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

This note is an extension of several contributions to theproblem of re¬source allocation in a developing economy. In separatepapers, I.M.D. Little and F. Seton* have introduced a model in whichlabour in a developing economy cannot be shifted from the subsistence tothe industrial sector at zero opportunity cost, even though this labourdisplays zero marginal product in its 'traditional' occupations; and inwhat follows this problem will be attacked via a diagramma¬tic analysis.A short appendix will treat a side issue of the topic. As Littlepresented the model, there was an initial amount of capital K to bedivided 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 ofProfessor W. A. Lewis2, in that the marginal product of labour in thissector is taken as equal to zero. As it happens, however, this labourcannot be moved to the I-Sector without an increase in production in theC-sector. The reason for this is because as labour is transferred to theindustrial sector, consumption per head increases in the C-sector, thusdecreasing the surplus available for workers being transferred to theI-sector. The transfer can only be carried out if a surplus equal to thedifference between the industrial wage in C-goods and the amount ofC-goods 'released' by the C-sector is forth¬coming, and for this anincreased production of C-goods (via the input of capital into theC-sector) must take place. A similar situation would exist iftransferring workers required a wage differential; or if C-goods had tobe exported to obtain certain types of capital goods for the labourbeing reallocated, and/or housing, training, etc.