Global Economic Development Class

1
Global Economic DevelopmentClass 22

• Division of labor and specialization
• Questions
• Determinants of division of labor? Adam Smith
  the extent of the market Becker coordination
  costs and general knowledge Davis public goods.
• Endogenous determination of growth and
  specialization

2
Becker and Murphy Model (1) Y min Y(s) Y only
good (pins) Y(s) rate of production of task
s (2) Y(s) E(s) Tw(s) E(s) productivity of
each hour in task s Tw(s) working time devoted
to s Teams Each member of team of size n
concentrates in ? 1/n tasks Y Y(H, ?), YHgt0,
Y?lt0 (increasing returns to specialization) H
general knowledge Assume E(s) dH?Th?(s) Th(s)
time devoted to acquiring skills of task s
3
Th(s) Tw(s) T(s) Y(s) AH?T(s)1?
AH?n1? Y/n B(H,n) AH?n? output per team
member If ?gt0, then output per team member
increases with team size. Productivity (income
per capita) increases in society. In this model
we want everybody to be part of the team
division of labor is limited only by the extent
of the market! Actual economies conflict in big
teams (example shirking) bargaining between
members of teams poor coordination and
communication in big teams. Costs of coordinating
specialists. C C(n), Cngt0 Net output per team
member y B-C B(H,n) C(n) Maximize y with
respect to n gives optimal n, n.
4
Examples of coordination costs determining
division of labor Doctors Historians Family Manage
ment in a firm coordinates the work of
specialists Prices in the market coordinates the
work of specialists Knowledge BnHgt0 an increase
in knowledge raises the marginal product of a
larger team and therefore the optimal size of
teams dn/dHBnh/(Cnn-Bnn)gt0 It is the extensive
cooperation among highly specialized workers that
enables advanced economies to utilize a vast
amount of knowledge.
5
Specialization and Kowledge Endogenous
growth yt AtHt?nt?-?tntß nt (?/ß?t)1/ß-?
At1/ß-? Ht?/(ß-?) Then, yt ktAtß/ß-?
Ht?ß/(ß-?) Ht1 yt ct AtHt?nt?-?tntß-ct U
1/sSatcts (1/a)(ct1/ct)1-s1rt 1rt
dyt1/dHt1 (ß?/ß-?)ktAtß/ß-?Ht(ß?/ß-?)-1 Three
possibilities Increasing returns to human
capital with increase human capital (growth
accelerates) Constant returns to human capital
with increase in human capital (constant
growth) Decreasing returns to human capital with
increase in human capital (growth desaccelerates)
6

• Question
• Any good way of measuring the relevance of these
  ideas
• Measuring coordination costs
• Measuring knowledge
• Measuring division of labor
• The ideas seem important but difficult to
  quantify the effects!

7

• Galor and Mountford
• Idea
• Increase total output in a country can be used
  in two ways
• Increase in standard of livings (industrial
  nations by decreasing fertility, increasing
  education)
• Increase in population (non-industrial nations
  by increasing fertility)
• International trade affected the timing of
  demographic transitions
• Distribution of world population
• Great divergence in income per capita

8

• Model
• Production
• Agriculture Yta Ata Lta
• Industrial Ytm AtHt?Ltm1-? AtmLtmhtm?
• Yta and Ytm total output in agriculture and
  manufacturing
• Lta and Ltm unskilled labor in each sector
• Ht skilled labor in manufacturing
• htm ration of skilled to unskilled labor in
  manufacturing
• pt price of agricultural good in terms of
  manufactured good
• wtu ptAta (wages of unskilled in agricultural
  sector)
• wtu (1-?)Atmhtm? (wages of unskilled in
  manufacturing sector)
• wts ?Atmhtm?-1 (wages of skilled in
  manufacturing sector)
• Mobility of unskilled workers imply
• pt (1-?)htm?(Atm/Ata)

9
Preferences Utalncta ßlnctm
(1-a-ß)ln(wt1sntswt1untu) cta and ctm
consumption of each good nts and ntu number of
skilled and unskilled children Budget
constraint ptcta ctm wti (ntsts ntutu) lt
wti ts and tu time required to raise skilled
and unskilled offspring ts gttu FOC cta
awti/pt ctmßwti ntstsntutu 1-a-ß Also, gt1A
t1m/Atm-1g(ht), dg/dhgt0, d2g/dh2lt0
10
Autarkic equilibrium Both goods are produced,
both types of workers (skilled and unskilled) are
produced Ht/Ltm constant pt increasing over
time due to technological progress in industrial
sector Lta, Ltm, Ht fixed fractions of Lt. Skill
abundance also constant over time, then constant
rates of growth of technology, population, income
per capita. International trade Lets say
economy A more advanced technologically in
industrial sector than economy B Then, pAgtpB With
trade, unique price pt, pBltptltpA A specializes
in producing the industrial good B in
agricultural good
11
(No Transcript)