On Disguised Unemployment: Some Issues

This post discusses some of the broad theoretical issues underlying the category of ‘disguised unemployment’. The discussion is made clear by closely examining the hypothesis that Indian agriculture is plagued by the presence of high disguised unemployment.

Let us take a glimpse at the Economics textbook for class XI published by the NCERT. (NCERT 2006, p 131, Indian Economic Development)

“Economists call unemployment prevailing in Indian farms as disguised unemployment. What is disguised unemployment? Suppose a farmer has four acres of land and he actually needs only two workers and himself to carry out various operations on his farm in a year, but if he employs five workers and his family members such as his wife and children, this situation is known as disguised unemployment. One study conducted in the late 1950s showed about one-third of agricultural workers in India as disguisedly unemployed.” (italics mine)

Is disguised unemployment unemployment?

A thought experiment. Suppose A and B are two similar countries – both are equally populated. Now, a study has estimated disguised unemployment in country A to be 30% and in country B to be 10%. This implies that employment in country A is more than that of country B. Should this be of concern? Must we try and reduce disguised unemployment in country A?

If so, what is the basis of ‘disguised unemployment’? Do we see the principle of allocative efficiency present in disguise? Disguised unemployment means that ‘labour’ is ‘inefficiently’ utilised. Attestation of this claim is done by showing the high share of workers employed in agriculture alongside the low contribution of agriculture to GDP.

The first draft of National Employment Policy (2008) reads thus: “Over half the workforce continues to depend on the agriculture even though it accounts for less than a fifth of the total GDP. This implies a vast gap in incomes and productivity between agriculture and non-agriculture sectors. This is mainly due to inadequate growth of productive employment opportunities outside agriculture.” Is employment the need of the hour or is it contribution to GDP? Which variable (employment or GDP) should be the criterion? Why not improve the quality of employment in agriculture? To attain quality, provision of infrastructural support is absolutely essential- credit facilities, good roads and increased railroad connectivity, storage houses, institutions so as to enable the farmers get a ‘decent’ price for their produce, etc.

In 1960-61, the share of agriculture, forestry and fishing in total GDP was 53% (at 1993-94 prices). This came down by around 30 percentage points to 22% in 2002-03. On the other hand, the share of agriculture, forestry and fishing in total employment was 75.9% in 1961; by 1999-2000, it had come down to 59.9%. [The Oxford Companion to Economics in India, ed Kaushik Basu, OUP: New Delhi, 2007, p. 11]

The above discussion attains significance when we view agricultural workers as those who are trying to make a livelihood out of various jobs – farm and non-farm employment and self-employed and casual labour. ‘Employment’ mainly refers to wage employment. In India, out of total employment, the share of self-employment is the highest. As Amit Bhaduri writes, the economic activities predominant in the agricultural sector (or rural or informal) can be called as ‘survival strategies’. [Bhaduri 2006, Employment and Livelihood, in Employment and Development: Essays from an Orthodox Perspective] He cautions the policy makers on the use of dual-sector models in framing development policies for India owing to the heterogeneity prevalent in rural India and also because of the specificities present in the unorganised agricultural sector. Hence, the notion of ‘surplus labour’ loses much of its weight. In turn, we need to carefully look at ‘disguised unemployment’ for it disguises a lot of specificities of rural India.

2009 (Nobel) Prize in Economics

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was established in 1968. Technically, there is no ‘Nobel’ prize in Economics; on the website of Nobel foundation, amongst Nobel Prize in Physics, Chemistry, Medicine, Literature and the Nobel Peace Prize, we have our ‘Prize in Economics’. The prize will be announced on the following Monday, the 12th of October. As always, consensus is impossible, for economics has given birth to too many sub-disciplines in the past few decades.

A brief round-up on the web seems to suggest/predict the following winners:

1) Thomson Reuters has predicted 6 winners- William D Nordhaus and Martin L Weitzman being two of the predicted winners. I have highlighted them, for it is their work in ‘environmental economics’ which is considered to be pioneering. The other economists who are mentioned have contributed to behavioral economics and monetary economics. Amol Agrawal at Mostly Economics, provides his views on the Reuters prediction.

2) Eugene Fama – for his ‘contributions’ to portfolio theory and asset pricing. It has to be a joke! (See the Wall Street Journal and Chris F. Masse at Midas Oracle, a blog about ‘predictions’.)

3) Inflation Targeting, according to Ajay Shah is path-breaking, and if given a chance, he would vote for J B Taylor and M Woodford.

4) And, comments on blog posts that discuss the ‘Nobel’ prize in economics show that each commenter wants/feels a particular economist should win the Prize, which is natural. Not much is spoken about Jagdish Bhagwati this time.

5) Robert Vienneau writes that Luigi Pasinetti and Paul Davidson should win the Prize, but they wont. For it is not surprising that Nobel prizes have not been awarded to heterodox economists. Yes, the prize winners in Economics have mostly worked within the Neoclassical framework, although, they have extended and utilized microeconomics and neoclassical general equilibrium by modifying it to a variety of problems – health, environment, behaviour, neuroscience, geography, etc. Hence, economics now is not only related to employment and poverty, but also to issues of climate change, complexities in human behaviour, legal theory (via law and economics) and so on and so forth.

I think it would be a right time to award the prize to a heterodox economist. There seems to be some problem (a lot of problems) with mainstream theory – a version of neoclassical theory. However, awarding it to an economist who has pointed out (and who still point out like Davidson, Garegnani, Pasinetti and many others) logical inconsistencies or unrealistic assumptions will be a bad move; as it will undermine the entire research programme of neoclassical economics. Hence, the award could go to an economist who uses neoclassical tools more or less, but in an unconventional way. For instance, for contributions to a theory of technical progress (Paul Romer), for research conducted in green accounting (William Nordhaus), using neuroscience to understand economic (read human) behaviour – neuroeconomics (Ernst Fehr), etc.

What is a Laureate?
A Laureate is a recipient of honour or recognition for achievement in an art or science. [FAQ, Nobelprize.org]

Achievement: Is there an ‘objective’ way of deciding? No. Note that most of the predictions made are based on citations of the economists’ works. In any case, let us see what Monday brings forth!

More on Nobel Prize in Economics

G Omkarnath, Nobel Economics, The Hindu, 2003.

Jayati Ghosh, The Nobel prize for economics may need its own bailout, Guardian.co.uk, 2009.