Weeks 6-10 Flashcards
(41 cards)
What is the core idea of the Lewis (1954) model of development?
explains how developing economies transition from a traditional subsistence sector with surplus labour to a modern capitalist sector. Capitalists hire workers at fixed subsistence wages, generate profits, and reinvest them—driving structural transformation and economic growth.
What is disguised unemployment”? How can it be measured? What are its causes? Which policies could reduce it?
Seminar question
- When more workers are employed than are actually needed to produce a given level of output
- Measured by asking workers directly whether they are ready to work more at the prevailing wage
Causes: weakeness of labour demand in rural areas, downward wage rigidity
Consequences: poverty and inequality between landless and land rich households, and lack of policy responses
Policies: rural job creation, skill workshops, better matching tools
What are the key assumptions of the Lewis model?
- 2 sectors
- Unlimited supply of labour at fixed subsistence wages until surplus is absorbed
- All capitalist profits are reinvested
How does the Lewis model explain the growth process?
Capitalists hire workers from the subsistence sector at fixed wages. The difference between marginal productivity and wage is the capitalist surplus, which is reinvested to expand production. This leads to more hiring, migration from agriculture, and economic transformation.
What is the “Lewis Turning Point” and why is it important?
when surplus labour is exhausted:
* wages begin to rise
* labour becomes scarce
* capitalist profit declines
Marks the end of the dual economy and start if a more conventional growth model where wages and capital accumulation are linked
What are the key policy implications of the Lewis model?
- Encourage industrial investment to absorb labour and raise productivity
- Support capital formation and reinvestment
- Industrialisation is crucial for sustained economic growth
What does Lafave & Thomas (2014) find about rural household labour allocation?
- test whether farm households behave recursively (i.e., separate production and consumption decisions)
Using Indonesian data, they show that larger households supply more farm labour, even after controlling for farm fixed effects—suggesting labour markets are incomplete and decisions are non-separable.
What does Kaur (2019) find about nominal wage rigidity in rural India?
Required Reading
Panel data from 256 districts in India. Positive shocks: rainfall above 80th percentile. Negative shocks: rainfall below 20th percentile.
Using rainfall shocks as exogenous events, Kaur finds that:
- Wages rise after positive shocks but do not fall after negative ones
- Real wages adjust with inflation, but nominal wages are rigid downward
- This rigidity is driven by fairness norms and money illusion, confirmed via survey
- Labour demand falls when wages ratchet up—hurting the poorest (e.g. landless)
“Ratcheting” effect: wages stay high even in later years after a good shock
What is the research design and key finding of Breza et al. (2021) on labour rationing?
Required Reading
Rationing: when there are more workers willing to work at the going wage than there are jobs available –> unemployment caused by lack of demand, not high wage expectations
- Hiring 25% of workers in rural Indian villages did not reduce employment or raise wages for others—proving that labour was rationed and surplus existed during the lean season.
- Although not hired in the factory, the spillover workers still saw a significant increase in employment. This is due to some of the hired workers, leaving their old jobs and leaving vacancies for the spillover workers.
- This also shows a misallocation of labour as we can see they prefer to work in a factory than agriculture. STRUCTURAL TRANSFORMATION.
However, this surplus disappears in the peak season or in better-connected areas.
What are the effects of public works (NREGS) in rural India, according to Imbert & Papp (2015)?
The National Rural Employment Guarantee Scheme (NREGS), which guarantees rural households 100 days of paid work per year.
- use DiD
- Wages go up by ~5% during the lean season (when farm work is scarce)
- Private employment goes down slightly — some workers choose NREGS jobs instead of private farm work
Shows that wage increases benefit the poor, suggesting that NREGS ahs redistributive gains even without surplus labour
Push story
- Increase in productivity in agr. (better tech.)
- Less workers are needed on farms
- Labour becomes availabal for manu. sector
e.g. a village adopts highyield seeds, and fewer farmers are needed to produce the same amount of food
Pull story
- tech. progress in manu. sector that increases productivity AND WAGE
- labourers are pulled out of agr. by the attraction of better opportunites
e.g. a city’s factory instralls modern machines and offers high wages
What did Lewis (1954) observe about the rural-urban wage gap, and what are its implications?
- observe 30% wage gap. even when surplus labour is present –> reflects more than just producitivity difference
Explanations given:
* higher living costs in urban (rent, transport)
* psychological costs of leaving the village (social ties)
* more demanding work discipline
Implications:
* symptom of dual economy
* explains why labour does not flow instantly (wait until wage premium is large enough to cover their real and perceived costs)
Why do people migrate from rural to urban areas despite high urban unemployment?
Harris and Todaro (1970)
Migration decisions are based not on actual wages but on expected wages.
Expected urban wage = urban wage × probability of finding a job
- High urban wages (often due to minimum wage laws or unions) attract rural workers
- But urban labour markets cannot absorb all migrants, leading to unemployment
- Labour missallocation, affecting development negatively
What does Gollin et al. (2014) conclude about the agricultural productivity gap, and what does it imply about labour misallocation?
Required Reading
- use national accounts and labour foce data from 151 coutnries
- find that productivity per worker in non-agriculture is ~4x higher than agr.; gap reamins 2x after adjusting for hours and skills
- LABOUR MISSALLOCATION (labours stuck in low-productivity agr.)
–> reallocating labour could raise overall output - Agr sector accounts for 52% of workers in india but only 1.5% of gdp
- Agr sector accounts for less than 2% of workers in the US but 19% of the countries GDP
arg. prod. gap = ratio of value added per worker b/w manu. and agr. sector
According to Young (2013), does the rural-urban gap reflect misallocation or optimal sorting?
- Uses consumption data from 65 countries.
- Finds large rural-urban consumption gaps but argues they reflect optimal sorting, not misallocation.
- More skilled workers self-select into urban areas.
- Implication: observed gaps may not imply that policy should push more migration.
How do Lagakos et al. (2020) distinguish between cross-sectional gaps and actual migrant gains, and what does this imply for policy?
- Panel data from 6 developing countries; track migrant households over time
Findings:
- Large positive cross-sectional gaps in consumption
- Gaps shrink but remain significant after controlling for individual fixed effects (productivity)
- Suggest real gains to migration, but less than what cross-sectional differences suggest
Limitation
- Cross-sectional gaps suffer from selection bias on who lives where
- Observed returns suffer from selection on who chooses to migrate (usually more educated, healthier, more motivated)
Large consumption gaps suggest potential welfare gains, but actual gains depend on who moves
What does Bryan et al. (2014) find about barriers to seasonal migration in Bangladesh, and what do the results suggest about migration constraints?
- randomised controlled trial in 100 villages during lean season: compare info, cash, and credit group
- only cash/credit subsidies significantly increases migration
- Offering a small travel subsidy (~$8.50) increased seasonal migration by 22 percentage points and led to significantly higher consumption (especially of rice)
Ruled out other explanations:
1. lack of info (no effect)
2. liquidity (subsidy was small)
3. income risk (need to be extramely risk averse)
–>small costs can be a major barrier to profitable migration
Bryan et al. (2014) Legacy
Same experiment was conducted in Indonesia, India, Sub-Saharian Africa, and none of the projects was able to replicate the positive effects of the initial project
How do Imbert and Papp (2020) estimate migration costs using NREGS variation, and what do they conclude?
Using a DiD strategy with NREGS rollout:
- Each additional NREGS workday reduces migration by 1.2–1.4 days
- Migrants give up Rs 100/day in urban jobs for Rs 60/day in NREGS, implying significant unobserved migration costs.
- Estimated migration costs = 80% of potential migration earnings.
Not explained by higher urban costs—migrants spend little and don’t pay rent.
Most of the cost is due to harsh living and working conditions at destination sites.
What does Gollin et al. (2020) find about urban living conditions in Africa, and how does this affect the rural-urban migration narrative?
Are higher urban wages offset by worse urban living conditions in Africa?
- Compare amenities across rural and urban areas.
- Urban areas perform better on health, infrastructure, and life satisfaction.
- No urban disadvantage in crime or air pollution.
Urban areas in Africa generally offer better amenities than rural ones. However, migrants may live in poorer parts of cities, experiencing worse conditions than average urban residents.
So migration decisions may reflect within-city inequality, not city-wide averages.
How does Morten (2016) model the relationship between migration and informal insurance, and what is the key theoretical insight?
- develops model with imperfect rish-sharing and migration
- shows ambiguous effects
- Trade-offs exists between migration and village-based insurance
What empirical evidence do Meghir et al. (2020) provide on migration and household risk-sharing?
Use Bryan et al. (2014)’s RCT to study changes in consumption insurance.
- Find that migration improves households’ ability to smooth shocks.
- Welfare gains arise from the complementarity between migration and insurance.
Implication: cash alone cannot replicate gains from enabling migration.
What are the key findings of Townsend (1994) regarding risk-sharing mechanisms in village India, and how do they contribute to our understanding of rural economies?
Required Reading
- data from household surveys in South Indian villages
- Systematic shocks: affect all households in a village (e.g. drought, inflation)
- Transitory/idiosyncratic shocks: affect individual households (e.g. illness, job loss)
Finds that villages smooth transitory shocks well, but cannot fully insure against systematic shocks
- strong informal risk-sharing networks (e.g. family, caste, credit/labor exchange)
- Consumption is much smoother than income, consistent with some degree of insurance
- Risk-sharing is incomplete—some households are better insured than others
Implication: informal risk-sharing networks work best for private shocks, but public insurance or policy is needed for village-wide crises
**Limitation of paper: **
* does not claim full insurance, only that informal insurance works to some extent
* substantial heterogeneity across households (violates the assumption of equal access to risk-sharing)
