LEWIS FEI RANIS MODEL (SURPLUS LABOUR THEORY)And Harris Todaro Model Of Migration

 

UNIVERSITY OF NIGERIA, NSUKKA

        FACULTY OF SOCIAL SCIENCE

• DEPARTMENT OF ECONOMICS 

                             TOPIC:

LEWIS FEI RANIS MODEL (SURPLUS LABOUR THEORY)And Harris Todaro Model Of Migration

AN ASSIGNMENT WRITTEN IN THE PARTIAL FUFUILMENT OF THE COURSE: ECO 361

(DEVELOPMENT ECONOMICS)

                   BY

OKO NKEM FRANKLINE.

2017/243813

LECTURER;

DR. Tony Orji

MARCH, 2021

Introduction

Lewis Fei Ranks model (surplus labour)

 is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.

Basics of the model/Main Argument

According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector.

Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.

 

Depiction of Phase1, Phase2 and Phase3 of the dual economy model using average output.

One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development,. In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero In

Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.

 

According to Fei and Ranis, AD amount of labor (see figure) can be shifted from the agricultural sector without any fall in output. Hence, it represents surplus labor.

 After AD, MP begins to rise, and industrial labor rises from zero to a value equal to AD. AP of agricultural labor is shown by BYZ and we see that this curve falls downward after AD. This fall in AP can be attributed to the fact that as agricultural laborers shift to the industrial sector, the real wage of industrial laborers decreases due to shortage of food supply, since less laborers are now working in the food sector. The decrease in the real wage level decreases the level of profits, and the size of surplus that could have been re-invested for more industrialization. However, as long as surplus exists, growth rate can still be increased without a fall in the rate of industrialization. This re-investment of surplus can be graphically visualized as the shifting of MP curve outwards. In Phase2 the level of disguised unemployment is given by AK.

 Phase 3 begins from the point of commercialization which is at K in the Figure. This is the point where the economy becomes completely commercialized in the absence of disguised unemployment. The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor.

 

Connectivity between sectors

Fei and Ranis emphasized strongly on the industry-agriculture interdependency and said that a robust connectivity between the two would encourage and speedup development. If agricultural laborers look for industrial employment, and industrialists employ more workers by use of larger capital good stock and labor-intensive technology, this connectivity can work between the industrial and agricultural sector. Also, if the surplus owner invests in that section of industrial sector that is close to soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized. They took the example of Japan's dualistic economy in the 19th century and said that connectivity between the two sectors of Japan was heightened due to the presence of a decentralized rural industry which was often linked to urban production. According to them, economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision-making powers and use industrial capital and consumer goods for agricultural practices.

Agricultural sector

 

Land-Labor Production Function

In (A), land is measured on the vertical axis, and labor on the horizontal axis. Ou and Ov represent two ridge lines, and the production contour lines are depicted by M, M1 and M2. The area enclosed by the ridge lines defines the region of factor substitutability, or the region where factors can easily be substituted. Let us understand the repercussions of this. If te amount of labor is the total labor in the agricultural sector, the intersection of the ridge line Ov with the production curve M1 at point s renders M1 perfectly horizontal below Ov. The horizontal behavior of the production line implies that outside the region of factor substitutability, output stops and labor becomes redundant once land is fixed and labor is increased.  

If Ot is the total land in the agricultural sector, ts amount of labor can be employed without it becoming redundant, and  represents the redundant agricultural labor force. This led Fei and Ranis to develop the concept of Labor Utilization Ratio, which they define as the units of labor that can be productively employed (without redundancy) per unit of land. In the left-side figure, labor utilization ratio

This mathematical relation proves that the non-redundancy coefficient is directly proportional to labor utilization ratio and is inversely proportional to the endowment ratio.

(B) displays the total physical productivity of labor (TPPL) curve. The curve increases at a decreasing rate, as more units of labor are added to a fixed amount of land. At point N, the curve shapes horizontally and this point N conforms to the point G in (C, which shows the marginal productivity of labor (MPPL) curve, and with point s on the ridge line Ov in (A).

Industrial sector.

 

Capital-Labor Production Function

Like in the agricultural sector, Fei and Ranis assume constant returns to scale in the industrial sector. However, the main factors of production are capital and labor. In the graph (A) right hand side, the production functions have been plotted taking labor on the horizontal axis and capital on the vertical axis. The expansion path of the industrial sector is given by the line OAoA1A2. As capital increases from Ko to K1 to K2 and labor increases from Lo to L1 and L2, the industrial output represented by the production contour Ao, A1 and A3 increases accordingly.

According to this model, the prime labor supply source of the industrial sector is the agricultural sector, due to redundancy in the agricultural labor force. (B) shows the labor supply curve for the industrial sector S. PP2 represents the straight line part of the curve and is a measure of the redundant agricultural labor force on a graph with industrial labor force on the horizontal axis and output/real wage on the vertical axis. Due to the redundant agricultural labor force, the real wages remain constant but once the curve starts sloping upwards from point P2, the upward sloping indicates that additional labor would be supplied only with a corresponding rise in the real wages level.

MPPL curves corresponding to their respective capital and labor levels have been drawn as Mo, M1, M2 and M3. When capital stock rises from Ko to K1, the marginal physical productivity of labor rises from Mo to M1. When capital stock is Ko, the MPPL curve cuts the labor supply curve at equilibrium point Po. At this point, the total real wage income is Wo and is represented by the shaded area POLoPo. λ is the equilibrium profit and is represented by the shaded area qPPo. Since the laborers have extremely low income-levels, they barely save from that income and hence industrial profits (πo) become the prime source of investment funds in the industrial sector.

 

Here, Kt gives the total supply of investment funds (given that rural savings are represented by So)

Total industrial activity rises due to increase in the total supply of investment funds, leading to increased industrial employment.

Agricultural surplus.

Agricultural surplus in general terms can be understood as the produce from agriculture which exceeds the needs of the society for which it is being produced, and may be exported or stored for future use.

Generation of agricultural surplus.

 

Agricultural surplus in the dual economy of Fei and Ranis

To understand the formation of agricultural surplus, we must refer to graph (B) of the agricultural sector. The figure on the left is a reproduced version of a section of the previous graph, with certain additions to better explain the concept of agricultural surplus. We first derive the average physical productivity of the total agricultural labor force (APPL). Fei and Ranis hypothesize that it is equal to the real wage and this hypothesis is known as the constant institutional wage hypothesis. It is also equal in value to the ratio of total agricultural output to the total agricultural population. Using this relation, we can obtain APPL = MP/OP. This is graphically equal to the slope of line OM, and is represented by the line WW in (C).

Observe point Y, somewhere to the left of P on the graph. If a section of the redundant agricultural labor force (PQ) is removed from the total agricultural labor force (OP) and absorbed into the industrial sector, then the labor force remaining in the industrial sector is represented by the point Y. Now, the output produced by the remaining labor force is represented by YZ and the real income of this labor force is given by XY. The difference of the two terms yields the total agricultural surplus of the economy. It is important to understand that this surplus is produced by the reallocation of labor such that it is absorbed by the industrial sector. This can be seen as deployment of hidden rural savings for the expansion of the industrial sector. Hence, we can understand the contribution of the agricultural sector to the expansion of industrial sector by this allocation of redundant labor force and the agricultural surplus that results from it.

.

CONCLUSION

Summary and Conclusions We have  endeavored to present  the  basic  outlines  of  the  labor  surplus  model  of development  and  addressed the  critiques  of  that  model, some  “red herrings,”  readily disposed of, and other, more  serious  challenges  from  the  micro-econometric  branch of neo-classical  economics.

The central  issue is  whether  wages  are determined  neo-classically  or  via a bargaining  process  at  the early  stages  of  development.   We conclude that  the neo-classical school  which finds  inelastic  supply  curves  of  labor  is  dealing  with a  cross-section  static analysis  of  labor  supply  within the  agricultural  sector  while  the  labor  surplus  model  is dealing  with the  tracing  of  a  dynamic  reallocation of  labor  from  a  subsistence  to a  neoclassical  organized  sector  in  the dual  economy.   The neo-classical  school’s  attack  on  the labor  surplus  model  is  thus  not  warranted. We  are  dealing  with different  issues, ships passing  in the  night.   The  paper  proceeds  by  marshalling  data  for  a  number  of  labor  surplus  developing countries  showing  that  institutional  wages  lag   behind productivity  changes  in the  course of  the  unskilled labor  reallocation process  en route  to a  “turning  point”  when decades  of inter-sectoral  balanced growth have  culminated in an unskilled labor  shortage  and the economy  has  lost  its  dual  characteristic. 

Reference

1. ^ Sadik-Zada, Elkhan Richard (2020). "Natural resources, technological progress, and economic modernization". Review of Development Economics. doi:10.1111/rode.12716.

2. ^ a b "Economnics4Development Website". Surplus Labor Model of Economic Development. Archived from the original on 16 October 2011. Retrieved 12 October 2011.

3. ^ Thirlwall, A.P (2006). Growth and Development: With Special Reference to Developing Economies. Palgrave Macmillan. ISBN 1-4039-9600-8.

Harris Todaro Model Of Migration

The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.

Overview

In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments' main concern in many cities.[1]

The formal statement of the equilibrium condition of the Harris–Todaro model is as follows:

• Let wr be the wage rate (marginal productivity of labor) in the rural agricultural sector.

• Let le be the total number of jobs available in the urban sector, which should be equal to the number of employed urban workers.

• Let lus be the total number of job seekers, employed and unemployed, in the urban sector.

• Let wu be the wage rate in the urban sector, which could possibly be set by government with a minimum wage law.

Rural to urban migration will take place if:

 

Conversely, urban to rural migration will occur if:

 

At equilibrium,

 

With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.

Conclusions

Therefore, migration from rural areas to urban areas will increase if:

• Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.

• Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.

However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.

ReferencesEdit

1. ^ Zhao, Zhong (2003). "Rural-Urban Migration in China – What Do We Know and What Do We Need to Know?" (PDF). China Center for Economic Research Peking University.