Chapter 13. Malnutrition and Rural Labor markets

In chapter 8 we introduced the capacity curve. It shows the

relationship between income (and presumably nutrition) and one’s

capacity to work.

The capacity curve

Huge gains in work capacity occur initially as income rises but, beyond point A, increase at a decreasing rate.

Imagine that you are paid a piece rate for the work

you do. The more work you perform the higher your income. How much higher is given by the slope of the line,v. Therefore the slope of this line corresponds to the

piece rate. (The flatter the line, the higher the piece rate)

Kinks in labor supply

Note that as the piece rate falls your ability to supply labor falls sharply. Below a piece rate of v3 it becomes

impossible to work.

As a result, the labor supply curve resembles

the following.This kink corresponds to the tangency of v to the capacity curve

Below v3 the effort I can supply falls sharply

Superimpose a normally shaped labor demand curve on this and

note the following

For high levels of labor demand the labor market functions normally

Superimpose a normally shaped labor demand curve on this and

note the following

For low levels of labor demand there exists an equilibrium in this market with involuntary unemployment!

There is involuntary unemployment in the sense that the distance AB represents a quantity of labor workers would willingly supply at v3. Note that a reduction in

wages is not possible! If the piece rate falls below v3 there will be excess demand in

rural labor markets forcing wages back up to v3.

As D. Ray points out ...

“We see, then, that the vicious circle is complete in this little model. Lack of labor market opportunities makes for low wages, but it is not only that wages

determine work capacity: a low work capacity feeds back on the situation by lowering access to labor

markets.” (Ray, p. 493)

Inequality and labor market equilibrium.

Property of one’s own (by providing another source of income) raises work capacity. As a small landholder, my wife and children work our land while I go out and work for a large landowner.

Inequality and labor market equilibrium.

At v3 I can work far more and earn more than my neighbor who owns no land. All he has to survive on is what he makes. What I make is over and above what my family produces with our little parcel of land. I arrive to work fed. He arrives hungry.

Inequality and labor market equilibrium.

At v4 I still have the capacity to work but just barely.

The minimum wage that one can work for depends on

one’s wealth.The preceding implies that for the landless the minimum scale of pay they can work for effectively is v3

The minimum wage that one can work for depends on

one’s wealth.Therefore i represents the total number of landless workers. The remaining people within this labor market are arranged in ascending order of their landholdings.

The minimum wage that one is willing to work for also depends

on one’s wealth.

The more land I hold the more I can produce and hence the more I must be offered to work.

The solid line represents a combination of the willingness and ability to work curves

Up to point Z ability to work is the effective constraint on the labor market. To the right of point Z willingness to work is the effective constraint.

At a wage rate of v* the quantity of labor supplied

would be AB.Individuals to the left of A cannot work as much as they might like to at that wage. Individuals to the right of point Z certainly can work but choose not to.

At a wage rate of v** the quantity of labor supplied

would be CD.CD. Individuals to the left of C cannot work as much as they might like to at that wage. Individuals to the right of point D certainly can work but choose not to.

The effect of land reform on labor market

conditions. At v* the landless peasant is effectively locked out of the labor market. He is like the clumsy little kid during recess when teams are chosen that nobody wants on their team. Meanwhile, whether he wants to or not, the rich

landholder could certainly work at a rate of v*

Taking land away from the rich landholder and giving some to the

landless peasant does the following: It increases the formerly landless peasant’s work capacity. Before he was willing to work at this wage but was simply unable to do so. This leads to an increase in the effective quantity of labor supplied at v*.

As far as the rich landholder is concerned ...

This should increase his willingness to work.

The shift encourages more effort

But since he is on a lower indifference curve he will not be happy about the changes

taking place.

Given the demand for labor we should see the following:

Given the demand for labor we should see the following:

As employment increases, production and hence real income increases.