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

Download Labour in Developing Countries - Development Economics - Lecture Slides and more Slides Development Economics in PDF only on Docsity! The labour market in Developing countries: Wasted opportunities? Docsity.com The labour market in Developing countries: Wasted 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). Docsity.com The labour market in Developing countries: Wasted 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). Docsity.com Effect of increase in one health unit on physical productivity: A comparison of initial ‘poor’ and initial ‘rich’ individuals Health units Physical Productivity Hp Hp’ Hr Hr’ Docsity.com 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 W1 W2 W3 W1>W2>W3 Docsity.com The labour market in Developing countries: Wasted 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’. Docsity.com The labour market in Developing countries: Wasted 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? Docsity.com The labour market in Developing countries: Wasted opportunities? (iii) Tenant Farming Pay rent to the land owner, but is little or no security in tenure on the land. Hence poor incentive to invest in capital and technology and no improvement in productivity. The relationship between land owner and tenant is modelled using principal-agent theory. The tenant (agent) attempts to maximise his utility subject to effort levels and the contractual agreement with the land owner. The land owner (principal) “tries to maximise his utility by manipulating contractual terms with consideration of the agent’s response to them under the constraint of guaranteeing to the agent ‘reservation utility,’ meaning the utility the agent can obtain if he does not enter the contract” (Otsuka and Hayami, 1988, p.32, Economic Development and Cultural Change). Docsity.com The labour market in Developing countries: Wasted opportunities? The issue of what kind of employment contract to offer to workers is based on type of work done. If easily monitored (e.g. harvesting) then wages can be based on the market – these types of jobs can be casual. If not easily monitored (e.g. irrigation, pesticide use) then issue of potential shirking – efficiency wage theory. Docsity.com The labour market in Developing countries: Wasted 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 Docsity.com The labour market in Developing countries: Wasted 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)). Docsity.com The labour market in Developing countries: Wasted 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) aWaWEuWuWE .1)(0.)1()( ==+−= αα Docsity.com The labour market in Developing countries: Wasted opportunities? where represents the probability of being unemployed in the urban labour market. It is assumed in the Harris-Todaro model that being employed in the urban labour market is uncertain – not full-employment so is a cost to not being employed. Being employed in the rural labour market is assumed in the model to be certain – even though the MP in the rural labour market could well be 0 (under-employment). From the equation, the expected wages in the two sectors are equal when, (2) Eu=Urban formal sector employees, Lu=Urban formal sector labour force, (Eu/Lu)=probability of being employed in urban labour market. α aWuWuLuEso uLuEwhere aWuW = =− =− )/(, /)1( )1( α α Docsity.com The labour market in Developing countries: Wasted opportunities? Since it follows from the previous result that the probability of being employed in the urban labour market must be < 1. See this by re-arranging (2), There is open unemployment in the urban labour market. aWuW > ,1)/( 1/,/)/( )/( < <= = uLuE thenuWaWifuWaWuLuE aWuWuLuE Docsity.com The labour market in Developing countries: Wasted opportunities? Table 2.1: Proportion of labour force in private formal sector wage employment, selected African economies, percentages, 1980-1995 1980 1986 1990 1993 1994-95 Kenya 9.3 9.0 9.1 9.1 9.2 Tanzania 2.0 1.7 4.3 4.8 4.0 Uganda - - 10.8 9.4 9.2 Zambia 12.2 - - 7.9 7.3 Zimbabwe 29.9 25.2 24.7 23.9 20.8 Source: 2001 World Employment Report: Life at work in the information economy, ILO, Geneva. Docsity.com The labour market in Developing countries: Wasted opportunities? More complex theories of labour market dualism exist, e.g. Esfahani and Salehi-Isfahani, (Economic Journal 1989). This model looks at how observability of effort differs amongst formal and informal workers – Borrows from efficiency wage theory. Lower observability in the formal sector means firms pay higher wages so as to encourage effort with the price of shirking being employment in the informal sector at a lower wage. Formal sector jobs are more likely to be about mental capital rather than physical capital. Informal jobs are more physical and labour intensive and hence easier to observe effort. Docsity.com The labour market in Developing countries: Wasted opportunities? Persistent involuntary unemployment in LDCs can also be explained by efficiency wage theory with the unemployed desiring to work in the formal sector only……. ……..Higher wages in this sector mean longer unemployment queues since it is worth trying to get a formal sector job rather than an informal sector job where current and future wages are very low. Docsity.com The labour market in Developing countries: Wasted opportunities? Figure 1 MR=P=AR Output Costs/Revenues MC ATC ATC2 MC ATC Formal: post tax increase – LEAVE MARKET TO ENTER INFORMAL SECTOR Informal: post tax increase – COSTS DECLINE AS CHEAPER LABOUR AND NOT PAY TAXES, PRICE DECLINES TOO BUT PROFITS MADE MR2=P2=AR2 LOSS MC2 PROFIT Docsity.com The labour market in Developing countries: Wasted opportunities? (Q) What determines the informal sector of a less developed country? Schneider and Enste (2000) cont… All these factors can effect the size of the informal sector. (2) and (4) represent the additional costs argument which ‘forces’ employees and employers to leave the formal sector since profits (likely to be small in the first place especially for start-up projects) are reduced. This can result in economic agents choosing the informal sector in the short- run which then limits potential growth since the business is not legitimate – issue too of the informal sector having no rules and regulations, protection etc…more likelihood of crime which has large negative externalities for the country/region. Docsity.com The labour market in Developing countries: Wasted opportunities? Essentially the informal sector persists and even expands as the rules and regulations of the formal sector become more complicated. One simple way to attract more informal sector businesses into the formal sector would be to adopt simple tax systems, particularly for small start-ups. Docsity.com The labour market in Developing countries: Wasted opportunities? As well as a lack of switching between the formal and informal sectors there is also the issue of negative feedback effects from being in the informal sector in the first place: “Although workers in the secondary sector may initially be as good as workers in the primary sector, a process of divergence eventually molds the workers to their jobs”, (Taubman and Wachter, 1986, pp.1192). Reduction in these workers’ skills and productivity resulting in ex post justification of these workers being in this sector. This however is the incorrect way to look at the evidence with an important determinant of sequencing being missed… Docsity.com The labour market in Developing countries: Wasted opportunities? To take as read that secondary sector workers are justified in being in this sector because their productivity is less than equivalent primary sector workers is to miss one of the points of any dualistic labour market: THE FACT THEY WERE UNLUCKY NOT TO BE IN THE PRIMARY SECTOR IN THE FIRST PLACE (Gary Fields). The size of the wage differential between sectors determines the size of unemployment, with queuing for primary sector jobs observed as long as the expected value of waiting is greater than the wage rate in the secondary sector. The prospect of widening earnings/wage differentials between two essentially identical labour market entrants reveals a serious inefficiency. Docsity.com The labour market in Developing countries: Wasted opportunities? Negative feed-back effect if in secondary labour market. Good quality workers Reduction in these workers’ skills since not necessary in the job:-MP reduced resulting in ex post justification of these workers being in this sector. Informal Sector Job Formal Sector Job Use skills and education and rewarded for this with higher wages and the possibility of more training: MP will increase and wage will increase Low Wage High Wage Docsity.com The labour market in Developing countries: Wasted opportunities? (5) Some Evidence of Dualism in LDC labour markets Case study evidence includes: Gindling (1991, Economic Development and Cultural Change) Tannen (1991 , Economic Development and Cultural Change). William Maloney, “Are labour markets in developing countries dualistic?”, and other working/research papers for the World Bank. Docsity.com The labour market in Developing countries: Wasted opportunities? Gindling (1991) uses a multinomial logit approach followed by a earnings equation approach to test differences in what determines employment and earnings in and urban area of Costa Rica. Docsity.com The labour market in Developing countries: Wasted opportunities? MuttinomtaL Locrr Estimates of THE Sector ASSIGNMENT Equations: THE REFERENCE Is THE PRIivATE-FORMAL SECTOR Variable Public Sector Informal Sector Constant —3.28 -926 (.336) (.267) ED 195 —.119 (.0199) (.019) SEX —.293 — 488 (.160) (.132) AGE .037 —.145 (.0064) (.00534) HEAD 550 321 (.175} (.00146) MAR —.451 .0880 (.146) (.125) BIRTHI —.347 — .429 (.342) (C278 BIRTH2 —.291 -.271 (302) (.231) Soci .222 -570 (.356) (.279) SOC2 .668 391 (321) (.241} Note,—Log likelihood = — 1675. Sample size = 1,724, Standard errors are in parentheses. The definitions of the variables are given in table 1, Docsity.com