On Capital Allocation And The Real Cost Of Labour (Notes & Comments)

F. E. Banks

Abstract


This note is an extension of several contributions to the
problem of re¬source allocation in a developing economy. In separate
papers, I.M.D. Little and F. Seton* have introduced a model in which
labour in a developing economy cannot be shifted from the subsistence to
the industrial sector at zero opportunity cost, even though this labour
displays zero marginal product in its 'traditional' occupations; and in
what follows this problem will be attacked via a diagramma¬tic analysis.
A short appendix will treat a side issue of the topic. As Little
presented the model, there was an initial amount of capital K to be
divided between two sectors, the I (industrial) sector, and the C
(subsistence, traditional, or agricultural) sector. In the C-sector,
there is excess labour or dis¬guised unemployment, in the sense of
Professor W. A. Lewis2, in that the marginal product of labour in this
sector is taken as equal to zero. As it happens, however, this labour
cannot be moved to the I-Sector without an increase in production in the
C-sector. The reason for this is because as labour is transferred to the
industrial sector, consumption per head increases in the C-sector, thus
decreasing the surplus available for workers being transferred to the
I-sector. The transfer can only be carried out if a surplus equal to the
difference between the industrial wage in C-goods and the amount of
C-goods 'released' by the C-sector is forth¬coming, and for this an
increased production of C-goods (via the input of capital into the
C-sector) must take place. A similar situation would exist if
transferring workers required a wage differential; or if C-goods had to
be exported to obtain certain types of capital goods for the labour
being reallocated, and/or housing, training, etc.

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DOI: https://doi.org/10.30541/v10i4pp.491-499

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