Externalities, Earnings and Surplus Labour in Jamaica: An Update

This paper justifies and specifies testable hypotheses about the relationship between the individual wage and the average level of subsistence productivity in the Jamaican labour market, as well as the degree of competitiveness. First, a framework is derived as a mathematical-economic model that links the marginal product of labour to the scale of unemployment or subsistence employment through the capital-output ratio and encompasses both Lewis surplus-labour hypothesis and the neoclassical alternative. Second, the implied specific testable hypotheses are formulated with a modified Becker-Chiswick-Mincer earnings function, which includes both log (hours worked) and log (weeks worked). Relationships are estimated using OLS with non-random selection of education and employment status on the one hand and a hierarchical random effects model on the other hand. Tests for competitiveness are conducted with Oaxaca-Blinder regression decompositions. Data are drawn from the Jamaica population census of 2001. It is found that there are conditions in the Jamaica labour market consistent with Lewis’ surplus-labour assumption as well as uncompetitive labour markets and significant externalities. These conditions imply the need for development of a large scale domestic capital sector, real and financial, growing at a rate faster than the economy as a whole and for suitable industrial, trade and financial policy to achieve that goal