Labour market (Outdated)

Skilled and unskilled labour are perfectly mobile across sectors within each region in the standard version. Labour supply is fixed exogenously and increase with respect to baseline (Outdated) specifications. Labour is not mobile across regions.

Dual labour market is used for unskilled labour only in order to represent rigidity in labour transfer from rural areas to urban areas.

Developing countries with Lewis assumption

Developing countries are considered as hardly segmented economies, with an urban labour market that is distinct from a “traditional” market in rural areas (W Arthur Lewis, 1954) (John R Harris, Michael P Todaro, 1970). This approach is limited to unskilled labour. The modern sector (industry and services) pays an efficiency wage to unskilled workers. This wage is independent from labour supply and is indexed on price inflation. The primary sector (i.e. agriculture), by contrast, relies on a fixed quantity of labour that is paid at its marginal productivity.

This assumption derives from the high level of underemployment observed in rural areas of many developing countries. That situation allows rural workers to answer to any labour demand in the formal urban sector, while being replaced at their position in the agricultural sector. The choice of the “Lewis” option has therefore to be made only when it is considered as appropriate. This is the case for instance for countries like China or Vietnam, as well as for many African countries. This mechanism however does not correspond to all developing countries: for instance Latin American countries are characterised by rather modern agricultural sectors that do not fit with this description.

$$ \begin{align} P^{L^{notAgri}}_{r,t} &= P^{L^{notAgri}}_{r,t,Ref} \prod_i\left(\frac{P^C_{i,r,t}}{P^C_{i,r,{Ref}}}\right)^{\frac{P^C_{i,r,{t_0}}C_{i,r,{t_0}}}{\sum\limits _j P^C_{j,r,{t_0}}C_{j,r,{t_0}}}}\\ L^{Agri}_{r,t}&=L^{Agri}_{r,t,Ref} \end{align} $$

where $L^{notAgri}_{r,t,Ref}$ and $L^{Agri}_{r,t,Ref}$ are the baseline “Ref” labour supply exogenously calculated from migration flows in FAO data.

$P^{L^{notAgri}}_{r,t,Ref}$ is computed endogenously from $L^{notAgri}_{r,t,Ref}$ in the baseline.

The transfer from the rural to the urban sector implies an increase of the labour remuneration. In this option, wages are thus not calibrated to unity any longer. On the contrary we rely on GTAP data and FAO statistics to compute the relative wages ratio. Migration from rural to urban regions in the baseline scenario is also quantified based on the FAO projections.

This specification provides a simple way to account for a hidden unemployment in developing countries, and to depart from the standard assumption of exogenous unemployment levels used in most CGE models.

Activation of the Lewis option

Regions following the Lewis specification are those belonging to the subset Lewis®, in the data.gms file. In practice, this subset is automatically created if the user fills out column 'Dual labour market' of the sheet 'Regions', in the Aggregation file (Outdated), while rural sectors have to be designated in the column 'Labour type 1' of the sheet 'Sectors'.

It is also possible in an optional version to run perfect labour markets across groups of countries.

See section Mobile labour and capital in integration zone

1. ^ W Arthur Lewis, 1954. Economic development with unlimited supplies of labour. The manchester school, 22, Wiley Online Library, pp.139–191.
2. ^ John R Harris, Michael P Todaro, 1970. Migration, unemployment and development: a two-sector analysis. The American economic review, 60, JSTOR, pp.126–142.