THE ECONOMIC WEEKLY August 25, 1956

Disguised Unemployment and Economic Development A K Dasgupta

ONE of the d is t inc t ive features of an under-developed economy is

the prevalence of w h a t our econo­mists are in the hab i t of ca l l i ng 'disguised unemployment ' . Too many people subsist on agr icul ture . See­m i n g l y they are employed. B u t the i r employment is not w h o l l y pro­ductive. I t i s no t w h o l l y product ive in the sense t h a t product ion does no t suffer even if some of the so-called employed are w i t h d r a w n . The r a t i o of labour to l and and other resources is so large t h a t the mar ­g i n a l p roduc t iv i ty of labour is re­duced to zero, a l though the average p roduc t i v i t y remains posit ive. A n d . un l ike in the organised sector, it is thin average p r o d u c t i v i t y and not the m a r g i n a l p roduc t iv i t y t h a t determines the earnings, and hence consumption of the labourers. The result is t ha t the m a r g i n a l body of labourers consume, but they do not produce. They are employed physi­cal ly , but not economical ly.

The organisa t ional set-up (such as we have in a subsistence economy) is wha t makes fo r this . F a r m s con­sist of f a m i l y holdings, and produc­t ive operations are done by the mem­bers of a f a m i l y as a group. Labour is not, dissociated f r o m capital , and workers may be said to be self-employed. There are the landlords and the money lenders. B u t they get their rent and interest at s t ipu­la ted rates; they do not per form the funct ion of an employer. Whatever output is derived f r o m productive operations therefore vests in the f a m i l y and is enjoyed by a l l the members irrespective of the i r speci­fic con t r ibu t ion ; the redundant mem­bers are not jus t t h r o w n away. The share of output tha t goes to the re­dundant uni ts of labour is of the nature of t ransfer income. I f , of ten persons w o r k i n g in a f a r m , four are redundant, in the sense tha t the f a r m could be managed equal ly efficiently w i t h six persons, then, f r o m the economic point of view, 40 per cent of the output of the f a r m can be viewed as being t ransferred to unproduct ive consumers. I t i s as if the ent ire output is the con­t r i b u t i o n of six persons who just 'save' a pa r t of this con t r ibu t ion and hand i t over to the r ema in ing four. P r o f Nurkse calls this the ' saving po ten t ia l ' of a subsistence economy.

I t is on th is concept of saving potent ia l ' as a concomi tan t of dis­

guised unemployment ' that Prof C N V a k i l and his colleague have bu i l t a theory of economic growth .* P lann ing in an under-developed economy, if i t is to be effective, must, according to our authors , take account of 'dis­guised unemployment ' of the sub­sistence sector and make f u l l use of the " sav ing potent ia l" t h a t is asso­ciated w i t h i t . The process can be in i t i a t ed on ly if the increase in the volume of employment in the p lann­ed sector is made to exceed the addi­t ion to the labour force consequent on the g r o w t h of populat ion. So long as our plan seeks just to ab­sorb the addi t ional labour force t h a t comes in to the m a r k e t as a re­sult of populat ion g r o w t h , the dis­guised unemployment remains un­touched and w i t h i t the sav ing potent ia l . Once, however, our p lann­ed investment passes this l i m i t , a cumula t ive process of expansion sets i n . The a rgument in this con­tex t runs in terms of a theorem thus: Suppose tha t the value of wage-goods needed to employ an add i t iona l un i t of labour in the planned sector is Rs 400 whereas the actual consumption of a corres­ponding un i t in the subsistence sec­to r is Rs 200. Then, if the planned sector can somehow secure an extra saving of Rs 400, the add i t iona l em­ployment created w i l l be two units instead of one. For , whi le w i t h the .saving of I t s 400 done in the plann­ed sector one un i t of labour is pro­duct ive ly employed, the w i t h d r a w a l of th i s un i t f r o m the subsistence sector is accompanied by a release of Rs 200 w o r t h of wage-goods. This can now be added to another equivalent bundle of wage-goods to be released if one more u n i t of labour is w i t h d r a w n from the sub-sistence sector. The economy is therefore in a position to absorb al­together t w o units of labour in pro­ductive employment . a l though the i n i t i a l dose of saving was jus t enough fo r one unit . Saving thus breeds saving, and we have a so-cal led ' m u l t i p l i e r , effect' on employ­ment, the value of the 'mul t ip l i e r ' depending upon the r a t i o of 'wage unit;** in the planned sector to w h a t '

* V a k i l and Brahmananda ; P lann­i n g fo r an Expand ing Economy

** The authors use a t e rm 'em­ployable un i t ' in th is context wh ich they define as ' labour plum wage

may be called the 'consumption un i t ' in the subsistence sector. The lower this r a t io , the h igher is the value of the 'mul t ip l i e r ' .

So far. so good. The emphasis on the implicat ions of 'disguised un ­employment ' for the economics of g r o w t h is commendable. The p ro­posit ion t ha t employment is l i m i t e d by the flow of wage-goods tha t can be made avai lable to labourers, though apparent ly commonplace. is w o r t h emphasizing at a t ime when econo­mic t h i n k i n g is so wide ly influenced by the Keynesian theory of effective demand. In an under-developed economy, the scope for expansion of the current output of wage-goods is l imi ted , and the Keynesian invest­ment m u l t i p l i e r is insufficiently operative. Yet an oppor tun i ty fo r a 'cumulat ive process' offers i t se l f in such an economy if the 'disguised unemployed' is released f r o m the subsistence sector and the ' saving potent ia l ' t ha t i t carries is used as a supplement to whatever add i t iona l savings can be d r a w n f r o m the rest of the economy. For th is to happen, the rate of g r o w t h of employment must pass the c r i t i ca l l imit , set by the g r o w t h of populat ion. Our authors ' crusade against Ind ia ' s Second F ive Year Plan is based largely on this concept. The em­ployment t a rge t set in the P lan is much too inadequate to d r a w in the 'disguised unemployed and to b r i n g the cumula t ive process in to play.

However, if our authors had re­flected upon their hypothesis a l i t t l e more closely they would perhaps re­alise tha t they had s tar ted f r o m the w r o n g end. N o t tha t the i r proposi­t ion is w r o n g ; of course it is not. so far as the a r i thme t i c is concerned. But the way it is presented suggests a cer ta in Lick of awareness of the obstacles to the g r o w t h of an under­developed economy. In their excite­ment at w h a t they thought was a discovery they forgot to notice tha t if the proposi t ion were put the other

good , apparen t ly f o r g e t t i n g t h a t ' labour' and 'wage goods' are not addi t ive . There are many such un­pardonable lapses in the book against w h i c h the reader mus t gua rd himself .

† The t e r m is used here to s igni fy the ac tua l consumption of a un i t of labour.

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w a y round, i t would take a f o r m w h i c h has been f a m i l i a r to most of us most of the t ime. Let us revert to our authors ' example. The 'con­sumpt ion unit',, as we have called i t , is Rs 200 and the 'wage un i t ' is Rs 400. Assume, w i t h our authors, t h a t a long w i t h the transfer of the 'disguised unemployed', the goods t h a t they used to consume in the subsistence sector are also trans­ferred to the planned sector. The m a r k e t is then provided w i t h an ad­d i t i ona l Rs 200 w o r t h of wage-goods fo r each ex t ra uni t of labour em­ployed in the planned sector. I t is true, then, t ha t i f an extra saving of Rs 400 Is made avai lable in the planned sector, possibilities w i l l he opened up for the employment of t w o uni ts of labour instead one w h i c h is the labour content of the ex t r a savings, and the so-called mu l t i p l i e r effect w i l l he operating. N o w look at th is same th ing the other w a y round, A uni t of labour is released from the subsistence sector and w i t h it a bundle of goods w o r t h Rs 200. The consumption un i t thus released is not sufficient to provide employment to one addi­t i ona l un i t of labour in the planned sector; the m a r k e t has to somehow secure another Rs 200 w o r t h of wage-goods by way of savings. The t ransfer of a uni t of labour f r o m the subsistence .sector releases wage-goods whose value is on ly one-half of the actual wage that has to be paid if i t is to be product ively em­ployed. I f we look at the ma t t e r th i s way, w h i c h is the correct way, the 'consumption-goods mul t ip l i e r ' takes on an al together strange com­plexion and turns out to be a m y t h .

One feels tempted, at this stage. to t u r n back and to see wherein our crucial problems He. The problem of g r o w t h in an under-developed economy w i t h a large and redundant populat ion is basically a problem of capi ta l fo rmat ion . Employment in the investment goods sector needed fo r capital fo rmat ion is no doubt l i m i t e d a t any moment by the ava i l ­a b i l i t y of wage-goods. But the out­put of consumption goods in general and of wage-goods in par t icu lar is i t se l f a funct ion of the stock of capi ta l An increase in the stock of capi ta l increases the scope for the employment of labour, a l though d u r i n g any g iven period of invest­men t needed for the production of cap i ta l goods, i t is the current re­lease of wage-goods t ha t determines the extent to w h i c h employment can

be increased‡

The pr incipal a i m of economic p lanning in an under-developed country is to raise the rate of i n ­vestment and hence of capi ta l for ­mat ion w i t h a view to an increasing flow of consumption goods in the future. Since there is a plethora of unemployed in the economy, the speeding up of investment does not require cur ta i lment of act ivi t ies in the consumption goods sector; the economy can d raw upon the reserve o f unemployed. I f concurrently w i t h the increase of investment there is also increased production of consum­ption goods, as happens when there is excess capacity in the consump­tion goods sector, the wage-bi l l of the addi t ional labourers can be met out of the addi t iona l output of con­sumption goods, and there is no pre­ssure on the consumption goods market . We are, so to say, in the Keynesian w o r l d of plenty where an increment of investment leads by itself to an increment of consump­t ion .

It is w r o n g to suppose that these Keynesian effects are altogether absent in an under-developed coun­t r y such as Ind ia . The capacity in our organised sector does lend itself to fuller u t i l i sa t ion , as findings of competent s tat is t icians indicate. Moreover the Plan period that we have in view is not exactly the Key­nesian short period where resources and technique are given and fixed; certain investments may wel l be made to bear f r u i t du r ing the Plan period. There is therefore some scope for the expansion of output of consumption goods to be set against the addi t ional employment in the investment goods sector. But these possibilities are negligible in the context of the volume of invest­ment t ha t is needed to fu l l y absorb the reserve of unemployed, when account is taken not on ly of the exis t ing volume of 'disguised unem­ployment ' but also of the addi t ion to the labour force resul t ing f rom the no rma l g r o w t h of population.

Assume, then, to b r i n g out the essence of the matter , tha t there is ' f u l l employment" in the organised sector. W h a t happens if, as the

+ There is therefore no contradic­t ion, as the authors imagine there is, between their theory of 'wage-goods gap' a n d the P l a n n i n g Com­mission's ' logic' stressing the need for fixed capi ta l . One refers to the short run and the other to the long r u n scope fo r employment.

need for economic development de­mands, more employment is to be provided in the investment goods sector towards the product ion of capi ta l goods? We are in the Classi­cal w o r l d of Scarcity, and an ade­quate volume of wage-goods has to be released f rom the rest of the economy to make provision for the addi t iona l labourers engaged in the investment goods sector du r ing the investment period. The rest of the economy has to put up w i t h reduced consumption, the extent of this ' re­duct ion being determined by the wages-bil l (assuming tha t wages are who l ly spent on consumption) of the newly employed labourers. This is the raison detre of " saving" in the context of the economic development of underdeveloped countries, i t i s " sav ing" that makes possible an expansion of investment needed for the g r o w t h of the economy.

Now, the dis t inct ion between 'dis­guised unemployment" and new la­bour force generated in the process of populat ion g r o w t h is often too sharply d rawn . They are not neces­sari ly distinct and separable entities. In practice, very sub­s tan t i a l ly one merges into the other. The major impact of the g r o w t h of population in an under­developed economy is on agr icul ture . A n d there wha t happens, as popula­t ion grows, Is t ha t an increasing degree of congestion occurs in the age group tha t ca l l themselves 'occupied'. The 'saving potential" remains more or less the same, but the mouths to d r a w upon it increase in number. In fact, the d is t inc t ion d r a w n here is not a d is t inc t ion be­tween two categories of unemploy­ment; it is ra ther a d is t inc t ion be­tween two ways o f l o o k i n g a t i t However, the d is t inc t ion becomes ana ly t i ca l l y s ignif icant i f we assume tha t the ' saving potent ia l ' gets re-leased for use in the planned sector on ly at a level of employment be­yond w h a t wou ld be needed for the f u l l absorption of the newly emerg ing labour force. At any ra te i t i s in th is sense tha t the d i s t inc t ion is used here, a l though it is clear that there is no k n o w i n g in practice, at w h a t level of employment th is pro-cess of release of the ' saving potenti­al' s tar ts operat ing, if it does oper­ate a t a l l .

Since in the context of the situa­t ion t ha t we are contemplat ing, ad-d i t iona l employment is devoted en t i r e ly to Investment and is unaccom panied by any expansion in the

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output of consumption goods, the wages-bi l l of the addi t iona l labour­ers has to be matched ent i re ly by ' saving ' done in the rest of' the economy. In so fa r as these addi­t i ona l labourers are recrui ted f rom the newly emerging labour force, the ent ire sav ing needed for meet ing the i r wages-bi l l has to be newly created. I t is only when investment is pushed so fa r as to enable the economy to encroach on the 'dis­guised unemployed' t ha t some rel ief is found, on our assumption, in the release of goods that the labourers d r a w n in to the planned sector used to consume in the subsistence sector. Even here, the 'wage un i t ' in the p lanned sector being subs tan t ia l ly h igher t h a n the 'consumption un i t ' in the subsistence sector, fu r the r new savings have to be created for cover ing the gap.

A l l th is becomes f a m i l i a r story. w h e n put in terms of money-wages and prices. An under-developed economy w i t h a reserve of unem­ployed embarks on a process of p lanned investment- Add i t i ona l em­p loyment is created in the invest­m e n t goods sector. Payment is made to the labourers newly employ­ed at the current money rate of wages. These wages are spent on the purchase of wage-goods. There is an increase in the aggregate-money demand for wage-goods. I f , to s t a r t w i t h , there is excess capa­c i t y in the consumption goods sector, ou tpu t of wage-goods expands in response to the increase of demand, and there is no rise of prices, except to the extent w a r r a n t e d by the em­ergence of 'bott lenecks' here and there. I f investment (and employ­men t ) is pushed beyond a level where excess capacity is fu l ly ex­hausted, increased money demand presses on an inelastic supply of wage-goods, and prices s t a r t r i s ing . The tendency is checked if the addi-t i o n a i expenditure done by the newly employed labourers is offset by re­duced expenditure elsewhere in the economy. The need for the offset is o n l y lessened to the extent, tha t there is transfer of wage-goods f rom the non-monetized sector to the monet ized sector where the addi t ion­al expenditure has i ts impact . If therefore prices of wage-goods are, to be held constant in order for the rea l wage ra te not to f a l l , the volume of add i t iona l (planned) sav­ings needed in the monetized sector for the f u l l absorpt ion of the un­employed (disguised and undisguis­ed) w o u l d be equal to the t o t a l

money wages accru ing to this ent i re body of newly employed labourers (assuming t ha t wages are a l l spent; minus the money value of cur ren t prices of the increment of output of wage-goods, inc lud ing the amount t ransfer red f r o m the non-monetized sector.

It is not diff icult now to see the k i n d of hurdles t h a t have to be got over in order for the economy to be able to ut i l ise the 'disguised un­employed' for purposes of develop­ment. F i r s t , there is the problem, how to create conditions under w h i c h the disguised unemployed wou ld get released f rom the subsis­tence sector and be d rawn in to the planned sector? Is wage incent ive enough? I f not. w h a t organisa t ion­al changes' would be necessary for the purpose? Secondly, supposing t h a t men are t ransferred, w h a t guarantee is there tha t the goods tha t they were consuming w o u l d be t ransferred, too. to the planned sector? Is i t not probable tha t those who would stay back would choose to re ta in at. least a part of the con­sumption of the group that are switched on to the planned sector? The exodus of the 'disguised un­employed' w i l l no doubt leave the subsistence sector w i t h a 'surplus' of wage-goods. But those who w i l l be s t i l l there w i l l in a l l p robab i l i t y be reluctant to part w i th this sur­plus. This is pa r t l y because they w i l l now wish to improve their s tandard and p a r t l y because they w i l l have perhaps some more mouths to feed in view of a possible increase in the number outside the employ­

able age group, as Is l i k e l y to happen as populat ion grows d u r i n g the P lan period. W h a t steps could be taken to prevent them f r o m be­h a v i n g t ha t way? W i l l the n o r m a l price incentive be enough? Above a l l , t h i r d l y , h o w are the necessary savings to be created in the econo­my, so as to cover the gap between the 'wage un i t ' and the 'consump­t ion uni t ' ? In an economy where n o r m a l savings do not take care even of current addi t ions to the labour force, this w o u l d appear to be the most serious obstacle to op t imum g r o w t h , p a r t i c u l a r l y when p lann ing is conceived agains t the background of a democratic; w a y of l i fe .

Oppressed w i t h these considera­tions, our P l a n n i n g Commiss ion has chosen to go slow and has contented i tself w i t h m a k i n g provis ion in the i r Second Five Year P lan at best for the current addi t ions to the labour force, hav ing to re ly even there largely on deficit f inancing and foreign aid. Nobody, not even the framers of the Plan , w i l l say i t is an ideal P lan . B u t one has to have a sense of real ism It is no good just con t r i v ing an a r i t h m e t i ­cal jugg le ry and i n d u l g i n g in gra tu i tous cr i t ic isms, when the b i g socio-economic questions t h a t the Commission is confronted w i t h remain unanswered. We have to show the way to the so lu t ion of these before we take up the cudgel. P ro f V a k i l and his colleague w i t h thei r new-fangled 'consumption-goods mu l t i p l i e r n o t w i t h s t a n d i n g , we have not done tha t .

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