Wage rate determination with limited supplies of labour in developing countries: A comment

Summary

This note analyses the working of the labour market under the assumption that the efficiency of labour is positively related to the wage level through effects of improved nutrition and health.

The novel feature of this analysis is that although market adjustment takes place through workers hired and wage per worker, demand is defined in terms of efficiency units of labour and cost per efficiency unit. Nevertheless, as long as the wage elasticity of worker efficiency is less than unity, comparative‐static propositions of conventional supply‐demand analysis remain valid. Evidence is summarized which suggests this elasticity is much lower than unity in present‐day developing countries.

Notes

The author is Associate Professor of Economics at the Massachusetts Institute of Technology. This note was written while he was visiting Research Fellow, Institute for Development Studies, Nairobi, Kenya. Financial support of the Rockefeller Foundation is gratefully acknowledged. Matthew Edel, Frank Mitchell, Joseph Stiglitz and Michael Todaro made useful suggestions on an earlier draft. Of course, they are not responsible for remaining errors.