Labor Markets and the Choice of Technology in an Open Developing Economy

This paper highlights economic factors determining the choice of technology and
openness in an intertemporal context in the presence of Institutional constraints In
the labor market. It considers the case in which a more aggressive - development
strategy involves an investment in a modern technology. This technology raises the
degree to which real wages and productivity depend on external factors while at the
same time It also raises the expected value of real income. In the absence of Such
investment, production takes place in a traditional sector, using a technology that
limits exposure to external shocks. The analysis evaluates the dependence of the
choice of technology on the volatility of the shocks affecting the economy, the
expected productivity gains, the investment cost associated with the modern
technology, and the attitude towards risk. It starts with a benchmark case of a
flexible wage/employment economy. The dependence of openness, investment, and real wages on the attltuae towards risk is derived for such an economy. The paper then
proceeds to analyze the implications of departures from the benchmark model.
Specifically, it evaluates the effects of minimum wage policy on the choice of
technology. it is demonstrated that institutional constraints in the labor market tend
to discourage adoption of new technologies. The importance of this effect depends
on the volatility of the underlying shocks. A rise In the volatility tends to be
associated with a drop in the degree to which a given institutional structure
constrains the move to the new sector. Thus, turbulent periods provide opportunities for structural shifts in favor of the new sector. The analysis assesses both the positive aspects of policies and the welfare costs associated with departures from fully flexible labor markets. It also discusses the interaction between institutional structure of the labor market and the use of protective measures that attempt to reduce exposure to external shocks.