The "Wage-Productivity" Theory of Underemployment: A Refinement

Yotopoulos, Pan A.
January 1965
Review of Economic Studies;Jan65, Vol. 32 Issue 1, p59
Academic Journal
The concept of disguised unemployment or underemployment has drawn considerable attention in the economic development literature for almost a decade. The efforts to reconcile a zero or "low" marginal productivity of labor with a higher wage rate have followed two directions. First, the approach usually associated with W. Arthur Lewis' work bases the phenomenon of underemployment on a postulated dualism that exists between the industrial and the agricultural or subsistence sector of an underdeveloped economy. Second, the theoretical approach first suggested by Harvey Leibenstein postulates a certain relationship between the wage rate and productivity and complements this relationship with certain assumptions on institutions. The purpose of this article is to refine some aspects of the "wage-productivity" theory of underemployment. We will argue that the analysis as it stands supplies some of the necessary but not alt the sufficient conditions for the theory to be correct. Accordingly, this approach to underemployment may be confirmed or rejected by theoretical or empirical evidence that has yet to come. In the last section of this paper we will argue that even if the wage-productivity relationship be confirmed by future research, still the conclusion to which the theory leads is not, thereby, logically necessary.


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