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Labor Surplus Revisited

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  • Gustav Ranis

    () (Economic Growth Center, Yale University)

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    Abstract

    Unskilled labor is the abundant resource in many developing countries, especially at an early stage of their development. Yet, even as at given technologies labor markets have not cleared, neo-classical economists have rejected the notion of an institutional or bargaining wage not based on competitive full employment marginal productivity fundamentals. This paper puts to rest some objections to labor surplus theory based on “red herrings” and then addresses the substantive challenges from the micro-econometric branch of neo-classical economics. We contend that the finding of inelastic supply curves of labor is based on a cross-section static analysis of labor supply within agriculture while the labor surplus model deals with tracing the dynamic reallocation of labor from a traditional to a neo-classical organized sector in a dualistic economy. We present data for a number of labor surplus developing countries showing that institutional wages lag behind agricultural productivity increases as countries move towards a “turning point” when inter-sectoral balanced growth has eliminated unskilled labor and the economy has lost its dual characteristic.

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    File URL: http://www.econ.yale.edu/growth_pdf/cdp1016.pdf
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    Bibliographic Info

    Paper provided by Economic Growth Center, Yale University in its series Working Papers with number 1016.

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    Length: 28 pages
    Date of creation: Aug 2012
    Date of revision:
    Handle: RePEc:egc:wpaper:1016

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    Related research

    Keywords: development; labor surplus; neo-classical economics; turning point labor markets;

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    1. Manning,Chris, 1998. "Indonesian Labour in Transition," Cambridge Books, Cambridge University Press, number 9780521594127.
    2. Vollrath, Dietrich, 2009. "How important are dual economy effects for aggregate productivity?," Journal of Development Economics, Elsevier, vol. 88(2), pages 325-334, March.
    3. Ranis, Gustav & Stewart, Frances, 1993. "Rural nonagricultural activities in development : Theory and application," Journal of Development Economics, Elsevier, vol. 40(1), pages 75-101, February.
    4. K.V. Ramaswamy, 2008. "Wage inequality in Indian manufacturing: Is it trade, technology or labour regulations?," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2008-021, Indira Gandhi Institute of Development Research, Mumbai, India.
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