Disguised unemployment is the wastage of labour resource of a country. For a country like India that wishes to move towards a fast growth tract, disguised unemployment is a serious setback to the growth path. Several theoretical justifications have been provided to contextualize disguised unemployment. They all assume homogeneous production structure across firms. However, the informal sector in India is a conglomeration of different firm types. In India, the NSSO data subdivided firms into family enterprises (Own Account Enterprises – OAE) and commercially motivated (Establishment). The authors require a theoretical justification following this line. In this chapter, they generalise the argument provided by Georgescu-Roegen (1960) for this purpose. In this chapter, an attempt is made to measure surplus labour in the informal sector of India using NSSO data. For this, the concept of sub-vector efficiency as developed by Ray (2005) is used. The authors calculate surplus labour in OAEs and EST firms separately.
Top2. Theoretical Rationale Of The Study
The literature on disguised unemployment is long. It traces back to the early writings of Rosenstein Rodan, Joan Robinson, Lewis among others1. The main argument is that there remains a substantial amount of labour force in the traditional sector that can be removed from their present employment without disturbing the current output. Numerous explanations have been sought for the prevalence of this phenomenon. They begin with the simplistic distinction between labour and labourers given by Sen (1966) to the more sophisticated use of the efficiency wage hypothesis by Basu (1992).
In this paper, we use the argument provided by Georgescu-Roegen (1960). In his view, neither capitalism, nor socialism is an efficient way of using labour force. Rather the peasant firms make optimum use of labour in a labour surplus economy. The capitalist system is profit oriented. It is run by the logic of maximisation of profit. Hence it will use labour only upto the point that will maximise profit. A peasant firm will employ labour beyond that. It is this excess of labour in the peasant firm that is called by surplus by the capitalist logic.
To formalise it, we consider a simple neoclassical production function of the form:
Y=f(l)(1)With f’(l)≥0, f”(l)≤0 and the usual Inada conditions are met.
Suppose the wage rate is given at w. So the capitalist’s profit is:
Max π =
f(l)-wl(2)The first order condition is:
f’(l)=w(3)For the peasant firm the exercise is:
Max Y=f(l) subject to π ≥
(4)The first order conditions are:f’(l)= (λ / (1-λ))w(5) where λ is the Lagrange multiplier. This parameter can be interpreted as (∂Y/∂π), the marginal response of output with respect to profit. We get three regimes comparing (5) with (3).