Pakistan Institute of Development Economics

PDR

THE PAKISTAN DEVELOPMENT REVIEW 

An Extension Of Sen’S Model Of The Valuation Of Labour In Surplus Labour Economies

Professor A. K. Sen argues in his book Choice of Techniques1 that if the objective of a surplus labour economy is to maximise growth, as opposed to the level of immediate output, and savings are suboptimal, labour drawn from the agricultural to the industrial sector should not be regarded as ‘costless’ even though its marginal product may have been zero. The reasoning is that while the marginal product of the labour may be positive in industry, a low-shadow wage will cause consumption out of money wages to increase more than production reducing the size of the investible surplus. If greater importance is attached to an additional unit of saving than consumption, the transference of labour involves a ‘cost’ in terms of extra consumption. The cost of a unit of labour is equal to the extra consumption induced by an extra unit of employment. The increase in consumption is given by [3, p. 54]:

A. P. Thirlwall

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