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Unesco : Internationa! Institute for Educational Planning

IIEP/TM/38/69

INTERNATIONAL INSTITUTE FOR EDUCATIONAL PLANNING

7i rue Eugène-Delacroix

Paris l6e, Prance

EMPLOYMENT AND UNEMPLOYMENT

by

Paul Streeten

Warden, Queen Elizabeth House, Oxford

This lecture is part of Fundamentals of Educational Planning! Lecture-Discussion Series' a controlled experiment undertaken by the International Institute for Educational Planning in collaboration with a limited number of organizations and individuals aiming at the development of efficient teaching materials in the field of educational planning. By their very nature these materials, which draw upon tape recordings, transcriptions and summary notes of seminars, lectures and discussions conducted by IIEP as part of its training and research pro­gramme, are informal and not subject to the type of editing customary for published documents. They are therefore not to be considered as "official publications'.

The opinions expressed in this lecture are those of the author and do not necessarily represent the views of the Institute.

The use, adaptation or reproduction, in whole or in part of these materials is limited to institutions and persons specifically authorized by IIEP.

i

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EMPLOYMENT AND UNEMPLOYMENT

Most less developed countries have what is commonly described as a serious and growing problem of surplus labour, unemployment, disguised unemployment and underemployment, Whatever the precise interpretation of these somewhat vague and ill-defined terms, there can be no doubt that development policies must give a high priority to a fuller mobilization and utilization of what is sometimes thought to be their most abundant factor of production - unskilled labour. It is worth considering briefly the notions of unemployment* disguised unemployment and underemployment.

Unemployment, underemployment and disguised unemployment are often considered both a cause of poverty and a potential source of development-Approaches in terms of 'employmentf, 'unemployment* and 'underemployment' are misleading because they suggest that an increase in effective demand and the provision of equipment are all that is needed to absorb labour and raise production, while all other conditions are adapted or easily and quickly adaptable to full labour utilization * In fact, a number of other measures are necessary for a full mobilization and utilization of manpower, which may be said to lie partly on the side of demand for labour and partly on the side of supply, except that this neat distinction sometimes breaks downs better feeding, improvements in health, training and education, transport and housing and fundamental attacks on prevailing attitudes to life and work (e.g. women's participation, a contempt for certain kinds of work, the desire to minimize work, lack of discipline) and on institutions (introduction of standard working week and working day, creation of labour market, provision of information, readi-ness to move from one place to another or to change one's occupation etc.)«

As a first step, it is helpful to break down the multiplicity of dimensions of Income (or Product) per Head of the Population into four categories. These should aid the collection of data, the organization of thought and the formulation of policies.(l)

People of Income Production Hours worked Labour force working age

Population Hours worked Labour force People of Population working age

(1) The identity was first used by Michael Lipton in his work for Gunnar Myrdal. See also his Assessing Economic Performance, p* 40, W.J. Barber 'Some questions about labour force analysis in agrarian economies with particular reference to Kenya', East African Economic Review, June 1966 and Gunnar Myrdal, Asian

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The identity brings out four distinct aspects of the Level of Living (= Income per Head) on which more information would he useful for framing policies for the multidimensional aspects of labour utilisation. Separation of the four ratios does not imply that there is no interdependence between them: there clearly is-

(1) Production or hourly productivity Hours worked

depends, in any given activity in any given sector, on a large number of factors, including other terms in the identity, such as: hours worked and participation rate (see below (2) and (3)Ь equipment, fuel, raw materials and other complementary productive factors ; education and training! health affecting work such as intestinal parasites, amoebas, onchocerciasis or schistosomiasis, levels of nutrition, intensity of application, itself a function of moralej industrial relations j motivation! incentives, etc; organization of work, management, etc*

This category covers numerous aspects, some of the most important of which are difficult to measure. It should be analysed in greater detail, For the country as a whole, it is an average of all sectors, each weighted by its share in the total number of hours worked» If we denote the sectors as 1, 2, 3 etc., and their shares in total working hours as h,, hp, etc.,

Output = Ц ^L - h2 ^2 + . . . . . . Hours H, Hp

Hourly productivity can be raised if all other things remain constant, either by transferring workers from low-productivity to high-productivity sectors, or by raising productivity within sectors.

(2) Hours or working time Labour force

depends on organizational and institutional factors ; whether there is a standard working day and working week! whether overtime is workedj whether multiple shifts exist! whether time is wasted in idleness, waiting for materials and components, or spent on holidays, weddings, funerals and at feasts. It also depends on natural factors such as the weather and the requirements of harvest seasons. The ratio will depend both upon the level of demand and on the availability of essential supplies. A shift of rural labour to urban industry raises output not only by changing the weights attached to low- and high-productivity sectors, but also by raising hours per labour force, unemployment of people both willing and able to work will show up as low hours/labour force. But the distinction between ability to work and willingness to work in any occupation outside the home may not

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always be easy to draw or even logically legitimate (e.g. Moslem women). Much time is spent in an underdeveloped country moving from one place to another: peasants walk from one piece of their land to another; women walk back and forth to draw water; migrant workers walk from one region to another to collect the harvest, etc, In so far as these movements are necessary to carry out specific tasks, given the prevailing institu­tions, transport facilities and co-operating factors, it is a factor accounting for low hourly productivity. But if the movements are in search of work, they come under low working time .

(3) Labour force or participation rate People of working age

depends on attitudes to work and to gainful activities (their dignity or ignominy), housing and transport facilities, legislation about minimum working age, compulsory full-time education, etc. Removal of the objections to certain kinds of work, increased incentives to earn money, emancipation of women, improved mobility, etc. will raise partici­pation rates.

Education can, in certain conditions, result in reduced labour force participation. The educated unemployed, a widespread phenomenon in South Asia, figure prominently in unemployment statistics. While their geographical mobility between urban areas is high, their occupational mobility is negligible. They are not prepared to accept manual work. Prom a sample survey of unemployment in Calcutta in 1953 it appears that only 10 per cent of the unemployed were illiterate and 27 per cent had enjoyed higher education. Only 43 per cent of the total sample were seeking work involving manual labour.

The attitude to work appropriate for one who has enjoyed education is rooted in traditional attitudes and re-inforced by the colonial heritage and possibly even by technical assistance. It is by no means just a matter of the wrong curriculum, for there is large and growing unemployment of engineers in India. If the existing engineering colleges merely maintain their capacity, while national requirements expand at the projected rate, there will be 50,000 fully qualified engineers un­employed in 1970. The shortage exists in the same occupation for less qualified people, e.g. for semi-skilled technicians.

Both in Asia and in Africa education reflects and instils an anti-rural bias; indeed the pressures for education arise from a desire on the part of parents to free their children from the miseries and hard­ships of rural life.

Attitudes towards work among the educated - often ill-educated -are deeply rooted in the social structure and cannot easily be eliminated by restoring 'equilibrium' between supply and demand, by changing curricula or by exhortation.

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There are parallels between the participation rate of the un­employed and the participation rate of women. Non-participation of women is linked with status and prestige, particularly in the higher strata of society.

(4) People of working age is a demographic ratio and Population

will depend on the age structure of the population, It can be predicted with a fair degree of accuracy for some time ahead.

Since each category is an average of sectoral ratios, the identity can be rewritten as;

Y

P

Li Pl V^ + P2

where Y is total income' (output) H is total hours worked L is labour force W is working age group P is population h is share in total hours worked 1 is share in labour force p is share in age group s is share in population

and the suffices indicate the different sectors.

The conventional presentation suffers from the fact that intensity of work, skill, organization, education, health, labour markets, transport, information, etc. are assumed given. Thus the only variables are demand and equipment. Furthermore, the assumption is usually made that unemploy­ment and underemployment are 'involuntary'.(1) This implies that

(1) ',.. there is a great deal of idleness, voluntary, and involuntary' (in Colombia), L. Currie, Accelerating Development, p. 168. In the Ivory Coast, the essence of the primitive methods of producing coffee is described by Professor Barna as minimizing the amount of work necessary for obtaining a coffee crop of any sort.

hi ÏT h2 Hi

H, H,

2 L,

W, 52 T,

Л

IIEP/TM/38/69 - Page 5

willingness and ability to work are present. Unemployment and underemploy­ment must also be defined with reference to some standard of working hours per day and working days per week. But such standards do not exist in large parts of developing societies and are therefore introduced, usually implicitly, from outside. The whole set of questions relating to partici­pation and organized work is thereby begged and a number of important relationships are concealed. The distinction between voluntary and involuntary unemployment, so crucial in our intellectual framework, does not make sense in an environment without a labour exchange and hence with­out an objective test. Some men work with dysentry, others do not. And how are we to describe the common situation that men do not seek work because they know none is available?

Policies can then be classified according to whether they use com­pulsion, permission or persuasion. The following table provides illustra­tions. Further sub- and cross-division could classify measures according to whether they are general or specific, and whether they are positive or negative.

Measures

Output/Hour

Compulsive

Make pay depend on minimum output

Permissive

Forbid trade union restrictions

Persuasive (incentives)

Piece rates

Hours/Lab. force

Fix 8-hour day Improve diet Overtime rates

Lab, force/ People of working age

Lock up workless, conscript, poll tax

Raise demand, provide equipment

Raise wages, supply incen­tive goods

People of working age/ Population

Draconian measures against large families, forced late marriage

Birth control ad­vice and contra­ceptives supplied

Birth control campaigns, a transistor for a vasec­tomy, child tax

CONCLUSIONS

The main conclusion of this brief discussion is that the utilization of labour in developing countries has many dimensions and that it is not warranted to assume that attitudes, aptitudes and institutions are adapted

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to full labour utilization. Measures which raise labour productivity may reduce hours worked or participation rates(l) and measures which raise participation rates may lead to work-spreading and less intensive or to otherwise less productive work. Only a simultaneous attack on several of the relevant variables can bring about fuller utilization of labour. The discussion also explains the paradoxical co-existence of labour surplus and labour shortage.

CREATION OF EMPLOYMENT OPPORTUNITIES

The analysis also bears on the argument that there is a surplus of unskilled labour to draw on for any alternative activities and that labour opportunity costs are therefore low or zero, If these alternatives require attitudes, motivations, responses, work habits or institutions different from those to be found in, say, coffee growing, the fact that coffee growers dispose over spare time is irrelevant to the availability of labour supply for these alternatives. It would be dangerous to argue from the premise that coffee-growing does not take up all the potential working hours of the farmers to the conclusion that alternative work opportunities, either elsewhere or in the place of residence, would auto­matically be taken up and result in larger production. Proposals for alternatives must be accompanied by detailed specification as to what measures of reform with respect to human attitudes to work and life and social and commercial institutions, such as land reform, or reform of the civil service, or the creation of a labour market, or of credit channels, or of marketing outlets, have to accompany this shift in resources.

The main causes of the gross underutilization of labour are to be found in rural underemployment, combined with an industrial sector which, though often growing very rapidly in terms of production, is too small and uses often techniques inappropriate to absorb even a fraction of the rapidly growing potential labour force.

The small base of the industrial sector is an important reason for its limited capacity to create employment opportunities and absorb the rural surplus population. With 20 per cent of the labour force employed in manufacturing and 80 per cent outside it and population growth (assumed for simplicity to be identical with the growth of the labour force) of 3 per cent, employment opportunities in industry would have to grow at 15 per cent in order to absorb only the total additions to the labour force, without reducing already existing unemployment and underemployment. If only 10 per cent of the labour force are in industry*

(l) ' ... the relative high productivity of the machine, and the use of better techniques in commercial farming lower the return the colonial-type farmer can gain and make it even less practical for him to do all the costly things that would increase his productivity." L. Currie, Accelerating Development, p- 156.

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employment growth would have to be 30 per cent. Although growth rates in industry have, on occasion, been not much below these rates, the methods used in manufacturing, often transferred from the advanced countries where they were developed in conditions of labour scarcity, tend to be labour-saving. Moreover, where the composition of manufacturing output shifts from light consumer goods to heavier industrial products, the weight of the more capital intensive activities in the total rises and the demand for labour tends to" be less than it would otherwise be, even if techniques in each sector are unchanged, Even if labour-using methods are available, they often require management, supervision and other skills in larger proportions than do some labour-saving methods.

The tendency to use labour-saving methods is reinforced by minimum wage legislation and trade union pressure for higher wages which dis­courage employers from making use of the labour even where techniques appropriate to the employment of plentiful cheap labour are available or where the production of labour-intensive products would be profitable at lower wages. Total industrial employment in East Africa has in fact declined over the last ten years.

While there can be no doubt about the urgency of employment creation in a well-designed development strategy, the discussion is some­times obscured by two types of confusion: one between the choice' of labour-intensive industries and products and the choice of labour-intensive techniques within a given industry in producing a given product1 the other between labour-intensity in relation to capital and in relation to output.

Foreign trade apart, there is relatively limited scope for per­mitting the composition of industries and the product-mix to be deter­mined by factor availabilities. Hair-cutting is labour-intensive, but this can be no reason for developing countries to establish large barbering sectors. Some consumer goods are more labour-intensive than many capital goods, but this can be no reason for encouraging consumption at the expense of investment. Where there is scope for choosing labour-intensive products that serve the objectives decided upon, clearly these should be chosen. And having determined the sectoral structure and the product-mix, it is sensible to employ techniques, where these are available, which economize in scarce factors and make fuller use of abundant factors. In some industries, there is a variety of processes between which one can choose.

Next it is important to avoid saving capital in relation to labour in a way which reduces output per unit of capital, In particular, the advocates of labour-using techniques sometimes fail to pay adequate attention to the capital requirements of inventories and work in progress«

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While it is desirable to use, ceteris paribus, methods of production which save capital per worker, it is not desirable to do so if this means using more capital per unit of output, i.e. reducing production by more than in proportion to the capital saved. The ratio of labour to capital is identically equal to the ratio of labour to product, divided by the capital/output ratio. An increase in the labour/capital ratio should not be achieved at the expense of an increase in the capital/output ratio, so as to reduce the productivity of labour.

In the conditions prevailing in many underdeveloped countries, the right result cannot always be taken for granted. It is likely that so-called labour-intensive methods will show less fixed capital per worker. Visible structures and equipment may be smaller. But particularly in rural and dispersed industries, requirements of working capital (inven­tories and work-in-progress) are likely to increase. Work-in-progress is likely to be greater, the more dispersed the industry, the longer the dis­tances from the centres, the higher the wastage of material and the greater the losses from lack of standardization. Inventories are also likely to be greater because economies of scale will not be available in stock holding. Investigations in India have shown that labour-intensive methods of production are, for these reasons, often capital-intensive in relation to output.(1)

The argument so far has been that labour-intensive methods should be efficient, i.e. they should not require more labour and more capital. In many cases there will be little or no choice of techniques and capital-intensive methods only will be available. If the raw material is avail­able locally, if other criteria are favourable and unit costs of production are internationally competitive, capital intensity should not in itself stand in the way of adopting the process.

In the long run, only accelerated successful development can solve the problem of unemployment and for this production at low costs is essential.

NOTE ON THE MEASUREMENT OF UNEMPLOYMENT AND UNDEREMPLOYMENT

In her well known essay 'Disguised Unemployment' Joan Robinson coined this term for a situation widely observed in the Great Depression in which men, thrown out of regular employment, crowd into occupations like carrying bags, rendering small services or selling matches in the Strand. The reasoning can best be brought out by a simple two-sector model: in one sector money wages are rigid downwards, in the^other, where self-employment is common, incomes are flexible. In competitive full employment equilibrium, the marginal productivity of labour is the same in both sectors. If then a fall in aggregate demand below the full employment

(1) P.N. Dhar and H.F. Lydall, The Role of Small Enterprises in Economic Development (Asia Publishing House, 1961).

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level occurs, men will be thrown out of work in the rigid wage sector but, rather than become unemployed, will move into the flexible income sector. Money income per man in this sector will fall as more men are accommodated to spread a smaller work load. Productivity differentials (measured in terms of man years, man weeks or man days, but not in terms of man hours, for productivity of hours not worked is not meaningful) will increase, but no visible unemployment will appear. The difference between a situation of general low labour productivity (say due to absence of skills) and a situation of disguised unemployment in this sense is that a rise in the level of effective demand will shift workers back into the high-productivity, rigid-wage sector and remove the disguised unemployment. The workers are adapted to the requirements in this sector and, if the time spent in the flexible sector has not been too long, so that they have not forgotten their skills, have remained well fed and healthy and have not been demoralized, a rise in effective demand is sufficient.

It is immediately obvious that the situation in the rural sector of developing countries is quite different from that described by Joan Robinson, It is true that the rural subsistence sector, in which small holdings are cultivated by families, resembles the flexible income sector in that it is capable of spreading a constant or slowly growing work load and product over a rapidly growing number of people. But it is not true that an increase of effective demand would, by itself, absorb the excess population in industry. Clearly a series of additional measures would be necessary. Machinery and equipment would have to be provided, a work force would have to be trained, disciplined and educated in co-operation, nutrition and health may have to be improved, public services would have to be provided, objections to factory work would have to be removed, etc.

But, looking at the problem simply from the point of view of rural surplus population, it may make sense to ask the questions How many people can be removed from agriculture without reducing output? Rosenstein-Rodan, in a subtle analysis, distinguishes between two basic concepts;(1) the static and the dynamic one, according to whether methods of cultivation are assumed not to change or whether they are assumed to change, when the surplus population is removed, while output remains constant,

Rosenstein-Rodan claims that the static concept is clear, whereas the dynamic concept requires a detailed specification of what changes in methods of cultivation are envisaged. These changes might vary from minor changes 'obtained merely through a rearrangement of work with but small additions of circulating capital' to throughgoing and even revolutionary

(1) P.N. Rosenstein-Rodan, 'Disguised Unemployment and Underemployment in Agriculture', Monthly Bulletin of Agricultural Economics and Statistics, Vol. VI, Nos. 7/8, July/August,. pp. 1-7.

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changes, 'including additional use of both fixed and variable capital*. The dynamic concept, carried to the extreme, becomes irrelevant for policy, because it raises questions such as what would surplus population be if the agricultural sector of an underdeveloped country were cultivated under Dutch conditions.

Rosenstein-Rodan discusses two methods of measuring disguised unemploy­ment in agriculture. The first and direct method is based on empirical sample enquiry with questionnaires distinguishing between different types of cultivation, different sizes and forms of property, the composition of the labour force and the 'labour diagram' (number of labour hours required and supplied). Such an enquiry would distinguish between permanent disguised un­employment and fractional or seasonal unemployment.

The indirect method may be used in three variants:

"(a) The number of labour hours required to produce a given output is subtracted from the number of labour hours available from the active agrarian population. The difference represents the agrarian surplus population.

(b) The density of population deemed adequate for a given type of cultivation is subtracted from the actual density of population. In order to take into account different grades of fertility of the soil, conversion coefficients of arable equivalents are used, for example? 1 hectare of garden = 3 hectares of cultivated area; 1 hectare of meadow =0.4 hectare of cultivated area, etc. (J. Poniatowski, quoted in 'Population in Agriculture', League of Nations, 1939).

(c) The number of hectares required under a given type of cultivation to provide one person with a 'standard income' is contrasted with the number of hectares and the agrarian population available. The difference represents people for whom there is no land available and who are therefore 'surplus'. For income calculation 'crop units' are used by H.E. Moore, instead of the arable equivalents (area conversion coefficients) of J. Poniatowski,"

But even on the most stringent static assumptions, amounts of labour required, adequate density and adequate income are vague concepts and involve value judgments.

Rosenstein-Rodan employs the direct method to calculate disguised unemployment in Southern Italy and spells out very lucidly the assumptions which have to be made in such an enquiry:

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1, Only agricultural small holdings of 'direct cultivators' (peasant owners and tenants) are considered. Employed workers, even though they may spend time in idleness, are assumed not to be underemployed•

2. The agricultural area is divided into representative types of cultivation and each of these types is grouped into holdings by size,

3- As labour force in each holding, he assumes active population to comprise persons from 14 to 65 years of age- Fractions can be attached to children below 14 and adults over 65. Those who work outside their own holdings are excluded. Problems arise if outside work is part-time and if certain jobs are traditionally done by women and others by men and they object to changing this.

4. It is assumed that one woman in a household of four is occupied in household activities and not available for cultivation. For larger-sized families greater numbers are assumed,

5. It is assumed that those who are in surplus are involuntarily unemployed. Where, owing to custom or religion, women do not accept work outside the home, they should not be counted as dis­guised unemployed. But it is not entirely clear how men are to be treated who would not wish to do more work than they are doing now or who would object to different kinds of work from the one they carry out now.

6. Labour hours required for each type of cultivation over the whole year* month by month, are counted and compared with available labour hours, In the resulting seasonal underemployment, two kinds are distinguished: first, 'seasonal underemployment of the productive capacity', which depends on biological and technical factors in growing crops and second, "seasonal under­employment proper', which takes into account labour not available for climatic reasons, such as snow, and institutional reasons, such as holidays. These reduce the number of working days avail-able during the year*

7- Next, allowance is made for the fact that the number of labour hours available in different months varies: fewer in winter and more in the summer.

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8. After labour hours have been calculated in terms of labour units (men and women) allowance must be made for the fact that not all underemployed thus calculated could be removed without causing output to decline. Only entire labour units (men and women) whose removal would not cause such a decline can be considered as surplus. Rosenstein-Rodan therefore distinguishes between (a) removable dis­guised underemployment; (b) disguised fractional underemployment, i.e. labour hours not used through the year which do not add up to an entire labour unit. These cannot be removed without a decline in output but they can be provided with part-time work in rural industries, rural public works, etcj (c) seasonal underemploy­ment due to climatic factors. Even a brief seasonal peak, together with a serious adherence to ceteris paribus, greatly reduces the amount of disguised unemployment.

9- Rosenstein-Rodan suggests a slight relaxation of the strict ceteris paribus rule to permit re •»organization of peak loads of up to two months and in this way the size of the surplus population can be considerably increased - doubled in Southern Italy.