LDCs
Landless, Jobless, Hungry

More than 400 million people in the world are estimated to be undernourished. An overwhelming majority of these people live in developing countries, and available evidence suggests that malnutrition is concentrated among the landless or near-landless, who presumably have little or no non-wage income. Why do the undernourished not take up jobs which provide them with a wage and adequate nutrition? One possibility is that existing resources may be insufficient to provide enough food for all. Another is that jobs are not available. The labour market may not clear at the going wage and this may lead to involuntary unemployment. Why doesn't the labour market clear? In particular, why don't frustrated job seekers undercut the wages of the employed? Conventional explanations emphasise constraints on the operation of the labour market, such as unionisation and minimum wage legislation. These seem of limited relevance in developing countries, and other explanations are needed.

In Discussion Paper No. 50 CEPR Programme Director Partha Dasgupta and Debray Ray of Stanford University examine the role the unequal distribution of assets such as land plays in the creation of malnutrition and involuntary unemployment in less developed countries. The general equilibrium model used by Dasgupta and Ray is in most respects a conventional one. In particular all markets are competitive, information is complete and there is no aggregate demand deficiency. Dasgupta and Ray find that all markets do not clear in their model; involuntary unemployment can exist, because of wage rigidity. The wage rigidity is however explained within the model and not merely hypothesized. The economy they consider is moderately endowed with physical assets, and is productive enough in principle to feed everyone adequately. Dasgupta and Ray find that competitive markets cannot be relied on to do so, and this problem is accentuated if the distribution of assets is unequal; those with few assets will be undernourished and unemployed. Dasgupta and Ray find that in such an economy the incidence of malnutrition and involuntary unemployment can be traced directly to inequalities in the distribution of these assets.

Why does this model produce results unlike those of conventional equilibrum theory? Economic theory takes the ability of an individual to perform tasks as given. Studies of malnutrition emphasize, however, that at low consumption levels there is a positive relationship between current consumption and current ability to work. Dasgupta and Ray's model focusses on the distinction between "labour time' and "labour power', the general ability to perform work. The authors assume that at low consumption levels labour power increases with daily consumption, at an increasing rate. A profit-maximizing enterprise is interested in minimizing the payment to a worker per unit of labour power he supplies, which is termed the "efficiency wage'. This efficiency wage can vary from worker to worker, depending on his non-wage income. Other things being equal, individuals with non-wage income have a lower "efficiency wage' than those without such income. Enterprises therefore seek to hire first those with non-wage income; the landless take second place because they cannot supply as much labour power relative to the cost of their hire. Dasgupta and Ray note that in equilibrium the wage per unit of labour power must be the same for all those who are employed. Those with non-wage income are a better bargain for firms; their wage per unit of labour time is bid up to the point where it exceeds that of the landless. Those with land are doubly blessed; they not only enjoy non-wage income, their wage rates are also higher. Competitive markets therefore widen income disparities if the distribution of assets is particularly unequal.

Why does this occur? The technical reason for the failure of the labour market to clear and the existence of involuntary unemployment lies in the "increasing returns' in the relationship between labour power and consumption. Workers with a moderate non-wage income are able to supply more labour power relative to the wage they receive. The undernourished landless are unable to undercut the employed because they cannot supply enough labour power to justify being paid the going wage rate per unit of labour time. Under a wide class of circumstances the resulting equilibrium is one in which a fraction of the landless find employment (at their efficiency wage), but the remaining landless are unable to obtain jobs. The landless are therefore rationed in the labour market and those who cannot get jobs are worse off than those who can. Those with a modest amount of land are able to find employment, while those with large holdings of land and non-wage income - the "landed gentry' - choose to enjoy leisure instead of working. With a large landless population competitive markets simply can't afford to employ all; the landless are too expensive and they are too expensive because they are hungry. But it is land distribution in conjunction with the competitive market mechanism which is at fault, not the intrinsic production capacity of the economy which is assumed to be sufficient to feed all.

Dasgupta and Ray show that in such circumstances certain patterns of inequality-reducing asset redistributions can reduce and possibly eliminate undernourishment and unemployment and can increase the level of aggregate output. Economic growth which brings about an improvement in land productivity would also eradicate unemployment and malnutrition over time, through a "trickle down' effect. Dasgupta and Ray's analysis suggests, however, that in some circumstances redistributive policies can more speedily reduce the extent of undernourishment and unemployment, and may be the only policies open to the government for eliminating unemployment in the short and medium run.


Inequality, Malnutrition and Unemployment: A Critique of the Competitive Market Mechanism
Partha Dasgupta and Debraj Ray

Discussion Paper No. 50, February 1985 (ATE)