Labour in Developing Countries - Development Economics - Lecture Slides, Slides of Development Economics

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The labour market in Developing

countries: Wasted opportunities?

opportunities?

Lecture Outline/Questions

(1) Agricultural Sector and labour

(2) Connections between the urban and rural labour markets: Lewis and Harris-Todaro model.

(3) Determinants of Informal sector employment

(4) Linkages between the formal and informal sectors

(5) Testing Dualism in LDC labour markets: Gindling (1991).

opportunities?

Theoretically the literature on rural labour markets is weak – based on household models (e.g. Barnum-Squire, 1979).

This model predicts households are either net importers or exporters of labour, with initial factor endowments important in who demands labour and who supplies labour.

These models also assume that households maximise profits by deciding (i) on what and how to produce and then (ii) what consumption bundle is chosen – assume production and consumption can be completely separated (these markets are complete ).

Empirically in rural Africa this is not the case due to (i) risk (ii) asymmetric information and (iii) incentive problems.

opportunities?

This means rural labour markets are characterised by numerous types of labour market models in the agricultural sector.

(i) Subsistence Farming : small-scale so no likelihood of any economies of scale. Productivity is low. Very low-tech production.

Such subsistence farming provides the household with the primary source of food.

Any excess food is likely to be sold in local market places.

However many chronically poor households (low nutritional intake, under- weight, calcium deficient etc…) are in a vicious circle that begins with low calorie intake and under-nutrition, which directly affects productivity in what is highly physical work (Strauss and Thomas, 1999).

Effect of increase in one health unit on physical productivity: A comparison of initial ‘poor’ and initial ‘rich’ individuals – D.Ray calls a Capacity Curve (p489)

Health units =f(wages)

Physical Productivity

W

W

W

W1>W2>W

opportunities?

Even when labourers can earn more from hiring out their labour

to others they may well remain farming their plot of land because

of the importance of producing/providing food for the

household given agricultural production is uncertain - food

security.

This decision can appear uneconomic (irrational) but because of

no insurance markets, lack of credit markets, asymmetric

information and incentive problems is in fact not irrational at all.

The risk of not having food security for the household will in

itself lead to (now well-known) diversification of income sources

• importance of non-farm income and issue of

migration/remittances.

opportunities?

Often landlords will offer sharecropping to individuals/households he knows – social networks and issue of trust (new institutional economics) that reduces transactions costs.

Kinship networks are particularly important here – so will offer sharecropping to a family member (prior to inheritance of land).

The only problem with sharecropping comes about when the lack of economic power of the landless workers is exploited by the powerful land-owner – has to be a degree of ‘good- will’.

opportunities?

Also is an issue of land reform in many low income countries,

that is deemed by the World Bank as being essential for

development and growth – not land grab.

However, there are cases where fertile agricultural land has

been given back to the indigenous people only for a lack of

resources, training, education, access to markets to prevent

these people from exploiting the land (e.g. South Africa).

Also the issue of people not being attracted back to rural areas

by the promise of land from urban areas. Could be a sense of

failure?

opportunities?

(iv) Co-operative farming: Small land-owners form

larger areas to cultivate so can exploit

economies of scale in inputs and outputs.

An issue of access to markets if any surplus is

produced: transport infrastructure needs to be

improved within rural areas and between rural

and urban areas, where the surplus will be sold

for more.

opportunities?

(v) Commercial Farming : Can lead to significant change in how rural labour markets work.

E.G. Contract farming (employer contracts small landowner to produce crops providing them with new technology (inputs)) is good if the small landowner still retains some land for his/her own use and has other sources of income.

If solely reliant on contract farming income then open yourself up to poor wages.

Work can be casual (day or so), seasonal (month or two), or permanent (more than 3 months), see Duncan and Howell, (1992) ODI, S tructural Adjustment and the African Farmer.

[See Porter and Phillips-Howard (1997), World Development Vol 25(2), pp. 227- 238].

opportunities?

The Model (variation of Shirking model of Shapiro and Stiglitz, 1984)

To prevent shirking employer can offer permanent contracts – offers certainty of income in return for no shirking GIVEN NO ALTERNATIVE PERMANENT CONTRACT JOB.

Permanent worker is paid Wp; Casual worker is paid Wc.

Wp>Wc

G is the gains from shirking ( high wage, low effort level).

If caught shirking the worker will only ever get Wc for rest of working life or N periods.

If

G>N(Wp-Wc) then shirk Wp>=Wc+G/N, then no shirking G<N(Wp-Wc) then not shirk

opportunities?

Non-Farming Activities

Found by a number of researchers in Africa that non-farm income/earnings is one of the most important components in rural household income – basis for hiring (cheap) farm labour.

The overriding argument for households wanting to participate in non-farming activities in both rural and urban locations is that it diversifies sources of income – like spread betting or ‘hedging’ your bets except this is done in order to decrease the likelihood of food insecurity.

The issue of non-farming activities undertaken is related to dualism theory (Lewis) and worker-migration (e.g. Harris-Todaro (1970)).

opportunities?

Arthur Lewis (1954) argued the urban (or the formal) wage was greater than the rural (informal) wage for 3 reasons:-

(1) the payoff to experience was greater in the formal sector than the informal sector

(2) labour unions and minimum wages ensure higher initial wages

(3) ‘psychological cost of transferring from the easy going life of the subsistence sector to the more regimented environment of the capitalist sector’.

Dualism within the urban labour market: in reality there are multi-tiered labour markets with some over-lap and therefore chance of ‘switching’, but only for the lucky few.

opportunities?

The formal Harris-Todaro (1970) model

The urban wage is equal to the MP of workers and is greater than the rural wage.

The basic premise is that if the Expected urban wage > Certain rural wage, then urban to rural migration will occur until the expected wages are equalised.

Formally this means that:

(1) E ( W (^) u ) = ( 1 −α) Wu +α. 0 = E ( Wa ) = 1. W a