ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

A+| A| A-

Economic Growth and Employment in Labour-Surplus Economies

The idea that growth of the modern sector alone can improve employment conditions in labour-surplus developing economies has been and remains extremely influential. It is implicit in the argument that rapid economic growth is all that is required to improve employment conditions. It is also implicit in the fact that issues of growth of the modern sector are usually presented as issues of economic growth in general while issues of growth of the traditional sector hardly ever figure in debates and discussions. And yet, this paper argues, neither theory nor real world experience supports the idea. For employment conditions to improve, growth must occur simultaneously in both modern and traditional sectors. There are important issues of growth strategy for the traditional sector waiting to be debated.

Economic Growth and Employment in Labour-Surplus Economies

The idea that growth of the modern sector alone can improve employment conditions in labour-surplus developing economies has been and remains extremely influential. It is implicit in the argument that rapid economic growth is all that is required to improve employment conditions. It is also implicit in the fact that issues of growth of the modern sector are usually presented as issues of economic growth in general while issues of growth of the traditional sector hardly ever figure in debates and discussions. And yet, this paper argues, neither theory nor real world experience supports the idea. For employment conditions to improve, growth must occur simultaneously in both modern and traditional sectors. There are important issues of growth strategy for the traditional sector waiting to be debated.

AJIT K GHOSE

I

E
ver since the publication of Arthur Lewis’s classic paper [Lewis 1954], the dual economy model has served as the core framework for thinking about development. The model starts from two stylised facts about developing countries. First, most developing countries have two distinct economic sectors: a small modern sector where production involves use of reproducible capital and labour, and a large traditional sector where only labour (together with a given quantity of natural resources and some simple tools) is used. In the modern sector, capitalist entrepreneurs (including governments) organise production for profit, save a part of the profits and use this to undertake investment. In contrast, producers in the traditional sector are subsistence-oriented and do not save or invest. Workers in the modern sector are employed in regular wagepaid jobs while workers in the traditional sector are mostly selfemployed in family enterprises.1 Second, the traditional sector is a reservoir of surplus labour in the sense that a part of the existing workforce could be transferred out of the sector without reducing the labour input actually used in production. This also means that neither labour use nor output in the traditional sector can be increased without introducing reproducible capital.2

These features define a setting in which economic growth means growth of output in the modern sector together with stability of output in the traditional sector. Growth is fuelled by rising profits in the modern sector and availability of surplus workers from the traditional sector for employment at a fixed real wage, which is linked to but higher than the average real earning in the traditional sector. Such a growth process continues till a point is reached where there is no surplus labour left in the traditional sector. This is a turning point at which a labour-surplus economy is transformed into a full-employment economy where output growth in the modern sector implies output decline in the traditional sector.3

The growth process, however, could conceivably come to a halt before an economy has reached this turning point. This happens if the real wage in the modern sector starts rising prematurely. For, then growth of profits, and hence of saving and investment, decelerates. Such developments slow down output growth. The process of transfer of surplus workers into employment in the modern sector slows down as a consequence and the turning point becomes unattainable.

This model continues to occupy the centre stage in development economics, though half a century of research, debates and realworld experiences have added many qualifications, refinements and extensions to it. Circumstances and institutions that permit the existence of surplus labour in the traditional sector, potential problems of ensuring adequate availability of food (the basic wage good) to the expanding modern sector, reasons for the existence of wage differential between the two sectors and problems of defining appropriate growth strategies for the modern sector are all issues that have received much attention from economists and development planners.4 Remarkably, however, the idea that growth in the modern sector alone can eliminate surplus labour from the traditional sector if wage stability can be maintained has largely escaped scrutiny.5 The only employment issue that has received some attention from economists relates to possible consequences of the existence of a large wage differential between the two sectors. This, it has been noted with some concern, gives rise to problems of unemployment and “informal” employment in urban areas (where the modern sector is usually located).6 Even these problems, however, have generally been regarded as transient in nature.

This paper begins by noting that the proposition that growth in the modern sector alone can reduce and eventually eliminate surplus labour cannot in fact be derived from the Lewis model, given its assumption that the real wage in the modern sector is linked to the real income per worker in the traditional sector. The assumption itself then comes in for a scrutiny, which casts doubts on its plausibility. But even a modified Lewis model, which incorporates more appropriate assumptions about the institutional features of the traditional sector and the process of wage formation in the modern sector, predicts that growth in the modern sector alone is most unlikely to reduce surplus labour. The paper then seeks to identify the characteristics that a growth process must possess if it is to improve employment conditions in labour-surplus economies. It also briefly considers the issues of policy that this perspective brings into focus.

II

A central argument of the Lewis model is that, in a laboursurplus economy, transfer of workers from the traditional sector into employment in the modern sector is what underpins

Economic and Political Weekly August 5, 2006

economic growth and leads to improvement in employment conditions. The reasoning is as follows. In a labour-surplus economy, genuine employment growth can only occur in the modern sector where employment is wage-paid; more workers in the traditional sector merely mean more work-sharing and not increased use of labour in production. The real wage in the modern sector, moreover, is substantially higher than the average real earning of workers in the traditional sector. This is rendered feasible by the fact that output per worker is also substantially higher in the modern sector than in the traditional sector for any given wage.7 In these circumstances, transfer of workers from the traditional to the modern sector not only reduces surplus labour in the economy but also increases the average productivity and income of workers. If such a process is allowed to continue uninterrupted, a labour-surplus economy eventually reaches the turning point where full employment is achieved.

A close look at the model reveals, however, that growth in the modern sector alone can never even begin to reduce surplus labour in the traditional sector. Any rise in the real wage slows down the process of labour transfer by restraining the growth of investment and by reducing the employment per unit of investment in the modern sector. But because the wage in the modern sector is linked to the average earning of workers in the traditional sector, any reduction of surplus labour in the traditional sector must necessarily increase the real wage in the modern sector. In schematic terms, the real wage in the modern sector

(w) in the Lewis model is given by

mw= yl (1 + d) ...(1)

mwhere yl is the average real earning per worker in the traditional sector (which is the same as output per worker in a situation where workers are self-employed and production is subsistenceoriented) and d is a fixed premium received by modern sector workers.8 Obviously, any rise in output per worker in the traditional sector raises the modern sector wage. And output per worker in the traditional sector must rise if the pace of labour transfer is rapid enough to reduce the absolute number of workers in the sector. Thus as soon as surplus labour in the traditional sector begins to decline, growth of the modern sector slows down leading to a reversal of the process.

The possibility of modern sector growth reducing surplus labour in the traditional sector is even more remote in economies where the modern sector does not produce food and must procure it from the traditional sector through trade. In such economies, the terms of trade between the two sectors mediate the relation between the real wage and the product-wage (w*):

mw* = w.(pt/p) ...(1a)

mmmwhere p is the price of the good produced in the modern sector

mand pt is the price of food produced in the traditional sector. It is the change in the product-wage that affects profits in the modern sector. Evidently, the product-wage in the modern sector could rise because of adverse movement in the terms of trade even while the real earning per worker in the traditional sector remains constant. And such adverse movement is most likely; for there is no good reason to suppose that, when a worker moves to the modern sector, the remaining workers in the traditional sector would sell the food hitherto consumed by the departing worker at the prevailing price in stead of consuming it themselves. Preventing wage rise in the modern sector then requires nonmarket interventions by governments to hold the terms of trade stable, which amounts to taxation of the already meagre labour incomes in the traditional sector.9 It is clear that the Lewis model, when properly interpreted, yields the conclusion that economic growth is most unlikely to improve employment conditions in a labour-surplus economy.

Moreover, in economies where only the traditional sector produces food, labour incomes in the traditional sector must actually be taxed by governments for growth in the modern sector to continue at all.

III

A crucial assumption of the Lewis model, it turns out, is that the real wage in the modern sector is higher than the average earning in the traditional sector by a fixed premium. How plausible is this assumption? It seems quite reasonable if we believe that self-employed workers are the only kind of workers in the traditional sector, that there is a need to offer material incentives to these workers in order to induce them to move to wage-paid jobs in the modern sector, and that this is the sole (or main) reason for the existence of a gap in real wage between the sectors. But such beliefs sit uneasily with what we know about real-world situtations. We know, for example, that government regulations and trade union activities are important determinants of the real wage in the modern sector in many developing countries. There are good reasons to think that governments and trade unions seek to establish norms for “decent” level of living for workers employed in the sector without any reference to the prevailing average real earning in the traditional sector. Besides, there are very few countries where the traditional sector is composed of an undifferentiated mass of self-employed peasants and artisans. Asset distribution across households in the traditional sector is in fact unequal, often highly unequal, in many developing countries. Thus real earning per worker actually varies a great deal across households. A statistical average can still be defined, but this can hardly serve as an analytically meaningful basis for fixing an “incentive wage” in the modern sector.

Inequality of asset distribution explains why wage employment is often significant in the traditional sector of developing countries (even though self-employment is usually dominant). Unlike in the modern sector, however, wage employment in the traditional sector tends to be casual or irregular in character; hiring of workers on a daily basis for a daily wage is common. The rationale for a system of casual wage-employment lies in the fact that it accommodates surplus labour; it makes sharing of a given amount of wage-paid work by a varying number of workers possible. No wage-worker need be wholly unemployed but few succeed in finding employment on all days they seek it. For an individual wage worker, the probability of finding employment on any given day is less than unity.

Obviously, the daily wage rate in a market for casual labour cannot be determined through demand-supply equilibrium since supply must always exceed demand. How then is this determined? The most plausible answer is that the wage rate is such that the wage-income per casual worker over a given period equals the lowest income per worker from self-employment (which can be seen as the opportunity cost of participation in the wage labour market) over the same period. It is not difficult to visualise a process through which such a wage rate could come to be established. Suppose that, in the initial situation, all workers in the traditional sector share whatever work is available in family enterprises and whatever income results from this work. If productive resource per worker is equal across households, all workers remain self-employed. Suppose, however, that productive resource per worker is unequally distributed. Then there are resource-rich (or labour-deficit) households that can increase incomes by hiring in labour as also resource-poor (or laboursurplus) households that can increase incomes by hiring out labour. A market for hired labour then naturally emerges. For

Economic and Political Weekly August 5, 2006

Figure

Wages

S2

MPMP1 MP3 MP2 S
S1

W O L LL1 Labour

o

workers in resource-poor households, labour is worth hiring out only if, for a given period, the income per worker from wage employment is at least equal to that from current employment in family enterprises. Since there are many resource-poor households, however, many workers are seeking wage-work at the same time and individual workers cannot be certain of finding it as and when they seek it. So workers will find seeking wage employment worthwhile if, over a given period, the income per worker from current employment in family enterprises equals the product of the wage-income they can earn if employed on all days of the period and the probability of their finding wageemployment on any given day. This equality defines a daily wage rate that gets established through a process of trial and error. At this wage rate, there is a fixed number of workers and hence a fixed amount of labour available for hiring (a larger supply of labour will require a higher wage) on each day of the period. The resource-rich households can only decide how much of the available labour to hire at this wage, for the supply of wage labour simply falls to zero if they offer a lower wage.10

The equilibrium in the casual labour market in the traditional sector is depicted in the figure. The curve showing the supply of wage labour is WS; at a wage OW, there is a fixed supply of labour OL0, but the wage must rise above OW to induce a higher supply. The curve showing the marginal product of labour is MP. At the wage OW, the amount of labour hired is OL. LL0is the excess supply of casual labour during a given period. The wage-income per unit of casual labour offered is (OW.OL/OL0) and this equals the income per unit of self-employed labour in resource-poor households.

Two important characteristics of this labour market need to be underlined. First, so long as no reproducible capital is employed in production, changes in demand for and supply of casual labour are driven solely by demographic change. Growth in the number of workers in resource-rich households reduces labour-deficits in these households and hence the demand for casual labour (shifting MP to MP1, for example). Similarly, growth in the number of workers in resource-poor households reduces earning per worker from self-employment and hence increases the supply of casual labour (shifting WS to WS1, for example). Thus population growth simultaneously reduces the demand for and increases the supply of casual labour. Second, changes in demandsupply conditions tend to change the wage-income per unit of casual labour offered rather than the wage rate; the probability of finding employment serves as the adjustment variable. This means that a wage rate, once established, tends to persist. Only a big jump in demand (a shift of MP to MP2, for example) or a large decline in the number of workers in resource-poor households (a shift of WS to WS2, for example) can increase the wage rate by efectively eliminating surplus labour.

Given these features of employment in the traditional sector, there are two possible ways of characterising the evolution of employment in the course of economic growth in a labour-surplus economy. In one case, we can assume that the expanding modern sector recruits exclusively from among the workers belonging to resource-poor (labour-surplus) households in the traditional sector. This approximates Lewis’s formulation, for this is when it can be plausibly supposed that growth of the modern sector is associated with transfer of surplus workers from the traditional sector and that the wage in the modern sector is based on the average income in the traditional sector but includes an incentive premium.11

The other, more realistic case, the case that we propose, is where government regulations and trade union pressure set the real wage in the modern sector much above, and without reference to, the real wage in the traditional sector. A job in the modern sector is then attractive not just to workers in resource-poor households but also to workers in resource-rich households in the traditional sector. In this setting, it is the workers from resource-rich households (who are not surplus workers) that are likely to move to the modern sector and we assume that this is what happens. One justification for the assumption is that it is only the resourcerich households that can support their workers for a period of job search; another is that the modern sector usually requires workers with some formal education for even unskilled jobs and workers in resource-poor households typically lack formal education.

We also assume that the natural rate of growth of labour force is the same for resource-rich and resource-poor households and equals that for the economy as a whole. Since workers from resource-poor households never get transferred into employment in the modern sector, the supply of wage labour in the traditional sector always rises if population growth is positive. The growth of demand for wage labour in the traditional sector, on the other hand, depends on the relationship between the rate of growth of modern sector employment and the rate of growth of the workforce in resource-rich households (which is the same as the natural rate of growth of labour force); as the former exceeds or equals or falls short of the latter, the demand for casual wage labour rises or remains unchanged or falls. It is easy to see, then, that the quantity of surplus labour rises, and the real income per worker in resource-poor households declines, except when the rate of growth of modern sector employment is substantially higher than the rate of growth of labour force (when, in the figure, MP shifts to MP3 while WS shifts to WS1). Growth in the modern sector alone reduces surplus labour in the traditional sector only when this growth is exceptionally rapid.12

However, in this modified Lewis framework, a change in the level of surplus labour in the traditional sector has no consequence for the real wage in the modern sector. It is theoretically possible, therefore, that the growth of the modern sector continues to accelerate and eventually reaches the exceptionally high level required to reduce surplus labour. In reality, though, Malthusian remedies will come into play long before that point is reached as the level of surplus labour continues to rise and real incomes of traditional sector workers continue to fall.

In the case of economies where the traditional sector is the sole producer of food, adverse movements in terms of trade are likely even as surplus labour grows. We can now suppose that “marketed surplus” of food is supplied by the resource-rich households in the traditional sector. When a worker from such a household moves to the modern sector, additional wage labour

Economic and Political Weekly August 5, 2006

would be required to compensate for the loss of family labour if output is to remain unchanged. This means that only a part of the consumption of the departing worker is transformed into “marketed surplus”; the other part must be used to hire casual wage-workers. So the growth of “marketed surplus” of food fails to keep pace with the growth of employment in the modern sector causing the terms of trade to move against the modern sector. Ceteris paribus, this reduces the real wage in the modern sector. If governments and trade unions seek to prevent this decline in the real wage in the modern sector, the product-wage must rise. If governments wish to pre-empt this outcome, they must use non-market interventions to maintain stability of the terms of trade, which now implies taxation of worker incomes in resourcerich households in the traditional sector.

Increases in real wage in the modern sector can now only result from changes in government regulations and/or trade union action and hence are autonomous. Such increases lead to a slow down in the growth of employment in the modern sector by simultaneously reducing the growth of investment and the employment per unit of investment. So the process of transfer of workers from resourcerich households in the traditional sector slows down as well. This restrains the growth of demand for casual wage labour in the traditional sector. The result is growth of surplus labour and reduction of real income per worker in resource-poor households.

Two basic conclusions follow. First, even rapid economic growth, when confined to the modern sector, is most likely to be associated with worsening employment conditions in laboursurplus economies. Such growth, moreover, is hard to sustain in economies where only the traditional sector produces food – the basic wage-good. Second, insofar as they seek to protect or increase the real wage of modern sector workers, governments and trade unions not only undermine growth of the modern sector but also depress incomes of workers in resource-poor households in the traditional sector.

IV

What kind of growth is required to improve employment conditions in labour-surplus developing economies? In answering this question, it is useful to start from a basic identity. If r is the growth rate of labour force in the economy, r is the

mgrowth rate of employment in the modern sector, rt is the rate of growth of labour force in the traditional sector and α is the initial ratio of modern sector employment to total labour force in the economy, then for any given period α.r + (1-α).rt = r, [0 < α< 1] ...(2)

m

Since the rate of growth of employment in any sector equals the product of the rate of output growth and the employment elasticity, we can also write this as α.g.e + (1-α).gt.et = r ...(3)

mmwhere g and gt are the growth rates of output in the modern

mand the traditional sectors respectively; and e and et are the

mvalues of employment elasticity in the modern and the traditional sectors respectively. Note, however, that et is not in fact employment elasticity in the usual sense of the term; it is what might be called absorption elasticity. Output per worker in the traditional sector (and hence the level of surplus labour) remains stable when the absorption elasticity equals unity. Overall employment conditions in the economy then remain stable if g.e= gt = r ...(4)

mm

When this condition is satisfied, the growth process leaves both the level of surplus labour and the share of the modern sector in total labour force unchanged, i e, overall employment conditions remain stable.

Stability of employment conditions, of course, is not what we are looking for. Economic growth should improve employment conditions by progressively reducing the level of surplus labour in the traditional sector so that the economy moves towards its turning point. The minimum condition for this to happen is g.e> r > gt [0 < e < 1, et = 1] ...(5)

mm m

When this condition holds, employment conditions in the economy improve because the modern sector employs a rising proportion of the labour force while the real earning per worker in the traditional sector remains constant. However, condition

  • (5) is relevant only for a dual economy where the modern sector itself produces food. In an economy where only the traditional sector produces food, condition (5) implies reduced food consumption per worker in both sectors. This is avoided if condition
  • (5) is modified as g.e> r = gt ...(5a)
  • mm

    If this condition is satisfied, however, the absorption elasticity (et) must be less than unity (because the rate of growth of labour force in the traditional sector is less than r). So condition (5a) could also be written as

    g.e > r > gt.et [0 < e < 1, 0 < et < 1] ...(5b)

    mmm

    The process of labour transfer, if it is to improve overall employment conditions in an economy in which the traditional sector supplies food to the modern sector, has to be associated with rising output per worker in the traditional sector. This is also when the terms of trade can be expected to remain stable without requiring non-market interventions from governments.

    Since the real wage in the modern sector is assumed to be independent of the average real income in the traditional sector, we can treat condition (5a) as the general condition relevant for all labour-surplus economies. This condition shows that economic growth must be of a particular pattern if it is to improve employment conditions; output growth in the modern sector must be sufficient to generate an employment growth that exceeds the labour force growth in the economy and output growth in the traditional sector must equal the labour force growth in the economy.

    V

    The perspective developed above points to the basic reasons why economic growth has so often failed to improve employment conditions in developing countries: economic growth has often meant growth of the modern sector and such growth has often failed to generate an employment growth higher than labour force growth. They also show why the argument that rapid economic growth is all that is required to improve employment conditions in developing countries is deeply misleading. It is to be noted too that the currently debated issues of relative merits of openness and protection, of domestic and foreign capital, and of state and markets are often presented as issues of growth strategy for the economy as a whole; though, in truth, these are issues of growth strategy for the modern sector. This does not make them irrelevant, for defining an appropriate growth strategy for the modern sector remains important. But a growth strategy for the economy as a whole must incorporate a growth strategy for the traditional sector as well. Recognition of this brings into focus a set of issues scarcely discussed in the literature on development.

    First, an important problem arises from the fact that output growth in the traditional sector necessarily requires introduction of reproducible capital, i e, investment. Since accumulation occurs solely (or primarily) in the modern sector, only the entrepreneurs (including governments) in the modern sector are in a position

    Economic and Political Weekly August 5, 2006 to invest. But why should they want to invest in the traditional sector? In economies where only the traditional sector produces food, there is a good reason: growth of profits in the modern sector is hard to sustain unless a growing supply of food is available from the traditional sector. But as land is held by a multitude of small producers, it is very difficult, if not impossible, for the private entrepreneurs from the modern sector to invest in the production of food. In economies where the modern sector itself produces food, on the other hand, there is nothing to even motivate the private entrepreneurs to invest in the traditional sector. In both types of economies, therefore, governments have to take the primary responsibility for investing in the traditional sector, and governments will do so only if they regard improving employment conditions as a central objective of economic policy. Explicitly defined employment objectives must guide the choice of growth strategy.

    Second, investment in the traditional sector in any given period obviously means reduced investment in the modern sector. If investment in the traditional sector generates no profit or tax revenue for governments, therefore, investment in the economy as a whole would decline in the next period. And if such a tradeoff between economic growth and improvement in employment conditions emerges, the process of improvement in employment conditions cannot be sustained. So it is vitally important to ensure that a part of the incremental output of the traditional sector, resulting from investment, accrues to governments as revenue. This can be done either through specially designed tax schemes or through special pricing of the investment goods made available to the traditional sector. The important point is that public investment in the traditional sector should bring returns and should not assume the character of pure transfers.13

    Third, there arises a question of adequacy of saving. A simple way of seeing this is by using the Harrod-Domar growth equation to reformulate condition (5a): (s/bv). e > r ...(6a)

    mm.mm(st/bt. vt) = r ...(6b)

    where s and st are the components of the national saving ratio

    mused in modern and traditional sectors respectively, b and bt

    mare the ratios of outputs of modern and traditional

    sectors respectively to aggregate output of the economy, and v

    mand vt are the capital-output ratios in modern and traditional sectors respectively. Conditions (6a) and (6b) suggest the rate of saving (s + st) required to achieve a growth process that

    mimproves employment conditions in any given economy. If, in an economy, the actual rate of saving falls short of the required rate, we have a conundrum: there is no feasible growth strategy that can improve employment conditions. Finally, it is clearly important to hold the real wage in the modern sector (which is much higher than the average real earning in the traditional sector) stable till the turning point has been reached. This raises complex issues relating to labour market regulations and trade union activities. A stable wage is associated with rising share of profits in value added in the modern sector and this makes it appear as something unfair to workers. It should be realised, however, that rising share of profits (including incomes of governments) means rising saving and investment rates. Rising real wage, on the other hand, not only restrains growth of investment but also reduces employment per unit of investment. It, therefore, slows down the growth of employment in the modern sector and hence depresses real incomes of the masses of workers in the traditional sector.

    EPW

    Email: ghose@ilo.org.

    Notes

    [The views expressed are the author’s and not of the instituion to which he belongs.]

    1 Modern and traditional sectors are often identified with industry andagriculture respectively. This is inappropriate. In many countries agricultureis an important part of the modern sector.

    2 Surplus labour is not always a result of overpopulation. In many cases,it is the result of extreme inequality in asset distribution.

    3 This is the first turning point. The second turning point is reached whenthe real earning in the traditional sector catches up with the real wagein the modern sector.

    4 The literature is large, but a comprehensive review is available in Meier (1995).See also Basu (1984), Lewis (1954, 1958, 1972, 1979) and Ray (1998).

    5 Yet this precisely is the proposition that flies in the face of real worlddevelopment experience. Many developing countries have achieved fairlyrapid rates of economic growth but have performed poorly in overcomingproblems of surplus labour. The recent experiences of China and Indiaprovide rather dramatic illustrations of this. See Ghose (2004,2005).

    6 The most well known study is that by Harris and Todaro (1970).

    7 This is so for two reasons: capital per worker is positive in the modernsector and zero in the traditional sector, and surplus labour exists onlyin the traditional sector.

    8 This is simplifying matters a bit. The premium does not have to beabsolutely rigid. The point is that any increase in the real earning perworker in the traditional sector necessarily increases the real wage in themodern sector.

    9 The idea of using non-market instruments to extract a surplus from thetraditional sector was first mooted by Preobrazhensky (1965) in the courseof debates on industrialisation strategy for the Soviet Union. It subsequentlyreceived wide attention in debates on development. See Mitra (1977) andSah and Stiglitz (1984, 1987).

    10 The efficiency-wage hypothesis also leads to a similar labour supply curve.See Ray (1998). But the efficiency-wage hypothesis is not relevant inthe context of markets for casual labour, since no stable employeremployee relationship exists. No worker works for a single employer andno employer hires the same worker for long periods.

    11 Lewis in effect assumes that all households in the traditional sector are resource-poor or labour-surplus.

    12 This, of course, is also what common sense would tell us. It is easy toshow that in an economy where the modern sector currently employs 10per cent of the labour force and the labour force is growing at a rate of2 per cent per annum, employment in the modern sector has to grow ata rate of 20 per cent per annum if the level of surplus labour in the traditionalsector is to remain constant.

    13 Anti-poverty programmes such as special employment schemes oftenfunction as vehicles for transfer payments. Such programmes may wellbe necessary or desirable, but they are no substitutes for investment.Subsidies on farm inputs amount to investment that brings negative returns.

    References

    Basu, Kaushik (1984): The Less Developed Economy: A Critique ofContemporary Theory, Basil Blackwell, Oxford.

    Ghose, Ajit K (2004): ‘The Employment Challenge in India’, Economic and Political Weekly, November 27.

    – (2005): ‘Employment in China: Recent Trends and Future Challenges’, International Labour Office (Geneva), Employment Strategy Paper2005/14.

    Harris, J R and M P Todaro (1970): ‘Migration, Unemployment andDevelopment: A Two-Sector Analysis’, American Economic Review, Vol 60, pp 126-42.

    Lewis, W A (1954): ‘Economic Development with Unlimited Supplies ofLabour’, The Manchester School, May.

  • (1958): ‘Unlimited Labour: Further Notes’, The Manchester School, January.
  • – (1972): ‘Reflections on Unlimited Labour’ in Luis Eugenio de Marco (ed),International Economics and Development: Essays in Honour of RaulPrebisch, Academic Press, New York and London.
  • (1979): ‘The Dual Economy Revisited’, The Manchester School, September.Meier, G M (1995): Leading Issues in Economic Development, Sixth Edition,
  • Oxford University Press, New York and Oxford.

    Mitra, Ashok (1977):Terms of Trade and Class Relations, Frank Cass, London.

    Preobrazhensky, E (1965):The New Economics(English translation), Clarendon

    Press, Oxford. Ray, Debraj (1998): Development Economics, Princeton University Press,Princeton, New Jersey.Sah, R K and J E Stiglitz (1984): ‘The Economics of Price Scissors’, American Economic Review, Vol 74, pp 125-38.

    – (1987): ‘Price Scissors and the Structure of the Economy’, Quarterly Journalof Economics, Vol 102, pp 109-34.

    Economic and Political Weekly August 5, 2006

    To read the full text Login


    To know more about our subscription offers Click Here.

    Comments

    (-) Hide

    EPW looks forward to your comments. Please note that comments are moderated as per our comments policy. They may take some time to appear. A comment, if suitable, may be selected for publication in the Letters pages of EPW.

    Back to Top