THE ECONOMIC WEEKLY
Disguised Unemployment and Economic Development
ONE of the d i s t i n c t i v e features of
an under-developed economy is
the prevalence of w h a t our econo-
mists are in the h a b i t of c a l l i n g
'disguised unemployment'. Too m a n y
people subsist on agriculture.
m i n g l y they are employed.
t h e i r employment is not w h o l l y pro-
ductive. I t i s n o t w h o l l y productive
in the sense t h a t p r o d u c t i o n does
n o t suffer even if some of the so-
called employed are w i t h d r a w n . The
r a t i o o f labour t o l a n d a n d other
resources is so large t h a t the m a r -
g i n a l p r o d u c t i v i t y of labour is re-
duced to zero, a l t h o u g h the average
p r o d u c t i v i t y remains positive. A n d .
u n l i k e in the organised sector, it is
thin average p r o d u c t i v i t y and not
the m a r g i n a l productivity that
determines the earnings, and hence
consumption of the labourers. The
result is t h a t the m a r g i n a l body of
labourers consume, but they do not
produce. They are employed physi-
cally, but not economically.
The o r g a n i s a t i o n a l set-up (such as
we have in a subsistence economy)
is w h a t makes f o r this. F a r m s con-
sist of f a m i l y holdings, and produc-
t i v e operations are done by the mem-
bers of a f a m i l y as a group. L a b o u r
is not, dissociated f r o m capital, and
w o r k e r s m a y be said to be self-
employed. There are the landlords
and the money lenders. B u t they
get their rent and interest at stipu-
lated rates; they do not p e r f o r m the
function of an employer. W h a t e v e r
output is derived f r o m productive
operations therefore vests in the
f a m i l y and is enjoyed by a l l the
members irrespective of t h e i r speci-
fic c o n t r i b u t i o n ; the redundant mem-
bers are not j u s t t h r o w n a w a y . The
share of output t h a t goes to the re-
d u n d a n t units of labour is of the
nature of transfer income. I f , of
ten persons w o r k i n g in a f a r m , four
are redundant, in the sense t h a t the
farm could be managed equally
efficiently w i t h six persons, then,
f r o m the economic point of view, 40
per cent of the output of the f a r m
can be viewed as being transferred
to unproductive consumers. It is
as if the entire output is the con-
t r i b u t i o n of six persons who just
'save' a p a r t of this c o n t r i b u t i o n and
h a n d it over to the r e m a i n i n g four.
P r o f N u r k s e calls this the 'saving
p o t e n t i a l ' of a subsistence economy.
It is on this concept of saving
p o t e n t i a l ' as a c o n c o m i t a n t of dis-
August 25, 1956
A K Dasgupta
guised unemployment' that Prof C N may be called the 'consumption
V a k i l and his colleague have b u i l t a unit' in the subsistence sector. The
theory of economic g r o w t h . * P l a n n i n g lower this r a t i o , the h i g h e r is the
in an under-developed economy, if it value of the ' m u l t i p l i e r ' .
is to be effective, must, according to So far. so good. The emphasis
See- our authors, take account of 'dis- on the implications of 'disguised u n -
But guised unemployment' of the sub- e m p l o y m e n t ' for the economics of
sistence sector and m a k e f u l l use of g r o w t h is commendable. T h e p r o -
the " s a v i n g potential" t h a t is asso- position t h a t employment is l i m i t e d
ciated w i t h i t . The process can be by the flow of wage-goods t h a t can be
i n i t i a t e d o n l y if the increase in the made available to labourers, t h o u g h
v o l u m e of employment in the plann- a p p a r e n t l y commonplace. is w o r t h
ed sector is made to exceed the addi- emphasizing at a t i m e when econo-
tion to the labour force consequent mic t h i n k i n g is so w i d e l y influenced
on the g r o w t h of population. So by the Keynesian theory of effective
l o n g as our plan seeks just to ab- demand. In an under-developed
sorb the additional labour force economy, the scope for expansion of
t h a t comes i n t o the m a r k e t as a re- the c u r r e n t output of wage-goods is
sult of population g r o w t h , the dis- l i m i t e d , a n d the Keynesian invest-
guised unemployment remains un- ment m u l t i p l i e r is insufficiently
touched and w i t h it the s a v i n g operative. Yet an o p p o r t u n i t y f o r
p o t e n t i a l . Once, however, our p l a n n - a 'cumulative process' offers i t s e l f
ed investment passes this l i m i t , a in such an economy if the 'disguised
c u m u l a t i v e process of expansion unemployed' is released f r o m the
sets i n . The a r g u m e n t in this con- subsistence sector and the ' s a v i n g
t e x t runs in terms of a theorem p o t e n t i a l ' t h a t it carries is used as
thus: Suppose t h a t the value of a supplement to whatever a d d i t i o n a l
wage-goods needed to employ an savings can be d r a w n f r o m the rest
additional unit of labour in the of the economy. F o r this to happen,
planned sector is Rs 400 whereas the rate of g r o w t h of employment
the actual consumption of a corres- must pass the c r i t i c a l limit, set b y
ponding u n i t in the subsistence sec- the g r o w t h of population. Our
t o r is Rs 200. Then, if the planned authors' crusade against India's
sector can somehow secure an extra Second F i v e Year Plan is based
saving of Rs 400, the a d d i t i o n a l em- largely on this concept. The em-
p l o y m e n t created w i l l be t w o units ployment t a r g e t set in the P l a n is
instead of one. For, w h i l e w i t h the m u c h too inadequate to d r a w in the
.saving of I t s 400 done in the plann- 'disguised unemployed and to
ed sector one u n i t of labour is pro- b r i n g the c u m u l a t i v e process i n t o
ductively employed, the w i t h d r a w a l play.
of t h i s u n i t f r o m the subsistence
sector is accompanied by a release However, if our authors had re-
flected upon their hypothesis a l i t t l e
of Rs 200 w o r t h of wage-goods.
more closely they w o u l d perhaps re-
This can now be added to a n o t h e r
alise t h a t they had started f r o m the
equivalent bundle of wage-goods to
w r o n g end. N o t t h a t t h e i r proposi-
be released if one more u n i t of
tion is w r o n g ; of course it is not. so
labour is w i t h d r a w n from the sub-
far as the a r i t h m e t i c is concerned.
sistence sector. The economy is
B u t the way it is presented suggests
therefore in a position to absorb al-
together t w o units of labour in pro- a certain Lick of awareness of the
obstacles to the g r o w t h of an under-
ductive employment. a l t h o u g h the
i n i t i a l dose of saving was j u s t developed economy. In their excite-
ment at w h a t they thought was a
enough f o r one unit. Saving thus
discovery they forgot to notice t h a t
breeds saving, and we have a so-
if the proposition were put the other
called ' m u l t i p l i e r , effect' on employ-
ment, the value of the ' m u l t i p l i e r ' good , a p p a r e n t l y forgetting that
depending upon the r a t i o of 'wage 'labour' and 'wage goods' are not
unit;** in the planned sector to w h a t ' additive. There are m a n y such u n -
pardonable lapses in the book
* V a k i l and Brahmananda; Plann- against w h i c h the reader m u s t
i n g f o r a n E x p a n d i n g Economy g u a r d himself.
** The authors use a t e r m 'em- † The t e r m is used here to s i g n i f y
ployable u n i t ' i n this context w h i c h the a c t u a l consumption of a u n i t of
they define as 'labour plum wage labour.
1011
 A u g u s t 26, 1956 THE ECONOMIC WEEKLY

w a y round, it w o u l d t a k e a f o r m be increased‡ need f o r economic development de-

w h i c h has been f a m i l i a r to most of The p r i n c i p a l a i m of economic mands, more employment is to be
us most of the time. Let us revert p l a n n i n g in an under-developed provided in the investment goods
to our authors' example. The 'con- country is to raise the rate of i n - sector towards the production of
sumption unit',, as we have called vestment and hence of capital f o r - capital goods? We are in the Classi-
i t , is Rs 200 a n d the 'wage u n i t ' is m a t i o n w i t h a view to an increasing cal w o r l d of Scarcity, a n d an ade-
Rs 400. Assume, w i t h our authors, flow of consumption goods in the quate volume of wage-goods has to
t h a t a l o n g w i t h the transfer of the future. Since there is a plethora of be released f r o m the rest of the
'disguised unemployed', the goods unemployed in the economy, the economy to make provision for the
t h a t t h e y used to consume in the speeding up of investment does not a d d i t i o n a l labourers engaged in the
subsistence sector are also trans- require c u r t a i l m e n t of activities in investment goods sector d u r i n g the
ferred to the planned sector. The the consumption goods sector; the investment period. The rest of the
m a r k e t is then provided w i t h an ad- economy can d r a w upon the reserve economy has to put up w i t h reduced
d i t i o n a l Rs 200 w o r t h of wage-goods o f unemployed. I f concurrently w i t h consumption, the extent of this' re-
f o r each e x t r a unit of labour em- the increase of investment there is duction being determined by the
ployed in the planned sector. It is also increased production of consum- wages-bill (assuming t h a t wages
true, then, t h a t if an extra saving ption goods, as happens w h e n there are w h o l l y spent on consumption)
of Rs 400 Is made available in the is excess capacity in the consump- of the newly employed labourers.
planned sector, possibilities w i l l he tion goods sector, the wage-bill of This is the raison detre of " saving"
opened up f o r the employment of the a d d i t i o n a l labourers can be met in the context of the economic
t w o u n i t s of labour instead one out of the a d d i t i o n a l output of con- development of underdeveloped
w h i c h is the labour content of the sumption goods, and there is no pre- countries, it is " s a v i n g " that makes
e x t r a savings, and the so-called ssure on the consumption goods possible an expansion of investment
m u l t i p l i e r effect w i l l he operating. market. We are, so to say, in the needed for the g r o w t h of the
N o w look at this same t h i n g the Keynesian w o r l d of plenty where an economy.
other w a y round, A u n i t of labour increment of investment leads by
is released from the subsistence N o w , the distinction between 'dis-
itself to an increment of consump-
sector and w i t h it a bundle of goods guised unemployment" and new la-
tion.
w o r t h Rs 200. The consumption bour force generated in the process
u n i t thus released is not sufficient It is w r o n g to suppose that these of population g r o w t h is often too
to provide employment to one addi- Keynesian effects are altogether sharply d r a w n . They are not neces-
t i o n a l u n i t of labour in the planned absent in an under-developed coun- sarily distinct and separable
sector; the m a r k e t has to somehow t r y such as I n d i a . The capacity in entities. In practice, very sub-
secure another Rs 200 w o r t h of our organised sector does lend itself s t a n t i a l l y one merges into the
wage-goods by w a y of savings. The to fuller u t i l i s a t i o n , as findings of other. The m a j o r impact of the
t r a n s f e r of a unit of labour f r o m competent statisticians indicate. g r o w t h of population in an under-
the subsistence .sector releases wage- Moreover the Plan period that we developed economy is on a g r i c u l t u r e .
goods whose value is o n l y one-half have in view is not exactly the Key- A n d there w h a t happens, as popula-
of the actual wage that has to be nesian short period where resources tion grows, Is t h a t an increasing
p a i d if it is to be productively em- and technique are given and fixed; degree of congestion occurs in the
ployed. If we look at the m a t t e r certain investments m a y w e l l be age group t h a t c a l l themselves
t h i s w a y , w h i c h is the correct way, made to bear f r u i t d u r i n g the Plan 'occupied'. The 'saving potential"
the 'consumption-goods multiplier' period. There is therefore some remains more or less the same, but
takes on an altogether strange com- scope for the expansion of output the mouths to d r a w upon it increase
plexion and turns out to be a m y t h . of consumption goods to be set in number. In fact, the d i s t i n c t i o n
against the additional employment d r a w n here is not a d i s t i n c t i o n be-
One feels tempted, at this stage. in the investment goods sector. But tween t w o categories of unemploy-
these possibilities are negligible in ment; it is r a t h e r a d i s t i n c t i o n be-
to t u r n back and to see wherein our
the context of the volume of invest- tween t w o ways o f l o o k i n g a t i t
crucial problems He. The problem ment t h a t is needed to f u l l y absorb
However, the d i s t i n c t i o n becomes
o f g r o w t h i n a n under-developed the reserve of unemployed, when a n a l y t i c a l l y significant if we assume
economy w i t h a large a n d redundant account is taken not o n l y of the t h a t the 'saving p o t e n t i a l ' gets re-
population is basically a problem of existing volume of 'disguised unem- leased for use in the planned sector
c a p i t a l f o r m a t i o n . E m p l o y m e n t i n ployment' b u t also of the addition o n l y at a level of employment be-
the investment goods sector needed to the labour force r e s u l t i n g f r o m y o n d w h a t w o u l d be needed for the
f o r capital f o r m a t i o n is no doubt the n o r m a l g r o w t h o f population. f u l l absorption of the n e w l y emerg
l i m i t e d at any m o m e n t by the a v a i l - i n g labour force. A t a n y rate i t i s
Assume, then, to b r i n g out the
a b i l i t y of wage-goods. But the out- in this sense t h a t the d i s t i n c t i o n is
essence of the matter, t h a t there is
put of consumption goods in general ' f u l l employment" in the organised used here, a l t h o u g h it is clear that
a n d of wage-goods in p a r t i c u l a r is sector. there is no k n o w i n g in practice, at
W h a t happens if, as the
i t s e l f a function of the stock of w h a t level o f employment this pro-
capital An increase in the stock cess of release of the 'saving potenti-
+ There is therefore no contradic-
of capital increases the scope for tion, as the authors imagine there al' starts operating, if it does oper-
the employment of labour, a l t h o u g h is, between their theory of 'wage- ate a t a l l .
d u r i n g a n y g i v e n period of invest- goods gap' a n d the P l a n n i n g Com- Since in the context of the situa-
m e n t needed f o r the production of mission's 'logic' stressing the need t i o n t h a t we are contemplating, ad-
c a p i t a l goods, it is the current re- f o r fixed capital. One refers to the d i t i o n a l employment is devoted en
lease of wage-goods t h a t determines short r u n a n d the other to the l o n g t i r e l y to Investment a n d is unaccom
the extent to w h i c h employment can r u n scope f o r employment. panied b y a n y expansion i n t h e
1012
A u g u s t 25, 1956 THE ECONOMIC WEEKLY

1013
 A u g u s t 25, 1956 THE ECONOMIC WEEKLY

output of consumption goods, the money wages a c c r u i n g to this entire able age group, as Is l i k e l y to
wages-bill of the a d d i t i o n a l labour- body of n e w l y employed labourers happen as population g r o w s d u r i n g
ers has to be matched entirely by (assuming t h a t wages are a l l spent; the P l a n period. W h a t steps c o u l d
' s a v i n g ' done in the rest of' the minus the money value of c u r r e n t be taken to prevent t h e m f r o m be-
economy. In so f a r as these addi- prices of the increment of o u t p u t of h a v i n g t h a t w a y ? W i l l the n o r m a l
t i o n a l labourers are recruited f r o m wage-goods, i n c l u d i n g the a m o u n t price incentive be enough? A b o v e
the n e w l y emerging labour force, t r a n s f e r r e d f r o m the non-monetized a l l , t h i r d l y , h o w are the necessary
the entire s a v i n g needed for meeting sector. savings to be created in the econo-
t h e i r wages-bill has to be n e w l y It is not difficult now to see the m y , so as to cover the gap between
created. It is only when investment k i n d of hurdles t h a t have to be g o t the 'wage u n i t ' a n d the 'consump-
is pushed so f a r as to enable the over in order for the economy to be t i o n u n i t ' ? I n a n economy where
economy to encroach on the 'dis- able to utilise the 'disguised un- n o r m a l savings do n o t take care
guised unemployed' t h a t some relief employed' for purposes of develop- even of current additions to the
is found, on our assumption, in the ment. F i r s t , there is the problem, l a b o u r force, this w o u l d appear to
release of goods that the labourers h o w to create conditions under be the most serious obstacle to
d r a w n i n t o the planned sector used w h i c h the disguised unemployed optimum growth, particularly when
to consume in the subsistence sector. w o u l d get released f r o m the subsis- p l a n n i n g is conceived a g a i n s t the
E v e n here, the 'wage u n i t ' in the tence sector and be d r a w n i n t o the b a c k g r o u n d of a democratic; w a y of
p l a n n e d sector being s u b s t a n t i a l l y planned sector? Is wage incentive life.
h i g h e r t h a n the 'consumption u n i t ' enough? I f not. w h a t o r g a n i s a t i o n - Oppressed w i t h these considera-
in the subsistence sector, f u r t h e r al changes' w o u l d be necessary f o r tions, our P l a n n i n g Commission has
n e w savings have to be created for the purpose? Secondly, supposing chosen to go slow a n d has contented
c o v e r i n g the gap. t h a t men are transferred, w h a t itself w i t h m a k i n g provision i n t h e i r
A l l this becomes f a m i l i a r story. guarantee is there t h a t the goods Second F i v e Year P l a n at best for
w h e n put in terms of money-wages t h a t they were consuming w o u l d be the c u r r e n t additions to the l a b o u r
and prices. A n under-developed transferred, too. to the planned force, h a v i n g to r e l y even there
economy w i t h a reserve of unem- sector? Is it not probable t h a t those largely on deficit financing and
ployed e m b a r k s on a process of w h o w o u l d stay back w o u l d choose foreign aid. Nobody, not even the
p l a n n e d investment- A d d i t i o n a l em- to r e t a i n at. least a part of the con- framers of the Plan, w i l l say it is
sumption of the group that are an ideal P l a n . B u t one has to
p l o y m e n t is created in the invest-
switched on to the planned sector? have a sense of realism It is no
ment goods sector. P a y m e n t is
The exodus of the 'disguised un- good just c o n t r i v i n g an a r i t h m e t i -
made to the labourers n e w l y employ-
employed' w i l l no doubt leave the cal j u g g l e r y and indulging in
ed at the current money rate of
subsistence sector w i t h a 'surplus' g r a t u i t o u s criticisms, when the b i g
wages. These wages are spent on
o f wage-goods. But those w h o w i l l socio-economic questions t h a t the
the purchase of wage-goods. There
be s t i l l there w i l l in all p r o b a b i l i t y Commission is confronted with
is an increase in the aggregate-
be reluctant to part w i t h this sur- r e m a i n unanswered. We have to
m o n e y demand for wage-goods. I f ,
plus. This is p a r t l y because they show the w a y to the s o l u t i o n of
to s t a r t w i t h , there is excess capa-
will now wish to improve their these before we t a k e up the cudgel.
c i t y in the consumption goods sector,
s t a n d a r d and p a r t l y because they P r o f V a k i l and his colleague w i t h
o u t p u t of wage-goods expands in
w i l l have perhaps some more mouths their new-fangled 'consumption-
response to the increase of demand, to feed in view of a possible increase
a n d there is no rise of prices, except goods m u l t i p l i e r n o t w i t h s t a n d i n g ,
in the number outside the employ- we have not done t h a t .
to the extent w a r r a n t e d by the em-
ergence of 'bottlenecks' here and
there. I f investment ( a n d employ-
m e n t ) is pushed beyond a level
where excess capacity is fully ex-
hausted, increased money demand
presses on an inelastic supply of
wage-goods, and prices s t a r t r i s i n g .
T h e tendency is checked if the addi-
t i o n a i expenditure done by the newly
employed labourers is offset by re-
duced expenditure elsewhere in the
economy. The need for the offset
is o n l y lessened to the extent, t h a t
there is transfer of wage-goods f r o m
the non-monetized sector to the
monetized sector where the a d d i t i o n -
al expenditure has its impact. If
therefore prices of wage-goods are,
to be held constant in order for the
r e a l wage rate not to f a l l , the
volume of a d d i t i o n a l (planned) sav-
ings needed in the monetized sector
for the f u l l absorption of the un-
employed (disguised and undisguis-
ed) w o u l d be equal to the t o t a l

1014