LDC Labor Markets: Applications of Internal Labor Market Theory
Authors: HANSEN BENT 
Published: May 2008

This article does not attempt, nor has it delivered, a complete theory for the labor market in Egypt, let alone for LDC labor markets in general. The macro‐model developed here serves mainly to demonstrate the diaculties involved in formulating macro‐theories for LDC labor markets that, while necessarily simple, can still claim realism when confronted with certain fundamental “stylized h t s. Our considerations have, moreover, been limited to LDCs with mixed economies, using Egypt as the example. Hence, large‐scale modern industry was assumed to belong to the public sector which then emerges as the country dominant, nonagricultural employer. Agriculture is the second large and relatively homogeneous sector, in Egypt dominated by small holdings. In‐between we find the private, nonagricultural sector, overwhelmingly dominated by small‐scale enterprises with large numbers of the self‐employed, and with trade as the most important single activity. Labor is (in Egypt) generally unorganized or enrolled in government‐controlled unions, active mainly in the public sector and without much real say in matters of wages and salaries.

It is in this specific institutional setting that I have tried to discuss the application of internal labor market theory. This theory has, to the best of my understanding, nothing to offer by way of explaining public sector behavior (which is of crucial importance for wage and employment formation in a mixed economy). However, adapted to the circumstances, internal labor market theory goes a long way toward explaining wages and employment in agriculture and the “informal” small‐scale sector. Our considerations, tentative though they are, do not point to any single, dominant labor market mechanism that could form the basis for a simple macro‐theory. Wage flexibility differs greatly between sectors, overstaEng may be a more important phenomenon than unemployment in some activities, and unemployment may be of both the voluntary and involuntary variety, with withdrawals from the labor market related to well‐defined reserve wages, and open unemployment related to internal labor market behavior.

These considerations are based more on loose impressions than on solid facts. Further theorizing may be needed, but the development of labor market theory for LDCs has undoubtedly reached a point where progress depends critically upon painstaking empirical studies of basic labor market institutions such as employment and wage forms and responses, bargaining procedures, and conditions of both labor and output markets for small private enterprises in particular countries. Considerable work has been done in India but even here much remains for investigation. Studies of specific countries may, even for LDCs in rapid, turbulent transformation, disclose ongoing changes in institutions that for a full understanding of the labor market may be more important than the institutions themselves. Existing wage theory has little to offer for the analysis of such institutional change, but something may be learned from the American institutional school in labor economics whose leading exponent we are paying homage to with these papers.