Key points are not available for this paper at this time.
ONE of the 'paradoxes' of developing economies is the coexistence of unemployment with a positive (although low) wage for hired labourers. Two resolutions of the paradox are commonly offered: (a) There really is no unemployment. (b) Markets are not in equilibrium, possibly because of institutional constraints on the level of wages offered. In the rural sector, these 'institutional constraints' take the form of 'communal pressure' rather than minimum wage legislation. This paper is concerned with exploring a third alternative explanation, the efficiency wage hypothesis. The hypothesis dates back at least to the work of Leibenstein,2 and there have been some theoretical investigations of its implications. This paper is concerned with the consequences of the efficiency wage hypothesis for the distribution of income in the rural sector and considers the effects of an increase in rural population on rural output and inequality.3 The economics of the rural sector-the allocation of labour, the supply of effort, the determinants of migration from the rural to the urban sector, etc.-depends critically on how the sector is organized; for instance, whether farms are individually owned or whether there are extended families, whether there is a large landless peasantry, whether individuals who migrate to the urban sector lose their rights to the land, etc.4 In this paper we consider several polar cases:
Joseph E. Stiglitz (Thu,) studied this question.