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Labour Supply in a High Unemployment Economy: Developing Economies

There is limited evidence regarding the determinants of labour supply in ETCs. Siliverstovs and Koulikov estimate a logarithmic specification of Equation for married females in Estonia and find that the wage elasticity of hours supplied per week is positive (0.53), while the non-labour income effect is insignificant. They also find a significant negative effect of the presence of small and teenage children and a significant positive effect of working experience. Mizala et al. find for Chile that education (as a proxy for the market wage) is more important for females than for males in determining hours of work per week. The presence of children inhibits the labour supply of women, while for males it has a positive effect on hours of work per week. For females, Mizala et al. find that the change in the labour supply with a change in the explanatory variables is largely reflected in the decision to participate in the labour force rather than changing hours of work supplied, while for males the change is more in terms of hours of work.
Some studies use a binary choice model of labour supply function (participation vs. non-participation) as described by Equation and take participation as synonymous with employment. Saget finds for the married women in Hungary a positive effect of the wage (in a model that includes the predicted wage for the non-employed women) on the probability of participation and no effect of earnings of other family members. Pastore finds for young Poles aged 15-30 that education is an important determinant of the probability of participation. Bardasi and Monfardini find that the probability of participation of Polish women decreases with the number of children. Chase, using a dataset for the Czech Republic and Slovakia during and after communism, finds that in the Czech Republic the own-earnings effect on the probability of participation fell during transition, while it rose in Slovakia. He also finds that the negative effect of children on women’s labour supply increased during transition, which coincides with the decrease in subsidies to childcare.
To summarise, the limited evidence for transition economies confirms the expected pattern of a positive effect of wage (or education that is a proxy for wage) and a negative effect of costs of employment on labour supply decisions. However, as we noted above, the observed labour supply of individuals when unemployment is high (and probably job offers are not available at the market wage) might not reflect utility maximising behaviour, which in the neoclassical framework is the underlying assumption when estimating the labour supply.