Labour Markets and the Choice of Technology in an Open Developing Economy

This article highlights economic factors determining the choice of technology and openness in an intertemporal context in the presence of institutional constraints in the labour market. It considers the case in which a more aggressive development strategy involves an investment in a modern technology. This technology raises the degree to which real wages and productivity depend on external factors while at the same time it also raises the expected value of real income the absence of such investment, production takes place in a traditional sector, using a technology that limits exposure to external shocks. The analysis evaluates the dependence of the choice of technology on the volatility of the shocks affecting the economy, the expected productivity gains, the investment cost associated with the modern technology, and the attitude towards risk. The dependence of openness, investment, and real wages on the attitude towards risk is derived for such an economy. The analysis also discusses the interaction between the institutional structure of the labour market and the use of protective measures that attempt to reduce exposure to external shocks.