Vittorio Bassi (USC): Causes and Consequences of Labor Utilization: Evidence from Ugandan Firms (joint with Imran Rasul, Ottavia Veroux and Anna Vitali)
Abstract: Labor underutilization is pervasive in small firms in developing countries, yet its causes and consequences remain poorly understood. Using a novel five-year panel of over 1,000 firms in Uganda, we document that firms face substantial and hard-to-predict demand volatility, that capital and labor adjustment costs are large, and that labor utilization is low. Firms with more volatile demand exhibit lower utilization and invest less in training. Guided by these facts, we develop a model of firm input and training choices under demand uncertainty. A key mechanism highlighted is that training requires up-front fixed investment while workers are paid piece-rates per unit of output, so higher volatility lowers expected utilization and reduces the returns to training. We estimate the model, identifying key parameters via a field experiment offering firms a substantial wage subsidy to recruit an additional worker. Counterfactual simulations show that reducing demand volatility raises hiring and training nearly as much as lowering training costs directly, and that the effectiveness of typical development policies to stimulate firm size, productivity and growth -- such as capital grants, management training, and market access interventions -- all depend critically on the volatility of demand firms face. Our findings highlight a novel demand-side mechanism limiting human capital accumulation, firm size and the effectiveness of firm-targeted policies in low-income settings.
Economics
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