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Lecture 4

Structural Change(Based on Chapter 3 of Perkins et al.)

 Autumn 2004Sumon Bhaumik

QueenQueen’’s University Belfast, 110 ECO 322, Advanced Economic Analysiss University Belfast, 110 ECO 322, Advanced Economic Analysis

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Correlates of Industrialisation Rise in share of industry in GDP, followed by rise in

share of the services sector.

Engel’s law.

Productivity growth in agriculture on account of

technological changes.

Urbanisation.

Economies of scale.

Formation of clusters.

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Concepts Diminishing returns.

Labour surplus.

Disguised unemployment.

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Diminishing Returns Production function   Marginal product of labour 

L

Y MPL

Labour force inagriculture→ Diminishing this way

h

h is the minimumwage

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Marginal product vs. Total Output

Total output Marginal product of

labour 

MPL

Lg

Totaloutput

Labour force in agriculture

→ Diminishing this way

Labour force in agriculture→ Diminishing this way

g

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Lewis-Fei-Ranis Model Assumption.

There are surplus labourers in the agriculturalsector whose MPL is zero.

Implication. These labourers can be shifted to the

industrial sector.

No change in industrial wage rate. No change in agricultural output.

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Demand and Supply of Labour 

g

wage

Labour supply

L

h

D1

D2D3

h’ 

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Policy Implications Agricultural productivity should be increased

over time.

Population growth is incompatible with rapid

industrialisation.

High wage rate is incompatible withindustrialisation.

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Lacunae Skill compatibility.

Can agricultural labourers be productive in the industrial

sector? ICT sector in developed economies.

Choice of industrial technology.

Would the process of industrialisation necessarily be labourintensive? Heavy industries in India.

Comparative advantage.

Do developing countries have comparative advantage inproduction of industrial products?

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Rural-Urban Migration

Agriculturalwage

Manufacturingwage

Total size of labour force

OAOML* LM

LA

WM*

WMmin

WA**

WA*

WA

The curve qq’ is thelocus of points for

which an agriculturallabourer is indifferentbetween staying inthe agricultural sectorand migrating to the

manufacturing sector.The condition forindifference is:

WA = (LM /LU)WM

q

q’ 

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Implications Case for reduction in urban bias of development policies.

Urban job creation is an insufficient solution to theunemployment problem.

Government expenditure on education may be ineffective

without appropriate targeting.

Wage subsidies for the manufacturing sector may becounterproductive.

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Efficiency Wages Higher wages can be paid to ensure the following:

Hold on to good labourers.

Multinational companies.

Lower labour turnover.

Cost of adjustment and job-specific training.

Labour productivity.

Labour productivity is likely to be zero up to some

minimum required level of consumption, and increases

with consumption thereafter.

Greater effort on the part of the labourer.