The Role of Labor Supply - Essay Example

Running head: Lewis two sector model of economic development Lewis two sector model of economic development By ____________________ Lewis two sector model of economic development Dual economy model developed by William Arthur Lewis explains the two sectors economy confronted by the developing countries; one refers to the traditional sector of the economy followed by low wages and infinite supply of labour whereas the other refers to the modern sector. "The two-tier model on one hand highlights the situation when labour from the traditional agricultural sector migrates towards the modern capitalist sector attracted by the higher wages but they are followed by competition in which the profits accruing in the modern sector provide the growing volume of savings which finances the formation of capital for expansion". (2006a) On the other hand it relates to the determination of the terms of trade between developing and industrialised countries, with the former exporting raw materials and tropical products and the latter industrial products as "Arthur Lewis described the goal of economic development as the narrowing of the gap in per capita income between the rich and poor countries". (Hosseini, 2003, p. 91) Two groups of countries i.e., north and south, rich and poor respectively, each produces two kinds of products, categorized as 'food' and 'coffee'. Food is common to both, while the other two referred to in the model as 'coffee' and 'steel' are exchanged. Lewis economic model explains as to how, subjected to certain specified conditions, the terms of trade will be determined by the relationship between labour productivity in agriculture of developing countries and industrialized countries. According to this analytical model, it is the low productivity of agriculture in the developing countries compared with agricultural productivity in the rich countries which decides the actual terms of trade between the two groups of nations". (2006a) Professor Lewis' second main model despite disparate development perspectives, raised a number of unresolved interpretive problems that remain central to both political economy and the development debate uptill now. "These include, the following: (i) the potential role of individual choice and freely competitive markets vis-a-vis government coercion in transforming societies from poverty to riches; (ii) the interplay between capitalistic forms of organisation, growth of human populations, natural resource scarcity, technological progress, and persistent poverty; (iii) the tradeoff between economic growth and distribution, or between efficiency and equity or distributive justice; (iv) the role of agriculture vis-a-vis industry and free trade in the economic transformation process; and (v) whether the development process is smooth, linear, and evolutionary, or discontinuous, revolutionary, and dialectical in nature". (David, 1997, p. 23) It we analyse Lewis traditional sector model with respect to contemporary developing economies, we would come to know that traditional sector is limited to consist of "labour intensive production methods that do not employ any reproducible capital. Examples include small scale farmers and farm laborers, construction gangs, retainers, domestic services and street-side services. In contrast the modern sector firms use physical and human capital intensive techniques. Examples include factory employment, large scale farms, and government administration". (2006b) "The rationing of modern sector employment means that not all workers have access to modern technology. Thus the spread of technology depends on the expansion of the modern sector and hence, on the accumulation of physical and human capital. In this way productivity growth is generated by factor accumulation as labour 'migrates' to the high productivity modern sector". (2006b) Lewis two sector model refers to today's under developed countries which are driven by low wages and infinite supply of labour. "Observers of such labour markets had long been concerned with bargaining power asymmetries. Workers' mobility is limited; employees who are fired e.g. because they demand higher wages or better working conditions may have a stigma, making it difficult for them to obtain another job, even if employers do not act collusively; credit market imperfections can make it difficult for a worker who is unemployed to live well for long, putting the worker in a far more precarious position than the employer who has lost whatever rents were gained from the worker's labour. Despite other market imperfections that may exist, these alone put workers in a decidedly disadvantageous position". (Stiglitz, 2002, p. 9) "International economic inequality, interpreted as the gap in per capita income between the richest and the poorest economies, undoubtedly increased during 1980-96; the range of per capita GDP for all the countries taken together increased from 3.49 to 3.88 and the 'coefficient of variation' increased from 0.95 to 1.03. But this growth of international economic inequality linked to the phenomenon of marginalization showed two things, that the marginalised countries suffered a mild deceleration in growth; and that there was in fact convergence between the industrialized economies and the G13 economies, at the same time as there was divergence between the industrialised and the G13 economies, on the one hand, and the other developing economies, on the other. Thus, the process of growth of international economic inequality actually conceals a remarkable process of convergence. It is nevertheless arguable that marginalisation led to a slow-down in economic growth in some of the poorest countries and hence contributed to the growth of inequality. But marginalisation was not caused by trade liberalisation: in fact the evidence suggests that trade liberalisation actually brought about a process of convergence between the industrialised economies and a few developing economies, by inducing growth of two-way trade in manufactures". (Ghose, 2000, p. 281) "Kindleberger, used the Lewis model to describe the migration of surplus labor from the Maghreb countries of Northern Africa and Turkey to Europe during the postwar boom of the European Community. Indeed, the flow of surplus labor across borders, along with the impact of remittances, remains one of the more controversial issues in economic development theory and policy to this day". (2006c) "It is widely believed that trade liberalisation has been a major cause of the growing inequalities between skilled and unskilled labour in industrialised countries. Since the late 1970s, the gaps between skilled and unskilled labour in terms of wages and unemployment rates have been widening in these countries. This has also been a period when barriers to international trade have been gradually falling. Many economists argue that these developments are causally linked. Trade liberalisation, the argument runs, has led to a relocation of the production base for unskilled-labour-intensive manufactures from industrialised to developing countries, thereby causing a decline in the demand for unskilled labour in the former. This has led either to a decline in the wages of unskilled labour or, where there are wage rigidities, to a rise in the unemployment rate of unskilled workers". (Ghose, 2000, p. 281) "Empirical studies do, indeed, report the supply behaviour of poor workers to be generally different from that of their richer counterparts. While the latter's supply behaviour is graphically observed to be positively sloping from the reservation wage upwards, with a backward-bending segment in the supply curve at high wages, that of the poor is characterised by a negative relation between wage rates and the quantity of labour supplied when wages drop below a certain level. Using this a priori framework, the empirical studies which observe a negatively sloping supply curve for the poor characterise it as backward-bending. However, in seeking to explain why this backward-bending supply behaviour occurs at very low wage rates under poor economic conditions, the authors impose a hypothesis of perverse economic behaviour on poor workers, variously calling it a 'target income' behaviour or according to Lewis 'a subsistence mentality' behaviour. The underlying assumption is that the conventional economic postulate of 'unlimited wants' for goods does not apply to the poor. Rather, the poor are held to have a 'strong preference for leisure', to be content if their minimum subsistence needs are met, and to enjoy most of their time in leisure. This implies that poor workers' aspiration for a better living is limited to their minimum standard of subsistence; the workers set this subsistence as the target they work for, and once this target income is earned, they quit working. In essence, it is concluded that a modest 'target of subsistence' dictated by the limited aspiration of the poor is the objective of their supplying labour, hence the inverse relationship between the wage rate and their labour supply. Such a conclusion, however, ignores the fact that the working poor are observed to work unusually long hours in physically exerting jobs, yet fall to meet even their minimum needs for food. However, these have not received sufficient attention in labour economics and the perverse-mentality hypothesis predominates". (Sharif, 2000, p. 419) "Contemporary Industrial development is impossible without a prior expansion of per capita agricultural production. When per capita food production increases, it becomes possible to support workers outside agriculture, that is, a labor potential, which may be used in the industrial sector while maintaining a necessary level of food production, is created. At the same time, however, incomes increase in the agricultural sector, which probably triggers off a demand for non-food products. Hence, an agricultural surplus is a necessary precondition for economic growth, not only because it facilitates the transfer of resources into the budding manufacturing sector but also because it creates a market for manufacturing goods. Hence, agricultural surplus occupies a particularly important place in the process of economic growth, because without an agricultural surplus industrialisation is simply not possible". (Danielson, 1994, p. 47) "Third World economies with surplus labour operate separately from a collective disadvantaged position in global trade because global capital obeys the Law of One Price while global labour is exempt from this law. Today's scenario has produced a structural shortage of capital for non-export domestic development in all developing countries. These unstable economies then suffer from an imbalance between excess labour and a shortage of capital that prevents them from achieving full employment and improving overall labour productivity. This imbalance translates into low wages that depress domestic consumer demand, which in turn discourages investment, in a downward vicious cycle of perpetual domestic underdevelopment. This widespread local underdevelopment in turn prevents the global economy from developing its full growth potential from rising consumer demand " (2006d) Lewis two-sector model when analysed in the light of current economic scenarios, it is found that, "cross-border wage disparity has given rise to predatory outsourcing that threatens employment and wage levels in the advanced economies which in turn has resulted in a need to prevent low wages around the world in terms of growth of exports from the advanced economies to balance trade. And since competition for global capital in a deregulated global financial market tends to depress wages worldwide to the detriment of all, it follows that a cartel to give labour fair pricing power in international trade would be a positive and progressive undertaking". (2006d) References 2006a, accessed on July 31, 2006 from 2006b, accessed on July 31, 2006 from 2006c, accessed on July 31, 2006 from 2006d, Henry CK Liu Danielson Anders, 1994. "The Economic Surplus: Theory, Measurement, Applications": Praeger Publishers. Place of Publication: Westport, CT. David L. Wilfred, 1997. "The Conversation of Economic Development: Historical Voices, Interpretations, and Reality": M. E. Sharpe. Place of Publication: Armonk, NY. Ghose K. Ajit, 2000. "Trade Liberalization, Employment and Global Inequality" in "International Labour Review". Volume: 139. Issue: 3. Kindleberger, Charles P. (1967). "Europe's Postwar Growth: The Role of Labor Supply", Cambridge, Massachusetts, Harvard University Press. Lewis, A. (1944) "An Economic Plan for Jamaica," Agenda, November: 154-163 in "Why Development Is More Complex Than Growth: Clarifying Some Confusions". Contributors: Hamid Hosseini - author. Journal Title: Review of Social Economy. Volume: 61. Issue: 1 Sharif Mohammad, 2000. "Inverted 'S'- the Complete Neoclassical Labour-Supply Function" in International Labour Review. Volume: 139. Issue: 4. Stiglitz E. Joseph, 2002. "Employment, Social Justice and Societal Well-Being" in "International Labour Review". Read More