Transcript Development Economics – Econ 682

Chapter 9
Employment,
Migration and
Urbanization
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Employment, Migration &
Urbanization
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Production Function
Uniqueness of Employment Problems in
LDCs
Unemployment, Underemployment &
Statistics
Disguised Unemployment
Rural-urban Migration
Harris-Todaro Model
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Employment, Migration &
Urbanization
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Western Approaches to Unemployment
Causes of Unemployment in LDCs
Policies for Reducing Unemployment
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The Production Function
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Y = F(L, K, N, E, T)
means that output (or national
product) (Y) during a given time
period depends on the input flows of
labor (L), capital (K), natural
resources (N), and entrepreneurship
(E); and prevailing technology (T).
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How unemployment in
LDCs is different
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Openly unemployed usually 15-24,
educated, and urban (at least in lowincome countries, especially in SSA and
South Asia).
Women higher unemployment rate.
Less likely from poorest 20% of
population.
Potential source of unrest.
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Unemployment/labor force
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3.7% East & South Asia.
8.2% China.
9.2% Latin America.
5.9% Middle East.
14.2% Africa.
11.1% Developing Europe & Central Asia.
6.2% high-income countries (World Bank
2003h: 52-53, ILO 2000).
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Labor absorption
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Assume labor force growing at subSaharan Africas rate 2.7% yearly,
1992-2000.
1/3 of labor force employed in nonagriculture.
1/3 X what = 0.027.
1/3 X 0.081=0.027.
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Labor absorption
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Assume labor force growing at sub-Saharan
Africa’s rate 2.7% yearly, 1992-2000.
1/3 of labor force employed in non-agriculture.
1/3 X what = 0.027.
1/3 X 0.081=0.027.
Does non-agriculture labor demand
grow by 8.1% yearly?
Not likely (see table 9.2, p. 314).
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Disguised unemployment
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Zero marginal revenue productivity of
LDC labor.
Theoretical basis – limited technical
substitutability of factors.
Marginal worker or marginal hour (?).
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Rural-urban migration
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LDC labor force growing 1.6% yearly.
Urban labor force & population growing
2.4% yearly.
LDC urban population/total population:
27% 1975, 35% 1992, 40% 2003.
75% Latin America, 38% Asia, 33%
Africa, 75% DCs, 47% world.
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LDC rural-urban migration
TWO MODELS
1. Lewis model.
2. Harris-Todaro model.
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LDC rural-urban migration
Harris-Todaro model
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Migration depends on expected
earnings.
Wages X probability of employment..
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Rs 6000 X 0.20 = Rs 1200 < Rs 3000
No migration
Rs 6000 X 0.60 = Rs 3600 > Rs 3000
Labor will migrate
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Critique of Harris-Todaro
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ILO indicates urban/rural income is 2 in Asia &
Latin America & 4-5 in Africa.
At Asian ratios, urban unemployment should be
50% to equate expected income.
Urban informal sector – petty traders, artisans, &
self-employed – absorbs many.
Low startup costs, no barriers to entry, hire labor
below minimum wage.
Informal sector 34% Mexico City, 45% Bogota,
43% Kolkata, 50% Lagos.
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Effect of other amenities
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Housing, shopping, transport, health
care, schools.
Overurbanization in many LDCs.
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Keynesian approach not so
applicable to LDCs
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What is the Keynesian approach?
Why is the Keynesian approach
NOT so applicable to LDCs?
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Why is the Keynesian approach
not so applicable to LDCs?
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Supply-side shortages (managers, capital,
foreign exchange, materials) limit output &
employment expansion.
Increased urban demand spurs more entrants
into urban labor force.
Government spending/GNP lower than in DCs.
Employment growth slower than output
growth because of capital-intensive techniques.
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Causes of LDC unemployment
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Unsuitability of technology – rigid
factor requirements.
Factor price distortions
High modern-sector wages.
Low capital costs.
Unemployment among educated.
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Policies to reduce unemployment
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Family planning programs to reduce
population growth.
Increased rural economic development.
Reducing urban bias.
Intermediate technology and other
modifications to inappropriate technology.
Reducing factor price distortions.
Reform the educational system.
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The best antidote for unemployment
Fast growth (such as in South Korea
& Taiwan) is generally the best
antidote for unemployment.
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