On Disguised Unemployment: Some Issues

This post discusses some of the broad theoretical issues underlying the category of ‘disguised unemployment’. The discussion is made clear by closely examining the hypothesis that Indian agriculture is plagued by the presence of high disguised unemployment.

Let us take a glimpse at the Economics textbook for class XI published by the NCERT. (NCERT 2006, p 131, Indian Economic Development)

“Economists call unemployment prevailing in Indian farms as disguised unemployment. What is disguised unemployment? Suppose a farmer has four acres of land and he actually needs only two workers and himself to carry out various operations on his farm in a year, but if he employs five workers and his family members such as his wife and children, this situation is known as disguised unemployment. One study conducted in the late 1950s showed about one-third of agricultural workers in India as disguisedly unemployed.” (italics mine)

Is disguised unemployment unemployment?

A thought experiment. Suppose A and B are two similar countries – both are equally populated. Now, a study has estimated disguised unemployment in country A to be 30% and in country B to be 10%. This implies that employment in country A is more than that of country B. Should this be of concern? Must we try and reduce disguised unemployment in country A?

If so, what is the basis of ‘disguised unemployment’? Do we see the principle of allocative efficiency present in disguise? Disguised unemployment means that ‘labour’ is ‘inefficiently’ utilised. Attestation of this claim is done by showing the high share of workers employed in agriculture alongside the low contribution of agriculture to GDP.

The first draft of National Employment Policy (2008) reads thus: “Over half the workforce continues to depend on the agriculture even though it accounts for less than a fifth of the total GDP. This implies a vast gap in incomes and productivity between agriculture and non-agriculture sectors. This is mainly due to inadequate growth of productive employment opportunities outside agriculture.” Is employment the need of the hour or is it contribution to GDP? Which variable (employment or GDP) should be the criterion? Why not improve the quality of employment in agriculture? To attain quality, provision of infrastructural support is absolutely essential- credit facilities, good roads and increased railroad connectivity, storage houses, institutions so as to enable the farmers get a ‘decent’ price for their produce, etc.

In 1960-61, the share of agriculture, forestry and fishing in total GDP was 53% (at 1993-94 prices). This came down by around 30 percentage points to 22% in 2002-03. On the other hand, the share of agriculture, forestry and fishing in total employment was 75.9% in 1961; by 1999-2000, it had come down to 59.9%. [The Oxford Companion to Economics in India, ed Kaushik Basu, OUP: New Delhi, 2007, p. 11]

The above discussion attains significance when we view agricultural workers as those who are trying to make a livelihood out of various jobs – farm and non-farm employment and self-employed and casual labour. ‘Employment’ mainly refers to wage employment. In India, out of total employment, the share of self-employment is the highest. As Amit Bhaduri writes, the economic activities predominant in the agricultural sector (or rural or informal) can be called as ‘survival strategies’. [Bhaduri 2006, Employment and Livelihood, in Employment and Development: Essays from an Orthodox Perspective] He cautions the policy makers on the use of dual-sector models in framing development policies for India owing to the heterogeneity prevalent in rural India and also because of the specificities present in the unorganised agricultural sector. Hence, the notion of ‘surplus labour’ loses much of its weight. In turn, we need to carefully look at ‘disguised unemployment’ for it disguises a lot of specificities of rural India.

2009 (Nobel) Prize in Economics

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was established in 1968. Technically, there is no ‘Nobel’ prize in Economics; on the website of Nobel foundation, amongst Nobel Prize in Physics, Chemistry, Medicine, Literature and the Nobel Peace Prize, we have our ‘Prize in Economics’. The prize will be announced on the following Monday, the 12th of October. As always, consensus is impossible, for economics has given birth to too many sub-disciplines in the past few decades.

A brief round-up on the web seems to suggest/predict the following winners:

1) Thomson Reuters has predicted 6 winners- William D Nordhaus and Martin L Weitzman being two of the predicted winners. I have highlighted them, for it is their work in ‘environmental economics’ which is considered to be pioneering. The other economists who are mentioned have contributed to behavioral economics and monetary economics. Amol Agrawal at Mostly Economics, provides his views on the Reuters prediction.

2) Eugene Fama – for his ‘contributions’ to portfolio theory and asset pricing. It has to be a joke! (See the Wall Street Journal and Chris F. Masse at Midas Oracle, a blog about ‘predictions’.)

3) Inflation Targeting, according to Ajay Shah is path-breaking, and if given a chance, he would vote for J B Taylor and M Woodford.

4) And, comments on blog posts that discuss the ‘Nobel’ prize in economics show that each commenter wants/feels a particular economist should win the Prize, which is natural. Not much is spoken about Jagdish Bhagwati this time.

5) Robert Vienneau writes that Luigi Pasinetti and Paul Davidson should win the Prize, but they wont. For it is not surprising that Nobel prizes have not been awarded to heterodox economists. Yes, the prize winners in Economics have mostly worked within the Neoclassical framework, although, they have extended and utilized microeconomics and neoclassical general equilibrium by modifying it to a variety of problems – health, environment, behaviour, neuroscience, geography, etc. Hence, economics now is not only related to employment and poverty, but also to issues of climate change, complexities in human behaviour, legal theory (via law and economics) and so on and so forth.

I think it would be a right time to award the prize to a heterodox economist. There seems to be some problem (a lot of problems) with mainstream theory – a version of neoclassical theory. However, awarding it to an economist who has pointed out (and who still point out like Davidson, Garegnani, Pasinetti and many others) logical inconsistencies or unrealistic assumptions will be a bad move; as it will undermine the entire research programme of neoclassical economics. Hence, the award could go to an economist who uses neoclassical tools more or less, but in an unconventional way. For instance, for contributions to a theory of technical progress (Paul Romer), for research conducted in green accounting (William Nordhaus), using neuroscience to understand economic (read human) behaviour – neuroeconomics (Ernst Fehr), etc.

What is a Laureate?
A Laureate is a recipient of honour or recognition for achievement in an art or science. [FAQ, Nobelprize.org]

Achievement: Is there an ‘objective’ way of deciding? No. Note that most of the predictions made are based on citations of the economists’ works. In any case, let us see what Monday brings forth!

More on Nobel Prize in Economics

G Omkarnath, Nobel Economics, The Hindu, 2003.

Jayati Ghosh, The Nobel prize for economics may need its own bailout, Guardian.co.uk, 2009.

On the Unorganised Sector in India

This post very briefly touches some aspects of the informal sector in India. Since, this sector is not organised strictly on the lines of capitalist systems, theoretical models find it difficult to accommodate them. And owing to the wide cultural and social differences in India, the informal sector is to that extent heterogeneous and differentiated. But, the first step is to identify such a sector and to broadly identify similarities, especially with respect to the production process and the organisation of the production process. It should be noted that the existence of a large ‘unorganised sector’ is not a problem; rather, it is a peculiar characteristic of the Indian Economy. And theory is supposed to be made in accordance with specificities of an economy and not the other way around.

The significance of the unorganized sector is seen when one takes a look at the NSS survey 1999-2000 – around 92% the Indian workforce (around 370 million workers) is employed in the unorganised sector. This is an extremely large section of India. Hence, any macroeconomic analysis (fiscal policy, monetary policy, international trade, etc) ought to look at this section of the Indian society.

The unorganized sector consists of small economic entities which are diverse and differentiated in nature. This sector (a.k.a. informal sector) is larger than the organized sector in terms of the relative share in GDP as well as the workforce. Moreover, the unorganised sector produces about 60 per cent of India’s GDP and also provides livelihood to nearly 93 per cent of the work force. [Kabra 2003] Whereas a report by National Commission for Enterprises in the Unorganised Sector (NCEUS) “estimated the un-organised/informal sector workers as comprising about 86% of work force in the Indian economy in 2004-2005 and informal employment both in the organised and unorganised sector as 92%.” How can any macroeconomic analysis/model leave this sector out?

Now, let us move on to how data is generated for this sector. As the ‘establishments’ in the informal sector are not governed by any legal provisions, no regular data is available such as that of the corporate (organised) sector. The Annual Survey of Industries (ASI) “provides statistical information to assess and evaluate, objectively and realistically, the changes in the growth, composition and structure of organised manufacturing sector comprising activities related to manufacturing processes, repair services, gas and water supply and cold storage” pertaining to the organised sector. [ASI 2005-06] Based on the Population Census (PC), the Economic Census (EC) is prepared which forms the reference for carrying out surveys to capture the informal sector. These surveys are conducted by the NSSO and are called as enterprise surveys.

To sum up, it is evident that the informal sector is an important contributor towards GDP as well as in terms of providing ‘livelihood’ to a large section of the Indian populace. And, we have data sources such as NSSO data which try to capture the process of production in the informal sector and their economic characteristics, which need to be looked at urgently. For any development process that does not explicitly address the informal sector will be blind towards the Indian reality!

References:

Kabra, Kamal Nayan (2003), The Unorganised Sector in India: Some Issues Bearing on the Search For Alternatives, Social Scientist, Vol. 31, No. 11/12 (Nov. – Dec., 2003), pp. 23-46.

ASI 2005-06, Introduction, Accessed at http://www.mospi.nic.in/stat_act_t3.htm on 26th September, 2009.

On Prices/Values

Economics, rather Political Economy attempted at providing a coherent theory of value. Economists such as Adam Smith, David Ricardo, Karl Marx, etc are associated with a ‘theory of value’. Currently, in economics, ‘value’ is not discussed in courses of relevance. However, students are exposed to value theories such as labour commanded, labour embodied and so on.

This post is the second in the series of posts ‘On Prices’. This posts attempts at clarifying concepts such as values, prices and costs of production. Note that all prices which are mentioned in economics textbooks (microeconomics, introductory economics, principles of economics, etc) pertain to relative prices or long-run prices. That is, they do not talk about market prices. The reason for this is because it is assumed/believed that market prices tend to fluctuate or hover around these relative prices. In other words, given a particular technology, these relative prices, in some sense, reflect the interrelationships in the economy. Hence, these natural/normal proces are studied in order to understand the workings of a capitalist economy.

Let me start with what is usually taught in various economics and management institutes across the world and even in higher secondary schools. Prices are determined by the interaction of supply and demand. This implies that an excess dmand leads to a price hike. Let us look at an example: Suppose I go to a toy shop and ask for a Meccano set and immediately, another customer asks for the same set. But, the shop has only one Meccano set. Will the price of the Meccano set increase? Is such an explanation intuitive or common sensical? This example talks of an isolated case.

Economics is interested in the formation of a spectrum of prices at the level of the economy. Interestingly, macroeconomics has nothing to offer on price formation. Often, or rather everywhere in the world, economics is taught as microeconomics and macroeconomics. The interdependence and interrelationship present in any economy is inadequately addressed. The closest one comes is probably through the ‘circular flow’ diagram which highlights the role of the firm as well as the households. In this diagram, the complex and strutural interdependence is oversimplified to that of a 2-way interaction between the firm and household via labour market, capital market, etc and the state is shown to play the role of a facilitator. The interrelated production structures goes unnoticed or is seldom mentioned. Why is this important?

How can prices be determined? (The dominant factor will be mentioned.)

1) Demand & Supply – The prices which are determined in this way are the prices of vegetables and fish, prices of shares in the stock markets, price of real estate, etc. In some sense, these prices can be said to be supply determined. For, these commodities are more often subject to variations in supply than in demand.

2)Costs of Production – An alternative view which is present in the literature is that the prices of commodities are prices according to the prices paid to the means of production as well as adding a certain percentage as profit. According to Kalecki, the percentage depends on the monopoly power of the firm. What if the firm’s final product is an input for another firm? Will this affect the price of the product? This aspect is often forgotten in economics.

This forgetfulness is strongly associated to the lack of importance mainstream and even some heterodox economic theories gives to interrelationships in the production structures in an economy. To have a glimpse into this, one needs only to look at an Input-Output table.

If we assume (correctly) that production structures in a capitalist economy are interrelated then we can conceptually distinguish goods/services into – Basics and Non-Basics. [Sraffa 1960] Basic goods are those goods which directly or indirectly enter into the production of every commodity in the economy including its own. An obvious example would be foodgrains because they are needed for labourers and labour is required in all activities. And a tax on a basic good will have cascading effects on the prices of all the goods in the economy.

I shall quote Sraffa to point out the significance of accepting and studying interdependence.

The exchange-ratio (or relative prices) of non-basics is “merely a reflection of what must be paid for means of production, labour and profits in order to produce them – there is no mutual dependence.” [p 8, Sraffa 1960]

“But for a basic product there is another aspect to be considered. Its exchange-ratio depends as much on the use that is made of it ….” [pp 8-9, Sraffa 1960]

It is because of these issues that Sraffa uses values/prices than costs. Also, Sraffa knew that in an economy, “costs of production cannot be measured independently of, and prior to, the determination of the prices of products.” [p 9, Sraffa 1960] To conclude, dan we therefore think that Sraffa’s analysis is similar to the neoclassical analysis of price using demand and supply?

In brackets, Sraffa writes “one might be tempted, but it would be misleading, to say that ‘it depends as much on the Deamnd side as on the Supply side.’” [p 9, Sraffa 1960]

References

1) Kalecki, Michal (1971), Costs and Prices, in Selected Essays on the Dynamics of the Capitalist Economy 1933-1970, Cambridge University Press, pp. 43-61.
2) Sraffa, Piero (1960), Production of Commodities by Means of Commodities, Cambridge University Press.

On Property Rights and Economic Development

India is ranked 46th alongside Costa Rica, Kuwait and Slovenia. Finland has secured the first rank and Bangaldesh is given the last rank in the IPRI 2009 report.

Property rights is an issue that all scientists, social scientists and others have had to think about directly or indirectly in their lives. It is property rights that we are talking about when a new product is introduced, a new book is released, two siblings fight over their father’s property, people are displaced from land which they had considered to be their own, prime agricultural land is handed over to giant companies, etc. This post questions the notion that property rights ’causes’ economic development by focusing attention on the International Property Rights Index (IPRI) 2009 report.

The 2009 IPRI shows that economic growth is intimately related to ownership. Such a statement is derived from a positive correlation that is seen to exist between a country’s protection of both physical and intellectual property rights and its economic well-being. In order to analyse this claim, the post looks at concepts such as economic growth, ownership and correlation.

Ownership
Property rights is considered to be fundamental to all human rights. Of course, lack of property rights makes governance difficult and also makes business cumbersome. But, one needs to understand the history of ‘property rights’ or ‘ownership’. This is where Karl Marx can aid us. It is the forced separation of the labourer from his means of production that led to the emergence of ‘private property’. In Das Kapital Volume I, Marx talks of the brutal and coercive policies that were carried out so as to divorce workers from their land. This is a section which all students who are concerned about property rights must read.

Economic Growth
There is an increasing tendency to equate economic growth with economic well being. Though, very often rates of economic growth surge without any ‘real’ improvement in the livelihood of the populace. Economic growth is to be understood as the rate of growth of GDP in a country over a period of time. At times, per capita GDP is used in the calculation. Which ever definition is used, one must always keep in mind that they are only statistical indicators, which are arrived at on the basis of a lot of assumptions. This is not to say that such indicators are useless or meaningless, but rather to emphasise their power in framing policies. Hence, the need to use them with utmost caution.

Correlation
It is alarming when correlation analysis provides ’scientific support’ to causation. Such instances are in plenty within the discipline of Economics. Economics as a discipline tries to identify cause and effects so that appropriate policies can be framed. But, causation is a philosophically challenging concept. Philosophers still grapple with it and will continue to do so. However, economists seem happy to be talking about causes and effects by making use of just correlation!

Positive correlation between IPRI and GDP per capita
Source: IPRI 2009 Report

How can one conclusively establish that it is property rights which leads to high GDP per capita? Couldn’t it be possible that it is the high per capita GDP that is resulting in stronger property rights? Is it is on the basis of statistical correlation that property rights are considered to be a significant factor for economic growth?