Imperfect Labor Substitutability in Microenterprises
When micro-entrepreneurs accumulate substantial business capital and expand operations, their workforce size expands far less than proportionally due to frictions in hiring and trusting outside hired labor compared to family labor.
Picture this
Think of a family-run bakery that buys a second oven and doubles its flour inventory, but hesitates to hire outside workers because of training costs and fear of theft. Instead of hiring employees, the family members simply work longer hours themselves, causing capital to grow much faster than worker count.
What the evidence says
Despite an 81.0% increase in business capital stock among grace period households, total enterprise workforce adjusted marginally from 2.53 workers in control to 2.89 workers in treatment, a difference that was statistically insignificant.
- Who
- 766 female microfinance clients in low-income neighborhoods of Kolkata, India.
- How
- Randomized Controlled Trial measuring total business workforce size three years post-disbursement alongside capital stock expansion.
What to do
Account for family labor constraints when designing business growth interventions, recognizing that capital accumulation in microenterprises outpaces formal hiring.
From the source
"The fact that scale of business operations adjusts more rapidly than size of the microenterprise workforce is consistent with imperfect substitutability between outside and in-family labor."
101_290 microfinance and entrepreneurship AER2013.pdf