \ f eh t a " E s t i m a t i o n oE Common C o e f f i c i e n t s i n Two clr s e g r e s i o n F q u a t i o n s ," J o u r n a l oE Economet r i c s , Vol . l o (1'979) , I

1-16.

n a ~ l o r , !?.=. "Small Sample P r o p e r t i e s oE a Class of Two S tage Aitklen F s t i m a t o r s , I 1 F conomet r i ca , L 7 0 1 .45 ( 1 9 7 7 ) , 497-508.

"The He t e r o s c e d a s t i c L i n e a r Yodel : Exac t F i n i t e Sample R e s u l t s , ' I

Econometr ica , Vol .66 , (1978) 663-67 5.

! Jachte l , iloward V. and B e t s e y , C h a r l e s . "Enp loynen t a t Low Wages", Review o f E c o n o n i c s and S t a t i s t i c s , Vol. 54 ( 1 9 7 2 ) , 121-129.

Weiss , -1. " C o n c e n t r a t i o n and Labor E a r n i n g s i n Read ings i n Labor Y a r k e t

A n a l y s i s . ed. J .F. B u r t o n , Jr. e t a l , pp 344-61

' J e lch , F. "Black-lslhite D i f f e r e n c e s i n R e t u r n s t o S c h o o l , American Econon ic Review, Vol. 6 3 ( 1 9 7 3 ) , 593-907.