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NO . 1016 Labor Surplus Revisited

Unskilled labor is the abundant resource in many developing countries, especially at an early stage of their development. Yet, even as at given technologies labor markets have not cleared, neo-classical economists have rejected the notion of an institutional or bargaining wage not based on competitive full employment marginal productivity fundamentals. This paper puts to rest some objections to labor surplus theory based on “red herrings” and then addresses the substantive challenges from the micro-econometric branch of neo-classical economics. We contend that the finding of inelastic supply curves of labor is based on a cross-section static analysis of labor supply within agriculture while the labor surplus model deals with tracing the dynamic reallocation of labor from a traditional to a neo-classical organized sector in a dualistic economy. We present data for a number of labor surplus developing countries showing that institutional wages lag behind agricultural productivity increases as countries move towards a “turning point” when inter-sectoral balanced growth has eliminated unskilled labor and the economy has lost its dual characteristic.