Chapter 9 Employment, Migration and Urbanization CHAPTER 9 ©E.Wayne Nafziger Development Economics

Employment, Migration & Urbanization Production Function Uniqueness of Employment Problems in LDCs Unemployment, Underemployment & Statistics Disguised Unemployment Rural-urban Migration Harris-Todaro Model CHAPTER 9 ©E.Wayne Nafziger Development Economics

Employment, Migration & Urbanization Western Approaches to Unemployment Causes of Unemployment in LDCs Policies for Reducing Unemployment CHAPTER 9 ©E.Wayne Nafziger Development Economics

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). CHAPTER 9 ©E.Wayne Nafziger Development Economics

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. CHAPTER 9 ©E.Wayne Nafziger Development Economics

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). CHAPTER 9 ©E.Wayne Nafziger Development Economics

CHAPTER 9 ©E.Wayne Nafziger Development Economics 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. CHAPTER 9 ©E.Wayne Nafziger Development Economics

CHAPTER 9 ©E.Wayne Nafziger Development Economics 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). CHAPTER 9 ©E.Wayne Nafziger Development Economics

CHAPTER 9 ©E.Wayne Nafziger Development Economics

CHAPTER 9 ©E.Wayne Nafziger Development Economics

Disguised unemployment Zero marginal revenue productivity of LDC labor. Theoretical basis – limited technical substitutability of factors. Marginal worker or marginal hour (?). CHAPTER 9 ©E.Wayne Nafziger Development Economics

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. CHAPTER 9 ©E.Wayne Nafziger Development Economics

CHAPTER 9 ©E.Wayne Nafziger Development Economics

LDC rural-urban migration TWO MODELS 1. Lewis model. 2. Harris-Todaro model. CHAPTER 9 ©E.Wayne Nafziger Development Economics

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 CHAPTER 9 ©E.Wayne Nafziger Development Economics

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. CHAPTER 9 ©E.Wayne Nafziger Development Economics

Effect of other amenities Housing, shopping, transport, health care, schools. Overurbanization in many LDCs. CHAPTER 9 ©E.Wayne Nafziger Development Economics

Keynesian approach not so applicable to LDCs What is the Keynesian approach? Why is the Keynesian approach NOT so applicable to LDCs? CHAPTER 9 ©E.Wayne Nafziger Development Economics

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. CHAPTER 9 ©E.Wayne Nafziger Development Economics

Causes of LDC unemployment Unsuitability of technology – rigid factor requirements. Factor price distortions High modern-sector wages. Low capital costs. Unemployment among educated. CHAPTER 9 ©E.Wayne Nafziger Development Economics

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. CHAPTER 9 ©E.Wayne Nafziger Development Economics

The best antidote for unemployment Fast growth (such as in South Korea & Taiwan) is generally the best antidote for unemployment. CHAPTER 9 ©E.Wayne Nafziger Development Economics