Effective Surplus Labor: Concept and Measures

Prof. Jingbei HUChair Professor of EconomicsTongji University, Shanghai, PR China

April 12, 2005 in University of Michigan

• Contents

• 1. Introduction: where does the problem come • from?• 2. Traditional concepts and measures of • agricultural surplus labor• 3. Failures in traditional measures of agricultural • surplus labor • 4. Concept of effective surplus labor• 5. Measures of effective surplus labor

1. Introduction: where does the problem come from?

• It is well known that there is a heavy surplus labor in agriculture in China

• But the shortage in migrated labor forces (mingong huang 民工荒 ) evolved in many industrial areas in Chinas since last year.

• There is a co-existence of both, a large surplus and a large shortage in labor supply in China

• Examples• In Shenzhen in South China, 300 000 migrated l

abor forces are short• In Dongguang in South China, 230 000 migrated

labor forces short• In different newspapers something as “shortage i

n migrated labor forces” stands in the title pages. It is reported that China confronts shortage of this kind for the first time since 20 years of the Reform.

• And wages for migrated labor forces began to rise since last year.

• To solve the obvious contradictions between theory and practice, there are two possible explanations to think about:

• 1) The shortage in migrated labor forces happens only in the short run. It happens because – The Chinese government raised prices for agricultural

products and cut agricultural taxes from 2003 on. These measures make some agricultural productions profitable and many peasants are reluctant to leave for city jobs.

– China got too quick industrial growth in these two years and many surplus labor forces are not ready enough for migration

• 2) It is of long-run nature because the so-called surplus labor in China is almost eliminated.

• But there are in China no scholars who are favorable to this explanation.

• In this paper I want to put forward a third explanation with a new concept of effective surplus labor and argue that a group of effective surplus labor can be identified from the whole pool of agricultural (surplus) labor forces.

• This group affects the supply-demand-relations of migrated labor markets effectively. In the case of shortage in labor supply coming from this group, the wages could rise, even if there is still much surplus labor in the agricultural sector.

• Literature: • In Chinese: only one found (Zhang, 2005).

He calculated the industrial and agricultural demands in the year 2003 for agricultural labor forces of ages up to 24 years old and came to the conclusion, that this group of labor forces would be short in comparison to demands, while there is a large pool of surplus labor forces of ages from 25 on (more than 70 millions).

• This paper will make use of Zhang’s statistical studies and tries to understand the problem in general.

2. The traditional concepts and measures of agricultural surplus labor

• -- Traditional concepts• 1) Economic definitions:• The standard concept of surplus labor resulted

from Lewis’ seminar paper [1954]. According to him, a peasant would be surplus if his marginal productivity in agriculture (MPA) is lower than the subsistence wage (E). A peasant should get this wage at least for his basic demands of life if he comes to take a job. That means

• If MPA < E, then a laborer is surplus

• Lewis believes that there is actually unlimited surplus labor in many developing countries around the world. These labor forces search jobs in the industrial sectors and lead industrial wages down to rural subsistence level with a gap related to the differences of life costs in urban and rural areas.

• 2) Technical definitions• Many definitions are put forth from more te

chnical aspects. – A part of peasants would be surplus if the pea

sants produce more agricultural products than demanded (Jorgenson, 1961). It should be noted that the highest demands for agricultural products are fixed in Jorgenson’s model.

surplus = peasants – (Y/m)(Y:highest agr. product,m: production coefficient of labor)

- A part of peasants would be surplus, if the cultivated land per agricultural labor force decreases in the long run [Guo, 1995], or the natural resources per agricultural labor force decreases down to a certain level [Zhang,1995].

Here the man-land-relations are stressed.

- A part of peasants would be surplus if their annual working hours are smaller than in urban industries [He,1999]

•

-- Traditional measures• According to above definitions there are two

kinds of measures of surplus labor. • 1) Calculating marginal productivity of labor in

agriculture. Researchers try to find the number of agricultural labor forces corresponding to certain parameters, e.g, MPA=0, =E or = a certain quantity. The total agricultural labor force minus this number tells the surplus figure.

• 2) Calculating the number of agricultural labor forces needed to produce certain quantities of agricultural products or to combine adequately with other inputs available to agriculture. The difference between this number and total agricultural labor forces will be the surplus.

• Three tables about quantities of Chinese agricultural surplus labor:

• See word-files

• The above three tables show very different estimations on Chinese agricultural surplus labor.

• But all these estimations do not imply that China could see shortage in migrating labor forces during the first decade of the 21st century.

• How the problem has to be explained?

3. Failures in traditional measures of agricultural surplus labor

• All the estimations shown above are subject to measuring deficits.

• They are based on the common principle:• Rural surplus labor• = total rural labor force• － “ adequate” quantity of agricultural la

bor• forces, calculated with different• estimation methods

• This principle has at least two premises:

• 1) Homogeneity of agricultural labor force.

•

• 2) Surplus could be defined within the agricultural sector.

• Regarding the homogeneity assumption

• It may lead to the image that all surplus labor forces go into industrial labor markets simultaneously.

• It means e.g. if there are 100 million surplus labor forces in Chinese agriculture, they would go to urban labor markets at the same time and cause unlimited labor supply of Lewis’ type.

• If the migration process of agricultural labor is not seen as only one point in the economic history or if the analysis of this process does not stay at the macro level, the homogeneity assumption is too strong to grasp the process and structure of the peasant migration.

• We may need a new concept to structure the process at the micro level.

• Regarding the agricultural Assumption

• The concept of agricultural surplus labor should not be understood only within the agricultural sector.

• A peasant is not necessarily surplus, if he is exceeding the agricultural labor demands to given technologies or exceeding the quantity of labor forces corresponding to some productivity indexes.

• If the labor surplus is defined with the co-existence of industrial sectors, we can say a peasant is not surplus if he, to any reasonable industrial wages, does not want to go to work in industrial sectors, although he is surplus within the agriculture.

• Labor surplus appears only if there is a reference: the industrial sectors searching for profits. For capitalist industries a labor force is surplus, if his marginal productivity does not, at least, reach his wage demand.

• In the traditional agricultural society without capitalist industries there would not be surplus labor even if the quantity of agricultural labor may be very big. In China’s agriculture, e.g., peasants have the right for working with land. They do not produce for profits and the marginal concepts are not important for their production.

4. Concept of effective surplus labor (ESL)

• ESL: Agricultural surplus labor forces who, to certain gaps of industrial wages over agricultural ones, are willing and able to migrate for industrial employment, but cannot get employed.

• Similarly, ESL can be understood as agricultural surplus labor which clearly affects to a certain wage level supply-demand-relations of industrial labor market.

• Examples: • To the same wage gap• a 50-years-old peasant (A) is surplus in agricultu

re, but may not migrate to search a job in industry;

• a 20-years-old peasant (B) may very probably search a job in industry.

• Observed from the industrial labor market, both peasants do not have the same meanings for the market: Person A may not be an effective surplus labor, while B is.

• The personal difference between A and B is age. It is understandable that peasants of different ages have different migration costs and therefore different expectations to incomes they could earn in industry if they migrate.

• This reasoning leads to the considerations that the age may be a superficial explanation. The economic calculation plays decisively. Young people have to bear lower migration costs and are ready to get lower industrial wages than the adults.

• There is a large amount of literature concerning developing countries which divide peasants in groups according to age, gender, education, region with distance to major industrial areas, etc. and which studies peasant migration behaviors with these characteristics.

• But beyond all these characteristics the economic calculation is hidden. So the ESL-concept tries to generalize these divisions and gives a description of general structures and processes of peasant migration in the developing countries.

• The concept emphasizes peasants who are ready to migrate for getting industrial jobs to prevailing wages.

• In the meantime, it implies that not the whole mass of peasants, but only a part of peasants have clear effects on industrial labor supply at a certain point of time.

Importance of wages for the ESL-definition

• With increases of industrial wages comparative to agricultural ones, the probability that the 50-year-old would emigrate to work in industry may become larger.

• Therefore: • Changes in wage could result in more or le

ss effective surplus labor.

• In this meaning we can get a function:

• ESL = f(w) f’ > 0

Fig. 1, see word-file

following contents see word-file

5. Measures of ESL

• From the definition of ESL, the logic of its measure could be thought out as follows

-- Industrial demands for migrated workers -- agricultural demands for similarly qualified p

easants-- total number of peasants of this group-- peasants of this group who are ready to mig

rate -- ESL

• If ESL >> industrial demands

• Then wages remain constant

• If ESL < industrial demands

• Then wages rise

• If ESL < industrial + agricultural demands

• Then wages may rise

• First: Industrial demand for migrated labor forces

• According to an investigation in the city of Dongguang, Province Guangdong in South China, where some 5 million migrated labor forces work in the industry and where the lack of further supply of these labor forces is obvious, 87% of demanded migrated labor force is agricultural labor forces with ages from 17 to 25.

• That is: unmarried young agricultural labor is particularly needed for industrial production.

• The measure of this demand, as in Zhang (2005), could be made as follows:

• In 2003, there are 169.50 million peasants working in non-agricultural sectors. Some 46.5% of them are young under the age of 25. It means that in China young peasants working in non-agricultural activities may amount to some 78.87 million.

• Second: Agricultural demand for young • peasants• According to China’s census of the year 2000

and with some adjustments, young agricultural labor forces under the age of 25 could amount to 19.3% of total agricultural labor forces. Assumed that this ratio could be used to the year of 2003 and considered that in this year labor inputs for China’s agriculture could be computed as 177.54 million, we may conclude that agricultural demand for labor forces under the age of 25 would be 34.27 million (177.54×19.3 ％ ).

• The total demand for young peasants is:• 113.14 million (78.87 + 34.27).

• Third: Availability of young peasants• According to estimation by Zhang (2005), 21.7

% of China’s total rural labor forces (489.71 million) are young under the age of 25. It implies total availability of young peasants would be 106.26 mil. in 2003.

• Result:• Demand for young peasants (113.14 million) wo

uld be larger than their supply (106.26 million) in the year of 2003. The difference might amount to 6.87 million

• But in fact, the demand estimated is the input of labor of the young group and should not be larger than supply available.

• The problems may lie in the estimation of labor input in agriculture in 2003. The rate of inputs of young peasants to total agricultural labor should be much lower than that in 2000 with 19.3%. This rate in 2003 should not be higher than 15%.

• According to figures from NBSC officer’s papers (2004a,2004b) and Zhang (2005),

• Rural labor forces: 489.71 mil.• Migrated: 169.50 mil.• Rate: 34.6%• Rural young labor forces: 106.26 mil.• Migrated: 78.87 mil.• Rate: 74.2%

• The figure would point out that ¾ of young peasants have got industrial jobs.

• In consideration of• -- agricultural demands • -- cases young peasants have to remain at home• -- particularly the desire of industrial enterprises

• it could be said that young peasants as ESL would be almost absorbed out now.

• The wages to attract ESL of young peasants could not attract new peasant groups as new ESL. They would have to rise.

• Questions:

• Who may the next ESL be?

• How big may the next ESL be?

• How big may possibilities of substitution between different labor groups for Chinese industry?

• Is the time of low-wages for Chinese industry over?

• ……

•THANK YOU!

• Email: jbeihu@mail.tongji.edu.cn• Homepage: www.hujingbei.net