Permanent labor: Casual tasks

Seasonality and income fluctuations We take a leisurely approach to motivating the second type of permanent labor. Imagine agricultural life in a developing country. The first fact of cultivation is the existence of seasons. Roughly speaking, we can divide an agricultural production cycle into a slack season and a peak season. In the slack, agricultural activity is at a relative low, whereas the peak season contains the bulk of the physical activity: harvesting. Thus the demand for labor in the slack season is relatively low and spikes sharply in the peak season. This fluctuation is naturally mirrored in the behavior of spot market (casual) wages: they follow a zigzag pattern, exhibiting lows in the slack and highs in the peak season.

We can add to these observations by noting that, in addition to the natural fluctuations imposed by the presence of the seasons, there is another source of fluctuation: uncertainty. From the vantage point of the slack season, it is difficult to predict what the peak season wage will be, except to observe that it is likely to be higher than the slack wage. The uncertainty arises from the fact that the peak season demand for labor depends on the abundance of the harvest, and the bounty of the harvest is affected by the weather as well as a host of other factors that may be out of the control (or predictive range) of the farmer.

It is possible to temper these observations somewhat by noting that in all parts of the world, multiple cropping is on the rise. This is especially so in regions where the availability of irrigation or new varieties of seeds serves to reduce dependence on the season. To the extent that multiple cropping occurs, the spikiness of the agricultural cycle is smoothed out and seasonality plays less of a role, but the role is still prominent enough to deserve our full attention.

Fluctuation aversion The fundamental point that we draw from seasonality is that rural wages have a built-in tendency to fluctuate, both over time and in the sense that they are only imperfectly predictable. To understand the implication of this, recall the analysis of risk aversion that we introduced in Chapter 10 and used in Chapter 12. Remember that risk aversion can be captured by postulating that an individual receives diminishing marginal utility from income. An extra $10 means more when you are earning $100 per month than when you are earning $1,000 per month. This tendency for marginal utility to diminish is connected to risk aversion in the following way: an individual would always like to transfer sums of money from his high-income state to his low-income state, because the loss of utility from a monetary reduction in the high-income state is less than the same monetary gain in a high-income state. You may want to go back to Chapter 10 and review the material on risk aversion before proceeding further.

Risk aversion is closely related to what we might call fluctuation aversion, a state of affairs in which an individual reacts to the prospect of a fluctuating but perhaps perfectly deterministic stream of income. In Figure

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13.15, we depict a two-income stream: a wage of Rs 100 per month in the slack and Rs 200 per month in the peak. Assume for simplicity that the two seasons are of equal duration. The utility that the worker receives from Rs 100 is given by point A and the utility he gets from Rs 200 is shown by point B.

What is the average utility received by the worker? By our simplifying assumption that both seasons are of equal lengths, it is, of course, the average height of points A and B. This is easy enough to depict on the diagram. Simply draw the chord joining A and B and then look at the height of the midway point along this chord, marked C. This is the average utility generated by the fluctuating stream of incomes (100, 200).