Nature of Unemployment in Labour Surplus Developing Countries

• Keynesian theory was primarily developed to explain cyclical unemployment in advanced capitalist economies, particularly during periods of economic depression. The experience of the Great Depression (1929–33), which generated massive unemployment in developed countries, formed the basis of Keynes’s analysis.

• Keynes argued that this unemployment resulted from deficiency of aggregate effective demand. In developed economies, unemployment generally emerges during the recessionary phase of the business cycle and is typically a short-run phenomenon, lasting for a limited period such as two to three years.

• As aggregate demand recovers and the economy emerges from recession, cyclical unemployment disappears and full employment tends to be restored in developed countries.

• The nature of unemployment in underdeveloped countries differs fundamentally from that in developed economies:

  • It is chronic, persistent, and long-term rather than cyclical and temporary.

  • It is not primarily caused by a deficiency of aggregate effective demand.

• Chronic unemployment and underemployment in less developed countries arise mainly from structural factors, including:

  • Lack of land.

  • Insufficient capital.

  • Inadequate complementary resources relative to the size of the population and labour force.

• In the Keynesian situation, both labour and capital equipment remained unemployed because aggregate demand was insufficient. Existing productive capacity was underutilised, and higher aggregate monetary expenditure could restore full employment by increasing demand.

• In contrast, developing countries suffer from unemployment because productive capacity itself is inadequate, not because existing capacity remains idle due to insufficient demand.

• As pointed out by Joan Robinson, Keynes’s theory has limited direct applicability to underdeveloped countries because it was formulated in the context of:

  • An advanced industrial economy.

  • Highly developed financial institutions.

  • A sophisticated business class.

• The unemployment analysed by Keynes was associated with underutilisation of already existing capacity caused by a fall in effective demand, whereas unemployment in underdeveloped economies exists because capacity and effective demand have never been sufficiently developed in the first place.

Lack of Capital as the Cause of Unemployment in Developing Countries

• In contrast to Keynesian unemployment, which arises from deficiency of aggregate demand in developed countries, the basic cause of unemployment in labour-surplus developing countries is considered to be the lack of capital stock and other complementary resources required to employ labour productively.

• Labour cannot produce effectively without the support of capital goods. Even primitive production required simple tools, while modern production demands substantially larger quantities of capital:

  • In agriculture, labour requires land, ploughs, oxen, seeds, and subsistence resources during the production period.

  • In industry, labour requires factories, machines, and equipment.

  • These productive aids collectively constitute the community’s stock of capital.

• When the labour force grows faster than the capital stock, sufficient instruments of production are unavailable to employ all workers productively. The resulting unemployment is called long-term or chronic unemployment.

• Expansion of a nation’s capital stock requires investment, which in the absence of unutilised resources necessitates additional saving by the community. Classical economists therefore emphasised maintaining a sufficiently high rate of capital formation so that employment opportunities could expand alongside population growth.

• This problem remains relevant for countries such as India, where the labour force has grown by more than 2 per cent annually, while the rate of investment relative to the capital stock has not increased rapidly enough to match population growth. Consequently, the economy’s capacity to provide productive employment to new labour market entrants has remained limited.

• The inadequate growth of productive employment in India manifests itself in:

  • Large-scale open unemployment in urban areas, reflected in employment exchange statistics.

  • Underemployment and disguised unemployment in rural agriculture.

• The existence of unemployment due to inadequate capital or other complementary resources was also discussed by Karl Marx in the context of industrial economies. Such unemployment is often referred to as Marxian unemployment, distinguishing it from Keynesian unemployment, which is caused by deficient aggregate demand.

• According to Marx, employment in modern industry depends upon the amount of available capital, creating a “reserve army of unemployed labour” because capital is insufficient to employ all available workers. However, the passage argues that Marxian unemployment is more appropriately viewed as technological unemployment arising from highly capital-intensive and mechanised production techniques, rather than merely from a deficiency of capital stock.

• The standard explanation of labour surplus, unemployment, and underemployment in developing countries is the limited availability of capital and complementary resources—including land, factories, machines, tools, and implements—relative to the size of the population and labour force. When labour force growth exceeds growth in these productive resources, all additional workers cannot be absorbed into productive employment.

• The importance of capital as the principal constraint on employment growth was emphasised by the Harrod-Domar growth model, which assigns a central role to capital accumulation and argues that the rate of output growth depends on the proportion of national income that is saved and invested.

• The Harrod-Domar growth relationship is expressed as:

  \(g=\frac{I}{v}\)

  where:

  • g = rate of growth of output.

  • I = rate of investment (investment as a proportion of national income).

  • v = capital-output ratio.

• The model assumes constant capital-output and capital-labour ratios. Under these assumptions, an increase in capital stock leads directly to higher output and employment.

• When applied to developing countries, the Harrod-Domar model implies that the growth of output and employment is fundamentally determined by the growth of the capital stock, making higher investment and capital accumulation the primary solution to unemployment in labour-surplus economies.

• Development strategies derived from the Harrod-Domar framework focused mainly on increasing investment and capital formation in the modern industrial sector to accelerate output and employment growth, while generally giving little attention to increasing capital formation in agriculture as a means of expanding employment opportunities.