Chapter 7

Employment,
Migration and
Urbanization

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 Employment, Migration &
Urbanization
 Production Function
 Uniqueness of Employment Problems in
LDCs
 Unemployment, Underemployment &
Statistics
 Disguised Unemployment
 Rural-urban Migration
 Harris-Todaro Model

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 Employment, Migration &
Urbanization

 Western Approaches to Unemployment

 Causes of Unemployment in LDCs
 Policies for Reducing Unemployment

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 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).

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 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.
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 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).

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 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.

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 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).

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 Disguised unemployment

 Zero marginal revenue productivity of

LDC labor.
 Theoretical basis – limited technical
substitutability of factors.
 Marginal worker or marginal hour (?).

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 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.

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LDC rural-urban migration

TWO MODELS
1. Lewis model.
2. Harris-Todaro model.

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 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

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 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.

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 Effect of other amenities
 Housing, shopping, transport, health
care, schools.
 Overurbanization in many LDCs.

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 Keynesian approach not so
applicable to LDCs
 What is the Keynesian approach?
 Why is the Keynesian approach
NOT so applicable to LDCs?

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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.

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 Causes of LDC unemployment
 Unsuitability of technology – rigid
factor requirements.
 Factor price distortions
High modern-sector wages.
Low capital costs.
 Unemployment among educated.

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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.

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The best antidote for unemployment

Fast growth (such as in South Korea

& Taiwan) is generally the best
antidote for unemployment.

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