Economic Growth, Rural Educational Investment and the Level and Distribution of Rural Incomes

8/10/2019 Economic Growth, Rural Educational Investment and the Level and Distribution of Rural Incomes

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Abstract

Economic grow th, rural educational investm ent and the level and

distribution of rural incomes

Reena Chandu Badiani

2010

This disserta t ion exam ines tw o re la ted q uestions . Firs t, i t es t ima tes the effect of

growth in the demand for skil led and unskil led labor on rural household incomes

and th e rural wag e s tructure . Second, i t exam ines theeffectof g row th in ho usehold

incomes and in labor marke t re tu rns to educa t ion on household educa t iona l inves t -

me nt. The contribu tion of this disserta t ion is to consider the se question s jointly: I

f irs t exam ine how varia tion in the de m an d for skil led and u nskil led labor a l ters in-

comes and re t urns to educ ation in rura l areas , and th en exam ine how th is varia tion

in incomes and re turns feeds through to household education choices . To do this ,

I f irs t develo p a m ode l of hous ehold educa tion choice that i l lus tra tes the effects of

po l icy induced expans ions in sk i l led and unsk i l led manufac tur ing labor demand

and increases in agricultural productivity on re turns to education and income for

skil led and un skil led worke rs . Second, I exploit p lausibly exo genou s varia tion in

skil led and unskil led labor demand caused by increases in regional agricultural

p roduc t iv i ty and po l icy d r iven va r ia t ion in manufac tur ing employment fo r d i f -

ferent skil l levels . The results sho w that an increase in unskil led labor dem an d

decreases re turn s to educ ation for a l l wo rkers , bu t has incom e effects that vary by

skil l and land ownership. An increase in skil led labor demand increases re turns

to education fo r a l l wo rker s but only increases income for skil led househo lds . The

resu l ts on educa t iona l inves tment show tha t inves tment fo r boys responds pos i -

t ively to both income and re turns to education. For girls , investment in education

only resp ond s to increases in incom e, bu t not to re turn s .


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Economic g rowth , ru ra l educa t iona l i nves tmen t and the

leve l and d i s t r ibu t ion of rura l incomes

A Dis s e r t a t io n

Presen ted to the Facu l ty o f the Gradua te School

of

Yale Univers i ty

in Candidacy fo r the Degree o f

Do c to r o f P h i lo s o p h y

b y

R e e n a C h a n d u B a d i a n i

D is s e r t a t io n D i rec to r : P ro fe s s o r M a rk Ro s e n z w e ig

May 2010


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UMI Number : 3414959

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2 01 0 b y Re e n a Ch a n d u Ba d ia n i

Al l r igh ts re se rved .


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Contents

List of Tab les iii

Lis t of Fig ure s v

A c k n o w l e d g e m e n t s v i

Ch a p te r 1 . In t ro d u c t io n to D i s s e r t a t io n 1

Ch a p te r 2 . H o w d o e s g ro wt h in th e d e m a n d fo r s k i l le d a n d u n s k i l l e d l a b o r

a f fe c t h o u s e h o ld in c o m e s a n d th e ru ra l w a g e s t ru c tu re ? 7

2 .1 . In t r odu c t io n 7

2 .2 . Re la t e d L i t e ra tu re : Ru ra l L a b o r M a rk e t s , De te rm in a n t s of W a g e s a n d

Incomes 10

2 .3 . Se t t ing : Th e Rur a l Ind ian Ec ono m y 11

2 .4 . Theo re t ica l M ode l 15

2 .5 . Em pir ica l S t ra tegy 27

2 .6 . Co nc lu s ion 59

Ch a p te r 3 . W h a t is t h e e f fe ct o f g ro wt h in h o u s e h o ld in c o m e s a n d re t u rn s to

e d u c a t io n o n h o u s e h o ld e d u c a t io n a l in v e s t me n t? 7 8

3 .1 . In t rod uc t i on 78

3 .2 . Re la ted Li te ra tu r e 81

3.3. Sett in g: Ed uc ati on in Ind ia 86

3 .4 . Theo re t ica l M ode l 90

3.5. Em piri cal Spec ification 95

3.6. Co nc lus ion 104

i


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CONTENTS i i

Bib l io g ra p h y 1 1 1

A p p e n d ix A . Da ta a n d De s c r ip t io n o f th e E n v i ro n m e n t 1 18

A p p e n d ix B . De r iv a t io n s 1 26

B . l . Ob ta in in g th e Wa g e E q u a t io n s 1 26

B.2 . O bta in i ng the Inco me equ a t io n 128

B.3 . Al te rn a t iv e spec i f ica t ion fo r the w ag e eq ua t ion 129

Ap p e n d ix C . F ig u re s 1 34


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List of Tables

Table la . De sc r ip t ive S ta t i s t ic s 61

Table lb . De sc r ip t ive S ta t i s tic s - L i te racy by Task an d Sec tor 62

Table lc . De sc r ip t ive S ta t i s t ic s - W ages by Task an d Sec tor 62

Table 2a . De sc r ip t ive S ta t i s t ic s - Ed uca t ion by Sk i ll Bracke t in M an uf ac tu r in g 63

Table 2b . De sc r ip t ive S ta t i s tic s - Tasks by Sk i ll Bracke t in M an uf ac tu r in g . . . 63

Table 3 . De sc r ip t ive S ta t i s t ic s - De com pos i t ion o f Var iance in the Pr op or t ion

of E d u c a te d W o rk e rs 6 3

Table 4 . Firs t Stag e Sta tic Re sults 64

Table 5 . F i rs t S tage Dy na m ic Res u l ts 65

Table 6 . Un sk i l led W ages 66

Table 7 . Skil led W ages 67

T a b le 8 . Wa g e Ro b u s tn e s s Ch e c k s , G ro u n d w a te r a n d Ag r ic u l tu ra l P r i c e s . . . 6 8

Table 9 . W age Ro bu s tne ss Ch ecks , In s t r um en ts and In i t ia l Ch arac te r i s t ic s . . 69

T a b le 1 0. Wa g e Ro b u s tn e s s Ch e c k s , P r i c e of Ag r ic u l tu ra l P ro d u c t s a n d P ro p o r t io n

of L in ked Ind us t r ie s 70

Table 11. In com e 71

Table 12. Incom e, Sp l i t t ing H ou se ho ld s by La nd and Sk i ll 72

Table 13. Inco me , Ch eck ing Ro bu s tne ss of Lan d Th resh o ld s 73

Table 14. Po ve rty 74

Table 15. In equ ali t y 75

T a b le 1 6. In c o m e Ro b u s tn e s s Ch e c k s , A l t e rn a t iv e In c o m e S o u rc e s 7 6

iii


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LIST OF TABLES iv

Table 17. Da ys de vo ted to W ork in Ag ricu l tu r e 77

Table 18. Des c r ip t iv e S ta t i s t ic s - Ed uca t ion 106

T a b le 2 0. S t ru c tu ra l E d u c a t io n P a ra me te r s 1 08

Table 21. Ro bus tne ss Che ck , Ed uca t io n Spec i f ica t ion 109

T a b le 2 2. Ro b u s tn e s s Ch e c k , E d u c a t io n In f r a s t ru c tu re 1 10

Table A.1 . De ns i ty an d Spec i f ic Gr av i ty of Ra w M ate r ia l s 135

Table A.2 . Ind us t r ie s by Fac tor In tens i ty 135


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List of Figures

T a b le 1. M a p of L im e s to n e De p o s i t s a n d E m p lo y m e n t in th e Ce m e n t In d u s t ry 1 36

T a b le 2 . M a p of F o re s t De n s i ty a n d E m p lo y m e n t in th e P ly wo o d In d u s t ry . . 13 7

Table 3 . Exe rp t f r om the Na t ion a l M iner a l At la s 138

Table 4 . M ap of so rg hu m reg io ns f ro m the GA EZ (FAO, 2001) 139

V


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Acknowledgements

I o w e a d e p th of g ra t i tu d e to m y in t e l l e c tu a l p a re n t s . T h a n k s to M a rk Ro s e n z w e ig

fo r g u i d in g m y s e a rc h fo r in t e re s t in g q u e s t io n s , fo r s t r e t c h in g m y c a p a c i ty a n d fo r

e n c o u ra g in g m e to s t r iv e fo r in t e l l e c tu a l rig o r . Yo u h a v e l ed b y e x a m p le a n d h a v e

c h a n g e d th e wa y th a t I t h in k . Jo e A l to n j i ' s p h e n o m e n a l e m p i r i c a l r ig o r a n d a b i l it y

to m a k e d a ta s p e a k h a s b e e n a g re a t mo t iv a t io n to me . Ho we v e r , I h a v e n o t y e t

me t th e s t a n d a rd s y o u s e t fo r me e a r ly in th e P h .D . : my h a n d wr i t in g i s s t i l l h o r r i -

b l e a n d a 90 h o u r w e e k s t il l s u rp a s s e s m e . I w a s in s p i re d b y C h r i s Ud ry ' s w o rk a s

a n u n d e rg ra d u a t e . I f e e l e x t re me ly fo r tu n a te to h a v e l e a rn t f ro m y o u a s a g r a d u a t e

s tu d e n t . I t h a n k Mik e Bo o z e r fo r in v e s t in g h i s t ime a n d s u p e r b ra in p o w e r in g u id -

in g me . Yo u r s u p p o r t h a s b e e n e x c e p t io n a l , I w o u ld n o t h a v e re a c h e d th i s p o in t

w i th o u t i t. F ina lly , t h a n k s to Da v id A tk in , Ab h i j i t Ba n e r j e e , Bo b E v e n s o n , M u s h f iq

Mo b a ra k , Na n c y Q ia n , Gu s Ra n i s , S te v e Re d d in g , P e te r S c h o t t , P a u l S c h u l t z , T .N .

S r in iv a s a n a n d Me l i s s a T a r t ar i fo r c o m m e n t s a n d a d v ic e .

I a m g r a te fu l t o m y p a re n t s , s ib l in g s a n d d o g s fo r s u p p o r t in g m y a c a d e m ic

p u r s u i t s w i t h s u c h p a t ie n c e . T o m y g r a n d m o t h e r : y o u h a v e p r o v i d e d a p h e n o m -

ena l l i tm us te s t, Toron to aske d to h i re you ove r me . To A nd rea s : tha nk yo u fo r a

b a la n c e w i th o u t c o m p ro m is e . I d e d ic a te th e in t ro d u c t io n to y o u , wr i t t e n f ro m a

s a n d b a n k f l e c k e d w i th g o ld o n th e Co n g o r iv e r .

I w o u ld l ik e to th a n k my f r i e n d s a n d c o l l e a g u e s a t t h e E c o n o m ic Gro wt h Ce n te r

an d bey on d fo r the i r sup po r t . Th an ks in pa r t icu la r to Ka tr in a Jessoe , Vis Taraz ,

Ra c h e l He a th , Gh a ra d Bry a n , a n d A l ic e K ly g n e , fo r in t e l l e c tu a l a n d m o ra l s u p p o r t ,

ga l lo ns o f tea , cup cak es and laug hte r , and to the S lu tsky s fo r m ak in g grad school

s ing.

V I


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1. INTRO DUC TION 2

T h i s d i s s e r t a t io n m a k e s t w o p r i n c i p a l c o n t r ib u t i o n s t o u n d e r s t a n d i n g h o w e c o-

n o m ic g ro w th a l t e r s h o u s e h o ld e d u c a t io n c h o ic e s a n d in c o m e s . C h a p te r 3 jo in t ly

in v e s t ig a te s th e e f fe c t s o f r i s in g in c o m e s a n d re tu r n s to e d u c a t io n o n e d u c a t io n a l

in v e s tm e n t in ru ra l In d ia b e t we e n 1 9 83 a n d 1 99 9. T h e two e f fe c t s a re s e p a ra te d

b y e x a m i n i n g

tw o

d e t e r m i n a n t s o f w a g e a n d i n c o m e g r o w t h , w h i c h i n d u c e i n d e -

p e n d e n t v a r i a t io n in h o u s e h o ld in c o me s a n d re tu rn s to e d u c a t io n . T h e s o u rc e s o f

g r o w t h e x a m i n e d i n d u c e e x o g e n o u s m o v e m e n t s of l a b o r b e t w e e n t h e a g r i c u l t u r a l

a n d n o n -a g r i c u l tu ra l s e c to r s . Ch a p t e r 2 e x a m in e s th e r e s p o n s e of th e le v e l a n d

d i s t r ib u t io n o f in c o me s in ru ra l a re a s to a n e x p a n d in g ma n u fa c tu r in g s e c to r .

T h e a p p ro a c h t a k e n in th i s d i s s e r t a t io n i s t o e x a min e th e r e s p o n s e o f wa g e s ,

h o u s e h o l d i n c o m e a n d e d u c a t i o n t o t w o d e t e r m i n a n t s of g r o w t h : r e g i o n - ti m e v a r y -

in g a g r i c u l tu ra l p ro d u c t iv i ty a n d p o l i c y d r iv e n re g io n - t ime v a r i a t io n in s k i l l e d

a n d u n s k i l l e d m a n u f a c t u r i n g e m p l o y m e n t . A g r i c u l t u r e a n d m a n u f a c t u r i n g d i f -

fe r in the i r dem an d fo r sk il l and la nd . H ire d labor in agr icu l tu re con duc ts low

s k il l t a s k s s u c h a s h a rv e s t in g . L a b o r in m a n u fa c tu r in g c o n d u c t s s k i ll e d a n d u n -

s k i ll e d t a s k s r a n g in g f ro m ma n a g e r i a l t o m a n u a l . E x o g e n o u s v a r i a t io n in th e s i z e

of these sec to rs sh i f t s sk i l led and uns k i l le d labor dem an d d i f fe ren t ly , an d cha nge s

the re tu rn to land . Ther e fore , sec to r spec i f ic shock s d i f fe r in the i r e f fec t on re t u rn s

to educa t ion , a s cap tured by the ra t io o f sk i l led to unsk i l led wages , a s we l l a s

on ho use ho ld inc om es , accord in g to the i r sk il l and lan d asse ts . I inves t iga te ho w

th e s e two s o u rc e s o f g ro wth a l t e r r e tu rn s to e d u c a t io n a n d h o u s e h o ld in c o me s ,

a n d h o w c h a n g e s in r e tu rn s a n d h o u s e h o ld in c o m e s a l t e r h o u s e h o ld e d u c a t io n a l

i n v e s t m e n t .

T o f r a m e my e m p i r i c a l a n a ly s is , I b u i ld a s ma l l - c o u n t ry g e n e ra l e q u i l ib r iu m

m o d e l of h o u s e h o ld e d u c a t io n c h o ic e s in ru ra l l a b o r ma rk e t s . T h e mo d e l i l l u s-

t ra tes the e f fec ts of inc reases in agr i cu l t u ra l p rod uc t iv i t y and po l icy in du ced ex-

p a n s io n s in s k i l l e d a n d u n s k i l l e d ma n u fa c tu r in g l a b o r d e ma n d o n re tu rn s to e d u -

c a t io n a n d h o u s e h o ld s in c o me , a c c o rd in g to th e i r s k i l l a n d l a n d e n d o wme n ts . T h e


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1. INTRO DUCT ION 3

mo d e l h ig h l ig h t s a s o u rc e o f e n d o g e n e i ty b i a s : r e g io n a l ma n u fa c tu r in g e mp lo y -

m e n t r e f le c t s lo c al w a g e s a n d u n o b s e r v e d d e te r m in a n t s o f e d u c a t io n . T h e m o d e l

mo t iv a te s a n in s t ru me n ta l v a r i a b le s s t r a t e g y to o v e rc o me th i s b i a s : i n d u s t r i e s a re

a t t r a c t e d to lo c a t io n s e n d o we d w i th th e r a w ma te r i a l s th e y u s e . Ch a n g e s to in -

d u s t ry l e v e l im p o r t ta r i f f s a n d re g u la t io n s th e re fo re a l t e r l a b o r d e m a n d in r e g io n s

e n d o we d w i th th e r e s o u rc e s th e in d u s t ry u s e s .

The pred ic t ions o f the mode l a re te s ted us ing a d is t r ic t and household leve l

da ta - se t cover ing over 250 d is t r ic ts in 15 m ajo r Ind ian s ta tes be tw ee n 1983 and

1 9 9 9 . T h e d a ta - s e t i n c lu d e s d i s t r i c t - l e v e l min e ra l , me ta l a n d e n e rg y e n d o wme n ts

a n d i s c o m p i l e d f ro m m a p s . In d ia p re s e n t s th e p e r fe c t s e t t in g fo r s tu d y in g h o w

s h o c k s to th e a g r i c u l tu ra l a n d ma n u fa c tu r in g s e c to r s a l t e r e q u i l ib r iu m o u tc o me s .

Ind i a in 1983 w as sp l i t in to 412 d is t r ic ts an d m igra t ion b e tw ee n d is t r ic ts i s low.

T h e e mp i r i c a l s p e c i f i c a t io n s e x a min e wa g e , h o u s e h o ld in c o me a n d e d u c a t io n re -

s p o n s e s to w i th in d i s t r i c t o v e r - t ime v a r i a t io n in a g r i c u l tu ra l p ro d u c t iv i ty a n d in -

s t r u m e n t e d s k il le d a n d u n s k i ll e d m a n u f a c t u r i n g e m p l o y m e n t . A g r i c u l t u r a l p r o -

d u c t iv i ty i s me a s u re d u s in g a L e s p e y re s in d e x o f r e g io n a l a g r i c u l tu ra l p o te n t i a l : I

app ly the na t iona l t ime-vary ing y ie ld f ron t ie r in seven c rops to the f rac t ion o f each

reg ion phys ica l ly su i ted to each c rop . Changes in the na t iona l c rop f ron t ie r occur

due to the in t roduc t ion o f new var ie t ie s o f seeds , fo r example .

In the f i rs t s tage ins t rum ent a l va r iab les spec i f ica t ion , I use the p red i c t io ns o f

t h e m o d e l t o i n d u c e v a r i a t i o n i n m a n u f a c t u r i n g e m p l o y m e n t t h a t i s u n c o r r e l a t e d

wi th u n o b s e r v e d d e te rm in a n t s o f in c o m e a n d e d u c a t io n . I e x p lo i t t h e o b s e r v a t io n

tha t in the ea r ly 1990s , Ind ian indus t r ie s were loca ted in d is t r ic ts endowed wi th

th e ma te r i a l s th e y u s e in t e n s iv e ly . F o r e x a mp le , c e me n t in d u s t ry e mp lo y me n t i s

c o n c e n t r a t e d w h e r e l i m e s t o n e is f o u n d , w h i l e p l y w o o d i n d u s t r y e m p l o y m e n t i s

h ig h e r in d e n s e ly wo o d e d d i s t r i c t s ( f ig u re A . l ) . T h i s m a y re f l e ct In d ia n in d u s t r i a l

p l a n n in g , wh ic h e n c o u ra g e d s t a t e s to p ro mo te in d u s t r i e s th a t u s e th e r e s o u rc e s


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1. INTRO DUCT ION 4

found in the d is t r ic t (Government o f Ind ia , 1969) . I t may a l te rna t ive ly re f lec t de -

c is ions by indus t r ie s to loca te nea r re la t ive ly immobi le inpu ts (Krugman, 1991) .

Ch a n g e s to in d u s t r y p o l i c y a re p re d ic t e d to d i r e c t ly a f fe c t e m p lo y m e n t in d i s t r i c t s

e n d o we d w i th th e ma te r i a l s th e in d u s t ry u s e s . In d ia r e l a x e d in d u s t r i a l r e g u la t io n s

and red uc ed im po rt ta r i f fs du r i ng a se r ie s o f c r ises s ta r t ing in 1984 (Topa lova , 2004;

Sr in ivasan , 2002) . The t iming and dep th o f po l icy changes va r ied ac ross indus t r ie s .

T h e p a p e r e x p lo i t s w i th in -d i s t r i c t o v e r - t ime re s p o n s e s o f ma n u fa c tu r in g e mp lo y -

me n t to p o l i c y c h a n g e s , wh e re th e id e n t i fy in g v a r i a t io n c o me s f ro m d i f fe re n c e s

a c ro ss in d u s t r i e s in th e b ro a d ty p e s of r a w ma te r i a l s u s e d a n d in in d u s t r y p o l i c y

o v e r t ime . E m p lo y m e n t i s b ro k e n a p a r t b y sk i ll b y e x p lo i t in g v a r i a t io n in th e t im-

ing and dep th o f po l icy changes ac ross indus t r ie s wi th d i f fe ren t sk i l l in tens i t ie s .

T h e wa g e a n d in c o me re s u l t s i n c h a p te r 2 in d ic a te th a t t h e two d r iv e r s of

g ro w th d i f f e r in th e i r imp a c t o n th e r e tu r n s to e d u c a t io n a n d h o u s e h o ld in c o me s .

A n i n c re a s e i n a g r i c u l t u r a l p r o d u c t i v i t y o r i n s t r u m e n t e d u n s k i l l e d m a n u f a c t u r i n g

e m p lo y m e n t d e c re a s e s r e tu rn s to e d u c a t io n , b u t h a s in c o m e e ffe c t s th a t v a ry b y

s k i l l a n d l a n d o wn e rs h ip . An in c re a s e in s k i l l e d e mp lo y me n t in c re a s e s r e tu rn s to

e d u c a t io n fo r a ll wo rk e r s b u t o n ly r a is e s in c o m e in e d u c a te d h o u s e h o ld s . H o u s e -

h o ld s w i th d i f f e re n t in i ti a l l a n d a n d e d u c a t io n e n d o w m e n ts e x h ib it h e te ro g e n e o u s

in c o me re s p o n s e s to d i f f e re n t d r iv e r s of g ro w th .

T h e e d u c a t io n s p e c i f i c a tio n s in c h a p te r 3 e x a m in e wh e th e r c h i ld re n a g e d b e -

twe e n 5 a n d 9 s t a r t s c h o o l . Un s k i l l e d ma n u fa c tu r in g g ro w th in c re a s e s th e p ro b a -

b i l i ty a ch i ld s ta r ts school in unsk i l led land less households , whi le i t reduces i t in

l a n d e d h o u s e h o ld s . T h e in tu i t io n l ie s in th e in c o m e e f fe ct : u n s k i l l e d m a n u fa c tu r -

in g g ro wth ra i s e s in c o me in u n s k i l l e d l a n d le s s h o u s e h o ld s , wh i l e i t h a s n o e f fe c t

in l a n d e d h o u s e h o ld s .

T h e in c o me a n d re tu r n s to e d u c a t io n e f fe c t s o n e d u c a t io n a l in v e s tm e n t a re e s -

t i m a t e d u s i n g m i n i m u m d i s ta n c e . S in c e a g r i c u l tu r a l p r o d u c t i v i t y a n d m a n u f a c -

t u r i n g e m p l o y m e n t a l t e r e d u c a t i o n a l i n v e s t m e n t t h r o u g h i n c o m e s a n d r e t u r n s t o


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1. INTRO DUCT ION 5

e d u c a t io n , t h e c o e f f ic i e n t s o n th e s e tw o t e rm s in th e e d u c a t io n s p e c i f i c a t io n re -

f l ec t we ig h te d c o m b in a t io n s o f in c o m e a n d re tu rn s to e d u c a t io n e f fe c t s , w h e r e th e

we ig h t s a re wa g e a n d in c o me re s p o n s e s to th e two d e te rmin a n t s o f g ro wth . I u s e

th e e s t ima te d c o e f f i ci e n t s f ro m th e e d u c a t io n , w a g e a n d in c o m e s p e c i f ic a t io n s to

jo in t ly e s t im a te th e tw o e f fe c ts fo r ru ra l l a n d le s s h o u s e h o ld s .

I f ind tha t income growth accounted fo r a la rge r f rac t ion o f the r i se in educa-

t io n s e e n b e tw e e n 1 98 3 a n d 1 99 9 th a n g ro w th in r e tu rn s to e d u c a t io n . M a le e d -

u c a t io n a l in v e s tme n t r e s p o n d s p o s i t iv e ly to r i s in g h o u s e h o ld in c o me s a n d l a b o r

ma rk e t r e tu rn s to e d u c a t io n . In c o n t ra s t , i n v e s tme n t a mo n g g i r l s o n ly r e s p o n d s to

r i s in g in c o me s . T h i s f in d in g f it s w i th th e o b s e rv a t io n o f lo w fe m a le p a r t i c ip a t io n in

c o m p le x o c c u p a t io n s in ru ra l a re a s. I t e s t wh e th e r r a i s in g th e c h i ld w a g e re d u c e s

e d u c a t io n t h ro u g h th e o p p o r tu n i ty c o s t c h a n n e l . I f in d n o st a t is t i ca l ly s ig n i f i c a n t

e ffec t , cons is t en t wi th the low inc ide nce of ch i ld labor am on g you ng ch i ld re n .

T h e e s t ima te s s h e d in s ig h t in to a fu n d a me n ta l q u e s t io n a b o u t th e p ro c e s s o f

d e v e lo p me n t : h o w d o e s a n e x p a n d in g n o n -a g r i c u l tu ra l s e c to r a l t e r t h e l e v e l a n d

d i s t r ib u t io n o f in c o m e s in p re d o m in a n t l y a g ra r i a n a re a s ? Be twe e n 1 9 83 a n d 1 99 9,

u n s k i l l e d m a n u fa c tu r in g g ro wth re d u c e d in c o me in e q u a l i ty b y a th i rd , wh i l e a g r i -

c u l tu ra l p ro d u c t iv i ty g ro w th ra i s e d i t b y 15 0%. Ho w e v e r , m a n u fa c tu r in g g ro w th

c o n t r ib u te d l it tl e to r a i s in g p o v e r ty r e l a t iv e to a g r i c u l tu ra l p ro d u c t iv i ty g ro w th .

M a n u fa c tu r in g g ro wt h e x p la in s a p p r o x im a te ly 2 7% o f th e r e d u c t io n in p o v e r ty

a n d 8 % o f th e in c re a s e in u n s k i l l e d w a g e s , wh i l e a g r i c u l tu ra l p ro d u c t iv i ty g ro w th

expla ins 21% of the inc rease in unsk i l led wages and 53% of the dec ine in pover ty .

T h e s ma l l r e l a t iv e imp a c t o f ma n u fa c tu r in g i s p a r t ly a t t r ib u ta b le to i t s s k i l l c o m-

p o s i t io n : s k i l l e d ma n u fa c tu r in g c o n t r ib u te s l i t t l e to r e d u c in g p o v e r ty o r r a i s in g

u n s k i l l e d wa g e s . My e s t ima te s s u g g e s t t h a t , h a d g ro w th in th e m a n u fa c tu r in g

s e c to r b e e n p u re ly u n s k i l l e d , In d ia wo u ld h a v e e x p e r i e n c e d a 9 % g re a te r in c re a s e

in unsk i l led w ag es and a 13% grea te r redu c t io n in pove r ty . The smal l impa c t of

ma n u fa c tu r in g g ro wth o n ru ra l p o v e r ty h a s r e p e a te d ly b e e n a s s e r t e d in th e p o l i c y


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1. INTRO DUCT ION 6

l i te ra tu re (Kocchar , 2004) . The es t ima tes in th is paper a re the f i rs t to empir ica l ly

v a l id a te th i s o b s e rv a t io n a n d to p ro v id e a n e x p la n a t io n fo r w h y th i s i s t h e c a s e .

T h e re s u l t s s u g g e s t t h a t , i n t e rms o f ma le e d u c a t io n a l in v e s tme n t , a r i s in g t id e

l i f t s a l l boa ts . Reg ard le ss of the source of g ro w th , edu ca t ion r i ses am on g the po or-

e s t h o u s e h o ld s in In d ia - ru ra l , u n s k i l l e d , l a n d le s s h o u s e h o ld s . S o u rc e s of g ro w th

th a t r a is e in c o m e s b u t r e d u c e re tu rn s to e d u c a t io n , s u c h a s a g r i c u l tu ra l t e c h n o lo g -

i c a l c h a n g e a n d u n s k i l l e d ma n u fa c tu r in g g ro wth , i n c re a s e e d u c a t io n a l in v e s tme n t

subs tan t ia l ly . Sk i l l b iased g rowth ra ises re tu rns bu t has l i t t le impac t on incomes ; i t

r a i s e s e d u c a t io n to a l e s s e r d e g re e th ro u g h th e r e tu rn s to e d u c a t io n c h a n n e l . T h e

s a me i s n o t t ru e fo r g i r l s , wh o s e e d u c a t io n wa s fo u n d to o n ly r e s p o n d to r i s in g

income: sk i l l b iased g rowth has l i t t le impac t on the i r educa t ion .

T h i s d i s s e r t a t io n c o n t r ib u te s to a n e x te n s iv e l i t e ra tu re o n th e d e ma n d fo r e d -

u c a t io n in d e v e lo p in g c o u n t r i e s .

1

T h e t w o d e t e r m i n a n t s of e d u c a t i o n i n v e s t m e n t

h a v e n o t p re v io u s ly b e e n c a p tu re d in o n e p a p e r ; a c o n t r ib u t io n o f th i s d i s s e r t a t io n

is to e s t ima te them jo in t ly and cap ture the i r re la t ive e ffec ts . The d is se r ta t ion a lso

c o n t r ib u te s to a g ro wi n g l i t e ra tu re o n n o n - a g r i c u l tu ra l g ro w th in ru ra l a re a s . I

d e v ia t e f ro m th e l i t e ra tu re b y b re a k in g ma n u fa c tu r in g a p a r t b y s k i l l a n d f in d in g

an exogenous source o f va r ia t ion in i t .

"*To n a m e b u t a f e w , t h e d e m a n d f o r e d u c a t i o n h a s b e e n s h o w n t o r e s p o n d t o r i s i n g r e t u r n s t o

e d u c a t i o n ( K o c h a r , 2 0 0 4; R o s e n z w e i g a n d F o s t e r , 1 9 96 ) , u n a n t i c i p a t e d a n d a n t i c i p a t e d g r o w t h i n

h o u s e h o l d i n c o m e s ( E d m o n d s , 2 0 06 ; E d m o n d s e t a l , 2 0 0 4; a n d J a c o b y a n d S k o u f i a s , 1 9 9 7) , t h e

o p p o r t u n i t y c o s t s of s c h o o l i n g ( R o s e n z w e i g a n d F o s t e r , 2 0 0 4) a n d t o c h a n g e s i n t h e d i r e c t c o s t of

sc h oo l ing (S c hu l t z , 2004 ; K r e m e r e t a l . 2003) .

P r o m i n e n t p a p e r s i n c l u d e L a n j o u w a n d M u r g a i , 2 0 09 ; E s w a r a n e t a l ., 2 0 0 9 ; F o s t e r a n d R o s e n -

z w e ig , 2004 ; D a t t a n d R a v a l l i on , 1999 .


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C H A P T E R 2

How does growth in the demand for ski l led and unskil led labor

affect household incomes and the rural wage structure?

2 . 1 . I N T R O D U C T I O N

Gro wth a l t e r s b o th th e l e v e l a n d th e d i s t r ib u t io n o f in c o me th ro u g h c h a n g in g th e

re tu rn s to u n e q u a l ly d i s t r ib u te d p ro d u c t iv e a s s e t s (Ku z n e t s ,

1 9 5 5 ) .

H o u s e h o l d s

e n d o w e d w i t h m u l t i p l e p r o d u c t i v e a s s e t s w i l l t h e r e f o r e e x p e r i e n c e h e t e r o g e n e o u s

in c o m e e ffe c t s w h e n fa c e d w i th d i f f e re n t s o u rc e s of g ro w th . T h e US l i t e ra tu re

o n sk i ll b i a s e d g ro wth f in d s th a t g ro w th in th e d e m a n d fo r e d u c a te d wo rk e r s c o n -

t r ib u te s to th e e x p la n a t io n o f c h a n g e s in th e US wa g e s t ru c tu re (Ca rd a n d D in a rd o ,

2 0 0 2 ;

K a t z a n d M u r p h y ,

1 9 9 2 ) .

T ra n s la t in g th i s q u e s t io n to a d e v e lo p in g c o u n t ry

c o n te x t , h o w d o e s g ro wth in th e d e ma n d fo r s k i l l e d v e r s u s u n s k i l l e d l a b o r a l t e r

th e l e v e l a n d d i s t r ib u t io n o f h o u s e h o ld in c o me s a n d in e q u a l i ty in ru ra l a re a s ?

The agr icu l tu ra l sec to r i s the p r imary sec to r o f employment in ru ra l a reas in

d e v e lo p in g c o u n t r i e s . T a s k s c o n d u c te d b y h i re d l a b o r in th i s s e c to r a re n o t c o m p le -

m e n t a r y w i t h e d u c a t i o n ( R o s e n z w e i g ,

1 9 9 5 ;

F o s te r a n d Ro s e n z we ig ,

1 9 9 3 ) .

G r o w t h

e ma n a t in g f ro m th e a g r i c u l tu ra l s e c to r th e re fo re in c re a s e s th e d e ma n d fo r p re -

d o min a n t ly u n s k i l l e d h i r e d l a b o r .

1

Gr o w th in ru ra l a re a s e m e rg in g f ro m th e n o n -

agr i cu l tu ra l sec to r m ay d i f fe r in i t s de m an d fo r sk il l . The l i te ra tu r e exa m in in g th e

imp a c t o f n o n -a g r i c u l tu ra l g ro wth o n ru ra l o u tc o me s h a s c o n s id e re d th i s s e c to r to

b e a h o mo g e n e o u s e n t i ty (E s wa ra n e t a l . ,

2 0 0 9 ;

L a n j o u w a n d M u r g a i ,

2 0 0 9 ;

Fos te r

a n d R o s e n z w e i g ,

2 0 0 4 ;

Da t t a n d Ra v a l l io n ,

1 9 9 9 ) .

Ho we v e r , i n d u s t ry l e v e l d a ta

^ G r o w t h i n t h e a g r i c u l t u r a l s e c t o r h a s b e e n f o u n d t o a l t e r e q u i l i b r i u m w a g e s ( J a y a c h a n d r a n , 2 0 0 6 ),

c h i l d l a b o r ( F o s t e r a n d R o s e n z w e i g , 2 0 0 4 b ) a n d i n e q u a l i t y ( F o s t e r a n d R o s e n z w e i g , 2 0 0 4 a ) .

7


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2 . EC O N O M IC G R O W TH , W A G ES A N D IN C O MES 8

f ro m In d ia s u g g e s t t h a t i n d u s t r i e s v a ry s u b s ta n t i a l ly in th e ta s k s th e y re q u i re th e i r

p o p u la t io n to p e r fo rm a n d in th e i r d e ma n d fo r s k i l l .

In th i s c h a p te r , I e x a m in e h o w g ro w th in th e d e m a n d fo r s k i l le d v e r s u s u n -

sk i l led labor in the non-agr icu l tu ra l sec to r a l te rs incomes and inequa l i ty in ru ra l

a g ra r i a n a re a s . I fo c u s o n th e m a n u fa c tu r in g s ec tor , t h e l arg e s t n o n -a g r i c u l tu ra l

sec to r o f em pl oy m en t (G ove rnm ent o f Ind ia , 2002) . I con tr ib u te to the l i te ra tu re by

a l lo w in g th e e f fe ct of ma n u fa c tu r in g g r o w th to v a ry b y s k i ll a n d b y u s in g a n o v e l

in s t ru m e n ta t i o n s t r a t e g y to d e a l w i th th e i s s u e s of c au s a l i ty th a t h a v e p la g u e d th e

l i te ra tu re .

T o f ra m e th e e mp i r i c a l a n a ly s i s , I b u i ld a sma l l c o u n t r y g e n e ra l e q u i l ib r iu m

m od e l of ru ra l labor ma rke t s . The mo de l i l lus t ra tes the e f fec ts o f inc reases in

a g r i c u l tu ra l p ro d u c t iv i ty a n d p o l i c y in d u c e d e x p a n s io n s in s k i l l e d a n d u n s k i l l e d

ma n u fa c tu r in g l a b o r d e ma n d o n wa g e s a n d th e in c o me s o f s k i l l e d a n d u n s k i l l e d

w o r k e r s .

T h e m o d e l h ig h l ig h t s a s o u rc e of e n d o g e n e i ty b ia s : r e g io n a l m a n u fa c tu r in g

e m p lo y m e n t r e f l ec t s loc a l w a g e s a n d u n o b s e rv e d d e te r m in a n t s of e d u c a t io n . T h e

m o d e l mo t iv a te s a n in s t ru m e n ta l v a r i a b le s s t r a t e g y to o v e rc o me th i s b i a s: i n d u s -

t r i e s a re a t t r a c t e d to lo c a t io n s e n d o we d w i th th e r a w ma te r i a l s th e y u s e . Ch a n g e s

to in d u s t ry l e v e l im p o r t t a r i f fs a n d re g u la t io n s th e re fo r e a l t e r l a b o r d e m a n d in r e-

g io n s e n d o we d w i th th e r e s o u rc e s th e in d u s t ry u s e s .

I t e s t t h e mo d e l ' s p re d ic t io n s u s in g d i s t r i c t a n d h o u s e h o ld l e ve l d a ta f ro m ru r a l

Ind i a be tw een 1983 an d 1999. The da ta cov ers over 250 d is t r ic t leve l labor m ark e ts .

I c o mp i l e a n e w d a ta s e t of di s t ri c t m in e ra l a n d m e ta l e n d o w m e n ts wh ic h I c o m b in e

wi th d a ta o n in d u s t ry r a w ma te r i a l u s e a n d in d u s t ry p o l i c i e s to in s t ru me n t s k i l l e d

a n d u n s k i l l e d m a n u fa c tu r in g e mp lo y m e n t in m y fi r s t s t a g e r e g re s s io n . I t h e n e x -

a m in e w a g e a n d h o u s e h o ld in c o me re s p o n s e s to w i t h in d i s t r ic t o v e r - t im e v a r i a t io n

in a g r i c u l tu ra l p ro d u c t iv i ty a n d in s t ru m e n te d s ki l le d a n d u n s k i l l e d ma n u f a c t u r -

in g e m p lo y m e n t . Ag r ic u l tu ra l p ro d u c t iv i ty i s m e a s u re d b y a L e s p e y re s in d e x o f


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r e g io n a l a g r i c u l tu ra l p o te n t i a l : I a p p ly th e n a t io n a l t im e -v a r y in g ma x i m u m y ie ld

in seven c rops to the f rac t ion o f each reg ion tha t i s phys ica l ly su i ted to each c rop .

T h e n a t io n a l a g r i c u l tu ra l p ro d u c t iv i ty f ro n t i e r s h i f t s o u t d u e to th e in t ro d u c t io n o f

new seed va r ie t ie s , fo r example .

T h e wa g e a n d in c o me re s u l t s i n d ic a te th a t t h e two d r iv e r s o f g ro wth d i f f e r in

th e i r imp a c t o n th e r e tu rn s to e d u c a t io n a n d h o u s e h o ld in c o me s . An in c re a s e in

a g r i c u l t u r a l p r o d u c t i v i t y o r i n s t r u m e n t e d u n s k i l le d m a n u f a c t u r i n g e m p l o y m e n t

d e c re a s e s r e tu rn s to e d u c a t io n , b u t h a s in c o me e f fe c t s th a t v a r y b y s k il l a n d l a n d

o wn e rs h ip . An in c re a s e in s k i l l e d e mp lo y me n t in c re a s e s r e tu rn s to e d u c a t io n fo r

a l l wo rk e r s b u t o n ly r a i s e s in c o me in s k i l l e d h o u s e h o ld s . Ho u s e h o ld s w i th d i f f e r -

e n t in i t i a l e n d o wme n ts e x h ib i t h e te ro g e n e o u s in c o me re s p o n s e s to th e two d r iv e r s

of g rowth .

Be tw e e n 1 9 83 a n d 1 99 9, a g r i c u l tu ra l p ro d u c t iv i ty g ro w th e x p la in e d 5 3 % of th e

re d u c t io n in p o v e r ty a n d h a l f o f th e r i s e in in c o me a mo n g l a n d le s s h o u s e h o ld s ,

n e a r l y f o u r t i m e s m o r e t h a n m a n u f a c t u r i n g g r o w t h ex p l a i n e d . H o w e v e r , m a n u -

fa c tu r in g g ro wth d a mp e n e d th e r i s e in in e q u a l i ty o v e r th e p e r io d , wh i l e a g r i c u l -

tu ra l p ro d u c t iv i ty g ro wth ra i s e d i t . T h e s ma l l r e l a t iv e imp a c t o f ma n u fa c tu r in g o n

p o v e r ty i s p a r t ly d u e to i ts s k il l c o m p o s i t io n : s k i l l ed e m p lo y m e n t g ro w th h a s c o n -

t r ib u te d l i t t l e to r a i s in g u n s k i l l e d wa g e s , a p r in c ip a l c o mp o n e n t o f in c o me a mo n g

p o o r , l a n d le s s h o u s e h o ld s . My e s t ima te s s u g g e s t t h a t h a d g ro wth in th e ma n u fa c -

tu r in g s ec to r b e e n p u re ly u n s k i l l e d , In d ia wo u ld h a v e e x p e r i e n c e d a 9 % g re a te r

inc rease in unsk i l led wages and a 13% grea te r reduc t ion in pover ty .

The chap te r i s s t ruc tu red as fo l lows . The nex t sec t ion desc r ibes the re la ted l i t -

e ra tu re . Sec t ion 3 p re sen ts desc r ip t iv e s ta t i s t ic s w hic h a re use d to m ot iv a te th e

a s s u m p t io n s of m y mo d e l . In s e c t io n 4 ,1 p u t fo rw a rd a m o d e l to f r a m e th e e m p i r -

ica l ana lys is . I te s t the m od e l ' s p red ic t io ns in sec t ion 5 an d sec t ion 6 co nc lud es .


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2. ECON OMIC GROW TH, WAGES AN D INCOME S 10

2 . 2 . R E L A T E D L I T E R A T U R E : R U R A L L A B O R M A R K E T S , D E T E R M I N A N T S O F

W A G E S A N D I N C O M E S

A k e y c h a r a c t e r i s t i c o f t h e c l a s s i c m o d e l s o f e c o n o m i c g r o w t h i s a m o v e m e n t o u t

o f a g r i c u l t u r e a n d i n t o t h e n o n - f a r m w o r k f o r c e ( K u z n e t s , 1 9 5 5 ; R a n i s - F e i , 1 9 6 1 ;

A h l u w a l i a , 1 9 7 5 ) . A c e n t r a l q u e s t i o n t h a t h a s o c c u p i e d t h e l i t e r a t u r e o n l a b o r m a r -

k e t s in d e v e l o p i n g c o u n t r i e s i s t h e e f f e c t o f m o v i n g l a b o r o u t o f a g r i c u l t u r e o n t h e

a v e r a g e a n d m a r g i n a l p r o d u c t o f t h e r e m a i n i n g l a b o r i n a g r i c u l t u r e ( R o s e n z w e i g ,

1 98 8 ). I n s e c t i o n 2. 2. 1, I e x a m i n e t h e l i t e r a t u r e o n r u r a l w a g e d e t e r m i n a t i o n a n d

h o w th i s pa pe r f i t s in to the l i t e ra tu re . In sec t ion 2 .2.2 , I r ev iew th e l i t e r a tu r e o n

n o n - a g r i c u l t u r a l g r o w t h i n r u r a l l a b o r m a r k e t s .

2.2.1.

Determinants of Wages in Rural Labor M arkets

T h e e a r l y l i t e r a t u r e o n r u r a l l a b o r m a r k e t s c h a r a c t e r i z e d t h e w a g e d e t e r m i n a t i o n

p r o c e s s a s u n c o m p e t i t i v e . R u r a l w a g e s w e r e p r e s u m e d t o b e s e t a b o v e t h e e q u i -

l i b r i u m w a g e r e s u l t i n g i n u n d e r a n d u n e m p l o y m e n t . I n t h e s u r p l u s la b o r m o d e l s

of Lewis (1954) and Ran is and Fe i (1961) , the agra r ian wage i s se t accord ing to

t h e a v e r a g e p r o d u c t o f l a b o r . A m o v e m e n t o u t o f t h e a g r i c u l t u r a l w o r k f o r c e i n t o

a n o n - f a r m s e c t o r h a s n o t o l i t t l e i m p a c t o n t h e m a r g i n a l p r o d u c t o f t h e r e m a i n -

i n g w o r k f o r c e i n a g r i c u l t u r e i .e . t h e s h a d o w w a g e o f a n a g r i c u l t u r a l l a b o r e r i s

z e r o .

2

A n e o c l a s s i c a l f r a m e w o r k , b a s e d o n t h e a s s u m p t i o n o f l a b o r m a r k e t c l e a r -

i n g a n d c o m p e t i t i v e l a b o r m a r k e t s , s u g g e s t s t h a t s h i f t i n g l a b o r f r o m a g r i c u l t u r e t o

m a n u f a c t u r i n g w o u l d i n c r e a s e t h e m a r g i n a l p r o d u c t o f t h e r e m a i n i n g w o r k f o r c e

i n a g r i c u l t u r e , a n d m a n i f e s t i t s e l f i n i n c r e a s e d a g r a r i a n w a g e s .

2

T h e l i t e r a t u r e t a k e s t h r e e a p p r o a c h e s t o m o d e l t h e h o u s e h o l d f o u n d a t i o n s o f t h e s e m a c r o d e v e l -

o p m e n t m o d e l s ( R o s e n z w e i g , 1 98 8 ). T h e f i r s t s e t o f m o d e l s p r e s u m e s t h a t n o l a b o r m a r k e t e x i s t s

a t a ll a n d m o d e l s f a m i l y l a b o r a s d i s g u i s e d u n e m p l o y m e n t . T h e s e c o n d a s s u m e s t h a t l a b o r m a r -

k e t s o p e r a t e p e r f e c t l y . T h e t h i r d s e t o f m o d e l s c o n s t i t u t e t h e n u t r i t i o n - e f f i c i e n c y w a g e m o d e l s o f

inv o lu n t a r y u ne m pl oy m en t ( Le ibe ns te in , 1957; Mi r r l ees , 1975; S t ig l i t z , 1976; B l i s s an d S te r n , 1976) .

I n t h i s t h e o r y , w a g e s a re i n f l u e n c e d b y a n e x p l i c i t l i n k b e t w e e n p r o d u c t i v i t y a n d c o n s u m p t i o n a t

l o w l e v e l s o f n u t r i t i o n . I n t h e s e m o d e l s , c o m p e t i t i o n a m o n g w o r k e r s d o e s n o t r e d u c e t h e w a g e r a t e

b e l o w a n e ff i c ie n c y w a g e s i n c e a l o w e r w a g e w o u l d n o t a l l o w w o r k e r s t o c o n s u m e e n o u g h t o w o r k

ef f ic ient ly.


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T h e e m p i r i c a l e v i d e n c e o f w a g e d e t e r m i n a t i o n a n d l a b o r s u p p l y i n d e v e l o p i n g

c o u n t r i e s i s b r o a d l y i n c o n s i s t e n t w i t h t h e p r e d i c t i o n s i m p l i e d b y t h e m i c r o m o d -

e l s u n d e r p i n n i n g t h e l a b o r s u r p l u s h y p o t h e s i s ( B a r d h a n , 1 9 7 9 ; L a u e t a l . , 1 9 7 8 ;

A d u l a v i d h y a e t a l . , 1 9 7 9 ; B a r n u m a n d S q u i r e , 1 9 7 8 ; R o s e n z w e i g , 1 9 8 0 ; S t r a u s s ,

1 9 8 3 ) . T h i s p a p e r t a k e s t h e n e o c l a s s i c a l f r a m e w o r k t o d e r i v e t e s t a b l e p r e d i c t i o n s

o n h o w g r o w t h in n o n - a g r i c u l t u r a l l a b o r d e m a n d a l t e r s t h e r u r a l w a g e a n d i n c o m e

s t r u c t u r e .

2.2.2.

Non-A gricultural Groivth in Rural Labor Markets

T h e r e i s a g r o w i n g l i t e r a t u r e e x p l o r i n g t h e i m p a c t o f r u r a l m a n u f a c t u r i n g g r o w t h

a n d a g r a r i a n p r o d u c t i v i t y o n a g r a r i a n w a g e s , p o v e r t y a n d t h e w e l f a r e of r u r a l

h o u s e h o l d s i n d e v e l o p i n g c o u n t r i e s ( E s w a r a n e t a l . , 2 0 0 9 ; L a n j o u w a n d M u r g a i ,

2009 ; Fos te r and Ro sen zw eig , 2004 ; Da t t an d Rava l l ion , 1999) . Th e e f fec t s e s t i -

m a t e d i n t h e e x i s t i n g l i t e r a t u r e h a v e b e e n e x p o s e d t o c o n c e r n s a b o u t e n d o g e n e -

i ty d u e t o t h e s i m u l t a n e o u s d e t e r m i n a t i o n of w a g e s a n d m a n u f a c t u r i n g e m p l o y -

m e n t . A n o t a b l e e x c e p t i o n i s F o s t e r a n d R o s e n z w e i g ( 20 0 4) , w h o u s e t h e N C A E R

A R I S / R E D S d a t a - s e t t o e x a m i n e t h e r e l a ti v e i m p a c t of g r o w t h i n t h e t r a d a b l e m a n -

u f a c t u r i n g s e c t o r a n d a g r a r i a n p r o d u c t i v i t y g r o w t h o n w a g e s , i n c o m e s a n d i n -

e q u a l i t y i n v i l la g e s i n r u r a l I n d i a . T h e y i n s t r u m e n t m a n u f a c t u r i n g e m p l o y m e n t

u s i n g t h e B e s l e y - B u r g e s s m e a s u r e o f l a b o r r e g u l a t i o n s t h a t v a r i e s a c r o s s s t a t e s a n d

o v e r t i m e .

3

T h e l i t e r a t u r e t o d a t e h a s c o n s i d e r e d t h e t r a d a b l e m a n u f a c t u r i n g s e c -

t o r a s a h o m o g e n e o u s e n t it y . H o w e v e r , i n d u s t r y l e v e l d a t a f r o m I n d i a s u g g e s t t h a t

i n d u s t r i e s v a r y s u b s t a n t i a l l y i n t h e e d u c a t i o n p r o f i l e o f t h e i r w o r k f o r c e .

2 . 3 . S E T T I N G : T H E R U R A L I N D I A N E C O N O M Y

I n t h i s s e c t i o n , I p r o v i d e d e s c r i p t i v e e v i d e n c e s u p p o r t i n g t h e c e n t r a l a r g u m e n t s

o f t h e c h a p t e r . S e c t i o n 2 .3 .1 s h o w s t h a t o c c u p a t i o n s v a r y s u b s t a n t i a l l y i n t h e i r

c o m p l e m e n t a r i t y w i t h e d u c a t i o n a c r o s s t h e a g r i c u l t u r a l a n d m a n u f a c t u r i n g s e c t o r .

o

T h e p r e d i c t i v e p o w e r o f t h i s i n s t r u m e n t i s h o w e v e r l o w .


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2 . EC O N O MIC G R O W T H , W A G ES A N D IN C O MES 12

H i r e d w o r k e r s i n a g r i c u l t u r e c o n d u c t u n s k i l l e d t a s k s , w h i l e t h o s e i n m a n u f a c t u r -

i n g c o n d u c t s k i l le d a n d u n s k i l l e d t a s k s . S e c t i o n 2. 3. 2 s h o w s t h a t w a g e s i n t h e r u r a l

l a b o r m a r k e t r i s e w i t h e d u c a t i o n a n d r e f l e c t t h e s k i l l l e v e l s o f t a s k s c o n d u c t e d .

T h e d e s c r i p t i v e s t a t i st i c s c o v e r i n g I n d i a ' s 1 5 m a j o r s t a t e s a r e f r o m f o u r r o u n d s o f

h o u s e h o l d d a t a c o l l e c t e d i n 1 9 8 3 , 1 9 8 7 , 1 9 9 3 a n d 1 9 99 b y t h e N a t i o n a l S a m p l e S u r -

v e y O r g a n i z a t i o n ( N S S O ) . I n a d d i t i o n , I m a k e u s e o f t h e 1 9 82 a n d 1 9 99 r o u n d s o f

d a t a f r o m t h e R u r a l E c o n o m i c a n d D e v e l o p m e n t S u r v e y s ( R E D S ) c o l l e c t e d b y t h e

N a t i o n a l C o u n c i l o f A p p l i e d E c o n o m i c s R e s e a r c h ( N C A E R ) . T h e D a t a A p p e n d i x

desc r ibes the da ta in g rea te r de ta i l .

2.3.1.

Complexity of

Tasks

and Education in Rural India, by Sector

I n t h i s s e c t i o n , I p r o v i d e e v i d e n c e t h a t a g r i c u l t u r e h i r e s w o r k e r s t o c o n d u c t u n -

s k i l l e d t a s k s w h i l e m a n u f a c t u r i n g h i r e s w o r k e r s t o c o n d u c t b o t h s k i l l e d a n d u n -

s k i l l e d t a s k s . Wo r k e r s c o n d u c t i n g s k i l l e d t a s k s h a v e h i g h e r e d u c a t i o n l e v e l s .

T a b l e 1 - a p r e s e n t s d e s c r i p t i v e s t a ti s t i c s t h a t d i v i d e t h e r u r a l I n d i a n w o r k f o r c e

i n t o a g r i c u l t u r a l a n d n o n - a g r i c u l t u r a l s e c t o r s i n 1 9 83 a n d 1 99 9 . A g r i c u l t u r e e m -

p l oy ed a l a rge f ra c t io n o f the ru r a l wo rk fo rc e in 1999 - 65% of m a le s an d 34% of

f e m a l e s . T h e si z e o f t h e a g r i c u l t u r a l w o r k f o r c e v a r i e s s u b s t a n t i a l l y a c r o s s I n d i a : i n

M a d h y a P r a d e s h 8 5% of t h e w o r k f o r c e w a s e m p l o y e d i n a g r i c u l t u r e c o m p a r e d t o

4 1 % i n K e r a l a a n d 6 1 % i n T a m i l N a d u . T h e m a n u f a c t u r i n g s e c t o r e m p l o y s a p p r o x -

i m a t e l y 3 1 % o f n o n - a g r i c u l t u r a l w o r k e r s , m a k i n g i t t h e l a r g e s t n o n - a g r i c u l t u r a l

s e c t o r o f e m p l o y m e n t ( G o v e r n m e n t o f I n d i a , 19 9 9) . I n 19 8 3, t h e m a n u f a c t u r i n g

s e c t o r e m p l o y e d 8 % o f t h e m a l e w o r k f o r c e w h i l e 1 3 % o f r u r a l w o r k i n g a g e m a l e s

w e r e w o r k i n g i n t h e s e rv i c e s e c to r (r e t ai l , c o n s t r u c t i o n a n d t r a n s p o r t ) . I n 1 99 2 ,

m a n u f a c t u r i n g a c c o u n t e d f o r 17 % of G D P w h i l e a g r i c u l t u r e a c c o u n t e d f o r 2 3 %

(Panagar iya , 2008) .

A g r i c u l t u r a l w o r k e r s c a n b r o a d l y b e d i v i d e d i n t o t h o s e f r o m l a n d e d h o u s e -

h o l d s , w h o c u l t i v a t e t h e i r o w n l a n d a n d m a y w o r k o n t h e w a g e l a b o r m a r k e t ,


24/155


a n d t h o s e f r o m l a n d l e s s h o u s e h o l d s , w h o p r e d o m i n a n t l y w o r k i n t h e w a g e l a -

b o r ma rk e t . T a b le 1 -a s h o w s th a t a p p r o x im a te ly h a l f of th e a g r i c u l tu ra l w o rk f o rc e

wo rk e d fo r wa g e s , 2 8 .5 % o f ru ra l ma le s . In a we e k ly t ime re c a ll , h i r e d w o rk e r s

re p o r t s p e n d in g 9 9 % o f th e i r t ime o n u n s k i l l e d t a s k s s u c h a s we e d in g a n d s o w-

ing . The se wag e labore rs a re d is pro po r t io na t e ly i l l i te ra te - in 1983, 71% of mal es

we re i l li t e rat e , c o m p a r e d to 5 3 % in th e wo rk i n g a g e p o p u la t io n a s a wh o le . I ll it -

e ra c y a m o n g fe m a le s wa g e l a b o re re s i s s u b s ta n t i a l ly h ig h e r - 9 4 % of f e ma le s we re

i l li t e ra t e , c o m p a re d to 8 3% in th e p o p u la t io n a s a wh o le .

S k i l le d w o rk i s m o re p re v a le n t a m o n g s t in d iv id u a l s w h o c u l t iv a te th e i r o w n

la n d - i n th e RE DS d a ta , 1 3% of h o u s e h o ld a g r i c u l tu ra l t ime a m o n g l a n d e d h o u s e -

h o ld s is d e v o te d to s u p e rv i s o r y a c t iv i t ie s . F o s te r a n d Ro s e n z w e ig (19 95 ) p re s e n t

e v id e n c e th a t e d u c a t io n ra i s e s th e p ro d u c t iv i ty o f in d iv id u a l s in l a n d e d h o u s e -

h o ld s wh o u n d e r t a k e ma n a g e r i a l t a s k s , s u c h a s d e c id in g wh a t v a r i e t a l s o f s e e d s

to s o w . T a b le s 1 -a a n d 1 -b s h o w th a t i n d iv id u a l s wh o c u l t iv a te th e ir o w n h o u s e -

h o ld ' s l a n d h a v e h ig h e r le v e l s of e d u c a t io n th a n h i re d l a b or . Ho u s e h o ld h e a d s ,

w h o a re li k e ly to b e ma k in g in p u t d e c i s io n s , a re s l ig h t ly m o re e d u c a te d th a n o w n -

household cu l t iva to rs who a re le s s l ike ly to be making these cho ices .

L a b o r in th e ma n u fa c tu r in g s e c to r c o n d u c t s b o th s k i l l e d a n d u n s k i l l e d a c t iv i -

t ie s . Tab le 2 -a examines educa t ion leve ls by worker ca tegory : sk i l led (whi te -co l la r

and b lue -co l la r sk i l led) and unsk i l led (b lue -co l la r unsk i l led) . Unsk i l led work is

th a t in wh ic h p u r e ly p h y s ic a l ta s k s we re r e p o r t e d . O c c u p a t io n s we re c l a ss i f ie d u s -

in g d e s c r ip t io n s in th e Na t io n a l C la s s i f i c a t io n o f Oc c u p a t io n (Go v e rn me n t o f In -

d ia , 1 9 6 8 ) . Oc c u p a t io n s d e s c r ib e d a s " wo rk d o in g p u re ly p h y s ic a l a c t iv i ty " we re

c la s si f i ed a s b lu e c o l la r u n s k i l l e d wh i l e mo re t e c h n ic a l d e s c r ip t io n s - wo rk in g w i t h

ma c h in e s , m ix in g p a in t u s in g th e r ig h t p ro p o r t io n s o f d i f f e re n t c h e mic a l s - we re

d e f in e d a s b lu e c o l l ar s k il l ed . W h i te c o ll a r o c c u p a t io n s in c lu d e ma n a g e rs , s e c re -

t a r i e s a n d p ro d u c t io n - f lo o r s u p e rv i s o r s . T h e c o d e s a n d c a te g o r i z a t io n s a re a v a i l -

a b le u p o n re q u e s t .


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Ap p ro x ima te ly 3 5 % o f ma le a n d 5 5 % o f f e ma le o c c u p a t io n s in ma n u fa c tu r in g

fa l l in to th is ca tegory . Ed uca t ion d ec reas es in the sk il l ca teg ory o f the occ up a t io n

c o n d u c te d . Wh i te -c o l la r a n d b lu e -c o l l a r s k i ll e d w o rk e r s a re c o m p a ra b le in th e i r

leve ls o f edu ca t ion - 78% of m ale wh i te co l la r w or ke rs a re l ite ra te com pa red to

72% of b lue -co l la r sk i l led workers . Blue-co l la r unsk i l led workers have lower lev-

e ls o f l i te racy re la t ive to the mor e sk i l led m an uf ac tu r i ng g r ou ps - 49% w ere l i te ra te

in 1987 . Th is is show n in tab le 1 -b , wh ich con di t io ns on v i l lag e f ixed e ffec ts to a l le -

v ia t e c o n c e rn s th a t t h e d e s c r ip t iv e s t a ti s t ic s r ef l e c t d e c i s io n s b y th e m a n u fa c tu r in g

sec tor to e s tab l ish i t se l f in more educa ted reg ions .

T a b le 2 -b d e s c r ib e s th e d i f f e re n t ty p e s o f t a s k s c o n d u c t e d in m a n u fa c tu r in g a n d

prov ides an ind ica t ion o f why educa t ion va r ies by sk i l l ca tegory . Task de f in i t ions

come from the US Dic t ionary o f Occupa t iona l T i t le s , 1977 . S ince the re a re l ike ly

to b e te c h n o lo g ic a l d i f f e re n c e s b e tw e e n m a n u fa c tu r in g in d u s t r i e s in th e US a n d

In d ia , t h is d a ta p ro v id e s s o m e in tu i t io n fo r w h y w o rk e r s c o n d u c t in g s k il l ed o c c u -

p a t io n s h a v e h ig h e r l e v e l s o f e d u c a t io n th a n th o s e c o n d u c t in g u n s k i l l e d o c c u p a -

t ions . A c rossw alk w as c rea ted be tw een th e 1968 Ind ian N a t io na l Class i f ica t ion of

O ccu pa t io ns and the 1960 US Ce nsu s of Oc cup a t io n Ti tle s. Th is i s ava i lab le u po n

requ es t . The da ta on occupa t ion a l sk i l ls com es f ro m A uto r e t a l (2003) . I tha nk

Da v id Au to r fo r s h a r in g th i s d a ta w i th me . E a c h t a s k v a r i a b le i s a s s ig n e d a v a lu e

rang ing f rom ze ro to ten , wi th h igher va lues represen t ing g rea te r in tens i ty o f a sk i l l

u s e d . T h e f iv e b ro a d m e a s u re s of t a s k s a re ro u t in e m a n u a l ac t iv i ty , n o n - ro u t in e

manua l ac t iv i ty , rou t ine cogni t ive ta sks , non-rou t ine in te rac t ive ta sks (d i rec t ion ,

c o n t ro l a n d p la n n in g ) a n d q u a n t i t a t iv e a n d a n a ly t i c a l t a s k s (ma th e ma t i c a l r e a s o n -

in g ) . Wh i te c o l l a r o c c u p a t io n s u s e q u a n t i t a t iv e a n d n o n - ro u t in e c o g n i t iv e s k i l l s

m o re th a n b o th s e t s of b lu e -c o l l ar o c c u p a t io n s . T h e b lu e -c o l l a r o c c u p a t io n s a re

qu i te s imi la r in a l l a t t r ibu tes , wi th the excep t ion o f rou t ine cogni t ive ta sks which

are conduc ted to a fa r h igher degree in the sk i l led b lue -co l la r b racke t .


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2. ECON OM IC GROW TH, WAGES AN D INCOMES 15

2.3.2.

Wages by Sector, Occupation and Complexity of

Task

T h e p r e v i o u s s e c ti o n s h o w e d t h a t s k i ll e d ta s k s in b o t h m a n u f a c t u r i n g a n d c u l ti -

v a t i o n a r e a s s o c i a t e d w i t h h i g h e r l e v e l s o f e d u c a t i o n t h a n u n s k i l l e d t a s k s . T h i s

s e c t i o n p r e s e n t s e v i d e n c e s h o w i n g t h a t r u r a l w a g e s v a r y w i t h e d u c a t i o n a n d t h e

c o m p l e x i t y of t a s k c o n d u c t e d .

T a b l e 1 - c d i s p l a y s d e s c r i p t i v e s t a ti s t ic s o n w a g e e a r n e r s b y se x . L i t e r a t e i n -

d i v i d u a l s w o r k i n g i n t h e w a g e l a b o r m a r k e t e a r n a 2 0 % p r e m i u m o v e r i l l i t e r a t e

w o r k e r s . S e p a r a t i n g w o r k e r s b y s e c t o r a s w e l l a s b y l it e ra c y , i l l it e r a t e m a n u f a c -

t u r i n g w o r k e r s e a r n a 1 0% w a g e p r e m i u m o v e r i l l it e r a t e w o r k e r s in o t h e r s e c t o r s

( c o l u m n c ). T h i s p r e m i u m a p p e a r s t o b e d r i v e n b y t h e c o m p l e x i t y o f t h e t a s k p e r -

f o r m e d r a t h e r t h a n b y e d u c a t i o n l e v e l - a n il l i te r a t e p e r s o n c o n d u c t i n g a n u n s k i l l e d

t a s k i n m a n u f a c t u r i n g e a r n s t h e s a m e w a g e a s a n i l l i t e r a t e p e r s o n i n t h e o t h e r n o n -

a g r i c u l t u r a l se c t o rs . N o n - m a n u a l w o r k e r s in a g r i c u l t u r e e a r n a p r e m i u m o v e r a g r i -

c u l t u r a l l a b o r e r s . T h i s s h o u l d h o w e v e r b e t a k e n w i t h a n o t e o f c a u t i o n s i n c e t h e

n u m b e r o f w o r k e r s f a l l i n g i n t o t h i s i n d u s t r y - o c c u p a t i o n c e l l i s e x t r e m e l y s m a l l -

0 .7 % o f h i r e d l a b o r i n a g r i c u l t u r e r e p o r t e d c o n d u c t i n g t h e s e o c c u p a t i o n s .

2 . 4 . T H E O R E T I C A L M O D E L

T h i s s e c t i o n p r e s e n t s a s t a t i c m o d e l o f r u r a l l a b o r m a r k e t s a n d h o u s e h o l d i n c o m e

t h a t b u i l d s u p o n F o s t e r a n d R o s e n z w e i g ( 1 9 9 5 , 2 0 0 4 a ) a n d E l l i s o n a n d G l a e s e r

( 19 99 ). T h e a s s u m p t i o n s of t h e m o d e l d r a w u p o n t h e d e s c r i p t i v e s t a t is t i c s p r e -

s e n t e d i n t h e p r e v i o u s s e c ti o n . T h e m o d e l p r o v i d e s a s e t t i n g f o r u n d e r s t a n d i n g

t h e d e t e r m i n a n t s o f r u r a l w a g e a n d i n c o m e g r o w t h i n t h e c o n t e x t o f a t w o - s e c t o r

r u r a l l a b o r m a r k e t . T h e p u r p o s e o f t h e m o d e l i s t w o f o l d . F i r s t , i t d e l i v e r s 3 s e t s

o f p red ic t ions tha t a re t e s ted in sec t ion 2 .5 . Second , i t h igh l igh t s a source o f endo-

g e n e i t y b i a s a n d p u t s f o r w a r d e x c l u s i o n r e s t r i c t i o n s t o o v e r c o m e i t .


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2.4.1.

Model Environment

H o u s e h o l d s l i v e i n a r e g i o n w h o s e b o r d e r s d e f i n e a c l o s e d l a b o r m a r k e t . A c o u n t r y

i s m a d e u p o f D r e g i o n a l e c o n o m i e s . T h e r e a r e t w o s e c t o r s i n e a c h e c o n o m y : a g r i -

c u l t u r e a n d m a n u f a c t u r i n g , w h i c h a r e m o d e l e d u s i n g a s p e c if i c f a c t o r s f r a m e w o r k .

T h e t w o s e c t o r s o v e r l a p i n t w o l o c al l y t r a d e d i n p u t s - s k i l l e d a n d u n s k i l l e d l a b o r .

E q u i l i b r i u m w a g e s a n d h o u s e h o l d i n c o m e s a r e d e t e r m i n e d w i t h i n t h e m o d e l , a n d

v a r y w i t h t h e r e g i o n a l e c o n o m i c e n v i r o n m e n t . E c o n o m y s u b s c r i p t s a r e o m i t t e d

un t i l necessa ry .

2.4.2.

Households: Endowments, Preferences and Maximization Problem

H o u s e h o l d s h a v e t hr e e e n d o w m e n t s i n b o t h p e r io d s : l a n d

(A),

a d u l t e d u c a t i o n

(s

a

) a n d a u n i t o f a d u l t l a b o r m a r k e t ti m e . H o u s e h o l d s u b s c r i p t s a r e s u p p r e s s e d

i n t h i s s e c t i o n . A d u l t e d u c a t i o n t a k e s t h e v a l u e of 0 if t h e a d u l t i s u n e d u c a t e d o r

1 if e d u c a t e d . H o u s e h o l d s c o n s u m e a m a r k e t e d c o n s u m p t i o n g o o d a n d s u p p l y

t h e i r o n e u n i t of l a b o r m a r k e t t i m e i n e la s t ic a l ly . U t i l i ty i s c o n c a v e i n c o n s u m p t i o n

- 0 < p < 1 ,

V(c

h

) =

c j .

H o u s e h o l d s a r e u n a b l e t o b o r r o w o r s a v e , i m p l y i n g t h a t th e i r b u d g e t c o n -

s t ra i n t s c lea r eve ry pe r io d . For tr ac tab i l i ty , the re i s no l e i su re ; in the em pi r i ca l

f r a m e w o r k , I d i s c u s s h o w i n c o r p o r a t i n g l e i s u r e a lt e r s t h e t e s ta b l e p r e d i c t i o n s .

4

A d u l t s s p l i t t h e i r l a b o r m a r k e t t i m e b e t w e e n f o u r a c t i v i t i e s : u n s k i l l e d w o r k i n

a g r i c u l t u r e , u n s k i l l e d w o r k i n m a n u f a c t u r i n g , s k i l l e d w o r k i n m a n u f a c t u r i n g a n d

s k i ll e d w o r k i n a g r i c u l t u r e . U n s k i l l e d w o r k i n a g r i c u l t u r e a n d m a n u f a c t u r i n g a r e

a c t i v i t i e s w h i c h b o t h e d u c a t e d a n d u n e d u c a t e d i n d i v i d u a l s c a n c o n d u c t ; s k i l l e d

w o r k i s d e f i n e d a s a c t i v it i e s t h a t o n l y e d u c a t e d i n d i v i d u a l s c a n d o . S k i l l ed w o r k

i n a g r i c u l t u r e c o n s i s t s o f s u p e r v i s o r i a l a c t i v i t i e s , w h i c h c a n o n l y b e c o n d u c t e d b y

^ J a y a c h a n d r a n ( 20 06 ) p r e s e n t s e v i d e n c e i n d i c a t i n g t h a t l a b o r s u p p l y r e s p o n s e s t o a p r o d u c t i v i t y

s h o c k a r e m o r e i n e l a s t i c i n d i s t r i c t s i n w h i c h c r e d i t c o n s t r a i n t s a r e g r e a t e r , i n w h i c h a g r e a t e r p r o -

p o r t i o n o f w o r k e r s c l o s e t o s u b s i s t e n c e a n d i n w h i c h m i g r a t i o n c o s t s a r e h i g h . I n t h e e m p i r i c a l

s e c t i o n , I e x a m i n e h o w a l l o w i n g l a b o r s u p p l y e l a s t i c i ty t o v a r y a c c o r d i n g t o l a b o r m a r k e t a l t e r s t h e

i n t e r p r e t a t i o n o f m y r e s u l t s .


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2 . ECONOM I C GROWTH, WAGES AND I NCOMES

m e m b e r s o f l a n d e d h o u s e h o l d s .

17

1 =

l + lM + l(s

a

= l)(lM + l(A

h

>0)lf)

w h e r e a n d i s u n s k i l l e d t i m e i n a g r i c u l t u r e a n d m a n u f a c t u r i n g ; i f i s s k i l l e d

t i m e i n a g r i c u l t u r e a n d m a n u f a c t u r i n g .

H o u s e h o l d s e a r n i n c o m e f r o m s u p p l y i n g l a b o r t o t h e w a g e l a b o r m a r k e t a n d

f r o m c u l t i v a t i o n i f l a n d e d . T h e y e a r n i n c o m e m f r o m a n e x o g e n o u s s o u r c e .

y

= w

u

(l^ +

l i f )

+ l(s

a

= l)w

s

l^ + l(A>0)Yl

A

{s

n

) + m

T h e h o u s e h o l d p r o b l e m i s g i v e n b y :

m a x

c

p

h

s.t .

p

c

c

h


29/155

2 . EC O N O M IC G R O W T H , W A G ES A N D IN C O MES 18

m a t e r i a l s i s d e n o t e d b y c

r

i = c(r

;

-, Ty) for j = 1 , 2, w h e r e rj d e n o t e s e x t r a c t e d r e -

s o u r c e s a n d T j d e n o t e s t h e t o t a l r e g i o n a l e n d o w m e n t . T h e r a w m a t e r i a l i s p r i c e d

a t m a r g i n a l c o s t ,

p

r

i = c

r

K

T h e c o s t o f e x t r a c t i n g t h e r e s o u r c e i s d e c r e a s i n g i n t h e

t o t a l r e g i o n a l e n d o w m e n t - p / < 0- F

r

s impl ic i ty , the marg ina l cos t o f ex t rac t ing

the reso urc e i s the sa m e ac ros s a l l un i t s ex t ra c ted : = 0 .

6

T h e r e n t s f r o m r a w

m a t e r i a l s f l o w o u t s i d e t h e r e g i o n .

2.4.4. Agricultural Production

A g r i c u l t u r a l p r o d u c t i o n c o m b i n e s l a b o r w i t h l a n d t o p r o d u c e a s i n g l e a g r i c u l t u r a l

o u t p u t a c c o r d i n g t o a c o n c a v e , C R S t e c h n o l o g y . I n t h e a b s e n c e of a l a n d m a r k e t ,

o n l y l a n d l e s s h o u s e h o l d s c u l t i v a t e l a n d .

7

T w o t y p e s o f l a b o r a r e d e m a n d e d i n

a g r i c u l t u r e : u n s k i l l e d a n d s k i l l e d . U n s k i l l e d l a b o r u n d e r t a k e s p h y s i c a l t a s k s s u c h

a s w e e d i n g a n d h a r v e s t i n g . T h i s l a b o r c a n b e c o n d u c t e d b y b o t h e d u c a t e d a n d

u n e d u c a t e d w o r k e r s . H i r e d a n d f a m i l y l a b o r a r e p e r f e c t s u b s t i t u t e s in u n s k i l l e d

w o r k .

8

S k i l l e d l a b o r u n d e r t a k e s m a n a g e r i a l t a s k s , s u c h a s d e c i d i n g w h i c h v a r i -

e t a l s o f s e e d s t o s o w . S k i l l e d l a b o r c a n o n l y b e c o n d u c t e d b y l a n d e d h o u s e h o l d

m e m b e r s .

9

L a b o r i n p u t s a re c h o s e n t o m a x i m i z e p r o fi t s , g i v e n t h e h o u s e h o l d ' s

l a n d a n d e d u c a t i o n e n d o w m e n t s a n d t h e a g r i c u l t u r a l p r o d u c t i v i t y f a c e d :

ll

A

= m a x

p

A

F(d

u

, d

s

; 9, A, s

a

)

w

u

d

u

(2.1)

d

u

,d

s

F(d

U/

d

s

;9,A,s

a

) = 9(d

s

(6

l

+S

2

s

a

))^d2 M^

6

T h e s i m p l e s t s t r u c t u r e f o r t h e r a w m a t e r i a l s m a r k e t i s p r e s e n t e d . T h e a s s u m p t i o n s a r e m o d i f i a b l e

w i t h m i n i m a l r e p e r c u s s i o n s t o t h e m a i n t e s ta b l e p r e d i c t i o n s . A m o r e c o m p l e x s t r u c t u r e w o u l d

a l l o w f o r a f i x e d t o t a l q u a n t i t y o f r a w m a t e r i a l s t o b e c o n s u m e d e v e r y p e r i o d , a n d f o r c o n v e x i t y i n

the c os t o f e x t ra c t ing the ma te r i a l s .

T h e R E D S d a t a s u p p o r t t h is : 5 . 5 % o f l a n d l e s s h o u s e h o l d s c u l t i v a t e d l a n d i n 19 9 9 . T h e d i s t i n c t i o n

b e t w e e n l a n d e d a n d l a n d l e s s h o u s e h o l d s c h a n g e s l it t le o v e r t im e : 5 % o f l a n d l e s s h o u s e h o l d s f r o m

1 9 7 1 o w n e d l a n d b y 1 9 8 2 a n d 8 % of a d u l t s b o r n i n l a n d l e s s h o u s e h o l d s o w n e d l a n d i n 1 9 9 9.

8

T h i s a s s u m p t i o n i s m a d e f o r t r a c t a b il i t y . B h a r a d w a j ( 2 00 9 ) s h o w s t h a t h i r e d a n d f a m i l y l a b o r c a n

b e c o n s i d e r e d t o b e p e r f e c t s u b s t i t u t e s i n s o m e , b u t n o t a l l , a g r a r i a n t a s k s .

9

T h e d a t a m o t i v a t e t h i s a s s u m p t i o n - l e s s t h a n 0 .5 % o f h i r e d w o r k e r s i n a g r i c u l t u r e c o n d u c t m a n -

a g e r i a l w o r k .


30/155


w h e r e : E I '

4

d e n o t e s p r o f i t s f r o m c u l t i v a t i n g l a n d , n e t o f h i r e d l a b o r e x p e n s e s ;

d

u

a n d d

s

d e n o t e s u n s k i l l e d a n d s k i l l e d l a b o r ; p

A

d e n o t e s t h e ( e x t e r n a l l y s e t ) n a t i o n a l

p r i c e o f a g r i c u l t u r a l o u t p u t ;

9

i s t h e a g r i c u l t u r a l p r o d u c t i v i t y , w h i c h v a r i e s b y r e -

g i o n a n d o v e r t i m e ;

A

i s h o u s e h o l d l a n d ;

s

a

i s t h e h o u s e h o l d a d u l t ' s e d u c a t i o n a n d

zv

u

i s t h e l a b o r m a r k e t c l e a r i n g w a g e of u n s k i l l e d l a b o r .

E d u c a t i o n o f t h e h o u s e h o l d a d u l t r a i s e s t h e m a r g i n a l p r o d u c t o f s k i l l e d l a b o r

- F^(s

a

= 1) F

d

.(s

a

= 0 ) > 0 . The p r od uc t iv i ty of un sk i l l ed l abor i s no t r i s ing

i n t h e e d u c a t i o n l e v e l s o f i n d i v i d u a l s c o n d u c t i n g t h e s e t a s k s . T h i s i m p l i e s t h a t e d -

u c a t e d a n d u n e d u c a t e d i n d i v i d u a l s c o n d u c t i n g u n s k i l l e d w o r k a re p a i d t h e s a m e

1 n

w a g e , i. e. t h e r e i s n o r e t u r n t o e d u c a t i o n i n t h e h i r e d l a b o r m a r k e t i n a g r i c u l t u r e .

I s i m p l i f y t h e p r o b l e m f a c e d b y h o u s e h o l d s b y a s s u m i n g a n i n t e r io r s o l u t i o n

f o r s u p e r v i s o r i a l t i m e .

1 1

A h o u s e h o l d ' s d e m a n d f o r u n s k i l l e d a n d s k i l le d la b o r is

g i v e n b y :

d

u

= d

u

(iv, w

s

; p

A

, 6, A,

s)

= A

1 s

n

7i s"7i

w

s

n

= A

d

s

(w

U/

iv

s

-

/

p

A

/

6,A,s

n

)


31/155


H o u s e h o l d p r o f i t s i n c r e a se i n a g r i c u l t u r a l p r o d u c t i v i t y , a d u l t e d u c a t i o n , l a n d , t h e

p r i c e o f a g r i c u l t u r a l p r o d u c t s a n d d e c r e a s e i n w a g e s .

T o ta l u n s k i l l e d a n d s k i ll e d la b o r d e m a n d i s g i v e n b y s u m m i n g l a b o r d e m a n d

a c r o s s l a n d e d h o u s e h o l d s :

D

U = d

uh

(w

Uf

w

5

-p

A

,e,A

h

,s

a

h

)

heP

A

= E d

sh

(iv

u

,w

s

;p

A

l

9,A

h

,s

a

h

)

heP

A

U n d e r t h e a s s u m p t i o n o f a C R S t e c h n o l o g y , t h e d i s t r i b u t i o n o f l a n d w i l l n o t a f -

f e c t t h e d e m a n d f o r l a b o r u n l e s s e d u c a t i o n i s u n e v e n l y d i s t r i b u t e d a c r o s s l a n d e d

h o u s e h o l d s .

2 .4 .5 . Manufacturing Production

T h e m a n u f a c t u r i n g s e c t o r u s e s f o u r i n p u t s i n p r o d u c t i o n : u n s k i l l e d l a b o r , s k i l l e d

l a b o r a n d t w o r a w m a t e r i a ls . O n l y e d u c a t e d w o r k e r s c a n c o n d u c t s ki ll e d m a n -

u f a c t u r i n g w o r k . M a n u f a c t u r i n g p r o d u c t i o n i s m o d e l l e d u s i n g a C o b b - D o u g l a s

t e c h n o l o g y , w h i c h i s i n c r e a s i n g a n d c o n c a v e in a ll i n p u t s . L a b o r a n d r a w m a t e r i -

a l s a r e c o m p l e m e n t s i n p r o d u c t i o n . T h e r e a r e t w o m a n u f a c t u r i n g i n d u s t r i e s t h a t

v a r y i n t h e o u t p u t s h a r e s o f i n p u t s . T h e r e f o r e t w o i n d u s t r i e s f a c e d w i t h t h e s a m e

vec to r o f inpu t p r ices wi l l va ry in the i r op t ima l inpu t cho ices .

T h e m a n u f a c t u r i n g s e c t o r c o m p e t e s w i t h t h e a g r i c u l t u r a l se c t o r f o r l a bo r . U n -

s k i l l e d a n d s k i l l e d l a b o r i s r e m u n e r a t e d a t t h e s a m e r a t e a c r o s s t h e t w o s e c t o r s .

B o t h i n d u s t r i e s c h o o s e l a b o r a n d r a w m a t e r i a l i n p u t s t o m a x i m i z e p r o f i t s , g i v e n

t h e p r i c e s a n d w a g e s f a c e d :

n

;

= m a x p j F j ( N

u

j , N

s j

,

r

Yj

, r

2j

) - w

u

N

u j

- w

s

N

s j

- p

n

r y

- p''

2

r

2j

N,tj,Nsj,rij,r

2

j

F j ( N

u j

, N

5 j

, r y , r

2 }

) = K H }

r

V

r

* l


32/155

2. ECON OMIC GRO WTH , WAGES AN D INCOM ES 21

w h e r e E l y d e n o t e s p r o f i t s i n i n d u s t r y j, N

u

j a n d N

S

j a r e u n s k i l l e d a n d s k i ll e d l a b o r

i n i n d u s t r y

j, ry

a n d

r

2

j

d e n o t e s r a w m a t e r i a l o n e a n d t w o ' s i n p u t s i n m a n u f a c -

tu r ing ; p j^

-

i s t h e o u t p u t p r i c e f a c i n g i n d u s t r y

j; w

u

a n d

w

s

a r e t h e u n s k i l l e d a n d

s k i l l e d w a g e s ; a n d

p

r

i and

p

r2

a r e t h e t i m e i n v a r i a n t p r i c e s o f r a w m a t e r i a l s 1 a n d

2 .

1 2

T o t a l d e m a n d f o r l a b o r a n d r a w m a t e r i a l s i n t h e m a n u f a c t u r i n g se c t o r i s g i v e n

by :

N

M

= Ey=i N

u j

( w , Ws, f \ p

r l

) p ) = L j

= 1

a y w - ^ j n j

= 1

p ?

N

S

M

=

E

-=i N

5j

(w

Uf

w

s

, f \ p

rl

', p) =

E

/=i a

2}

w-

l

yj

nt=i Ps*

r f = L U r y ( w

u

, w

5

, f \ f

2

; p M ) = F g

= 1

p

a

s

rf = Y.)

=x

r

2]

(w

u

,w

s

,f\fhp% ) ^LU^p ^ijjYlUipl" -

M a n u f a c t u r e d g o o d s h a v e a p e r f e c t s u b s t i t u t e p r o d u c e d i n t h e w o r l d m a r k e t .

I p l a c e m y s e l f i n a s m a l l o p e n e c o n o m y s e t t i n g i n w h i c h t h e w o r l d p r i c e of t h e

p e r f e c t s u b s t i t u t e t i e s d o w n t h e d o m e s t i c p r i c e f a c e d b y i n d u s t r y j , p ^ - . Xj d e n o t e s

i n d u s t r y v a r y i n g t a r i f f b a r r i e r s . C i j r e p r e s e n t s a n i n d u s t r y v a r y i n g p e r - u n i t c o s t o f

c o m p l y i n g t o l a b o r a n d i n d u s t r i a l r e g u l a t i o n s . R e g u l a t i o n s a n d t a ri f f b a r r i e r s a r e

t h e s a m e i n a l l i n d u s t r i e s a c r o s s a l l e c o n o m i e s w i t h i n t h e c o u n t r y .

= P tt j + T; " C j (2.2)

Z e r o p r o f i t s c o n d i t i o n s i m p l y t h a t i n d u s t r i e s c h o o s e i n p u t s u n t i l t h e p r i c e of o u t p u t

i s e q u a l t o t h e m a r g i n a l c o s t o f p r o d u c t i o n .

2 .4 .6 . Equilibrium Cond itions

U s i n g t h e t w o l a b o r m a r k e t c l e a r i n g c o n d i t i o n s f o r s k i l l e d a n d u n s k i l l e d l a b o r , t h e

t e n f i r st o r d e r c o n d i t i o n s f r o m p r o d u c t i o n a n d t h e u t i l i ty m a x i m i z a t i o n c o n d i t i o n ,

i t i s p o s s i b l e t o s o l v e f o r t h e e q u i l i b r i u m q u a n t i t i e s a n d p r i c e s o f i n t e r e s t , n o t a b l y

1 9

I n t u i t i v e l y , t h i s r e q u i r e s t h e d e c r e a s e i n t h e s t o c k o f r a w m a t e r i a l s d u e t o c o n s u m p t i o n d u r i n g

the pe r iod to be sm a l l .


33/155


t h e w a g e s o f s k i l l e d a n d u n s k i l l e d w o r k e r s , t h e a l l o c a t i o n o f l a b o r a c r o s s s e c t o r s ,

r a w m a t e r i a l i n p u t s a n d t h e s c h o o l i n g c h o i c e s o f h o u s e h o l d s .

E q u i l i b r i u m w a g e s a r e d e t e r m i n e d b y t h e l a b o r m a r k e t c l e a r i n g c o n d i t i o n s :

P = D

A

W*

U

,W*

S

,Z

A

) + G

A

WIW*,Z

A

) + NM W*

U

,W*

S

,Z

M

) (2.3)

+ n

s

m

K X , Z

m

)

P

s

=

Gf(w*,zv*,Z

M

)

+ N

s

M

( w * , w * , Z

M

) (2.4)

w h e r e P i s t h e t o t a l w o r k i n g a g e p o p u l a t i o n a n d P

s

is t h e e d u c a t e d w o r k i n g a g e

p o p u l a t i o n . G

s

i s e d u c a t e d s k i l l e d ( s u p e r v i s o r i a l ) l a b o r in a g r i c u l t u r e .

Z

A

d e n o t e s

d e t e r m i n a n t s th a t o n l y s h i f t a g r i c u l t u r a l la b o r d e m a n d a n d o n l y a lt e r m a n u f a c t u r -

i n g l a b o r d e m a n d t h r o u g h t h e l a b o r m a r k e t c h a n n e l , s u c h a s a g r i c u l t u r a l p r o d u c -

t ivi ty .

Z

M

d e n o t e s d e t e r m i n a n t s t h a t o n l y s h i f t m a n u f a c t u r i n g l a b o r d e m a n d , s u c h

as indus t r i a l po l i cy .

T h e w a g e s o f s k i l l e d a n d u n s k i l l e d w o r k e r s a r e i d e n t i c a l i f t h e s u p p l y o f e d u -

c a t e d w o r k e r s a t t h e s k i ll e d w a g e i s g r e a t e r t h a n o r e q u a l t o t h e d e m a n d f o r s k i l l e d

w o r k e r s a t t h e u n s k i l l e d w a g e . I n t u i ti v e l y , t h i s i s b e c a u s e e d u c a t e d w o r k e r s c a n

c o n d u c t u n s k i l l e d w o r k . If t h e d e m a n d f o r s k i l le d w o r k e r s i s g r e a t e r t h a n t h e s u p -

p l y o f w o r k e r s a t t h e u n s k i l l e d w a g e , t h e s k i l l e d w a g e r i s e s a b o v e t h e u n s k i l l e d

w a g e . U n d e r t h e s e c o n d i t i o n s , e d u c a t e d w o r k e r s n o l o n g e r c o n d u c t u n s k i l l e d

t a s k s . I f o c u s o n t h e m o r e i n t e r e s t i n g c a s e i n w h i c h t h e w a g e s a r e d i f f e r e n t a n d

e d u c a t e d w o r k e r s o n l y w o r k i n t h e s k i l l e d l a b o r m a r k e t .

T h e r e a r e t w o r e g i o n s of i n t e r e s t fo r i n d u s t r i e s i n t h e m a n u f a c t u r i n g s e c to r : t h e

c o r n e r s o l u t i o n w h e r e p r o d u c t i o n i s z e r o a n d t h e i n t e r i o r s o l u t i o n . T h e c o r n e r s o -

l u t i o n o c c u r s w h e r e t h e e x i s t i n g u n s k i l l e d w a g e , t h e s h a d o w s k i l l e d w a g e a n d r a w

m ate r ia l p r i ce s a re su f f i c ien t ly h ig h tha t the ma rg i na l cos t o f the f i r s t un i t of p ro -

d u c t i o n i s g r e a t e r t h a n t h e p r i c e o f o u t p u t , o r w h e r e t h e s u p p l y o f li t e r a t e w o r k e r s


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i s z e r o . In t h e i n t e r i o r s o l u t i o n , m a n u f a c t u r i n g o u t p u t a n d i n p u t s a r e c

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