Dual Economy

BIBLIOGRAPHY

In the mid-twentieth century, theoretical modeling of economic growth was dominated by single-sector models, such as that of the Nobel Prize winner Robert Solow. Other analysts, however, felt that economies should be characterized as having multiple sectors, which they stylized into dual-economy models. Foremost among the early dual-economy modelers were two other Nobel Prize winners, W. Arthur Lewis and Simon Kuznets. The dual economy models posited an economically “advanced” sector and an economically “backward” sector. These have alternatively been called capitalist and subsistence, formal and informal, modern and traditional, industry and agriculture, urban and rural, primary and secondary, and good-jobs and bad-jobs sectors.

For both Lewis and Kuznets, the two sectors differed in terms of the goods produced, the nature of the growth process, and conditions in labor markets. Lewis specified a capitalist sector that produced industrial goods and a subsistence sector that produced agricultural goods, services, and commercial activities. Kuznets distinguished an agricultural sector from all others, primarily the industrial sector. For Lewis, capital accumulation took place in the capitalist sector only, and he viewed this sector as the engine of growth. For Kuznets, the essence of modern economic growth was the gradual shift of production from lower-income to higher-income sectors. For both Lewis and Kuznets, the advanced sector offered higher real wages than the backward sector did.

This coexistence of high-wage and low-wage sectors is the defining feature of labor-market dualism, the generalization of which is labor market segmentation. Besides real wages being higher in the good–jobs sector, dualism and segmentation require that access to this sector be restricted, in the sense that not all who want to work there are able to do so. As summarized by Michael Wachter, the dual labor-market model advances four hypotheses:

First, it is useful to dichotomize the economy into a primary and a secondary sector. Second, the wage and employment mechanisms in the secondary sector are distinct from those in the primary sector. Third, economic mobility between these two sectors is sharply limited, and hence workers in the secondary sector are essentially trapped there. Finally, the secondary sector is marked by pervasive underemployment because workers who could be trained for skilled jobs at no more than the usual cost are confined to unskilled jobs. (1974, p. 639)

Some of the subsequent writings on labor-market dualism adopted human capital theory, as developed in the Nobel Prize–winning work of T. W. Schultz and Gary Becker and the work of Jacob Mincer. Human capital theory maintains that workers with more education and training have higher skills, which the labor market rewards. Thus, it is not enough for labor-market dualism that workers in one sector earn systematically more than those in another; it must also be true that workers with the same skills do better in one sector than in another. Ample research has demonstrated empirical evidence that wages are systematically higher for observationally equivalent workers in some economic sectors than in others: non-agriculture versus agriculture, urban versus rural, formal versus informal, and so on. Many observers take this as evidence of labor-market dualism, though some dismiss it as merely indicating the existence of unmeasured skills and abilities.

What the works reviewed thus far have in common is that all available workers are employed either in the advanced sector or in the backward sector. Thus, unemployment is absent in these models. Later models, such as that of John Harris and Michael Todaro, specified two types of employment (industrial and agricultural) plus unemployment.

One feature that could not be ignored by labor market modelers was the duality within the urban economy, with some jobs being desirable and others being deemed quite miserable to have. This observation led to the development of a model with three types of employment: an urban formal sector, an urban informal sector, and a rural agricultural sector—plus unemployment (Fields 1975).

More recently, one more need has become apparent. This is to give due recognition to the fundamental duality to be found within the informal sector. On the one hand, the informal sector has free-entry activities such as street vending and small-scale services that enable those who do such work to eke out a meager existence. Individuals who engage in such enterprises do so because it is better for them than being unemployed. On the other hand, the informal sector also has restricted-entry activities that people who could be working formally choose to take up instead, such as leaving a formal sector auto repair shop to set up one’s own backyard operation or moving from a formal sector restaurant to operate one’s own noodle stand. Some current segmented labor-market models include both the “free entry” part of the informal sector and the “upper tier” of the informal sector.

In the 2000s, dual-economy and multisector models dominate both academic research and applied policy work. Analysts routinely utilize models with many economic sectors and many labor markets. The sectors, at a minimum, include industry and agriculture, while other sectors, such as commerce and services, may also play a role. As for the labor market, workers might be employed (be it in wage employment or self-employment) in one of four sectors: the formal sector, the free-entry part of the urban informal sector, the upper tier of the urban informal sector, and rural agriculture. They might also be unemployed. Models assuming that the economy has only a single sector or that all employed workers earn the same amount seem hopelessly unrealistic.

SEE ALSO Harris-Todaro Model; Labor Market Segmentation

BIBLIOGRAPHY

Becker, Gary S. 1964. Human Capital: A Theoretical and Empirical Analysis. New York: Columbia University Press for the National Bureau of Economic Research.

Fields, Gary S. 1975. Rural-Urban Migration, Urban Unemployment and Underemployment, and Job Search Activity in LDC’s. Journal of Development Economics 2 (2): 165–188.

Harris, John, and Michael Todaro. 1970. Migration, Unemployment, and Development: A Two Sector Analysis. American Economic Review 60 (1): 126–142.

Kuznets, Simon. 1955. Economic Growth and Income Inequality. American Economic Review 45 (1): 1–28.

Lewis, W. Arthur. 1954. Economic Development with Unlimited Supplies of Labour. Manchester School 22: 139–191.

Schultz, T. W. 1961. Investment in Human Capital. American Economic Review 1 (2): 1–17.

Wachter, Michael. 1974. Primary and Secondary Labor Markets: A Critique of the Dual Approach. Brookings Papers on Economic Activity 3: 637–680.

Gary S. Fields