THE ECONOMIC WEEKLY September 29, 1956 Labour Cost and Amartya Kumar Sen

ON what principles should the cost cost, we get a good idea of the crease in consumption due to of labour be estimated for a changes in total output. If how­ the transfer. Should It be equal developing economy, is by no means ever, we are interested in to the full rate? The an easy question to answer. It is, the rate of growth of the economy, normal tendency seems to be to however, a very vital question for given by the rate of surplus of pro­ answer the question in the negative. economic development, as a lot of duction over immediate consumption, The increase in consumption, it Is decisions, e g, the choice of techni­ labour has to be valued at the addi­ argued, will surely be given by the ques of production, depends on the tional consumption which an addi­ difference between the industrial costs of labour. tional unit of industrial employment wage rate and the average rural con­ induces. Thus the problem of va­ sumption of the labour transferred The Concept of Coat luation of labour turns out to be from rural disguised unemploy­ The theory of factor-costing which another way of looking at the old ment to industrial employments enjdys most prestige today in the controversy about the rate of income Armed with this piece of theory. economic literature is that of oppor­ and the rate of growth of income Prof Vakil and Brahmanand have tunity costs. Labour, according to When we are interested in growth, developed their thesis of the "Con­ this theory, should be valued at the labour should be valued at. the in­ sumption Multiplier", given by alternative use to which it might crease in consumption due to addi­ have been put to. In an underdeve­ tional employment, even if the op­ portunity cost of labour is nil. This loped economy with large-scale dis­ trial wage rate and 'd' the average necessitates considerable change in guised , e g, in India, consumption of the disguised unem­ the economic recommendations (eg the of labour is nil, ployed.3 If d AW, an investment of Prof Lewis, Op cit specially p 207 though the have to be equal made with Rs 1,000 worth of wage and p 386) based on the opportunity- at least to the level of subsistence. , leads to that transfer of cost-valuation of labour. That is why no less an authority on, labour from disguised unemployment growth and planning than Prof W A Mr Hollis B Chenery in his arti­ to industrial employment as to re­ Lewis argues for valuing labour at cle on "The Application of Invest­ lease Rs 500 worth of consumer less than its wage cost in econo­ ment Criteria" (Quarterly Journal goods previously consumed by the mies with surplus labour. "Special of , February 1953) con­ fuses the problem. His theory is transferred labour force. That care has to be taken in those coun­ basically one of Social Marginal when invested releases Rs 250, and tries which have a large surplus of Productivity with a 'welfare func­ so on. So total investment that can unskilled labour, for in such circum­ tion' embracing 'effect on national be made with Rs 1000 worth of ini­ stances wages will not reflect income' (along with effects on balance-of-payments and income- tial wage goods is Rs 2000 and the the real of using labour. ). Now, when one is in­ "multiplier" is 2. All these are based In these circumstances capital is not terested in total national income (as on the assumption that while the productive if it is used to do what with the Social Marginal Producti­ newly employed labourers spend all vity criterion) one should labour could do equally well; given their new wages, the amounts which the level of wages such investments labour at its opportunity cost. In­ stead he values labour (equations 4 they were consuming previously are may be highly profitable to capita­ and 5) at the 'increase in consump­ now saved. lists, but they are unprofitable to the tion' (pp 82-3). "The effect on natio­ community as a. whole since they nal income, Y, can be aproximated, This is a questionable assumption. add to unemployment but not to by applying a set of correctives to In all probability, as an individual the businessman's calculation of output" (The Theory of Economic the annual rate or ." (p 24, leaves the village for industrial em­ Growth, p 386). "It is then (when emphasis mine). This is a confusion ployment, without, affecting the out­ there Is surplus labour) arguable between the rate of surplus and the put there this is so by definition, that the real cost of using labour in rate of net income flow. There is no as marginal product has been assu­ reason whatsoever why in national med to be nil in rural areas his cottage industry is zero, whereas income measurement the increase factory production uses scarce capi­ in the consumption of wage earners relatives will be only too glad to eat tal and supervisory skills." i Op cit should not be included. The con­ his pancakes. In a country like p 140). cept of opportunity cost is legitimate India, where the rural income when for income calculation but not for calculating the rate of growth; the Prof A E Kahn makes the feme 2 To use Dr A K Das Gupta's no­ concept of surplus of production menclature, the difference between point in connection with his "Social over consumption is legitimate for the "wage unit" and the rural "con­ Marginal Productivity" Criterion for the latter but not .''or the former. sumption unit", "Disguised Unem­ tackling the problem of choosing To save confusion, the distinction ployment and Economic Develop­ has to he appreciated. between techniques (Investment Cri­ ment", Economic Weekly, August 25, 1956/ teria in Development Programs, Measure of Cost * Vakil and Brahmanand, "Plan­ Quarterly Journal of Economics, The relevant question for growth ning for an Expanding Economy'*, Feb 1.951, .see specially p 24). then, is what determines the In- Vora & Co,, 3956. See specially, Labour should be valued, according •pages 262-3 and 215-6. "Assuming For an account of the "old con­ that the money' value of the wage- to him, at Its opportunity cost, and troversy" referred to above, see W goods consumed by the disguised in areas where it is nil, labour should Galenson and H Leibenstein, "Invest­ unemployed is Rs 200, and that the be treated as cost-less whatever the ment Criteria, Productivity and Eco­ level of real wage is Rs 400, the wage rate. nomic Development", Quarterly money value of the wage-goods ne­ Journal of Economics, August 1955, cessary to increase employment In It can easily be realised that If and K N Raj, Economic Weekly, investment by an additional worker labour is valued at its opportunity April 7 and 14, 1956. is Rs 200/' (p 215) 1159 THE ECONOMIC WEEKLY September 29, 1956

divided by the rural population even development and growth is given by after some considerable town-ward the increase in consumption due to drifts, would remain far below a the transfer from disguised unem­ comfortable figure it would not be ployment to gainful occupations, wise to assume that the rural popu­ where the disguised unemployment lation would start practising thrift is the main source of labour supply. The opportunity cost of labour is a as they waved their handkerehieves Combinations or a lower p and a valid guide only when we are inte­ at their town bound relatives. The lower C may now become relatively rested in the immediate rate of in­ position can be illustrated with a preferable as a result of this fall come and not in the rate of growth simple example. Let us assume that in the effective labour cost. This of income. a rural family of five hap an income can be illustrated with a numerical 2) The increase in consumption as of Rs 100, ie of Rs 20 per head. One example:— of the five leaves for the town. a result of the transfer is not ap­ where he gets say Rs 30. The re proximated by the difference between suit is a rise in the total income of the industrial wage and the rural the family from Rs 100 to Rs 130, average consumption, but by the and as with low income groups all full industrial wage (unless the over the world, this would mean a State intervenes with taxation, or rise in the consumption expenditure with other Income-leakage-mecha­ almost equal to Rs 30, the marginal nisms). This reveals the basic propensity to consume being very weakness of theories like the one of the "Consumption Multiplier" of Prof near one. Thus from the point of With the recovery, technique I Vakil and Brahmanand. view of growth, the relevant cost of (less intensive) becomes superior. labour i in terme of increase in con­ Thus a strong policy of "compulsory 3) The more successful the State sumption) is approximated by the delivery", or taxation, linked with is in siphoning off the previous rural wage rate, and not by the differ­ the exodus from the rural area consumption of the new labourers, ence between the wage rate and the .should make the urban industries through taxation or other means, average consumption of the man in less capital-intensive, if such a the less becomes the relevant labour disguised unemployment. This fact choice existed. t-ost, and hence, the less is the makes the foundation of the Vakil degree of capital-intensity, that is Brahmanand thesis of the "Con­ Conclusions best, for economic growth, if a sumption Multiplier'' rather dubious. The conclusions reached at the choice of techniques exists. A prac­ various stages of this paper could tical conclusion from this, I sup­ Recovery and its Implication be summarised as follows: pose, is that the technological plans 1) The relevant industrial cost of and the fiscal policies must be co­ It may now be asked what happens labour from the point of view of ordinated. if the previous consumption of the newcomer to the industry is taxed away as he moves out of disguised unemployment. It is of course like­ ly to affect his movement, if he has any sense, since the movement which is worth doing for an extra Rs 30 for the family, may hardly be so for an extra Rs 10 (Rs 30 minus Rs 20). But if he still does move, the relevant cost of labour would be less. This would have some in­ teresting results. The more com­ plete this Is, the stronger would be the case for substituting less capi­ tal-intensive techniques for more, as the effective cost of labour to society would be less. If p is the net product per unit of labour, w is the wage rate and C is the capital cost the rate of surplus is given by

recovery of previous consumption. If k is his previous rural con­ sumption and q the proportion of it recovered, the new rate of surplus

* Vakil and Brahmanand deal with the limiting case where q=--l. and that Is somehow brought about without the help of any means like taxation. 1160