1. POPULATION SIZE AND DEMOGRAPHIC TRENDS

Changes in Population
The people of a country are its consumers. They provide the labour force for production.
A study of the population of any country, therefore will give a bird‟s eye view of the
community for which the economic system must provide, and also of the size and nature
of the available labour force. At any one time the structure of the population is largely the
result of demographic factors prevailing some fifty years earlier. In Africa, the
improvements in medical knowledge and increased application of that knowledge have
been able to produce dramatic reductions in death rates, so that the average life
expectancy in Africa may well have been doubled over the past half-century, application of
the improvements in technical knowledge has not been able to produce equally dramatic
changes in the supply of food.
b. Causes of changes in the Rate of Growth
Changes in population come about in two ways; (i) by movements in crude death rates,
and (ii) by migration. The crude birth rate is usually expressed as the number of births per
annum per thousand of the population and the crude death rate is the number of deaths
per thousand of the population per annum. The natural growth rate will be the difference
between these two rates,
Natural Growth Rate = Birth Rate – Death Rate
Thus if a country has a birth rate of 40 per 1000 and a death rate of 20 per 1000, its
population has a natural growth rate of 2 per cent per annum. The actual rate of
population growth is calculated by adjusting the natural growth rate by the extent of net
immigration or emigration.
Movements in crude birth and crude death rates has been the most important factor in
population development of East Africa countries. The factors which have led to high
natural growth rates in East Africa can be summarized as:
Declining mortality rates,
High fertility levels,
Low marriage age,
Rapidly growing number of women who are in and about to enter the child bearing
age because of young populations.
T.R. Malthus
The current trends in world population have revived interest in the population theories of Rev.
Thomas Robert Malthus, whose “Essays on the Principles of Population (1978) led to the
first serious discussion of the problem. Malthus wrote at a time when the British population
was increasing rapidly and the basis of his theory was that whereas population tended to grow
at a geometric rate (by a constant and percentage each period, as for example,
4,6,16,24,32,40,48…), the food supply could only be expected to grow at an arithmetic rate (by
constant amount each period, as for example 8, 16, 24, 32,40,48…). His observations seemed
to confirm his views that increasing numbers could only increase the misery of the masses.
He declared that population has a persistent tendency to outstrip the means of subsistence.
Any rise in the living standards of the masses of the people would lead to earlier marriages,
more deaths, and more babies surviving. The increased numbers would simply lower living
standards back to the bare subsistence level. His purpose was to demonstrate that the increase
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in population is necessarily limited by the means of subsistence. That population does not
invariably increase when the means of subsistence increase and that the superior power of
population is repressed, and the actual population kept equal to the means of subsistence by
misery and vice versa.
The checks on population which Malthus summarized as misery and vice versa were
famines, plagues, wars and infanticide. He was, off course concerned with the British
problem and believed that agricultural output could not possibly increase at the rate at
which population tends to grow. In this he was undoubtedly influenced by the Law of
Diminishing Returns because he saw the supply of land as relatively fixed. He was proved
wrong in the case of Britain for the population quadrupled during the nineteenth century.
Malthus‟ predictions about population have not occurred because:
He did not consider the tremendous improvements in agricultural and food technologies
such use of chemical fertilizers, hybrid seeds an insecticides, and modern irrigation
systems to increase land productivity. Famine such as occurred in Ethiopia, Mozambique
and many African countries is explained by political instability or inadequate or lack of a
clear food policy, not population explosion as suggested by Malthus.
Malthus did not consider that industrialisation by its very nature would reduce population
growth.
He did not foresee the great improvements in transport and technology which enabled the
British people to be fed from the vast lands of the new continents.
Malthus did not consider that agricultural land area would be increased by reclaiming land
from rivers, lakes and oceans.
Finally he did not foresee that rising standards of living would bring falling birth rates as
they did in most Western nations after 1870
Nevertheless the germs of truth in his doctrines are still important for an understanding of
the population problems in much of Africa where as we said before, the balance between
the numbers of people and the means of subsistence is often precarious. Where
inexpensive science greatly reduces the death rate without increasing productivity Malthus
still has some relevance.
John Stuart Mill
Mill developed and refined the “Malthusian “ theory in order to generalize the relationship
between the supply of labour (population) and supply of food from land. This
generalization is known as the “Law of Diminishing Returns, sometimes called the Law
of Variable Factor Proportions”. (See lesson 2)
2. THE STRUCTURE OF POPULATION AND SUPPLY OF LABOUR
The structure (also called age distribution or composition) of population, or the number
of people in the different age groups is of considerable economic significance; for not all
individuals in the population contribute equally to production. Given the numbers of the
population, the supply of labour depends on the proportion of people who are members
of the workforce. The size of the economically active population is determined especially
by: Labour and Unemployment
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i. Population Size
In any given economy, the population size determines the upper limit of labour supply.
Clearly there cannot be more labour than there is population.
ii. Age Structure
The population is divided into three age groups. These are:-
The young age group usually below the age of 18, which is considered to be the minimum
age of adulthood. People below this age are not in the labour supply, i.e. they are
supposed to be working or looking for work.
The working age group, usually between 18 and 60, although the upper age limit for this
group varies from country to country. In Kenya for example, for public servants, it is 55
years. It is the size of this group which determines the labour supply.
The age group, i.e. above 60 years are not in the labour force.
iii. The Working Population
Not everybody in the working age group will be in the labour force. What is called the
working population refers to the people who are in the working group, and are either
working or are actively looking for work i.e. would take up work if work was offered to
them. These are sometimes called the active people. Hence this group excludes the sick,
the aged, the disabled and (full time) housewives, as well as students. These are people
who are not working and are willing or are not in a position to take up work if work was
given to them.
iv. Education System
If the children are kept in school longer, then this will affect the size of labour force of the
country.
v. Length of the Working Week
This determines labour supply in terms of Man-hours. Hence the fewer the holidays there
are, the higher will be labour supply. This does not, however, mean that if the number
of working hours in the week are reduced, productivity will fall if there is a high degree of
automation.
vi Remuneration
The preceding five factors affect the supply of labour in totality. Remuneration affects the
supply of labour to a particular industry. Thus, an industry which offers higher wages
than other industries will attract labour from those other industries.
vii. The Extent to Barriers to Entry into a Particular Occupation
If there are strong barriers to the occupational mobility of labour into a particular
occupation, e.g. special talents required or long periods of training, the supply of labor to
that occupation will be limited.
The most popular way of presenting the age composition of the population of a country is
in the form of a bar graph where the length of each indicates the number of people in that
particular age group.
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A country with a high birth and death rate will have a large proportion of young people in its
population. This is the most significant feature of the structure of population in East Africa, as
is the case throughout the low-income countries. Life expectancy is relatively low because the
death rate is high in all the age groups. Thus between 40 per cent and 45 per cent of the
population are below the age of 15 years and only about 4 per cent are older than 60 years.
The situation is however different in developed countries, which normally have a stationary
population with low birth and death rates. Expectancy of life is high and most people survive
into the older age groups. The percentage of young people in these societies is typically
between 20 per cent and 25 per cent, about 15 per cent of the population is over 60 years of
age.
The economist is interested in the age distribution of population because it reveals the
proportions between the numbers in the working age groups and the numbers in the non
working age groups. This dependency ratio, as it is called, is measured in the following
manner.
Dependency Ratio =
 
Number below school leaving age + Numbers over retirement age
 
Number between school leaving age and retirement age
The dependency ratio will be relatively high in the developing countries e.g. there is only one
person of working age for every one that is too young or too old to work in East Africa.
The Economics of Population
Population issues became matters of economic concern when it became increasingly apparent
that the problem of excess population may be a serious obstacle to development. This is
because although it might seem to appear that given the appropriate conditions, sufficient
foreign capital and technical assistance the poor countries could move along the same path of
economic progress as the developed nations, often this is frustrated by growth of population
which means that the expansion of output is outstripped by increased needs.
a) An optimum Population
Countries are often described as under populated or overpopulated. From the
economist‟s viewpoint these terms do not refer to the population density (i.e. the number
of persons per square kilometer), but to the relationship between the numbers of people
and the supplies of land, capital and technical knowledge available to them.
“Under population” is an issue of concern because a thinly distributed population means
relatively high transport costs. This in turn has two effects. First, trade and exchange are
made more difficult; hence there is less specialization and more inclination to undertake
subsistence production in agriculture and less specialized industry because of smaller
market. Secondly, the amount of social capital required per head of population is
increased, so that it may not be worth building roads, dams, bridges or even schools and
hospitals, or spending money on general administration for the small number of people in
each area.
Excess or overpopulation may also make it extremely difficult for a country to “get
started” on the path towards economic growth. Because of excess population, there is
poverty; because of poverty, people find if difficult to save and acquire capital equipment; Labour and Unemployment
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therefore agriculture stagnates, education is limited, and health poor; the lack of capital
and technical progress keeps incomes low, we thus have a „vicious circle‟.
It is therefore argued that if “under population” and “over population” can exist,
somewhere in between there must be an “optimum” or best of population i.e. that size
of population which with the existence stock of land, capital and knowledge, would
give rise to the maximum output per capita are subject to constant change. An
increase in the national stock of capital, improvements in the techniques of production,
and in the fertility of land will all tend to increase the size of the optimum population.
b)
Problems of high population growth rates
Whether an increase in the size of a population brings economic advantages or
disadvantages depends very much on the size of the existing population in relation to
the other economic resources available to it; in other words whether it is above or
below the optimum size. When population is growing fast and there is a large excess
of births over deaths, the proportion of people in the younger age groups will be
increasing. A large increase in the numbers of young dependants can be a serious
barrier to economic growth. The economic resources needed to care for growing
numbers of children and to educate them might have been devoted to industrial
development and training. Alternatively, the same resources could have been used to
give a small number of children a much better education.
An increase in the number of children now will bring about an increase in the number
of workers in the future. New workers need capital, however, even if it is only a
simple plough. Economic growth depends very much on increasing the amount of
capital per worker.
When a country is heavily dependent on the world trade for a major part of its
requirement of food and basic materials, a rapidly rising population might give rise to
serious balance of payment problems. Quite apart from the need to import more
food, creating work for the increasing numbers will require larger imports of raw
materials and other capital goods. To pay for these additional imports, the country will
have to achieve a substantial increase in its exports.
A country with a high birth rate and high death rate will have a larger proportion of
young people in its population.
c)
Beneficial effects of High Population Growth Rates
A number of influential economists have argued that population growth may either be
harmless as far as real income growths is concerned or even beneficial.
An expanding population will create increased demands for goods and services and
growing markets tend to stimulate investments and create employment. A growing
population will be able to take more of specialized production and economies of
scale. Comprehensive road and networks, power supplies and other public utilities
can only be operated at relatively low average cost when there is a relatively larger
population to ensure full utilization.
A country with growing a population and hence a young age structure will be more
mobile. With increasing numbers entering the working population, expanding
industries will have little trouble in recruiting labour. A more rapid rate of technical
progress is possible when the population is expanding, because new industries, new
factories and new techniques of production can come into operation alongside the
older ones. With static or declining population these changes might have to wait for
the redundancy of the other older equipment. It is also argued that pressure on the
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standard of living due to land shortage may produce the necessary “shock” to the
system leading peasant cultivators, for example, to look for new ways of increasing
productivity. Once new methods have been adopted to stop income per head from
falling, there might be continued interest in innovations for the purpose of raising
incomes.
3. WAGE DETERMINATION, POLICY AND THEORIES
Wages and salaries are rewards to labour as a factor of production of goods and services. In
ordinary speech a distinction is frequently made between wages and salaries. Some people
might attempt to differentiate between them by saying that wages are payments for manual
work; others may say that wages are paid weekly and salaries at longer intervals; yet others may
say that wages are paid for a definite amount of work, as measured by time or price, so that if
less than a full week is worked, a proportionate deduction from the weekly wage will be made
whereas salaried workers suffer no such deductions. Only the last definition is of any
economic importance. Wages are variable costs varying with output whereas salaries in the
short run are a fixed cost since they do not vary with output.
Theories of wage determination
Early theories about wages
The earliest theories about wage determination were those put forward by Thomas Malthus,
David Ricardo and Karl Marx.
i.
Thomas Robert Malthus (1766 – 1834) and the Subsistence Theory of Wages:
The germ of Malthus‟ Theory does come from the French “physioirats” who held that it
was in the nature of things that wages could never rises above a bare subsistence level.
When wages did for a time rise much above the bare necessities of life, the illusion of
prosperity produced larger families, and the severe competition among workers was soon
at work to reduce wages again. In a world where child labour was the rule it was only a
few years before the children forced unemployment upon the parents, and all were again
reduced to poverty. Such was the subsistence theory of wages.
ii. Ricardo and the Wages Fund Theory:
Ricardo held that, like any other commodity, the price of labour depended on supply and
demand. On the demand side, the capital available to entrepreneurs was the sole source of
payment for the workers, and represented a wages fund from which they could be paid.
On the supply side, labour supply depended upon Malthus‟ arguments about population.
The intense competition of labourers one with another, at a time when combinations of
workers to withdraw their labour from the market were illegal, kept the price of labour
low. The fraction:
Total wages fund (capital available)
Total population
Fixed the wages of working men.
iii. Karl Marx (1818 – 83) and the „Full Fruits of Production‟ Theory of Wages:Labour and Unemployment
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Karl Marx was a scholar, philosopher, journalist and revolutionary extraordinary who
spent much of his life in dedicated poverty reading in the British Museum Library.
His labour theory of value held that a commodity‟s worth was directly proportional to
the hours of work that had gone into making it, under the normal conditions of
production and the worth the average degree of skill and intensity prevalent at that time.
Because only labour created value, the worker was entitled to the full fruits of
production. Those sums distributed as rent, interest and profits, which Marx called
surplus values, were stolen from the worker by the capitalist class.
Modern theories of wage determination
i. Real and nominal wages
 
Wages are wanted only for what they will buy, real wages being wages in terms of the
goods and services that can be bought with them. Nominal wages are wages in terms
of money, and the term money wages is perhaps to be preferred. In determining
nominal wages of people in different occupations; account must be taken of payments
in kind, such as free uniform for policemen, railway workers and may others, free travel
to and from work for those engaged in the passenger transport undertakings, the use of
the car by some business executives, free board and lodging for some hotel workers and
nurses.
“ The labourer”, say Adam Smith, “is rich or poor, is well or ill rewarded, in proportion to
the real, not to the nominal price of his labour.”
ii. Marginal productivity theory of wages
According to the Marginal theory of distribution, the producer will pay no more for
any factor of production that the value of its marginal product, since to do so will raise
his costs by a greater amount than his revenue. As applied to labour this provides us
with the Marginal Productivity theory of wages.
Consider a wage rate w above the average revenue product curve