To better understand Lewis's model of underemployment and its predictions it is helpful to refer to Figure 1. the horizontal dimension of the figure is determined by the labor endowment L of the economy. We will treat total labor supply as fixed,so we will not consider the possibility that,for example, people might work more or less in response to higher wages.
Agricultural employment is measured to the right starting from Oa and industrial (manufacturing) employment Lm is measured to the left starting from Om. the left vertical axis measures the marginal value product of labor in agriculture;the right vertical axis measures the marginal value product of labor in industry, which is assumed to be located in urban rather than rural areas. the prices of agricultural and manufacturing output,Pa and Pm, are assumed to be determined in international markets that economy is too small to influence. this assumption allows us not to consider how the terms of trade between agriculture and industry might change as the relative outputs of the two sectors change. the marginal physical products of labor in agriculture and manufacturing, MPLa and MPLm, are determined by the respective technologies (the production functions) and by the ratio of labor to land in agriculture and the ratio of labor to capital equipment in industry. Land and capital stocks are assumed to be fixed , so the ratios of labor to land and labor to capital only change when employment in agriculture and industry changes,respectively.By diminishing returns, the marginal physical products of labor decrease as these ratios increase, hence the marginal value products of labor curve for agriculture AA slopes down to the right as La increase and the marginal value product of labor curve for industry MM slopes down to the left as Lm increases. Finally, w- gives the subsistence wage mentioned by Lewis in his preceding selection,which is assumed to be equal for both agricultural and industrial (rural and urban)workers.
In figure 1 , farmers and manufacturing firms both find it worthwhile to hire labor until its marginal value product equals the subsistence wage, yielding employment La- in agriculture and Lm- in industry. this leaves a group of workers U=L-LA-Lm who must eke out a living in some way other than employment by farmers or manufacturing firms. We call this group the underemployed.
Why do the underemployed not bid wages down below the subsistence level? A popular answer to this question is the nutrition-based efficiency wage model, which asserts that it is not profitable for employers to pay workers less than W- because of adverse effects on employee nutrition and health. The idea is stated well by Swamy (1997,p.86), Who also provides a fine survey of the relevant literature: employers do not lower the Wage because the worker would then consume less,thereby lowering his productivity; paying a lower wage may raise the cost per efficiency unit of labor.;(We should note that Swamy argues against the relevance of this model for rural India. )
To better understand Lewis's model of underemployment and its predictions it is helpful to refer to Figure 1. the horizontal dimension of the figure is determined by the labor endowment L of the economy. We will treat total labor supply as fixed,so we will not consider the possibility that,for example, people might work more or less in response to higher wages.Agricultural employment is measured to the right starting from Oa and industrial (manufacturing) employment Lm is measured to the left starting from Om. the left vertical axis measures the marginal value product of labor in agriculture;the right vertical axis measures the marginal value product of labor in industry, which is assumed to be located in urban rather than rural areas. the prices of agricultural and manufacturing output,Pa and Pm, are assumed to be determined in international markets that economy is too small to influence. this assumption allows us not to consider how the terms of trade between agriculture and industry might change as the relative outputs of the two sectors change. the marginal physical products of labor in agriculture and manufacturing, MPLa and MPLm, are determined by the respective technologies (the production functions) and by the ratio of labor to land in agriculture and the ratio of labor to capital equipment in industry. Land and capital stocks are assumed to be fixed , so the ratios of labor to land and labor to capital only change when employment in agriculture and industry changes,respectively.By diminishing returns, the marginal physical products of labor decrease as these ratios increase, hence the marginal value products of labor curve for agriculture AA slopes down to the right as La increase and the marginal value product of labor curve for industry MM slopes down to the left as Lm increases. Finally, w- gives the subsistence wage mentioned by Lewis in his preceding selection,which is assumed to be equal for both agricultural and industrial (rural and urban)workers. In figure 1 , farmers and manufacturing firms both find it worthwhile to hire labor until its marginal value product equals the subsistence wage, yielding employment La- in agriculture and Lm- in industry. this leaves a group of workers U=L-LA-Lm who must eke out a living in some way other than employment by farmers or manufacturing firms. We call this group the underemployed. Why do the underemployed not bid wages down below the subsistence level? A popular answer to this question is the nutrition-based efficiency wage model, which asserts that it is not profitable for employers to pay workers less than W- because of adverse effects on employee nutrition and health. The idea is stated well by Swamy (1997,p.86), Who also provides a fine survey of the relevant literature: employers do not lower the Wage because the worker would then consume less,thereby lowering his productivity; paying a lower wage may raise the cost per efficiency unit of labor.;(We should note that Swamy argues against the relevance of this model for rural India. )
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