Abstract:
This paper investigates wage differentials between workers in
subcontracting and non-subcontracting firms, using data from a recent
survey of small manufacturing firms in Gujranwala, Pakistan. The paper finds
that subcontracting workers receive a high wage premium and invokes
efficiency wage arguments to explain this differential. The paper argues that
due to a client/vendor monitoring problem it is optimal for subcontracting
firms to pay higher than the market clearing wages. The use of Heckman's
two stage procedure to test for sample selection bias fails to give such
evidence. A decomposition of the wage differentials indicates that
endowment differentials partly explain higher wages for subcontracting
workers while the bulk of this wage gap is explained by differential returns
to workers' attributes.
