chapter no.20

MEANING OF DISGUISED UNEMPLOYMENT

The concept of disguised unemployment was introduced into the theory of underdevelopmentby Rosenstein-Rodan in his famous article “Problems of Industrialization of Eastern and South-Eastern Europe” and was elaborated by Ragner Nurkse. In its strict sense, it means that giventhe techniques and productive resources, the marginal productivity of labour in agricultureover a wide range is zero in overpopulated underdeveloped countries. It is, therefore, possibleto withdraw some surplus labour from agriculture without reducing total farm output. Suchunemployment is found where too many workers are engaged in agricultural operations becauseof the lack of alternative or complementary employment opportunities. If, for example, sevenpersons are engaged in cultivating a farm that could be cultivated by five, it implies that all theseven workers are not fully employed. If two are withdrawn and given some alternative job,the total output of the farm will not be reduced when five workers are left to do the same work.It means that two workers are not contributing anything to farm output and their marginalproductivity is zero.Prof. A.K. Sen does not agree with this interpretation of disguised unemployment. He asks, “Ifmarginal productivity of labour over a wide range is zero, why is labour being applied at all?”The confusion arises from failure to distinguish between labour and labour time. In Sen’s view,

C H A P T E RC H A P T E RC H A P T E RC H A P T E RC H A P T E R

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“It is not that too much labour is being spent in the production process, but that too manylabourers are spending it. Disguised unemployment thus normally takes the form of a smallernumber of working hours per head.”1 If, for instance, in a family 35 hours’ work a day is doneon a farm, the marginal product of the 35th hour falls to zero. Let us further assume that7 members work on the farm for 5 hours a day. Given the same technique and production process,

if two labourers go away, the remaining 5 labourers would beable to maintain the same level of output by working harderand longer for 7 hours a day. Thus there is disguisedunemployment of two labourers. The amount of disguisedunemployment also depends on the number of hours’ work aday per labourer. If it is fixed at 7 hours a day, then again twolabourers are disguised unemployed even if they work on thefarm. It is thus the marginal productivity of the labourer thatis nil over a wide range and the productivity of labour may bejust equal to zero at the margin. Sen explains the differencebetween the two approaches with the help of the Fig. 1.TP is the total output curve which becomes horizontal whenOL labour is employed. It implies that the marginal product oflabour becomes zero with OL labour hours and it is no useemploying labour beyond this point. However, the number oflabourers engaged in agricultural operations is OL2 and eachworks for tan a hours. But the working hours per labourer aretan b. Thus L2L1 labourers are disguised unemployed. It shows

that marginal productivity of labour is zero at point L and that of labourer over the range L2L1is nil.

NURKSE’S THEORY

Ragner Nurkse2 developed the thesis that disguised unemployment in overpopulatedunderdeveloped countries can be a source of capital formation. According to Nurkse, the stateof disguised unemployment in underdeveloped countries constitutes “a disguised savingpotential.’ Underdeveloped countries suffer from disguised unemployment on a mass scale.With existing techniques of production in agriculture, it is possible to remove from land a largeproportion of the surplus labour force without reducing agricultural output. This surplus labourforce can be put to work on capital projects, like irrigation, drainage, roads, railways, houses,factories, training schemes, community development, education and health, etc. In this way,rural underemployment can be a source of capital formation.Nurkse has split up the problem of mobilizing the disguised unemployed as a saving potentialin two parts:Firstly, how to feed the surplus population transferred to the various capital projects.Secondly, how to provide tools to the new workers to work with.Feeding the Surplus Population. Though the first problem can be solved to some extent byvoluntary savings, by taxation and even by importing foreign capital, yet the magnitude of theproblem requires that it should be self-financing. At present the unproductive surplus labourers

1. A.K.Sen, Choice of Techniques, pp. 3-5.2. R. Nurkse. op. cit. Ch. 11.

O

bL

L1

a

TP

Labour

L2

Number ofLabourers

Tota

l Out

put

154 The Economics of Development and Planning

are being supported by the productive labourers. The latter are doing virtual saving since theyare producing more than they consume. But this saving is running waste because it is beingutilized in feeding the unproductive labourers whose contribution to output is zero or negligible.If the productive peasants working on land continue to feed their unproductive dependentsworking on capital projects, then their virtual saving would become effective saving. But thiscapital formation “through the use of surplus labour is self-financing only if the mobilizationof the concealed saving potential is 100 per cent successful.” Nurkse further emphasizes, “Itseems to be a question of all or nothing. Either the whole of the food surplus that becomesavailable on the land through the withdrawal of the surplus labourers is mopped up to feed theunproductive labourers in their new occupations or nothing can be done at all.” But the snag isthat there may arise certain leakages in this food fund available for capital formation:

(a) The newly employed worker may start consuming more food than they were consumingat the farms;

(b) the peasants left behind on the farms may themselves start consuming more food thanbefore; and

(c) the problem of bearing the cost of transporting food from the farms to the capital projects.Though it is not possible to plug these leakages fully, Nurkse suggests that this can be done bycomplementary savings in other sectors of the economy, by state action in requisitioning thesurplus food stocks from the peasantry, and even by meeting the deficit from imported foodstocks. He also stresses the need for levying indirect taxes on commodities that enter into thepeasants’ budget: taxation in kind, a tax on land owners and on their rents may further help inmopping up the food surplus. Nurkse’s firm conviction is that “whatever the machineryemployed may be, some form of collective saving enforced by the state may prove to beindispensable for the mobilization of the saving potential implicit in disguised unemployment.”Financing of Tools. The second problem relates to the financing of tools to be provided to newconstruction project workers. Even though capital goods can be imported, yet as usual an act ofdomestic saving is required in this case. In some of the densely populated agricultural economies,there is not only underemployment of labour but also of capital. Due to small scattered plots,large number of farm tools, implements and draught animals are used. But if these small andscattered holdings are consolidated, certain simple tools will be released which the investmentworkers can use in new capital projects. Moreover, simple tools and equipment that the newlyemployed workers require can be made by the workers themselves with their own hands. Suchsimple tools can also be imported from abroad in exchange for the country’s exports. But it isessential that only that capital equipment should be imported which can be easily adapted tothe prevailing factor endowments in the country. As Nurkse puts it, “Much simpler tools andequipment may be appropriate to the relative factor endowments of countries of this type inthe early stages of development.”To sum up, “Hands would move from the village to the new construction sites; with the handswould also move mouths; and with less mouths to feed in the village the possibility would becreated for food to move out of the village to supply the needs of a swollen army of constructionworkers, without any fall in consumption on the part of those remaining in the village.”3 Thusa process of economic development is generated through the use of the disguised unemployed.

3. M. Dobb, Some Aspects of Economic Development, 1951. Dobb propounded this thesis, independent of Nurkse, in one of his lectures delivered at the Delhi School of Economics when the writer was a student.

Nurkse’s Theory of Disguished Unemployment as a Saving Potential 155

Nurkse, therefore, rightly believes that there is concealed saving potential in ruralunderemployment in overpopulated underdeveloped countries that can be effectively utilizedas a means of capital formation.

LIMITATIONS OF THE CONCEPT

The concept of disguised unemployment as a concealed saving potential has led to considerablecontroversy. Economists have questioned the practicability of this concept in democraticunderdeveloped economies. The various difficulties that stand in its working are examinedbelow:1. Propensity to Consume not Constant. Nurkse assumes that the propensity to consume ofboth the newly employed workers and those left on the farms remains constant. But this is anuntenable assumption. Kurihara is of the view that as a result of transferring the disguisedunemployed to the capital-goods sector, the propensity to consume may rise in the case of thewhole economy. “In this event the pressure will increase for allocating to the consumer goodssector those resources which might otherwise be used to increase output of capital goods.”4

2. Problems of Collection and Distribution of Food Surplus. Nurkse fails to visualise theproblems connected with the mopping up and the distribution of the food surplus from thoseworking on the farms to those working on the new capital projects. How is the food to becollected and distributed to workers at the project sites? How much each farm is to contributeto the food fund, if such a fund is created? If farm owners refuse to supply food, what action iscontemplated? Nurkse’s thesis does not offer any solution to these problems.3. Marketable Surplus does not Increase. Further, it is doubtful that the withdrawal of surpluslabour from agriculture would increase the marketable surplus. Kaldor holds that inunderdeveloped countries, peasants produce for self-sufficiency rather than for profits and theamount supplied to the non-agricultural sector tends to be governed by the need for industrialproducts. Since as a result of reduction of farm hands, the demand for industrial products isalso reduced, it is possible that a reduction in surplus labour force would be followed by areduction, rather than an increase, in the amount of marketable surplus for the towns.5

4. Difficult to Mobilize Disguised Unemployed. It is not easy to mobilize the disguisedunemployed and send them to the new capital projects. They are so intensely attached to theirfamily and land that they do not like to leave their kith and move to the new projects. Majorityof the disguised unemployed, however, find their way into the armed forces, as is the case inIndia.5. Not Possible to Get Work without Payment of Wages. In Nurkse’s analysis, the problem ofpayment of wages to the workers does not arise because the entire process of capital formationis assumed to be self-financing. This is unrealistic. Unless wages are paid, workers cannot beattracted to the new capital projects. As Lewis remarks, “Unpaid labour may be very importantin countries which resort to compulsory labour but its scope in other countries is limited.”6. Successful only in Totalitarian States. As a corollary to the above, this ‘up by the bootstraps’approach can succeed only under strong totalitarian governments and has little relevance todemocratic underdeveloped countries. As a matter of fact, this approach to capital formationhas succeeded in China where the masses have been forced to work on capital projects byproviding only minimum rations required for bare subsistence. Nurkse himself admitted this

4. K. Kurihara, op. cit., pp. 119-120.5. N. Kaldor, Essays on Economic Stability and Growth, 1960.


fact when he declared later on, “Some of the underdeveloped countries do have potentialdomestic resources available for capital construction. But it may be very hard nay impossible tomobilize them without resorting to coercive methods.”6

7. Problems of Inflation and Balance of Payments. The task of providing work to the surpluslabour force is beset with a number of difficulties. Lewis maintains that what holds back the useof such labour is not the lack of fixed capital but the lack of working capital. Assuming thatworking capital is available, the employment of surplus labour is likely to lead to inflation inthe economy. When the newly employed workers are paid wages, their demand for consumergoods increases without a corresponding increase in the output of consumer goods. Henceprices will rise. “This will also stimulate imports of consumer goods, with unfortunate effecton the balance of payments, and if these effects are prevented by strict control of imports and ofexports the effect is merely to swell the sum of money circulating at home, and set to putgreater pressure on the domestic prices.”7

8. Unskilled Labour Fails to Increase the Output of Fixed Capital. According to Kurihara, theuse of unskilled and ill-equipped labour may not increase significantly the output of fixedcapital which is of crucial importance to industrialization. The shifting of the disguisedunemployed to investment projects of a labour-intensive type requiring no special skill orequipment cannot be expected to produce fixed capital “in quantities and qualities that are ofimmediate and adequate use to industrialization. The most that could be expected of suchlabour-intensive projects is a limited amount of preliminary capital formation (e.g., swampclearance of factory sites, dirt road building for modern highways, and handicrafts serving asraw materials for machine made manufactures). But it takes machines to make machines on ascale large enough to speed up industrialization. And the disguised unemployed are anineffective substitute for such machines to make machines.”8

9. Unrealistic Assumption of Technological Neutrality. Kurihara further maintains that thetacit assumption of technological neutrality involved in Nurkse’s idea of disguisedunemployment as a saving potential is untenable and unhelpful. During the process ofindustrialization, if the capital-goods sector adopts labour-saving devices, it will set a limit tothe full mobilization of the disguised unemployed in the economy. In such a situation, capitalequipment will have to grow at a much faster rate to equip labour with increasing productivity.Technological progress is thus inevitable.10. Effects of Increasing Population on Capital Formation. To Kurihara, Nurkse fails to analysethe effects of rising population on capital accumulation. A rapidly growing population aggravatesthe difficulty of increasing the rate of capital formation in two ways:

“(i) there is a continuous addition to the unproductive labour force which eats up whateversaving potential is created by shifting the disguised unemployed to the new capital projects;and

(ii) this population growth outstrips capital accumulation showing thereby that disguisedunemployment grows faster than can be absorbed productively by the very stock of capital thatthe disguised unemployed are supposed to help expand.”11. Not Applicable to Directly Productive Activities. Hirschman makes a distinction between‘permissive’ and ‘compulsive’ factors in economic development. According to Nurkse, it is by

6. R. Nurkse, Lectures on Economic Development, p. 200. Italics mine.7. W.A. Lewis, op. cit., p. 218.8. K. Kurihara op. cit., p. 119.

Nurkse’s Theory of Disguished Unemployment as a Saving Potential 157

employing the unproductive workers in social overhead capital projects that capital formationwill take place. But Hirschman is of the view that though social overhead capital is fundamentalto economic development, yet it is only a ‘permissive’ factor, for it simply permits privateinvestment to go ahead. The existence of ‘directively productivity activity,’ on the other hand, isa ‘compulsive’ factor in economic development. It includes, among others, machine tools andiron and steel industries. He, therefore, contends that Nurkse’s concept of converting the ruralsurplus labour into capital formation can have relevance only with regard to social overheadcapital but not to directly productivity activities which are more significant from the viewpointof economic development.9

12. Fall in Production. Schultz does not agree with Nurkse that the removal of surplus labourforce from the farms to the new capital projects will not reduce agricultural productivity. Hecontends that there is “no evidence for any poor country anywhere that would suggest that atransfer of even some small fraction, say, 5 per cent of the existing labour force out of agriculture,with other things equal, could be made without reducing its production.”10 As Doreen Warrinerhas pointed out, the emphasis on overpopulation or disguised unemployment is mostunfortunate because it concentrates on pure guesswork and diverts attention away from theascertainable facts—the fall in output per head resulting from pressure of population on themeans of subsistence and the destruction of soil fertility.11

13. Defective Empirical Evidence. Empirical evidence has shown that the estimates of 20-25per cent of surplus labour are entirely inadequate and defective. Kao, Anschel and Eicher haveshown that the empirical studies supporting such optimistic estimates of disguisedunemployment were often poorly conceived. In addition, “by considering temporary ratherthan permanent labour transfers and by allowing some reorganisation of production, variouswriters have arrived at a high percentage of disguised unemployment. To date, there is littlereliable empirical evidence to support the existence of more than 5 per cent disguisedunemployment in underdeveloped countries.”12

Conclusion. The inference can be drawn from the entire discussion that the existence of disguisedunemployment as a concealed saving potential and hence as a source of capital formation inoverpopulated underdeveloped countries is beset with a number of difficulties and has littlepracticability in countries that have wedded themselves to a democratic way of living. We maythus conclude with Viner that “there is little or nothing in all the phenomena designated as‘disguised unemployment,’ as ‘hidden unemployment,’ or as ‘underemployment’ which in sofar as they constitute genuine social problems would not be adequately taken into account bycompetent, informed, and comprehensive analysis of the phenomenon of low productivity ofemployed labour, its causes, its true extent, and its possible remedies.”13

A REALISTIC VIEW

The views expressed above are by those who are sceptical about the concept. But it cannot bedenied that the use of surplus labour as the source of capital formation “brings within a narrow

9. A.O. Hirschman, The Strategy of Economic Development, 1958.10. ’The Role of Government in Promoting Economic Development’ in The State of Social Sciences (ed.)

L.D. White.11. D. Warriner, Land Reform and Economic Development, 1955.12. C.K. Eicher and L.W. Witt (eds.), Agriculture In Economic Development, 1964.13. Some Reflections on the Concept of Disguised Unemployment’, IJE.


time-horizon projects which were outside this horizon. It gives scale economies, enlarges land,capital and employment and raises productivities all round.” So far as the problem of wagepayment is concerned Prof. Khusro14 suggests three methods:

(i) Underemployed workers can be organized on their own and on their neighbours’ farmson mutual aid on capital building. They need not be given a wage. They eat the same food attheir own kitchens. As a result, there are no inflationary pressures on food prices.

(ii) Underemployed workers can be organized to work on capital construction within a villageoutside their own farms. They are given a wage. But they return to their kitchens daily to eat thesame food which they would have eaten any way. They spend their wages on non-food itemswhose prices rise. But with a time-lag, they would produce the capital which would producethe extra food which will pay for the ‘wage-goods.’

(iii) Underemployed workers can be organized to work on capital projects away from theirvillages and paid a wage. They would spend their wages on food and this will lead to inflationarypressures. “But eventually it produces the capital which produces the food which pays for thewage. The problem in all the three cases is (a) of organization, and (b) of bridging the gapbetween work (wage payment) and product. If these programmes are undertaken on anationwide basis, monetary-fiscal measures become necessary.” According to Khusro, the essenceof the matter is organization in the field and taking up of projects with due regard to efficiency.

14. A.M. Khusro, Readings In Agricultural Development, 1968.

chapter no.20

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