Labour markets in low-income countries are characterised by informal work, in which most people cycle between casual wage labour and low-return self-employment, facing weak returns to skills and experience. Improving outcomes will require not just more education but better matching, as well as a deeper understanding of worker constraints and employer behaviour.
Editor's note: This episode of VoxDevTalks is available on Spotify and Apple Podcasts.
In this episode of VoxDevTalks, Emily Breza and Supreet Kaur explore what it really means to enter the labour market in a low-income country – and why the experience differs so sharply from richer economies. Their message is clear: for hundreds of millions of workers, the central challenge is not job choice but job access – work is often rationed, informal, unstable and shaped by day-to-day risks.
A key theme is that standard headline statistics can mislead. People may appear ‘employed’ most of the time, yet still spend limited time in stable wage jobs. This is partly because much work happens outside formal employment relationships, and partly because labour markets are organised around extremely short-term hiring. As Kaur puts it, a defining fact is “how little time people actually spend in wage employment”.
How much of work is actually wage employment?
One of the episode’s most surprising insights is the small share of time that workers spend in wage employment, especially in rural settings. Kaur explains that in rural areas of developing countries, people may spend only “10 to 15% of [their] time in wage employment”, and even in cities it may only be “25 to 50%”. The remainder is typically split between self-employment and periods with no paid work.
Kaur notes that if you simply ask how often people work, they might report working around 80% of days of the month, resembling full employment. But once you break that down, the bulk of activity is self-employment, particularly in rural areas. In other words, people are busy, but not necessarily in secure jobs with predictable pay.
Casual labour and the one-day contract economy
When wage employment does exist, it is frequently organised through informal spot markets for casual labour. Kaur highlights the sheer scale of these arrangements:
“Hundreds of millions of people in developing countries every day get their jobs by participating in these spot markets”. Kaur
The typical agreement is not a month-long contract or even a week-long shift pattern, but something far shorter:
“The modal contract in these spot markets is only one day long”. Kaur
This creates a labour market where instability is built into the system. Workers often treat job search itself as a regular routine. Kaur describes workers in Chennai who have turned daily job-seeking into a way of life: “it is their full time job to show up to the labour stand and get a job for that day”.
Yet day-to-day outcomes vary: they may be hired one day, the next day not, and sometimes may not even attempt to search because the costs and likelihood of success change.
The result is volatile employment and income, even among people who are actively seeking work. This volatility also shapes behaviour: workers may juggle options, combine activities, and move between wage labour and self-employment depending on what the market offers that week.
Why wages don’t always reward skills and experience
Another striking feature is wage setting. In many informal labour markets, wages can be compressed, meaning individual productivity and experience do not translate into large wage differences. Kaur explains that rather than wages rising sharply when demand increases for certain skills, many workers face a fixed “going rate”. In construction, for example, pay may be determined largely by occupation category, not by measured performance.
This can weaken incentives and reduce the payoff to experience. Drawing on related research, Kaur notes evidence of “less of a return to experience” in poorer countries, consistent with rigid daily wage norms. The implication is that labour markets may not reward skills in the way policymakers or jobseekers might expect – a reality that affects both training policy and worker expectations.
Rural versus urban labour markets
The researchers also challenge the idea that moving from rural to urban areas automatically means entering a fundamentally different labour market. Though the research project began with a strong rural–urban contrast in mind, that distinction blurred over time:
“We left this thinking that there's much less of a bright line between urban and rural labour markets than when we started”. Breza
Certainly, cities have more non-agricultural sectors, including factories and formal employers, and wage employment is more common. Kaur notes that wage employment rates in urban areas can be “up to 50% rather than only 15%”. But many structural features – job churn, informal hiring, reliance on networks, movement between wage work and self-employment – show up in both settings. The difference is often one of degree and sector mix, not an entirely separate system.
Self-employment as a fallback, not a dream
Self-employment is often portrayed as entrepreneurship, but the researchers argue that much of it is closer to a coping strategy than a growth engine. Breza explains that many microbusinesses do not expand or respond strongly to credit and training, partly because people enter them for survival rather than profit maximisation. In this view, self-employment is something you ‘pick up’ when wage opportunities fail: driving a taxi, delivering goods, vending food or vegetables – activities requiring little capital and offering flexibility.
Kaur adds compelling evidence from their work on labour rationing: when wage work becomes available at the prevailing wage, “people immediately abandon self-employment”. This revealed preference demonstrates entrepreneurship is often not chosen because it is attractive, but because it is available.
However, Kaur points out that while people may prefer casual wage labour to low-return self-employment, they may not want formal full-time jobs – describing new evidence showing that when informal, flexible work is replaced with rigid factory schedules, “labour supply really plummets”.
“We have tons and tons of growing evidence now that people just don't want formal, full time jobs. They really want the day to day flexibility that casual work provides”. Kaur
This flexibility may be essential for managing household demands, illness, and social obligations – even if it comes with income risk.
Job search frictions, social networks, and over-optimism
Finding work is itself costly. Breza notes that in many cities, workers live far from where jobs are posted or allocated, meaning travel and search time pose significant barriers. Referrals and social networks are thus central to job access, helping workers navigate search frictions.
The researchers also discuss jobseekers’ expectations, especially among young people in fast-changing labour markets. In several urban contexts in sub-Saharan Africa, Breza notes that jobseekers can be overly optimistic about their prospects, particularly as education has expanded rapidly and young workers have different skills than older members of their networks. Information interventions often push expectations downward, sometimes changing what wages people accept and how quickly they take a job.
What policy can do, and what researchers still don’t know
For policymakers, the case for improving labour markets is both economic and human. Kaur stresses that labour is central to welfare and productivity, and also a key way families manage shocks. If a relative gets sick, one option is to supply more labour to earn money quickly – an informal insurance mechanism that depends on labour markets functioning reasonably well.
On education policy, the researchers urge caution. One study finds that more schooling raises learning and credentials, but may not reliably translate into earnings gains for men, and improvements for women may partly reflect competition for scarce public sector jobs. Vocational training shows promise when quality is high, and there is encouraging evidence for programmes that improve signalling, CV preparation, and matching.
They also identify major knowledge gaps. Kaur argues that one of the most important unanswered questions is absenteeism – a constraint that discourages firms from offering longer contracts. Employers report frequent absence, and Kaur notes absenteeism can be “10 to 15% per day” even in well-run factories, and as high as “40% a day” in some contexts. Yet researchers still lack reliable daily data on the causes: illness, social obligations, or other pressures. Without understanding that, it is difficult to design policy that improves job stability and encourages employers to invest in workers.