11 Wage and Productivity Premiums in Sub-Saharan Africa. Introduction In the textbook economics world, markets are the most efficient institution to allocate scarce resources. | 11 Wage and Productivity Premiums in Sub-Saharan Africa Johannes Van Biesebroeck Introduction In the textbook economics world markets are the most efficient institution to allocate scarce resources. They clear all the time equalizing demand and supply and profit opportunities are arbitraged away. In particular production factors are predicted to be paid the marginal productivity of the market-clearing factor. In the real world there are frictions unobservable characteristics adjustment costs erroneous expectations and maybe discrimination all of which can distort the market equilibrium away from efficient allocation. This should not necessarily worry us economists as the theory is only intended to be a stylized version of reality. However a systematic gap between costs wages in our case and benefits productivity can provide information about crucial omissions from the theory. A well-functioning labor market should perform at least two tasks matching workers with firms and setting wages. The ability of the labor market to allocate workers to firms or industries with the highest productivity or the best future prospects is of particular importance for the likely effect of trade reforms and this has been studied extensively see Pavcnik 2002 Eslava et al. 2004 and Filhoz and Muendler 2006 for studies on Johannes Van Biesebroeck is an associate professor of economics at the University of Toronto and a faculty research fellow of the National Bureau of Economic Research. This paper was presented at the Conference on Firm and Employees CAFE held September 29-30 2006 in Nuremberg Germany. We gratefully acknowledge the financial support provided by the Institute for Employment Research IAB the Data Access Center FDZ-BA IAB The Deutsche Forschungsgemeinschaft German Research Foundation their Research Network Flexibility in Heterogeneous Labour Markets the Alfred P. Sloan Foundation and the National Science Foundation. Seminar participants at the University of Illinois .
