California Center for Population Research

In a model of an agrarian economy in which individuals vary in landownership, workers supply labor more inelastically the poorer they are and the less easily they can borrow, save, or migrate in response to productivity shocks. Consequently, underdeveloped and isolated areas experience more wage volatility. This equilibrium e�ect hurts the poor. But for landowners, inelastic labor supply is a form of insurance. One ramification is that reducing the cost of borrowing and saving can actually hurt a landowner. For a given level of income volatility, he can smooth consumption better; but his income becomes more volatile due to changes in the equilibrium wage. Data on the agricultural wage in 257 districts in India for 1956-87 are consistent with the model. In districts with better banking or access to other areas (e.g., higher road density), the agricultural wage is less influenced by fluctuations in crop yield, instrumented with rainfall variation. In sum, the poor are vulnerable to productivity risk; I show that underdevelopment exacerbates this risk.