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The problem of unemployment in industrialized countries

Keynesian theory is mainly concerned with cyclical unemployment, which emerges in the developed capitalist countries, especially in times of depression. During the period 1929-33, the developed capitalist economies suffered from serve depression which caused huge magnitude of unemployment. Keynes analysed this type of unemployment and asserted that it was caused by deficiency of aggregate demand. The nature of unemployment in under-developed countries is quite different; it is of chronic and long-term nature.

It is now almost universally recognised that the chronic unemployment and under-employment in less developed countries are not due to the lack of aggregate effective demand which, according to J. Keynes, was responsible for unemployment in developed countries in times of depression. Rather it is stated to be due to the lack of land, capital and other complementary resources in relation to the total population and labour force. In the phenomenon examined by Keynes, not only labour force but also capital equipment were unemployed due to the deficiency of aggregate effective demand.

In other words, in the Keynesian scheme, both the labour force and capital equipment were crying out for full employment which could be achieved by raising the level of aggregate monetary expenditure. Thus, according to Joan Robinson: The unemployment that concerned Keynes was accompanied by under-utilisation of capacity already in existence.

It had resulted from a fall in effective demand. The existence of unemployment due to lack of capital or other co-operating factors was an important question which was discussed by Marx in the context of advanced industrialized countries.

Therefore such unemployment has often been called Maxian unemployment as distinguished from Keynesian unemployment which is caused by the deficiency aggregated demand.

If A stands for the total amount of available labour, N for the amount of labour-employment which is necessary to work with the existing stock of capital at its normal capacity, then A-N is the reserve army of unemployed labour. Now, if the population grows faster than the stock of capital of a country, the entire addition to the labour force cannot be absorbed in productive employment because not enough instruments of production would be there to employ them.

Since in less developed countries, the stock of capital has not been growing at a rate fast enough to keep pace with the growth of population, the ability to offer productive employment is very limited. This has resulted in surplus labour which is manifested in the existence of huge magnitude of under-employment or disguised unemployment and open unemployment in both the rural and urban areas.

This model assumes capital-coefficients i. With constant capital-output and capital-labour ratios, the more the the problem of unemployment in industrialized countries, the more will be both output and employment.

Therefore, when adapted to the less developed countries, this model suggests that the rate of growth of output and therefore of employment is determined by the growth of capital stock. This dissenting view had been put forward by Prof. Vakil of Bombay University. According to them, the basic cause of unemployment in developing countries is the deficiency of the availability of essential consumer goods, often called wage goods. They point out that when the unemployed people or disguisedly unemployed people who are withdrawn from agriculture are engaged in some public works, they will have to be supplied with wage-goods so that employed labourers can subsist.

If the wage-goods are not sufficiently available, their employment in capital-creation works cannot be sustained.

Given the real wage rate, a particular number of people can be employed in the economy, depending upon the supply of wage-goods in the economy. Now, the total quantity of wage-goods required to employ all the disguised unemployed workers in agriculture, according to them, would exceed the actual available supply of wage-goods even when the release of wage goods by the withdrawal of disguised unemployed is take into account. Thus, according to Prof.

Brahmananda and Vakil, there exists a wage-goods gap which is the fundamental cause of unemployment in labour surplus developing countries. A prominent Indian economist Prof. Sen has also emphasised the supply of wage-goods in determining employment in developing countries.

Sen, the quantum of wage employment in the economy depends on the total supply of wage-goods on the one hand and the real wage-rate on the other. If E represents the quantum of employment, M represents the supply of wage- goods and W, the problem of unemployment in industrialized countries real wage-rate, then the employment which can be provided will be given by the following equation.

Thus, to generate enough employment and solve the problem of unemployment and under-employment, the wage-goods industries, especially agriculture, must be accorded a high priority in the strategy of economic development. Most of the unemployment in underdeveloped countries is of a different the problem of unemployment in industrialized countries from that in advanced and developed countries.

A major part of unemployment in present-day developed countries is of cyclical nature which is due-to deficiency of aggregate effective demand. But most of the unemployment in developing countries is not cyclical. Thus, in developing countries, there is not much Keynesian type short-term unemployment. Instead, it is a chronic problem. Causes of Unemployment in Developing Countries: We have explained above the two basic explanations of unemployment and under employment prevailing in the developing countries.

We now explain below in some detail the various causes which account for unemployment and underemployment that still prevails in the developing countries. Lack of the Stock of Physical Capital: The major cause of unemployment and underemployment in underdeveloped countries like India is the deficiency of the stock of capitaI in relation to the needs of the growing labour force. In the modern world, man by himself can hardly produce anything.

Even the primitive man needed some elementary tools like the bow and arrow to engage in hunting for the earning of his livelihood. With the growth of technology and specialisation, he needs much more capital with which to engage in the productive activity. If he is an agriculturist, he needs a piece of land and also a plough, a pair of oxen, seeds and some foodgrains and other necessities of life to sustain himself during the period of sowing to the reaping of the harvest.

In the industrial sector, he needs factories to work in and machines to work with. Now, if the working force grows faster than the stock of capital of a country, the entire addition of labour force cannot be absorbed in productive employment because not enough instruments of production would be there to employ them.

The resulting unemployment is known as the long- term or chronic unemployment. The concern of the classical economists was to ensure that the rate of capital formation was kept sufficiently high so that employment opportunities were successively enlarged to absorb the additions to the working force of a country as a result of population growth. This is also the problem that the developing countries like India are facing today.

In recent times, the labour force in India has the problem of unemployment in industrialized countries growing at more than 2 per cent per year, yet our rate of investment expressed as a percentage of our stock of capital has not been growing at a fast enough rate so as to keep pace with the growth of population.

This manifests itself in two things: Use of Capital Intensive Techniques: An important factor responsible for slow growth of employment has been the use of capital-intensive techniques of production, even in consumer goods indpstries where alternative labour-intensive techniques are available.

Even before 1991, under the industrial policy resolution 1956, the development of consumer goods industries were left open for the private sector. However, private sector prefers to invest in highly capital-intensive plants and equipment on the basis of technology developed in labour- scarce western countries.

It is argued by them the alternative labour-intensive techniques have low productivity and low-surplus-generating capacity.

However, the important reason for the use of capital-intensive techniques has been the availability of cheap capital. Even firms in modern small industry sector which were expected to generate large employment opportunities have also tended to use capital-intensive techniques of production.

In agriculture, reckless mechanisation of various agricultural operations despite the existence of surplus labour has reduced the employment-augmenting effect of new high-yielding technology involving the use of HYV seeds, fertilisers and pesticides. This has prevented the generation of enough employment opportunities in rural areas. Now, a pertinent question is why capital-intensive techniques are used in industries despite the condition of labour-abundance in the economy.

First reason is the relatively low price of capital, relatively low the problem of unemployment in industrialized countries of capital has caused by a lower rate of interest, b liberal depreciation allowance on capital investment permitted in the taxation system of the country, c relatively cheap capital equipment imported from abroad. Second, higher wages of labour in the organised sector relative to their productivity under pressure from trade unions.

Thirdly, rigid labour laws also discourage the employment of labour. It is difficult to retrench labour even when it is not required in case an industrial unit becomes sick and proposes to close down or exit.

Inequitable Distribution of Land: Another cause of unemployment prevailing in the developing countries like India is inequitable distribution of land so that many agricultural households have no adequate access to land which is an important asset for agricultural production and employment. Sub-division of land holdings under the pressure of rapid population growth since 1951 has further reduced access to land for several agricultural households.

As a result many persons who were self-employed in agriculture have become landless agricultural labourers who suffer from acute unemployment and under-employment. Rigid Protective Labour Legislation: Another reason for the slow growth of employment in the organised sector has been the existence of unduly rigid protective labour legislation which makes it very difficult to retrench a worker who has been employed for 240 days.

Labour-legislation is so much rigid that it is even difficult to close down the unit and quit the industry. Thus, this excessively protective labour-legislation induces private entrepreneurs to prefer the maximum use of capital in place of labour. Neglect of the Role of Agriculture in Employment Generation: An important factor the problem of unemployment in industrialized countries for slow growth of employment opportunities is the neglect of agriculture for generating employment opportunities.

By the mid-sixties it was realised that not to speak of employing new entrains to the labour force year after year, the modern industrial sector could not absorb productivity even a fraction of the then existing unemployed persons in the foreseeable feature. Agriculture though containing surplus labour can generate employment opportunities if proper strategy for its development is adopted.

For instance, the empirical evidence shows that on an irrigated hectare of land the number of man-hours employed is almost twice that on the unirrigated hectare. Irrigation requires more labour input for watering the fields, but also since output per hectare on irrigated land is much higher, more labour is used for harvesting and threshing the crop.

Besides, irrigation makes the adoption of double cropping possible which greatly raises the employment potential of agriculture.

The Nature and Causes of Unemployment in Developing Countries

It is worth noting that new agricultural technology, commonly called green revolution technology, involving the use of HYV High Yielding Varieties seeds, greater use of fertilisers and pesticides along with water is highly labour absorptive. What is equally important, this new green revolution technology is size-neutral, that is, it can be equally well adopted by small farmers. Further, HYV seeds are of short-duration type, that is, they mature in a short time so that they make multiple cropping more feasible.

The use of double or multiple cropping greatly enhances the opportunities of employment generation in agriculture. The experience of Punjab, Haryana and Western UP is a shining example of large employment generation in agriculture. What is needed for the generation of large employment opportunities in agriculture, the new green revolution technology should be widely diffused and adopted in the backward and lagging agricultural regions in India. We have explained above lack of physical capital with which labour is equipped for productive employment as the cause of unemployment prevailing in the developing countries like India.

But a similar factor responsible for huge unemployment prevailing in these countries is lack of infrastructure such as roads, power, telecommunications, highways, irrigation facilities in agriculture. Inadequate availability of infrastructure is a great obstacle for the generation of opportunities for productive employment. It follows from above that unemployment and under-employment prevailing in India and other developing countries is not cyclical Keynesian type of unemployment caused by decline in aggregate demand.

Unemployment and under-employment in India are caused by more basic structural factors such as lack of capital, use of capital-intensive technologies, lack of access to land for agricultural household, lack of infrastructure, racial growth of population resulting in large annual increments in labour force year after year.

Unemployment in India, as in other developing countries, manifests itself in both open unemployment and under-employment.