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Lectures Notes

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LECTURES Development of the Bottom Billion

Development traps o Conflict trap o Natural resource trap o Landlocked with bad neighbours o Bad governance in a small country

Explanation of civil war onset o Economics o Political science o Sociology o History o Geography o Demography

Conclusion o Countries with natural resources are more conflict prone o An increase in natural resource prices tends to increase the duration of the war Labour and Industry

Income and poverty - links to the structure of an economy o A key aspect to understanding poverty is to understand what determines the price of labour in an economy o In developed economies the price of labour for most of the workforce is the wage o Poverty in such economies will fl w from either low pay in employment or o unemployment o In poor countries most of the workforce - and most of the poor - do not have wage jobs o What is it about having a wage job that gives one a higher income?
 Wage jobs tend to embody more human capital than non wage jobs
 Wage jobs are the result of industrialisation
 The formation of frms which produce their output in factories which typically operate at a much larger scale of production than do self employment activities
- whether these be rural or urban
 The relative importance of the human capital component of wages and the role of frm characteristics are central empirical issues in understanding why wages difer as much as they do and why wages can be so much higher than non-wage sources of income in poor countries o Wage employment and economic structure
 The fact that richer countries have more wage jobs reflects a fundamental diference in the structure of poor and rich countries
 Poor countries have a much higher proportion of their GDP coming from the rural sector
 One of the major themes in the transformation of economies over time - the classic study is one by Kuznets entitled 'Modern Economic Growth' - is the contraction of agriculture and the rise of industry of which manufacturing is frequently seen to be the core element o What are the sources of the diferences we observe in the returns to labour?
 Remember than in asking that question you are very close to asking the question as to why people are poor as the major asset owned by the poor is often their labour

We can think of the sources of diferences in the return to labour as due to their observable and their unobservable characteristics
 Their observable characteristics include - gender/age/education and training etc
 All of these factors have been shown to be highly correlated with the earnings both of those in wage employment and those in self employment
 However once all allowance is made for these factors it is found that the unobservable characteristics of the worker matter a lot
 What are these unobservables?

Energy/ability/ini tia tive
- 'quality'

Hard to quantify

Part of the unobservable aspects of the determinants of earnings comes from the characteristics of the frm of workplace

Some of these may be observable in principle like the size and efciency of the frm but may not in practice given the data we have. Some like the quality of the skills of the workforce may be very hard to measure in principle
 Why should the sector or the frm in which the individual works matter?

One possibility is that certain sectors or frms have more desirable characteristics than others in which case wages will reflect an element of compensating diferentials

Another model suggests that workers may be harder to monitor in some frms or occupations in which case the wages may be part of the inducement mechanism to work harder. This is one version of the efciency wage argument to which we will come back later

Do certain types of frms - ones that are either larger or more productive - pay their workers more? This is the rent sharing explanation for wage diferences
 Which factor is more important?

The explanations for wage and labour income diferences are not mutually exclusive

It is not either human capital or rent sharing or efciency wages - it is how much of each

This may difer over countries over time and over types of labour market so you should not expect there to be one answer to the question as to what determines the price of labour

To repeat: the most striking feature of data on wages and labour incomes is its extraordinary heterogeneity - people get paid radically diferent amounts for their labour time. Why?
The dual economy model o Taking this model of labour we can see that the further the demand for labour shifts to the right the higher will be the wages o By far the most important factor that is shifting the demand curve for labour to the right is the rate of investment in physical capital o By far the most important factor afecting how far any shift to the right in at demand curve afects the price of labour is the elasticity of the supply of labour

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