Inverted “S” — the Complete Neoclassical Labour-Supply Function

International Labour Review, Vol. 139 (2000), No. 4

Inverted “S” — The complete neoclassical labour-supply function

Mohammed SHARIF *

hough extensive and rigorous, existing surveys of the labour-supply Tliterature do not distinguish between the supply behaviour of the working poor and that of the non-poor. 1 Yet the economic conditions faced by the working poor are fundamentally different from those enjoyed by the non- poor in terms of assets and human capital. The reservation wages of the working poor and the relative weights of the income and substitution effects of a wage change on their labour supply might therefore be fundamentally different as well. This implies that the minimum wage rate below which the worker quits the labour market, the quantity of labour she/he supplies at that wage rate, and her/his net response to a wage increase might differ as between the two groups. If such differences do exist, they would have important implications for labour supply theory and human resource policy. But while studies of the supply behaviour of workers in general have been widely reviewed, those focusing on the labour supply of the working poor have eluded proper documentation and deserve attention. Empirical studies do, indeed, report the supply behaviour of poor workers to be generally different from that of their richer counterparts. While the latter’s supply behaviour is graphically observed to be positively sloping from the reservation wage upwards, with a backward-bending segment in the supply curve at high wages, that of the poor is characterized by a negative relation between wage rates and the quantity of labour supplied when wages

*1 Department of Economics, University of Rhode Island. 1 See Keeley (1981), Killingsworth (1983), Killingsworth and Heckman (1986) and Pen- cavel (1986).

Copyright © International Labour Organization 2000 410 International Labour Review drop below a certain level. 2 Conventional neoclassical theory, however, analyses the former behaviour only, as if it were universal. In this formulation, the substitution effect dominates the income effect on the upward- sloping segment of the function while the income effect dominates the substitution effect on its backward-bending section; and the reservation wage rate ¾ a function of the worker’s preference and unearned income ¾ sets the lower limit to the supply curve. Using this a priori framework, the empirical studies which observe a negatively sloping supply curve for the poor characterize it as backward- bending.3 However, in seeking to explain why this backward-bending supply behaviour occurs at very low wage rates under poor economic conditions, the authors impose a hypothesis of perverse economic behaviour on poor workers, variously calling it a “ target income” behaviour (Berg, 1961; Dunn, 1978), a “limited aspiration” behaviour (Mellor, 1963) or a “subsistence mentality” behaviour (Lewis, 1954). The underlying assumption is that the conventional economic postulate of “unlimited wants” for goods does not apply to the poor. Rather, the poor are held to have a “strong preference for leisure”, to be content if their minimum subsistence needs are met, and to enjoy most of their time in leisure. This implies that poor workers’ aspiration for a better living is limited to their minimum standard of subsistence; the workers set this subsistence as the target they work for, and once this target income is earned, they quit working. In essence, the authors conclude that a modest “target of subsistence” dictated by the limited aspiration of the poor is the objective of their supplying labour, hence the inverse relationship between the wage rate and their labour supply. Such a conclusion, however, ignores the fact that the working poor are observed to work unusually long hours in physically exerting jobs, yet fail to meet even their minimum needs for food. Objections have occasionally been raised against characterizing this as perverse behaviour (Rottenberg, 1952; Miracle and Fetter, 1970; Myint, 1971; Sharif, 1991b), and theoretical analyses have been provided for viewing it as a phenomenon of economic distress (Barzel and McDonald, 1973; McGregor, 1990; Sharif, 1991a and 1991b). However, these have not

2 Following Myint (1971), this is referred to as the forward-falling supply function to distinguish it from the backward-bending one. For empirical evidence on this negatively sloping supply curve in the context of industrialized countries, see Ashenfelter and Heckman (1973), Atkinson and Stern (1980 and 1981), Boskin (1973), Brown, Levin, and Ulph (1976), Burtless and Greenberg (1982), Cain and Watts (1973), Dunn (1978), Greenberg and Kosters (1973), Hall (1973), Hill (1973), Johnson and Pencavel (1982), Keeley and Robins (1980), Leuthold (1968), Masters and Garfinkel (1977), Moffit (1979), Rosen and Welch (1971), and Watts et al. (1974). Reviews of most of these studies can be found in Keeley (1981), Killingsworth (1983), Killingsworth and Heckman (1986) and Pencavel (1986). For studies in the context of developing countries, see Anderson and Frantz (1984), Bardhan (1977), Bardhan (1979), Berg (1961), Hart (1986), Huang (1976), Mellor (1963), Miracle and Fetter (1970), Myint (1971), Papola and Misra (1980), Rodgers (1975), Rosen- zweig (1984), Rottenberg (1951) and Sharif (1989, 1991a and 1991b). For a review of studies on Indian agriculture, see Bardhan (1977). 3 See Berg (1961), Dunn (1978), Huang (1976) and Mellor (1963). Inverted “S” — The complete neoclassical labour-supply function 411 received sufficient attention in labour economics and the perverse-mentality hypothesis predominates. The failure of analysts to accept as rational the negatively sloping supply behaviour of the working poor might derive from two misconceptions. The first relates to the concept of subsistence, and the second to the reservation wage. Generally speaking, the people in a society’s lowest income cate- gory at a given point in time are referred to as subsisting, and their standard of living as subsistence, irrespective of whether this really embodies the minimum decency that the standard of subsistence requires. Although this general concept is not meaningful in subsistence analysis, it does seem to have influenced the theory of labour supply. But if the lowest standard of living observed in a society at a given point in time is taken to be the subsistence standard ¾ as is done by the proponents of the “perverse mentality” theory ¾ it simply eliminates any possibility of below-subsistence living 4 and, hence, below-subsistence labour supply. This makes the upward-sloping supply ¾ starting at the lowest standard of living and ending with a backward bend at higher wages ¾ the only possible supply function. Any observed supply behaviour that does not conform to this standard postulate is characterized as perverse. But subsistence and poverty studies show that the lowest standard of living observed in a society is not necessarily the subsistence standard. Subsist- ence is a minimum standard of decent living, 5 and a large number of people in the world live below this standard. A third of the world’s population ¾ about 1.7 billion people ¾ live in absolute poverty, i.e. below the official poverty line, which is the official standard of subsistence. If those living at, and marginally above, the poverty line are counted as well, the number gets much larger. Even excluding the very young, the very old and the disabled, the overall number of these people who work for an income ¾ from employment or self-employment ¾ therefore accounts for a significant percentage of the world’s total labour force, 6 and their labour supply behaviour can obviously not be analysed by the existing upward-sloping supply theory. Not only does this exclude from labour-supply analysis a significant segment of the world’s working population, but it also forces empirical researchers to look for unusual explanations when they observe something that differs from the upward-sloping supply pattern. Moreover, the perverse-behaviour analysis of the labour supply of a large portion of the world’s working population might have serious adverse implications for human-resource and economic development policies in general and poverty-alleviation policy in particular.

4 This essentially rules out the existence of absolute poverty in any society at any time. 5 See Sharif (1999), for an analysis of the concept, and Sharif (1986), for a survey of the literature on it. 6 In poor households, especially in the developing countries, children start working as early as age six and old people keep on working as long as they can physically do so (Cain, 1977; Hart, 1986; Sharif, 1991a and 1991b). Thus, for the working poor, dependency has not been observed to have a statistically significant effect on labour supply behaviour (Sharif, 1989, 1991a and 1991b). 412 International Labour Review

The conventional analytical assumption about the reservation wage 7 is the second misconception that accounts for the failure to accept the negative supply behaviour of the poor as rational. In this framework, the concept of a reservation wage relates to the lowest point of the upward-sloping supply curve. Implicit in this is the assumption that, at the reservation wage rate, the worker earns/receives at least a subsistence income from non-labour sources (asset or transfer income, past savings, etc.), which affords him/her the ability to quit working if the wage rate falls below that reservation level. Thus again, the possibility of below-subsistence living and that of below-subsistence labour supply are ruled out. However, if non-labour income is not available ¾ which is really the case for poor workers, especially in traditional economies ¾ the notion of a reservation wage establishing a threshold to the non-decreasing supply function is irrelevant. In such a situation, the lower limit to the non-decreasing segment of the supply curve will be given by the wage-labour combination that yields the worker’s subsistence income. This wage-labour combination will, in turn, depend on the socially determined standard of hours/ days of work and the wage rate that yields the subsistence income at that standard hours/days. While this wage rate can be called a subsistence wage, it is far from being a reservation wage, because a reduction in the wage rate below that level would require the worker to increase his/her hours/days of work, rather than to quit work or even to work less. The possibility of increased labour supply at lower wages derives from the worker’s need to maintain a subsistence income, which graphically translates into a forward-falling (i.e. downward-sloping) segment in his/her supply curve (Myint, 1971) — with the income effect of a wage change dominating the substitution effect on this segment. This forward-falling supply curve reflects distress sale of labour and is analysed as rational behaviour using the conventional utility maximizing hypothesis (Barzel and McDonald, 1973; McGregor, 1990; Sharif, 1991a). The lowest limit to this forward-falling segment of the supply curve would be given by a minimum wage rate at which the quantity of labour supplied by the worker reaches the maximum limit of his/her physical tolerance; and this is indeed his/her reservation wage. While this “reservation wage” at the lowest point of the forward-falling segment shows the largest quantity of labour supplied, the one at the lower limit of the upward-sloping segment shows the smallest quantity of labour supplied. Moreover, whereas the former is the result of lack of unearned income, the latter is dependent upon the worker’s enjoyment of subsistence from unearned income. Obviously, the reservation wage for a worker without an unearned income is lower than that of a worker who can rely on such income.

7 The reservation wage can be considered as the minimum acceptable market rate of return to labour in the formal or informal sector. This rate of return can be hourly as in the industrialized countries or daily as in developing countries. What is relevant here, however, is the return to total supply of labour, including both employment and self-employment (Sharif, 1991a). Inverted “S” — The complete neoclassical labour-supply function 413

More importantly, the forward-falling supply pattern is observed to turn positive-sloping when the worker’s economic condition improves with wages rising to and above subsistence level. This observation strongly refutes the perverse-mentality hypothesis, while substantiating the idea that forward- falling supply is the result of rational economic behaviour caused by distress. It seems that forward-falling supply is only a logical downward extension of the upward-sloping supply pattern. Adding the backward-bending segment to these downward-sloping and upward-sloping sections thus provides a complete representation of the neoclassical labour-supply function, given by an inverted “S”. In support of this conclusion, this article begins with a discussion of the studies of labour supply, first on industrialized countries and, then, on developing countries. The findings of the review are then synthesized and the major competing theories compared.

Studies in the context of industrialized countries Before getting into the discussion of studies of labour supply in industrialized countries, it seems appropriate to take a look at the evidence on the relationship between the aggregate wage rate and the average hours worked by the working poor. In the United States over the period 1980-1995, the depressed labour market forced wage rates down to very low levels; this is expected to induce the working poor to make distress sales of labour which ought to show up in aggregate data. Mishel, Bernstein and Schmitt (1997), in their series The State of Working America , provide an exhaustive analysis of this phenomenon and show that working families did indeed suffer economic distress, working longer at lower wages, yet failing to maintain total family income. This finding is also supported by evidence of an increased percentage of multiple job holders among both male and female workers. The evidence of rising unemployment with falling wages ¾ especially for the male workers ¾ indicates a higher labour supply together with longer hours of work (note that labour supply is work hours/ time desired as given by the actual hours/time worked and hours/time of unemployment). The data given in tables 1 and 2 substantiate these general conclusions. The hourly real wage rate for husbands, the principal earners in families with children in the lowest quintile of households in income distribution, declined from US$8.12 in 1979 to US$7.02 in 1989 and US$6.43 in 1994. The corresponding figures for husbands in the second quintile of households were US$13.15, US$11.55, and US$10.81, again showing a steady decline. These wage reductions caused husbands in the bottom and second quintiles to increase their yearly hours of work, respectively, from 1,678 and 2,074 in 1979 to 1,706 and 2,138 in 1989. Although the annual working time of husbands in the bottom quintile declined to 1,607 hours in 1994, the higher male unemployment rate of 5.6 per cent and multiple-job-holding rate of 6.3 per 414 International Labour Review

Table 1. Hourly wage rate, hours worked, and family income (married-couple families with children)

Year Husband Wife Annual family income (1994 US dollars) Wage rate Hours worked Wage rate Hours worked (1994 US dollars) (per year) (1994 US dollars) (per year) Bottom Second Bottom Second Bottom Second Bottom Second Bottom Second 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 19798.12 13.15 1 6782 0745.07 6.94 478 73319 09935 313 19897.02 11.55 1 7062 1385.15 7.41 653 1 00918 16435 168 19946.43 10.81 1 6072 1455.36 7.20 634 1 06216 60433 905

Source: Mishel, Bernstein and Schmitt, 1997.

Table 2. Unemployment and multiple-job-holding

Year Unemployment (percentage) Multiple-job-holders as percentage of total workers Male Female Male Female

1979 5.1 6.8 5.9 3.5 1989 5.2 5.4 6.4 5.9 1994 5.6* 5.6* 6.3 6.5

*1995 rates. Source: Mishel, Bernstein and Schmitt, 1997. cent suggest increased or at least undiminished labour supply. The hours worked by husbands in the second quintile rose to 2,148 in 1994. That these families were facing economic hardship is also evident from the drastic increase in the hours worked by wives — from 478 in 1979, to 653 in 1989 and 634 in 1994 in the first quintile and from 733 to 1,009 and 1,062 respectively in the second quintile. Their wage rates, however, remained almost stagnant. Moreover, the multiple-job-holding rate for females increased significantly, from 3.5 per cent in 1979 to 5.9 per cent in 1989 and 6.5 per cent in 1994. The female unemployment rate declined from 6.8 per cent in 1979 to 5.4 per cent in 1989, and then increased to 5.6 per cent in 1994. All this evidence points to the desire of wives/mothers to work longer hours in order to supplement the reduced income of the family’s principal earner. However, the evidence on annual family income earned by both husband and wife shows that their attempt to maintain their standard of living failed in both quintiles, though more seriously in the bottom quintile. In 1994 dollars, family income in the lowest quintile declined from US$19,099 in 1979 to US$18,164 in 1989 and US$16,604 in 1994. The corresponding figures for the second quintile are US$35,313, US$35,168, and US$33,905. It is evident from this analysis that declining wages compelled the working poor to increase their hours of work in an attempt to maintain a minimum standard Inverted “S” — The complete neoclassical labour-supply function 415 of living. However, their failure to maintain that standard of living suggests they and their families suffered economic distress. This finding highlights the importance of discussing the micro-studies that analyse the supply of labour rather than the hours worked by the working poor. It is important to mention at the outset that all the micro-studies of labour supply in the context of industrialized countries make the a priori assumption of an upward-sloping function with a backward-bending section at higher wage rates. The neoclassical hypothesis of utility maximization is indeed the basis of all the studies. While most of them explicitly derive the supply function from a leisure-income trade-off, 8 some base their supply specification on it implicitly. 9 But virtually none of the studies provide any analysis of the supply behaviour of the absolute poor who work at very low wage rates in the absence of any other sources of income. This lack of attention might be explained by the provision of unemployment and welfare benefits, unionization and a statutory minimum wage. The works by Leuthold (1968), Dunn (1978), and Barzel and McDonald (1973) are notable excep- tions — although the workers included in these studies have some asset income, the income is so small that it does not seem to make any significant difference in their standard of living. A discussion of the first two follows, while the last is taken up at the end of the next section. Leuthold specifies a log-linear utility function in the tradition of the linear expenditure system. Incorporating property and transfer income into constrained utility maximization for dual-income poor families, she derives the labour-supply function for each of the two earners. These functions are estimated using the University of Michigan Survey Research Center data on poor workers. She then uses these estimates to simulate the effects of transfer income on the supply of work efforts for different income groups among the poor. The estimates show the usual negative property-income and cross-wage effects on the number of hours worked, but they also provide evidence of a significant negative relation between wage rates and hours worked for both spouses. Moreover, an interesting relationship also shows up between an estimated shortfall in income from an arbitrary minimum and mean hours worked by the household heads before the transfer. A shortfall in income in excess of US$2,000 is associated with 2,000 hours of work/employment. As the shortfall decreases to US$1,001, working time declines to 1,600 hours. Beyond that, any further reduction in the shortfall comes with an increase in the number of hours worked. This implies some sort of economic distress factor in the supply behaviour. Leuthold’s (1968) simulation results substantiate this: an increase in income through transfer reduces total family labour

8 See, for example, Abbott and Ashenfelter (1976), Ashenfelter and Heckman (1973), Bar- nett (1979), Becker (1965) and Hausman (1981). 9 Boskin (1973), Garfinkel (1973) and Hill (1973) are examples of such works. 416 International Labour Review supply for the poorer households and increases it for the relatively well-to-do households in the sample. These results imply that the negative supply function observed in respect of poor workers is a case of their living below subsistence, with the function reverting to the upward-sloping pattern once the shortfall from subsistence income is eliminated. Dunn (1978) estimates an empirical indifference function for poor tex- tile workers in the south-eastern United States. From this, she derives their labour-supply function ¾ which is downward-sloping over “the entire range of realistic wage rates”. The existence of unemployment compensation and minimum-wage legislation (even assuming the absence of any asset incomes and trade unions) raises serious questions about this result. Yet, two features of the estimated indifference function and the slope of the derived labour- supply function deserve special attention. First, the indifference function shows very little substitutability between leisure and income — approaching the Leontief function. Second, a slight decline in income causes a sharp drop in the level of utility, implying that consumption is at a bare minimum. Indeed, the derived labour-supply curve shows that a decline in the wage rate causes an increase in the supply of labour; but total income continues to decline (though very little) with falling wages. Dunn (1978), however, chooses to ignore this on the ground that the continuing decline in income is very small, hence her conclusion that a target-income behaviour constrains poor workers’ labour supply. 10 This idea of a target income for poor workers is actually borrowed from the Marxian tradition. Though the concept of labour supply itself is not Marx- ian, a behavioural relation can be constructed from analyses of surplus value and class struggle: the capitalist hires labour in return for a given subsistence income determined by physical needs and socio-cultural norms (Marx, 1867), but the actual amount of labour which then goes into creating value depends on the exploitative power of the capitalist. Given the physical and mental capacity of the worker, the state of technology and the mode of work organization, the capitalist’s exploitative power depends in turn on the degree of the worker’s compliance with or resistance to his/her use in creating surplus value (Lazonick, 1978). In other words, the relative class power of the worker determines the amount of surplus value — i.e. the difference between the actual value created and the subsistence paid to the worker. And one of the factors that affects the amount of surplus value within this framework is the length of the workday which, once the worker has been hired for a given subsistence income, will be longer for a weaker working class and shorter for a stronger class. The relation of a given income to the amount of working time thus gives a hyperbolic supply function (Roemer, 1978; Gintis, 1976).

10 In a recent study, however, Dunn (1996) shows that even well-paid and well-rested workers may display L-shaped indifference curves at the status quo point, if preferences are assumed to be adaptive. Inverted “S” — The complete neoclassical labour-supply function 417

Although the studies by Leuthold and Dunn are the only ones that estimate the supply function for the absolute poor working at unusually low wage rates, there is a large body of experimental and other research concerned with the effect of income maintenance programmes on the supply of labour by poor workers. These studies postulate an upward-sloping supply function a priori, but their findings are interestingly varied — some so completely opposed to others as to preclude any general conclusion. Some report no effect of wage changes on the supply of labour (Garfinkel, 1973; Hall, 1973); others provide evidence of positive wage elasticity of labour supply; 11 and others still — an overwhelmingly large number — show estimates of negative wage elasticity. 12 While the estimates of positive wage elasticity are accepted as substantiating the upward-sloping supply, the zero and negative estimates are treated as the results of errors in the measurement of variables and of functional specification and sample selection bias (for reviews, see Keeley, 1981; Killings- worth, 1983; Pencavel, 1986). Attempts are therefore made at correcting for these errors; but the finding of a negative wage effect on labour supply persists. These negative and very small (or even zero) estimates of elasticity may reflect a special type of sample selection bias caused by the pooling of data relating to workers who come from different economic backgrounds, work at different ranges of wages, and display contradictory supply behaviours. Inherent in such a pooled data set might be the supply curve given by the inverted “S” shape — with different groups of workers making up its different segments. The sample selection bias such data can generate has so far not been considered in analyses or reviews. In fact, the estimates arrived at by using such pooled data may derive either a negative or a positive sign, depending on the relative strength of various sub-samples of the data set and on the nature of the functional form used. If the sample consists mostly of assetless poor workers, the analysis will derive a negative estimate for wage elasticity, irrespective of whether a linear or a nonlinear functional form is used. Similarly, a positive estimate will obtain for a sample consisting mostly of non-poor workers, as the upward-sloping behaviour generally dominates the backward-bending behaviour. Even if the data relating to poor, moderately poor and non-poor workers are equally represented, a linear regression will virtually force the data to generate a negative estimate for wage elasticity because the workers on the forward-falling segment at low wages supply, on average, a larger quantity of labour than do those on the upward-sloping and backward-bending sections at higher wages. An estimate thus derived can also be expected to be small in absolute size as the negative responses of

11 See Ashenfelter and Heckman, 1974; Kalachek and Raines, 1970; Masters and Garfinkel, 1977; MaCurdy, 1980; and Tella, Tella and Green, 1971. 12 See the references listed in note 2. 418 International Labour Review workers on the forward-falling and backward-bending sections of the function are partially or totally neutralized by the positive response on the upward-sloping segment. Although the use of a nonlinear function in estimation with pooled data can capture the true shape of the inverted “S” curve, the algebraic sign of the wage elasticity calculated at sample mean will depend on the relative importance of different sub-samples of workers with opposite behavioural responses. If workers living in absolute poverty dominate the sample, the sample mean for wage rate and labour supply will be somewhere on the forward-falling segment, and the estimate will therefore display a negative sign. Conversely, positive wage elasticity will be calculated if the moderately poor and/or non-poor workers dominate the sample. While the negative or positive estimate will represent the average response of workers, it will fail to distinguish between the responses of the two groups. This failure to differen- tiate might lead to the wrong policy conclusion, especially where policy aims to address the behaviour of one group and the estimate is determined by dom- ination of the other. An examination of the estimates relating to the economic situation of workers in the samples of the studies under review on the United States lends support to the suggested implications of the inverted “S” function discussed above. Studies that restrict their sample to workers in similar economic situ- ations ¾ instead of pooling data and using variables like education, unearned income, etc. to control for differences across economic groups ¾ appear to substantiate the differential behaviours. Most of the works that use data relating to workers of intermediate economic means report positive wage responses,13 while studies which investigate the behaviour of the absolute poor observe negative responses to wage changes. 14 The studies based on samples that include both poor and non-poor workers report either a nega- tive15 or a zero16 estimate for wage elasticity. Thus, the negative wage elasticity for the poor and the positive elasticity for the non-poor can be viewed as unbiased estimators of the true parameters. However, the negative or zero estimates for unstratified samples of workers might be the result of sample selection bias, as non-poor workers’ positive response at higher wages partially or completely offsets the negative response of poor workers at lower wages. More interesting still are the results reported by studies that use data on the United Kingdom. All the studies reviewed in Pencavel (1986) report negative estimates for wage elasticity of labour supply. All these studies appear

13 See, for example, Cain and Watts (1973) and Masters and Garfinkel (1977). See also the evidence compiled in Pencavel (1986) and Keeley (1981). 14 See Ashenfelter and Heckman (1973), Cain and Watts (1973), Dunn (1978), Greenberg and Kosters (1973), Hill (1973) and Leuthold (1968). 15 See Boskin (1973), Hall (1973), Greenberg and Kosters (1973) and Rosen and Welch (1971). 16 See Ashenfelter and Heckman (1974), Cain and Watts (1973) and Garfinkel (1973). Inverted “S” — The complete neoclassical labour-supply function 419 to have used either a random or a non-random sample without any differen- tiation for the economic situation of workers, and they derive estimates that are very small in size. More importantly, three of these studies 17 show that the negative wage elasticity estimated at sample mean declines in absolute value as the wage rate rises and eventually becomes positive, thus providing support to the forward-falling supply curve with an upward-sloping segment at higher wages. All these findings seem to support the hypothesis of a supply function with both upward-sloping and forward-falling segments. However, while the evidence of upward-sloping supply for non-poor workers can be accepted without question, as it is a priori justified, that of the forward-falling pattern displayed by the poor and the bias it possibly generates in estimation cannot be accepted without caution. Indeed, in industrialized countries, the structure of the work incentives faced by the poor may be altered by the existence of legislated minimum wages, unionization, unemployment compensation and welfare benefits. The mixed results reported by the studies that use data on the United States also suggest that caution is in order. Studies of labour supply behaviour among the working poor in the traditional economies of the developing countries, however, provide acceptable evidence to support the hypothesis of a forward-falling function. The labour markets in these economies are basically neoclassical (Rosenzweig, 1984; Bliss and Stern, 1982) ¾ i.e. free of such institutional constraints as minimum wages and trade unions ¾ and a large number of the workers participating in the market live in absolute poverty, obtaining their livelihood solely from wages.

Studies in the context of developing countries In the context of developing countries, studies of labour supply differ as to their theoretical contentions and empirical findings. The most celebrated labour-supply function in development literature is horizontal in nature (Lewis, 1954); but negatively (Berg, 1961; Huang, 1976) and positively sloping (Lal, 1976; Bardhan, 1979) functions are serious contenders. Another theory tries to explain the empirical finding of a negative relation between wage rate and labour supply by resorting to the nutritional needs of the workers in a way similar to the subsistence wage theory of the “Physiocrats”. 18 The bases for Lewis’ horizontal supply function are surplus labour and an institutional wage rate. It postulates that developing countries have “unlimited supplies of labour” in the traditional sector, and that workers are paid an institutional wage rate which affords them their minimum subsistence income. This wage rate is considered to be a social datum much above their

17 Atkinson and Stern (1980 and 1981) and Brown, Levin and Ulph (1976). 18 See Mirrlees (1975), Rodgers (1975) and Stiglitz, (1976 and 1982). 420 International Labour Review marginal productivity. Hence the workers can supply any amount of labour at the given wage rate. 19 Once the horizontal nature of the labour-supply function within the traditional sector is thus specified, the horizontal nature of the function of labour supply from the traditional to the modern sector becomes evident. By paying a wage rate slightly higher than that of the traditional sector, modern sector employers can hire any amount of labour, thus facing an infinitely elastic supply of labour. Such is the main thrust of the theory. Recent empirical evidence, however, casts doubt on its validity. The shortage of labour during the peak seasons of agricultural activity contradicts the hypothesis of surplus labour (Byerlee and Eicher, 1972; Lal, 1976). The marked seasonal variation of the wage rate (Ahmed, 1981; India, 1976) and serious fluctuations in the indices of wages for agricultural labourers cross- sectionally and over time 20 also fail to support the notion of the wage rate as an institutional datum. These findings suggest that the labour-supply function within the traditional sector is something other than horizontal. However, the horizontal nature of the supply function from the traditional to the modern sector may still be considered valid. If the modern-sector wage invariably stands above the traditional-sector wage, then the supply function remains infinitely elastic. This, however, does not represent the supply behaviour of common workers in developing countries. The modern sector in these countries absorbs only a small percentage of their total labour force; most of their workers are employed in the traditional sector. What is important, therefore, is the behaviour of workers in the traditional sector, and that is not explained by this theory. Furthermore, the results of the empirical works by Pranab Bardhan (1979) and Deepak Lal (1976) call into question the validity of the horizontal labour-supply function altogether. Though both these studies use Indian National Sample Survey (NSS) data, the former provides support for the non- horizontal supply function within the traditional sector, and the latter estimates an unambiguously upward-sloping function for labour supply from the traditional to the modern sector. The general nature of this upward-sloping function is demonstrated by the estimates for all the states of India. This evidence weakens the last stand of the horizontal supply function. Another study that deals with the supply of labour from the traditional to the modern sector is that of Berg (1961). In fact, this is the earliest work on the “backward-sloping” labour-supply function in the context of developing countries. The basic premise of this work is the assumption of a target income for poor workers, who leave their homes and the traditional sector to work in the modern sector. 21 Since reductions in the wage rate require higher supplies

19 However, the concept of subsistence wage rate does not have any meaning without reference to the quantity of labour supplied. This point is elaborated in the following section. 20 See FAO (1975), Khan (1976) and Lal (1976). 21 His modern sector is mining in Africa. Inverted “S” — The complete neoclassical labour-supply function 421 of labour to make up the target income, the workers’ behaviour is represented by a negatively sloping supply function. Miracle and Fetter (1970), however, question the validity of this target- income explanation for the negative supply behaviour of poor workers. To them it is the adverse economic conditions to which these migrant workers are subjected, rather than their perverse economic mentality, that generate the observed negative supply pattern. They argue that the proponents of the target-income theory neglect the extremely harsh working conditions in the mines, the treatment meted out to the workers by their colonial employers, and the high opportunity costs — sometimes even involving the loss of their wives — the workers had to pay. Thus, they contend that the observed behaviour of these migrant mine workers is not a perverse phenomenon, but the result of hard economic rationality. Moreover, the target-income theory deals with a small portion of the total labour force and therefore suffers from the same drawback as the subsistence theory. In the works concentrating on the supply of labour within the traditional sector, both negative- and positive-sloping functions are postulated and supported by empirical evidence. While the positive-sloping functions are analysed in the conventional way, different theoretical explanations are provided for the negative-sloping functions. Huang’s (1976) work on backward- bending supply curves is a study of family labour supply. He starts by mod- elling the traditional idea that subsistence farmers’ labour supply is geared to earning a given subsistence income. Unlike other studies on family labour supply, Huang’s generalizes the model by including non-farm income. His model is tested using Malaysian data relating to subsistence and commercial farmers. The conclusion of a negative-sloping labour-supply function is drawn on the basis of the negative coefficients of farm size and non-farm income explaining farm productivity. But for the commercial farmers, the results are ambiguous — the estimates are negative for one set and positive for the other. The backward-sloping labour-supply function for subsistence farmers and the upward-sloping function for commercial farmers seem to be reasonable characterizations. But Huang’s explanation of the subsistence farmers’ backward-sloping supply behaviour ¾ in terms of earning a given income only, without any reference to the total labour actually supplied ¾ is a ques- tionable one. The snag is that the reduced quantity of labour supplied by the subsistence farmers might even exceed the increased quantity supplied by the commercial farmers. This question, however, is not investigated in Huang’s work. In addition, the supply behaviour of the most important component of the agricultural workforce — landless labourers ¾ is beyond the scope of his study. Mellor’s (1963) theory of limited aspirations is another analysis of the farm-based, family labour supply in terms of a given subsistence income. Assuming low labour productivity and a substantial drop in the marginal utility of income as income rises from below to above subsistence, Mellor 422 International Labour Review contends that, in traditional agriculture, the quantity of labour supplied by a family is determined by its subsistence needs. Thus a family with a smaller amount of land per worker will supply a higher quantity of labour at lower average and marginal returns than a family with a larger farm. This implies a negative relation between the quantity of family labour and the return to it. While Mellor emphasizes the subsistence behaviour of traditional farmers, he ignores the distress nature of labour supply by the smaller farmers that emerges from his analysis. However, he does point out that an improvement in technology, by shifting the leisure-labour-output transformation curve out- ward, can generate a family labour-supply curve with both forward-falling and upward-sloping segments. Thus, his analysis implicitly refutes the limited-aspiration assumption and introduces the distress factor into the supply of labour at lower returns. Besides, his analysis does not deal with the supply of wage-labour, for which distress is a common phenomenon. Another group of theories that tries to analyse the traditional labour market in developing countries is that centring on nutrition or efficiency wages.22 The general idea here is that the employer provides minimum nutrition to the workers to ensure optimal work efficiency and thereby minimizes average labour costs. But the empirical evidence of serious deficiency in rural workers’ food intake coupled with wide inter-household variation in the extent of that deficiency does not appear to support this theory. 23 Moreover, the labour-market conditions prevailing in the rural areas of developing countries have been observed to resemble those of a typical neoclassical economy, leaving the workers at the mercy of market forces to fight for their needs. Bliss and Stern’s (1982) work on Palanpur village in India seems to substantiate this. However, Rodgers’ (1975) theory of nutritional wage determination in poor agriculture calls for further discussion. He observes that for poor agricultural workers in India, an increase in the wage rate causes a reduction in employment. Furthermore, changes in the wage rate are not reflected in family income per household consumption unit. He tries to explain these observations by developing a theory of nutritional wage rate. The main point here is that the workers are hired for a given amount of working time, but that employers are interested in work units supplied within that time. At poor conditions, the number of work units supplied is directly related to physical nutrition, so the employers offer a minimum nutritional wage rate. Once this nutritional basis is accepted, differences in wage rates are explained in terms of the dependency ratio — higher wage rates for workers with larger numbers of dependants, with Muslim workers thus receiving higher wage rates than the Hindu and tribal workers.

22 See Bliss and Stern (1978), Mirrlees (1975), Rodgers (1975) and Stiglitz (1976 and 1982). 23 See Dandekar and Rath (1970), INFS (1977), Khan (1976) and Naseem (1977). Inverted “S” — The complete neoclassical labour-supply function 423

Two points need a little more elaboration here. First, this theory considers employment, not labour supply. Second, it is the average income of the family ¾ not the total income of the wage earner ¾ that is related to wage changes. While the supply of labour depends on the worker, employment does not. Given the supply, employment is determined by the forces of demand and, if productivity theory is used, by the marginal productivity of the specific group of workers. Thus, a productivity differential might offer a better explanation than does the dependency ratio for the differences between the wage rates earned by the Muslim and the Hindu and tribal workers in Rodgers’ study. Changes in the wage rate will also be reflected in income from employment if the wage earner’s labour supply and income are considered instead of employment and the income of the family consumption unit, respectively. Rodgers provides a curious explanation for the inappropriateness of the traditional theory of preference maximization in analysing the negatively sloping labour-supply behaviour. His contention is that such behaviour imposes an implausible assumption of “inferior good” on income and, hence, on consumption and saving as a whole. This contention, however, is based on the mistaken argument of a decline in income with rising wages. In negatively sloping labour-supply behaviour, an increased wage rate implies a reduced supply of labour. But such a reduction in labour supply does not necessarily imply a decline in income — the income may remain constant or even increase. And if income does not decline, the conventional analysis can easily explain the behaviour of the negatively sloping labour-supply curve without any implausible assumption. 24 Rosenzweig’s (1980) work is indeed a good response to Rodgers’ contention. Contrary to the institutional and nutritional wage theories, his contention is that the competitive neoclassical theory is applicable to wage determination in poor agriculture. He argues that supply of and demand for labour are determined independently of each other and that the wage rate is determined in the market by their interactions. From this premise, he derives the labour-supply function through utility maximization, satisfying all the neoclassical assumptions. This derived function is then tested for the landless and the landholding classes separately for their male and female members with data from India. While his estimates for female workers give a positively sloping function (for reasons neither understandable nor explained by the author), those for the male workers in both the landless and landholding classes show negatively sloping functions. The important implication of this work, however, is the use of the utility maximization hypothesis in explaining the negative relation between wage rate and labour supply.

24 Even if wage-income declines with rising wages, it does not imply that total income is inferior. Inclusion of non-wage income (if there is any) might provide an increasing total income with higher wages. 424 International Labour Review

Another empirical study of the supply of female labour 25 in Indian agriculture deserves mention, namely, that by Papola and Misra (1980). By using combined data from different agricultural districts of Uttar Pradesh, the authors estimate a female labour-supply function that is entirely negatively sloping. Then, based on the proposition that poor conditions compel the women to vary their labour supply inversely with their wage rate and that better conditions generate positively sloping behaviour, they divide their data into three sets on the basis of the average agricultural income of the districts. The estimates for these sets show the supply function to be negatively sloping for the low-income districts and positively sloping for the high-income districts, thus lending support to their hypothesis. Similar evidence emerges from Kalpana Bardhan’s (1977) work on the labour-supply behaviour of male workers in both landless and small-farm households. By using NSS data for Uttar Pradesh in India, she estimates labour-supply equations separately for the advanced western regions and the depressed regions in the rest of the state. Her results show a negatively sloping supply function for the depressed regions and a positively sloping function for the advanced regions for both the landless and small-farm households. Moreover, her estimation of the function for most of the groups shows a negative coefficient for the average household consumption expenditure explaining the supply of labour. She calls this phenomenon of increased labour supply with reduced consumption a “distress-sale behaviour” of the poor. The study by Anderson and Frantz (1984) ¾ analysing the effects of the Mexican peso devaluation on the labour-supply behaviour of poor garment workers ¾ provides similar evidence. As the devaluation reduced their real wages, the workers were observed to increase their supply of labour, thereby lending support to the distress-sale hypothesis. It appears from the above discussion that almost all the empirical studies provide evidence for a negatively sloping or positively sloping labour-supply function, depending on the economic situation of the workers and the market to which labour is supplied. Within the traditional sector, the supply function of poor workers is negatively sloping, while that of relatively well-off workers is positively sloping. The supply function from the traditional to the modern sector is positively sloping irrespective of the workers’ economic situation. Considered by reference to a subsistence-income point, however, all these pieces of partial evidence, when combined, present a picture of the inverted “S” supply function without its backward-bending portion. In a low- wage traditional economy, it is indeed quite natural for studies of the labour- supply behaviour of poor workers to show only the forward-falling and upward-sloping segments. The supply behaviour of richer workers is

25 Female participation rate is the term used by the authors. Inverted “S” — The complete neoclassical labour-supply function 425 expected to depict the backward-bending section only at very high wages, thereby completing the picture of the total supply function. The only theories that recognize the minimum survival requirements of income and physical rest and postulate a supply function with both forward- falling and upward-sloping segments by incorporating distress-sale behaviour are those of Barzel and McDonald (1973), McGregor (1990) and Sharif (1989 and 1991b). In the tradition of the linear expenditure system, Barzel and McDonald specify the characteristics of a utility function that can generate a large number of shapes for the labour-supply function. The crucial ele- ment in their utility function, however, is the asset income of an individual. Indeed, this formulation can generate a labour-supply function with both forward-falling and upward-sloping sections only when the elasticity of substitution between income and rest is greater than one and asset income is less than survival income. Although the derivation of the forward-falling supply is reasonable with less than survival asset-income, the substitutability between the survival consumption of income and rest is expected to be extremely low. Therefore Barzel and McDonald’s imposition of a larger- than-one elasticity of substitution does not seem to be a realistic assumption. Furthermore, they do not explain why the supply curve should turn its slope from negative to positive at a certain wage rate. McGregor (1990) models a situation of economic crisis in a peasant economy, incorporating survival needs for nutrition. His analysis implies a negatively sloping labour supply for poor peasants working under extreme economic distress generated by conditions of famine. Although this study does not analyse the supply behaviour of the chronically poor under normal economic conditions, it does add weight to the theory of the forward-falling supply function. The studies by Sharif (1989 and 1991b), however, model the supply behaviour of the chronically poor under normal economic conditions ¾ poor workers who earn their living solely from wages in a labour-abundant traditional economy where the wage rate is often depressed and stays below the subsistence level (Rodgers, 1975; Cain and Mozumder, 1981). These workers have to work very hard for long hours — an average of 71 hours a week — in an attempt to ensure their very survival (Farouk, 1980; Farouk and Ali, 1975; Hart, 1986; Sharif, 1991b). But even by sacrificing their required physical rest, they typically fail to meet their minimum nutritional needs and con- sequently lack both food and physical rest. Following Kalpana Bardhan (1977), this deficiency in both food and physical rest, associated with a high quantity of labour supplied, is called a distress-sale phenomenon. This distress sale of labour is a below-subsistence phenomenon which generates a forward-falling supply curve showing an expansion in labour supply as the wage rate declines (Sharif, 1991b). Once the subsistence income is earned and the distress-sale phenomenon disappears at higher wages, the supply function is expected to turn upward-sloping, hence the postulation of a 426 International Labour Review supply function comprising both forward-falling and upward-sloping segments, with the subsistence-income point providing the link between them. To analyse this supply behaviour, an increasing-elasticity-of-substitution (IES) utility function is specified (Sharif, 1989 and 1991b). This function is characterized by poor substitutability between food and physical rest at low levels of their consumption and high substitutability at high levels of consumption — the function combines the properties of both non-homotheticity and variable elasticity. The use of this function in constrained utility maximization generates the postulated labour-supply function with the two distinct segments. The lowest point of this supply function is associated with substitution elasticity close to zero. As the wage rate rises, resulting in increases in income and physical rest, the elasticity of substitution continuously goes up. At the subsistence-income turning point, it reaches the value of one and continuously grows bigger along the upward-sloping section of the supply curve. Thus changes in the elasticity of substitution between food and physical rest provide the rationale for the overall shape of the supply function, with its turning point explained by the attainment of subsistence and the elimination of the distress-sale effect. The function is estimated using 12 sets of Indian NSS data pertaining to different sex, age and household groups of landless and near-landless workers — the results for all groups strongly support the postulated supply function. While all 12 sets show the forward-falling sections, six of them derive both the forward-falling and the upward-sloping segments. To substantiate the contention that economic condition causes the supply function to be either forward-falling or upward-sloping, the differential supply behaviour of workers in landless and landholding households was investigated using data collected from rural Bangladesh (Sharif, 1991a). The estimates unambiguously show the function to be forward-falling with an upward-sloping section at higher wages for the landless workers and upward- sloping with a backward-bending portion at higher wages for the workers in landholding households. It is worth noting that the average wage rate observed for the landless workers is lower than that observed for the landholding workers.

Comparison of the major theories While discussing the subsistence and nutrition theories of labour supply in the last section, it was shown that empirical evidence does not support the concept of wage rate as a given datum. Moreover, without any reference to the quantity of labour supplied, subsistence or nutritional wage does not provide any meaningful concept. In this section, an attempt will be made first to construct a labour-supply function as implied by the subsistence and nutrition theories and consistent with empirical observations and, second, to identify the characteristic features of the forward-falling labour-supply function as distinct from the subsistence, efficiency and nutrition theories. This distinc- Inverted “S” — The complete neoclassical labour-supply function 427

Figure 1. A comparison of the forward-falling with the subsistence theory of labour supply

S e t

a N r

e Ws g a

W R

Wq M

0 Ls Lm Labour supply

tion is drawn with respect to the level of consumption of physical rest and subsistence income, specification of the lower limit of the negatively sloping function and the relation between the negatively sloping and positively sloping functions. The subsistence, efficiency and nutrition theories of labour supply and wage determination assume a labour surplus situation in developing countries. This assumption implies work-sharing — i.e. a large number of people are willing to work, but sufficient work is not available, so everybody is employed part-time. Given this surplus-labour/work-sharing situation, the subsistence theory hypothesizes that society makes provision for the absorption of everyone into the system in return for a minimum subsistence income. Once subsistence is thus guaranteed, the actual work time shared out varies directly with the total amount of work available. But the return to labour per unit of time ¾ called the subsistence wage ¾ varies inversely with the work time shared for that given income. In short, given the subsistence income, if the shared work time is low, the subsistence wage offered is high and if the shared work time is high subsistence wage is relatively low. Thus the subsistence theory implies a supply function given by the hyperbolic curve KNR in figure 1. This hyperbolic supply function has two important implications. First, by being hyperbolic it shows invariant wage-income with changes in the supply of labour. Second, since it is based on the concepts of surplus labour and 428 International Labour Review work-sharing, it implies a very high level of consumption of leisure by poor workers. Hence, the maximum quantity of labour supplied by the worker is given by point R on curve KNR in figure 1. The supply function implied by the efficiency and nutrition theories is also given by the curve KNR. These theories also assume a given income called nutrition or efficiency income for the workers. But here, this income is not provided by society; it is provided by employers, to optimize efficiency in the supply of efforts by the workers. Once this income is determined by their nutritional needs, the wage rate varies inversely with the shared work time, hence the hyperbolic supply function. Although both the subsistence and the efficiency theories imply the hyperbolic supply function given by KNR, they assume surplus labour and, therefore, shared employment for all the workers in the traditional economy. This suggests that while the possible maximum quantity of labour supplied can be at point R, the actual labour supplied cannot exceed point N, thus, restricting the function to KN only. Contrary to the surplus-labour hypothesis, the forward-falling labour- supply function is based on the assumption of labour abundance. This change of assumption makes a significant difference in implications for analysis. The surplus-labour hypothesis implies redundancy of labour in the sense that a sizeable portion of the total labour force could be withdrawn from the system without any loss of output. But this redundant labour is absorbed in the system through the institutional provision of subsistence by work-sharing. Labour abundance, by contrast, is a less restrictive concept. It simply means that labour is abundant relative to other means of production. Abun- dance, however, does not necessarily imply redundancy and, hence, work- sharing. Nor does it impose any institutional arrangement for ensuring workers’ minimum subsistence. Rather, this abundance exerts its influence through the forces of the market. Thus, what it necessarily implies is the depression of the wage rate to a very low level, even below subsistence. On the one hand, this depressed wage rate precludes the high-income asset- holding classes from participating in physical work — both for the market and on family farms; and on the other, it allows for the absorption of a large number of assetless poor workers into the labour market. 26 This depressed wage rate also implies very long hours of work for these poor workers to earn enough to survive. Empirical studies provide very strong evidence in favour of this hypothesis of labour abundance as against that of surplus labour. The evidence of serious shortages of labour during the peak seasons in agriculture and marked fluctuations in the real wage rate for agricultural labourers has already been cited in the previous section. While the former go against the idea of surplus labour, the latter speak against the wage rate as a given datum. The strong

26 Note that physical labour is considered detrimental to social prestige in traditional societies and is, therefore, reserved for the poor. Inverted “S” — The complete neoclassical labour-supply function 429 inverse relationship between asset-holding and hardship/duration of work 27 provides support for the implications of labour abundance. The evidence of a depressed wage rate and a very low unemployment rate for poor households, showing their inability to afford unemployment even at seriously depressed wages,28 also offers support for this hypothesis. Contrary to the assumption of high leisure consumption, these workers have been found to have very little physical rest. On average, they have been observed to work 10-11 hours a day, seven days a week (Farouk, 1980; Farouk and Ali, 1975; Sharif, 1991a and 1991b). Other studies also report very long hours of hard work for poor workers (Cain, 1977; Cain and Mozumder, 1981; Habibullah, 1962; Hart, 1986). The strong evidence against a given subsistence income is provided by the poverty and basic-needs analyses which estimate the nutritional deficiencies of different categories of people in developing countries. Empirical studies show that the daily food consumption of poor workers can fall as low as 50 per cent of the official prescription of 2,248 kcal per capita, though they incur 90 per cent of their total expenditure on food and food preparation. 29 This serious deficiency in food intake means physical deterioration, and the wide variation in this deficiency among different households speaks of non- constant survival incomes, rather than a given subsistence income. Drawing on this empirical evidence, the forward-falling hypothesis implies that the supply function lies somewhere in the shaded area below the curve KNR in figure 1: NM is one such curve. The forward-falling supply function given by NM has two important characteristics which distinguish it from that of the subsistence and efficiency theories. First, it shows a very high supply of labour. Since the market, not society, dictates the wage rate, abundance of labour implies a very low wage rate which, in turn, compels poor workers to work very long hours for their survival. Accordingly, the maximum quantity of labour supplied in this formulation is given by point M, as against R on the subsistence/nutrition function. Second, since poor workers depend solely on their wage-income, a very low wage rate means malnutri- tion and even partial starvation for them. So they attempt to compensate for low wage rates by expanding their labour supply. But this means sacrificing their required physical rest. Thus, a reduction in wage rate implies a reduction in the consumption of both wage-income and rest, causing physical deterioration. This phenomenon of distress-sale of labour is reflected in the reduction of survival income as the wage rate declines. The point N on curve NM shows the subsistence income; however, reductions in the wage rate continu-

27 See Cain (1977), Dasgupta (1977), Farouk and Ali (1975), Habibullah (1962) and Hart (1986). 28 See Ahmed (1981), Cain and Mozumder (1981), Hart (1986) and Krishna (1973). 29 See Dandekar and Rath (1970), INFS (1977) and Naseem (1977). Originally developed by the Indian Medical Association and applied by the Government of India, this norm was later adopted by the international community for developing countries. 430 International Labour Review ously reduce wage-income below this subsistence as one moves towards point M which offers the lowest survival income. None of the theories of the negatively sloping supply function attempts to identify the lower and the upper limits of this function. Given the flexibility in the wage rate, none of the existing studies considers how far its downward movement will bring forth expansion in labour supply and how far the opposite wage trend will reduce it. In fact, the assumption that the wage rate is an institutional datum eliminates these questions altogether. But once this assumption is set aside, specification of the lower and upper bounds becomes necessary. The forward-falling theory argues that the lower bound to this function will be provided by the limit of physical tolerance, i.e. the point at which the wage rate is just sufficient to make up for the additional expenditure of energy on work. The upper limit to this curve will be determined by the earning of subsistence income and, thereby, the elimination of the distress-sale effect. A comparison of this forward-falling function with the Marxian theory of labour supply might be of interest here. First, like the subsistence and efficiency theories, Marxian theory also offers a hyperbolic labour-supply function. In this case, however, the given minimum subsistence income is provided by the capitalist employer not for any efficiency or social consider- ation, but because the worker will quit the market if she/he is not paid her/his subsistence (Gintis, 1976; Lazonick, 1978). 30 Whatever the underlying con- sideration may be, the worker always gets her/his minimum subsistence; but in the forward-falling function, she/ he cannot maintain it. Second, in the Marxian analysis, the quantity of labour required to earn the subsistence income depends on the relative class power of the worker. Thus a poor worker with very little class power might have to work to the limit of her/his physical ability. In this respect, Marxian theory is different from the subsistence and efficiency theories, but similar to the forward-falling function. Before concluding this section, a few comments must be made regard- ing the relation of this study to the conventional neoclassical theory of upward-sloping and backward-bending labour supply. The conventional theory postulates an upward-sloping supply curve with a backward-bending portion at high wage rates and analyses it using the hypothesis of utility maximization. However, it says nothing about supply behaviour if the wage rate falls below subsistence and the agent has no alternative source of income. The theory thus faces problems in its application to developing countries where traditional-sector wage rates often stay below subsistence and poor workers depend solely on their labour for income. The forward-falling supply function is an analysis of this behaviour using the neoclassical utility- maximization framework. It thus completes the picture of the neoclassical

30 Note that, in Marxian analysis, the capitalist system maintains a reserve army of unem- ployed to keep the wage rate at the lowest subsistence level. Thus, workers with full employment only earn subsistence income. Inverted “S” — The complete neoclassical labour-supply function 431 labour-supply curve, which is then given by an inverted “S” with a downward-sloping segment at low wages, an upward-sloping segment at high wages, and a backward-bending one at very high wages. The IES utility function specified by Sharif (1991a and 1991b) can generate this shape for the supply function.

Concluding remarks This article has reviewed the theoretical and empirical studies of the labour supply of poor workers at low standards of living. Almost all the empirical studies observe that their labour supply at very low wage rates is a negatively sloping (forward-falling) function. However, studies that distinguish very low from moderately low wage rates report two types of supply function — a negatively sloping one at very low wages and a positively sloping one at moderately low wages. Most of the existing theories that try to analyse the supply behaviour of the poor use the negatively sloping function and explain it by assuming a perverse economic mentality on the part of poor workers. Contrary to the “unlimited wants” assumption, they impose on the behaviour of these workers a condition of subsistence/nutrition mentality, limited aspirations, target income or strong preference for leisure. A careful examination of these theories in the light of the empirical evidence, however, shows that these assumptions are neither realistic nor necessary to explain the negative supply behaviour of poor workers. These workers have been observed to work very hard for long hours and to suffer from deficiencies in their consumption of food and physical rest. These observations strongly suggest economic distress, rather than a perverse mentality. Some theoretical studies, however, do contend that the economic behaviour of an individual is a function of her/ his economic condition. Accordingly, these studies argue that the negatively sloping supply behaviour of the poor is the result of an adverse economic condition generated by the very low wages on which they depend for a living. To distinguish this negatively sloping behaviour from the backward-bending one that takes place at very high wage rates, these studies call it “forward-falling”. The analysts also insist that this behaviour is highly rational and can be explained by the same neoclassical utility maximization tools as those used in the case of the positively sloping and backward-bending supply functions. They develop the utility maximization framework and derive and estimate labour-supply functions with both forward-falling and upward-sloping segments. This formulation has been found to be consistent with the general empirical evidence that exists in the literature. The inclusion of the traditional backward-bending section of the function at very high wage rates completes the total supply function given by an inverted “S”. Although it is difficult to draw any unquestionable conclusion about this supply behaviour in the context of industrialized countries, sufficient 432 International Labour Review evidence exists to question the applicability of the conventional postulate as to poor workers’ behaviour and to consider an alternative pattern for the function. Obviously, the enormous body of evidence on the negatively sloping supply behaviour of the poor indicates at least some support for the forward- falling theory. The studies of labour supply in the traditional sectors of developing countries, however, provide unambiguous results supporting the forward-falling supply theory and the complete, inverted “S” supply curve. The absence of trade unions, minimum wage legislation, and unemployment and welfare benefits makes the assetless poor workers in these traditional economies solely dependent on their labour for a living. This makes it easier for empirical studies to draw consistently unambiguous conclusions about the supply behaviour of the poor.

References Abbott, Michael; Ashenfelter, Orley. 1976. “Labour supply, commodity demand and the allocation of time”, in Review of Economic Studies (Edinburgh), Vol. 43 (3), No. 135 (Oct.), pp. 389- 411. Ahmed, Iqbal. 1981. “Wage determination in Bangladesh agriculture”, in Oxford Economic Papers (Oxford), Vol. 33, No. 2 (July), pp. 298-322. Anderson, Joan; Frantz, Roger. 1984. “The response of labour effort to falling real wages: The Mex- ican Peso devaluation of February 1982”, in World Development (Oxford), Vol. 12, No. 7 (July), pp. 759-766. Ashenfelter, Orley; Heckman, James. 1974. “The estimation of income and substitution effects in a model of family labor supply”, in Econometrica (Bristol), Vol. 42, No. 1 (Jan.), pp. 73-85. ¾ ; ¾ . 1973. “Estimating labor-supply functions”, in Cain and Watts, pp. 265-278. Atkinson, Anthony B.; Stern, Nicholas H. 1981. “On labor supply and commodity demands”, in Angus Deaton (ed.): Essays in the theory and measurement of consumer behaviour in honour of Sir Richard Stone . Cambridge, Cambridge University Press, pp. 265-296. ¾ ; ¾ . 1980. “On the switch from direct to indirect taxation”, in Journal of Public Economics (Amsterdam), Vol. 14, No. 2 (Oct.), pp. 195-224. Bardhan, Kalpana. 1977. Rural employment and wages with agricultural growth in India: Inter- temporal and cross-sectional study . Mimeo. Berkeley, CA, Department of Economics, Uni- versity of California. Bardhan, Pranab K. 1979. “Labor supply functions in a poor agrarian economy”, in American Econ- omic Review (Menasha, WI), Vol. 69, No. 1 (Mar.), pp. 73-83. Barnett, William A. 1979. “The joint allocation of leisure and goods expenditure”, in Econometrica (Bristol), Vol. 47, No. 3 (May), pp. 539-563. Barzel, Yoram; McDonald, Richard J. 1973. “Assets, subsistence and the supply curve of labor” in American Economic Review (Menasha, WI), Vol. 63, No. 4 (Sep.), pp. 621-633. Becker, Gary S. 1965. “A theory of the allocation of time”, in Economic Journal (London), Vol. 75, No. 299 (Sep.), pp. 493-517. Berg, Elliot J. 1961. “Backward-sloping labor supply functions in dual economies — The Africa case”, in Quarterly Journal of Economics (Cambridge, MA), Vol. 75, Aug., pp. 468-492. Bliss, Christopher J.; Stern, Nicholas H. 1982. Palanpur: The economy of an Indian village . Oxford, Clarendon Press. ¾ ; ¾ . 1978. “Productivity, wages and nutrition — Part I: Theory, Part II: Some observations”, in Journal of Development Economics (Amsterdam), Vol. 5, No. 4 (Dec.), pp. 331-398. Boskin, Michael J. 1973. “The economics of labor supply”, in Cain and Watts, pp. 163-181. Inverted “S” — The complete neoclassical labour-supply function 433

Brown, C.V.; Levin, E.; Ulph, D.T. 1976. “Estimates of labour hours supplied by married male workers in Great Britain”, in Scottish Journal of Political Economy (Edinburgh), Vol. 23, No. 3 (Nov.), pp. 261-277. Burtless, Gary; Greenberg, David. 1982. “Inferences concerning labor supply behavior based on limited-duration experiments”, in American Economic Review (Menasha, WI), Vol. 72, No. 3 (June), pp. 488-497. Byerlee, D.; Eicher, C. 1972. Rural employment, migration, and economic development: Theoretical issues and empirical evidence from Africa . African Rural Development Employment Paper No. 1. East Lansing, MI, Agricultural Economics Department, Michigan State University. Cain, Glen C.; Watts, Harold W. (eds.). 1973. Income maintenance and labor supply: Econometric studies. New York, NY, Academic Press. Cain, Mead T. 1977. “The economic activities of children in a village in Bangladesh”, in Population and Development Review (New York, NY), Sep., pp. 201-227. [Reprinted in Hans P. Bin- swanger, Robert E. Evenson, Cecilia A. Florencio and Benjamin N. F. White (eds): Rural household studies in Asia . Singapore, Singapore University Press, 1980, pp. 218-247.] ¾ ; Mozumder, A.B.M. Khorshed Alam. 1981. “Labour market structure and reproductive behaviour in rural south Asia”, in Gerry Rodgers and Guy Standing (eds): Child work, poverty and underdevelopment . ILO, Geneva, pp. 245-287. Dandekar, V. M.; Rath, Nilakantha. 1970. Poverty in India . New Delhi, Ford Foundation. [Reprinted by the Indian School of Political Economy, Poona, 1971.] Dasgupta, Biplab. 1977. Village society and labor use . Delhi, Oxford University Press. Dunn, L. F. 1996. “Loss aversion and adaptation in the labor market: Empirical indifference functions and labor supply”, in Review of Economics and Statistics (Cambridge, MA), Vol. 78, No. 3 (Aug.), pp. 441-450. ¾ . 1978. “An empirical indifference function for income and leisure”, in Review of Economics and Statistics (Amsterdam), Vol. 60, No. 4 (Nov.), pp. 533-540. FAO. 1975. Production Yearbook 1974 . Rome. Farouk, Abdullah. 1980. “Use of time by individuals: A survey in Bangladesh”, in Hans P. Bin- swanger, Robert E. Evenson, Cecilia A. Florencio and Benjamin N. F. White (eds.): Rural household studies in Asia . Singapore, Singapore University Press, pp. 169-187. ¾ ; Ali, Muhammad. 1975. The hard working poor: A survey on how people use their time in Bang- ladesh. Dhaka, Bureau of Economic Research, Dhaka University. Garfinkel, Irwin. 1973. “On estimating the labor-supply effects of a negative income tax”, in Cain and Watts, pp. 205-264. Gintis, Herbert. 1976. “The nature of labor exchange and the theory of capitalist production”, in Review of Radical Political Economics (Cambridge, MA), Vol. 8, No. 2 (Summer), pp. 36-54. Greenberg, David H.; Kosters, Marvin. 1973. “Income guarantees and the working poor: The effect of income-maintenance programs on the hours of work of male family heads”, in Cain and Watts, pp. 14-101. Habibullah, M. 1962. Pattern of agricultural unemployment . Dhaka, Bureau of Economic Research, Dhaka University. Hall, Robert E. 1973. “Wages, income, and hours of work in the U.S. labor force”, in Cain and Watts, pp. 102-162. Hart, Gillian P. 1986. Power, labor, and livelihood: Processes of change in rural Java . Berkeley, CA, University of California Press. Hausman, Jerry A. 1981. “Labor supply”, in Henry Aaron and Joseph Pechman (eds): How taxes affect economic behavior . Washington, DC, Brookings Institution, pp. 27-83. Hill, C. Russell. 1973. “The determinants of labor supply for the working urban poor”, in Cain and Watts, pp. 182-204. Huang, Yukon. 1976. “Backward-bending supply curves and behaviour of subsistence farmers”, in Journal of Development Studies (London), Vol. 12, No. 3 (Apr.), pp. 191-211. India (Government of). 1976. “Time disposition and wage rate for economically weaker sections of the rural population of India”, in Department of Statistics (ed.): The National Sample Survey, 25th Round, July 1970-June 1971, Subrounds I-IV, Nos. 223, 226 and 227 . Delhi, Ministry of Planning. Jan. 434 International Labour Review

INFS (Institute of Nutrition and Food Science). 1977. Nutrition Survey of Bangladesh, 1975-76 . Dhaka, Dhaka University. Dec. Johnson, Terry R.; Pencavel, John H. 1982. “Forecasting the effects of a negative income tax pro- gram”, in Industrial and Labor Relations Review (Ithaca, NY) Vol. 35, No. 2 (Jan.), pp. 221- 234. Kalachek, E. D.; Raines, F. Q. 1970. Labor supply of lower-income workers . President’s Commis- sion on Income Maintenance Programs, Technical Studies. Washington, DC, Government Printing Office. Keeley, Michael C. 1981. Labor supply and public policy: A critical review . New York, NY, Aca- demic Press. ¾ ; Robins, Philip K. 1980. “The design of social experiments: A critique of the Conlisk-Watts assignment model and its application to the Seattle and Denver Income Maintenance Pro- gram”, in Ronald G. Ehrenberg (ed.): Research in labor economics . Greenwich, CT, JAI Press, Volume 3, pp. 293-333. Khan, Azizur R. 1976. Poverty and inequality in rural Bangladesh . World Employment Programme Research, Working Paper WEP 10-6/WP1. Geneva, ILO. Killingsworth, Mark R. 1983. Labor supply . Cambridge, Cambridge University Press. ¾ ; Heckman, James J. 1986. “Female labor supply: A survey”, in Orley Ashenfelter and Richard Layard (eds.): Handbook of labor economics . Amsterdam, North-Holland, Volume 1, pp. 101-204. Krishna, Raj. 1973. “Unemployment in India”, in Indian Journal of Agricultural Economics (Bom- bay), Vol. 28, No. 1 (Jan.-Mar.), pp. 1-23. Lal, Deepak. 1976. “Supply price and surplus labour: Some Indian evidence”, in World Develop- ment, Vol. 4, Nos. 10/11 (Oct.-Nov.), pp. 889-905. Lazonick, William. 1978. “The subjugation of labor to capital: The rise of the capitalist system”, in Review of Radical Political Economics (Cambridge, MA), Vol. 10, No. 1 (Spring), pp. 1-31. Leuthold, Jane H. 1968. “An empirical study of formula income transfers and the work decision of the poor”, in Journal of Human Resources (Madison, WI), Vol. 3, No. 3 (Summer), pp. 312- 323. Lewis, W. Arthur. 1954. “Economic development with unlimited supplies of labor”, in Manchester School of Economic and Social Studies (Manchester), Vol. 22, No. 2, pp. 139-191. Marx, Karl. 1867. Das Kapital . Volume 1 [translated into English as Capital: A critique of political economy. Volume 1. New York, NY, International Publishers, 1967]. MaCurdy, Thomas E. 1980. An empirical model of labor supply in a life cycle setting . NBER Work- ing Paper No. 421. Cambridge, MA, National Bureau of Economic Research. Jan. Masters, Stanley; Garfinkel, Irwin. 1977. Estimating the labor supply effects of income-maintenance alternatives . New York, NY, Academic Press. McGregor, Pat. 1990. “A model of crisis in a peasant economy”, in Oxford Economic Papers (Oxford), Vol. 42, No. 4 (Oct.), pp. 793-811. Mellor, John W. 1963. “The use of farm family labor in early stages of agricultural development”, in Journal of Farm Economics , Vol. 45, No. 3 (Aug.), pp. 517-534. Miracle, Marvin P.; Fetter, Bruce. 1970. “Backward-sloping labor-supply functions and African economic behavior”, in Economic Development and Cultural Change (Chicago, IL), Vol. 18, No. 2 (Jan.), pp. 240-251. Mirrlees, James A. 1975. “A pure theory of underdeveloped economies”, in Lloyd G. Reynolds (ed.): Agriculture in development theory . New Haven, CT, Yale University Press, pp. 84-106. Mishel, Lawrence; Bernstein, Jared; Schmitt, John. 1997. The state of working America, 1996-97 . Economic Policy Institute Series. Armonk, NY, M. E. Sharpe. Moffit, Robert A. 1979. “The labor supply response in the Gary Experiment”, in Journal of Human Resources (Madison, WI), Vol. 14, No. 4 (Fall), pp. 477-487. Myint, Hla. 1971. Economic theory and the underdeveloped countries . New York, NY, Oxford Uni- versity Press. Inverted “S” — The complete neoclassical labour-supply function 435

Naseem, S. M. 1977. Rural poverty and landlessness in Pakistan: Dimensions and trends (1960-75) . World Employment Programme Research, Working Paper WEP 10-6/WP-14. Geneva, ILO. Papola, T. S.; Misra, V. N. 1980. “Labour supply and wage determination in rural Uttar Pradesh”, in Indian Journal of Agricultural Economics (Bombay), Vol. 35, No. 1 (Jan.-Mar.), pp. 106- 120. Pencavel, John. 1986. “Labor supply of men: A survey”, in Orley Ashenfelter and Richard Layard (eds.): Handbook of labor economics . Amsterdam, North-Holland, Volume 1, pp. 3-102. Rodgers, Gerry B. 1975. “Nutritionally based wage determination in the low-income labour market”, in Oxford Economic Papers (Oxford), Vol. 27, No. 1 (Mar.), pp. 61-81. Roemer, John E. 1978. “Differentially exploited labor: A Marxian theory of discrimination”, in Review of Radical Political Economics (Cambridge, MA), Vol. 10, No. 2 (Summer), pp. 43- 53. Rosen, Sherwin; Welch, Finis. 1971. “Labor supply and income redistribution”, in Review of Eco- nomics and Statistics (Cambridge, MA), Vol. 53, No. 3 (Aug.), pp. 278-282. Rosenzweig, Mark R. 1984. “Determinants of wage rates and labor supply behavior in the rural sector of a developing country”, in Hans P. Binswanger and Mark R. Rosenzweig (eds.): Con- tractual arrangements, employment, and wages in rural labor markets in Asia . New Haven, CT, Yale University Press, pp. 211-241. ¾ . 1980. “Neoclassical theory and the optimizing peasant: An econometric analysis of market family labor supply in a developing country”, in Quarterly Journal of Economics (New York, NY), Vol. 94, No. 1 (Feb.), pp. 31-55. Rottenberg, Simon. 1952. “Income and leisure in an underdeveloped economy”, in Journal of Polit- ical Economy (Chicago, IL), Vol. 60, No. 2, pp. 95-101. Sharif, Mohammed. 1999. A behavioral analysis of the subsistence standard of living . Mimeo. Kingston, RI, Department of Economics, University of Rhode Island. ¾ . 1991a. “Landholdings, living standards, and labour supply functions: Evidence from a poor agrarian economy”, in Journal of Development Studies (London), Vol. 27, No. 2 (Jan.), pp. 256-276. ¾ . 1991b. “Poverty and the forward-falling labor supply function: A microeconomic analysis”, in World Development (Oxford), Vol. 19, No. 8 (Aug.), pp. 1075-1093. ¾ . 1989. “A technique for estimating a direct utility function”, in Journal for Studies in Economics and Econometrics (Stellenbosch), Vol. 13, No. 2, pp. 1-23. ¾ . 1986. “The concept and measurement of subsistence: A survey of the literature”, in World Devel- opment (Oxford), Vol. 14, No. 5 (May), pp. 555-577. Stiglitz, Joseph E. 1982. “Alternative theories of wage determination and unemployment: The efficiency wage model”, in M. Gersovitz et al. (eds.): The theory and experience of economic development — Essays in honor of Sir Arthur Lewis . London, George Allen and Unwin, pp. 78-106. ¾ . 1976. “The efficiency wage hypothesis, surplus labor, and the distribution of income in LDCs”, in Oxford Economic Papers (Oxford), Vol. 28, No. 2 (July), pp. 185-207. Tella, Alfred; Tella, Dorothy; Green, Christopher. 1971. The hours of work and family income response to negative income tax plans. Kalamazoo, MI, W. E. Upjohn Institute for Employ- ment Research. Watts, Harold W.; Avery, Robert; Elesh, David; Horner, David; Lefcowitz, M. J.; Mamer, John; Poirier, Dale; Spilerman, Seymour; Wright, Sonia. 1974. “The labor supply response of husbands”, in Journal of Human Resources (Madison, WI), Vol. 9, No. 2 (Spring), pp. 181-200.