Market Imperfections, Labor Management, and Earnings Differentials in a Developing Country: Theory and Evidence from Yugoslavia.

In this paper, the authors evaluate empirically the relative importance of two explanat ions of Yugoslav interindustry income differentials. One explanation, proposed initially by J. Vanek and M. Jovicic (1975), stresses capit al market imperfections which permit capital rents to be appropriated as workers' incomes. The second explanation points to labor allocati on problems under self-management. The authors first present a critiq ue of the Vanek-Jovicic original formulation and then respecify the p roblem to permit simultaneous evaluation of the two schools of though t. Results based on two data sets suggest that labor allocation facto rs and monopoly power, rather than capital rents, are the main source of Yugoslav earnings dispersion. Copyright 1988, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.