chapter 9©e.wayne nafziger development economics 1 chapter 9 employment, migration and urbanization

CHAPTER 9 ©E.Wayne Nafziger Development Economics 1

Chapter 9

Employment, Migration and Urbanization

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Employment, Migration & Urbanization

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

Western Approaches to Unemployment

Causes of Unemployment in LDCs Policies for Reducing Unemployment

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The Production Function

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

Openly unemployed usually 15-24, educated, and urban (at least in low-income 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 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

Assume labor force growing at sub-Saharan Africas 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.

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Labor absorption 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

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

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 Migration depends on expected

earnings. Wages X probability of employment..

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 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

Housing, shopping, transport, health care, schools.

Overurbanization in many LDCs.

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Keynesian approach not so applicable to LDCs

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? 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

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 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.