CHAPTER 4
POPULATION, LABOR AND
DEVELOPMENT
2
CONTENTS
4.1. Population
4.2. Labor markets
4.1. POPULATION
4.1.1. Population Growth
4.1.2. Population and Productivity
4.1.3. Population Issues
4.1.4. Population Policy
4.1.1 Population
growth: past,
present and future
A. World population
growth through
history:
Doubling time: Period
that a given population
or other quantity takes to
increase by its present
size.
B. Structure of the world’s population:
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The world’s population is very unevenly distributed by geographic region, by
fertility and mortality levels, and by age structures.
• Geographic region: More than three-quarters of the world’s people live in
developing countries; fewer than one person in four lives in an economically
developed nation.
• Fertility and mortality trends:
- Rate of population increase: The growth rate of a population, calculated as the
natural increase after adjusting for immigration and emigration.
- Natural increase: The difference between the birth rate and the death rate of a
given population.
- Net international migration: The excess of per sons migrating into a country over
those who emigrate from that country.
- Crude birth rate: The number of children born alive each year per 1,000
population (often shortened to birth rate).
- Death rate: The number of deaths each year per 1,000 population.
- Total fertility Rate (TFR): The number of children that would be born to a
woman if she were to live to the end of her childbearing years and bear
children in accordance with the prevailing age-specific fertility rates.
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- Life expectancy at birth: The
number of years a newborn 7
child would live if subjected to
the mortality risks prevailing for
the population at the time of
the child’s birth.
- Under-5 mortality rate: Deaths
among children between birth
and 5 years of age per 1,000 live
births.
• Age structure and dependency
burdens:
- Youth dependency ratio: The
proportion of young people
under age 15 to the working
population aged 16 to 64 in a
country.
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4.1.2. Population and Productivity
- Malthus (population pessimist) saw population growth leading to an
inevitable decline in agricultural productivity and having devastating
consequences for humanity.
- Population optimists would view population growth as having the
potential to increase factor productivity, because:
+ Large population -> economies of scale in production and consumption;
+ Population pressures can induce technological change -> encourage
more labor-intensive farming systems, increasing the return to land and,
perhaps, to other inputs;
+ A larger population contains more entrepreneurs and
other creators, who can make major contributions to solving the problems
of humanity
4.1.3. Population issues 9
1. Underdevelopment: As long as people in developing countries remain impoverished
(poor), uneducated, and unhealthy and the social safety net remains weak, the large family
will constitute the only real source of social security (i.e., parents will continue to be denied
the freedom to choose a small family if they so desire)
2. World resource depletion and environmental destruction: Population can only be an
economic problem in relation to the availability and utilization of scarce natural and
material resources.
- developed countries, with less than one-quarter of the world’s population, consume almost
80% of the world’s resources.
3. Population distribution: Many regions of the world (e.g., parts of sub-Saharan Africa) and
many regions within countries (e.g., the northeastern and Amazon regions of Brazil) are
viewed as underpopulated in terms of available or potential resources. Others simply have
too many people concentrated in too small an area (e.g., central Java or most urban
concentrations).
4. Subordination of women: women often bear the disproportionate burdens of poverty, poor
education, and limited social mobility. In many cases, their inferior roles, low status, and
restricted access to birth control are manifested (clear) in their high fertility.
4.1.4. Population policy
10
A. What developing countries can do:
- First, they can try to persuade people through the media and the educational process, both formal
(school system) and informal (adult education), to have smaller families.
- Second, they can enhance family-planning programs to provide health and contraceptive services to
encourage the desired behavior.
- Third, they can deliberately manipulate economic incentives and disincentives for having
children—for example: through the elimination or reduction of maternity leave and benefits, the
reduction or elimination of financial incentives, or the imposition of financial penalties for having
children beyond a certain number; through the establishment of old-age social security provisions
and minimum-age child labor laws; through the raising of fees and elimination of heavy public
subsidies for higher education; and through the subsidization of smaller families through direct
money payments.
- Fourth, governments can attempt to coerce (force) people into having smaller families through the
power of state legislation and penalties.
- Finally, no policy measures will be successful in controlling fertility unless efforts are made to raise
the social and economic status of women and hence create conditions favorable to delayed marriage
and lower marital fertility.
4.1.4. Population policy
11
B. What developed countries can do:
- Simplifying lifestyles and consumption habits -> free resources that could then be
used by poor nations to generate the social and economic development essential to
slowing population growth.
- Liberalizing the legal conditions for the international immigration of poor, unskilled
workers and their families from the poor countries.
C. How developed countries can help developing countries with their population
programs:
- Giving genuine assistances to the poor countries such as finance, trade relations
(tariff, quota free access to developing countries’ markets), appropriate technology
transfers, developing indigenous scientific research capacities, better international
commodity-pricing policies, and a more equitable sharing of the world’s scarce
natural resources.
- Financial assistance from developed countries for family-planning programs, public
education, and national population pol icy research activities in the developing
countries
4.1.4. Population policy
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D. Policy for Still-Developing Countries Facing Population Declines:
These countries face special challenges known as the problem of “getting old before
getting rich.”
- First, perhaps the most obvious strategy is to allow immigration.
- Second, provide generous retraining of workers so that they can work productively
later in life as the economy modernizes and is in need of more advanced skills.
- Third, “move up the value chain” to make it profitable to do more of the advanced
parts of the production process in the domestic economy, noting that higher
productivity becomes more important than ever to be able to support a larger
nonworking population.
- Fourth, to complement the previous points, create conditions to attract foreign
investment of the type that will lead to increased worker productivity and incomes.
- Fifth, as a last resort, consider implementing incentives for families to have more
children, such as income tax breaks.
4.2. LABOR MARKETS 13
4.2.1. Unemployment and Underemployment
4.2.2. Formal and Informal Sectors
4.2.3. Mobility in Developing Country Labor
Markets
4.2.4. Skill Acquisition in Developing Country
Labor Markets
4.2. LABOR MARKETS 14
4.2.1. Unemployment and Underemployment
- Because finding appropriate jobs is time-consuming,
workers can experience periods of unemployment
between jobs, when they are not working and are actively
seeking employment at going wages.
- Because job search is an investment that may be difficult
to finance, workers might also settle for
underemployment—employment in jobs that make poor
use of their skills or employ only a fraction of the labor
time they are willing to offer— as they become desperate
to find new sources of income.
4.2. LABOR MARKETS 15
4.2.2. Formal and Informal Sectors
- The formal sector in which jobs conform to the developed country norm:
+ Involves work for an employer with beautiful headquarters and hundreds or
thousands of employees.
+ Job responsibilities and compensation are spelled out in formal documents,
and workers receive important nonwage benefits, as well as access to Social
Security and other government-stipulated protections
- The informal sector is so much larger in developing countries:
+ Large fractions of workers are self-employed or work for wages in very
small enterprises
+ Many jobs are performed on the streets or in rudimentary workplaces,
written employment contracts are rare.
4.2. LABOR MARKETS 16
4.2.3. Mobility in Developing Country Labor Markets
* Labor mobility in development
- When workers maximize utility and are perfectly mobile, and when
producers maximize profits and are perfectly competitive, their labor
market interactions lead to an efficient allocation of labor.
- Labor mobility into the labor force and from stagnant to dynamic sectors
increases the rate of growth in GDP generated by sector-specific
investment and innovation.
- When labor is mobile, labor markets help spread the benefits of sector-
specific labor demand growth to workers in other sectors and locations.
- Workers face mobility costs that are comparable to wage reductions as
they move from Producer 1 to Producer 2.
4.2. LABOR MARKETS 17
4.2.3. Mobility in Developing Country Labor Markets
* Geographic mobility concerns
- Over the course of development, the shares of manufacturing and service sectors in
GDP tend to rise, while the agricultural sector declines, and the rise of
nonagricultural production tends to shift jobs into urban areas.
- Migration flows are high within many developing countries.
- Temporary migration: migrants stay to work in destination regions only for a limited
number of months or years before returning to their origin regions.
- Migration decision: Households weigh what they know about the benefits and costs
of each migration option they face (relative to remaining where they are). Among
migration options, they prefer the one for which the benefits are highest relative to
the costs, and they exercise that option if its benefits outweigh the costs.
- Remittances from members who have migrated elsewhere can allow sending
households to purchase agricultural inputs or send children to school.
4.2. LABOR MARKETS 18
4.2.3. Mobility in Developing Country Labor Markets
* Interfirm mobility and related costs and policies
- Successful growth and development requires mobility of workers not only from
region to region but also from firm to firm within regions.
- Workers’ mobility from firm to firm may be inhibited by search costs, which
resulted by both employers and workers.
- Governments might also attempt to finance workers’ job search efforts by
creating unemployment insurance programs, which provide cash transfers to
workers who have recently become unemployed.
- Many developing-country governments attempt instead to reduce workers’
vulnerability to unemployment through job security regulations, which require
employers to give workers advance notice of firing, to make large lump-sum
severance payments to workers they dismiss, or to obtain government approval
before laying off workers.
4.2. LABOR MARKETS 19
4.2.3. Mobility in Developing Country Labor Markets
* Labor market segmentation
- In competitive labor markets, all workers with identical skills and preferences obtain
jobs that leave them equally well off, and labor is allocated efficiently across uses.
- In segmented labor markets, by contrast, among workers with identical skills, some
have “good jobs” – which offer packages of wages and working conditions that most
workers would prefer –while others have “bad jobs” in which wages and working
conditions are inferior.
Three sets of forces might prevent some employers (but not others) from lowering wages
and taking on new workers, even when workers with the required skills are willing to
work for less: + First, the government might set a legal minimum wage above the
competitive equilibrium wage, and it might enforce this only for large, highly visible
employers.
+ Second, labor unions might achieve bargains with some employers that raise members’
wages but succeed only in certain types of industries and firms.
+ Third, and more subtly, some firms might find it in their profit-maximizing interest to
pay higher wages than many of their labor market competitors.
4.2. LABOR MARKETS 20
4.2.4. Skill Acquisition in Developing Country Labor Markets
Workers acquire skills through education and job training.
Education refers to the acquisition of skills through primary and secondary
schools, colleges, and universities, often by children and young adults
before entering the labor market.
Job training refers to the acquisition of skills after entering the labor
market, usually through activities closely tied to specific lines of work or
specific employers. Job training includes formal training, acquired through
programs offered on employers’ premises or off-site at training institutes, as
well as informal training acquired on the job as mentors help newer
workers learn the ropes or as new hires learn by doing.
4.2. LABOR MARKETS 21
4.2.4. Skill Acquisition in Developing Country Labor Markets
• A benchmark model of skills in labor markets
4.2. LABOR MARKETS 22
4.2.4. Skill Acquisition in Developing Country Labor Markets
• A benchmark model of skills in labor markets
- The model focuses on the interaction between the markets for
two types of labor: low-skill and high-skill labor.
- Assumptions:
+ employers maximize profits and are competitive;
+ workers are perfectly mobile across employers;
+ the numbers of low- and high-skill workers are fixed;
+ low skill workers may invest in becoming high-skill workers
through education or training
4.2. LABOR MARKETS 23
4.2.4. Skill Acquisition in Developing Country Labor Markets
• A benchmark model of skills in labor markets
- The model:
+ First, because high-skill workers are more productive than low-skill
workers (VMPLH > VMPLL, the labor demand schedule is farther
above the horizontal axis in panel b than in panel a, indicating that
wH >wL.
+ Second, because high-skill workers are scarce relative to low-skill
workers in developing countries, the labor supply schedule is closer to
the vertical axis in panel b than in panel a, indicating that the
quantity of high-skill labor supplied at any wage is smaller than the
quantity of low-skill labor that would be supplied at that same wage.
4.2. LABOR MARKETS 24
4.2.4. Skill Acquisition in Developing Country Labor Markets
• A benchmark model of skills in labor markets
- The model:
+ Workers invest in skills by costs, which may be sponsored or provided by
the employers;
+ The training costs paid by the employers which are offset by the discount they
enjoy on the labor of low-wage trainees;
+ When workers acquire skills in this model, they transform themselves from
low-skill to high-skill workers. This shifts the supply schedule for low-skill
workers to the left; shifts the supply schedule for high-skill workers to the
right; tending to raise wages for low-skill workers and reduce wages for high-
skill workers;
+
THE END
