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Running Head: ENSURING SUSTAINABILITY OF INDUSTRIALIZATION

Ensuring Sustainability ofIndustrialization

Balancing Trade-Off Resolution andGrowth – Example of Labor

Purang MehtaDePaul University (Graduated 2012)

ENSURING SUSTAINABILITY OF INDUSTRIALIZATION

ABSTRACT

There are trade-offs associated with the process ofindustrialization. This can be seen as a trade-offbetween development and growth over the short-term, butto ensure its continuation over the long-term theassociated trade-offs need to be addressed in mannerwhere the long-term process of industrialization doesnot get jeopardized. Here we use the factor input oflabor and consider how it responds to the evolution ofthe larger process of industrialization and the trade-offs it imposes in the course of this process. Weaddress the trade-offs by policy prescriptions thatseeks to meet both the objectives of addressing thetrade-off and ensuring the continuation of the processof industrialization. We identify the critical factorsto be addressed through this process as the adverseshocks on people’s income as firms begin to substitutecapital for labor and potential for curbingproductivity enhancing investments of firms by pressurefrom unions and others.


Economics is a field that seeks to study the efficient

allocation of scarce resources. It is these scarce

resources that result in the creation of an adversarial

relationship among different choices or pursuits,

whereby the pursuit of one choice or object requires

giving up a number of units of another object or

diminishment of another pursuit. It is from this that

the concept of “no free lunch” arises. Opportunity

costs are the cost incurred by the foregoing of the

next best alternative pursuit in favor of the current

pursuit.

Where opportunity costs arise due to the scarcity of

resources, trade-offs summarize the benefits acquired

and the costs incurred by a particular pursuit or

choice, and summarizes the adversarial relationship

among alternate pursuits by also taking into account


the implicit costs imposed by a foregone pursuit. The

trade-offs that occur within a larger, dynamic and

inter-related system, where individual markets and

industries are closely inter-related, results in the

imposition of a limited number of efficient and

sustainable outcomes in the course of achieving

industrialization. These efficient and sustainable

outcomes are those outcomes that allow for the

management of the various adversarial pursuits in such

a dynamic and inter-related economic system.

These outcomes are considered to be efficient by virtue

of the benefits exceed the costs, where the former is

acquired and latter incurred by the acquisition of a

particular outcome. These outcomes are sustainable by

virtue of ensuring or enabling the continuation of the

process of growth or the process of industrialization,

as is considered in this paper.

In order to attain these efficient and sustainable

outcomes the trade-offs have to be addressed via policy

measures and cannot be allowed to continue unaddressed.

Failure to address these can hamper the characteristics

of being either efficient or sustainable. Consider the

process of economic growth and industrialization. Given

a set of incentives or the initiation of either process

of growth or industrialization, it is those individuals


who will benefit initially that are better suited to

respond to these incentives or those that are directly

involved in the activities whereby which the process

is initiated. In this scenario, these are the investors

of capital who invest into projects designed to take

advantage of and exploit these incentive schemes and

the laborers who are employed by these projects or

undertakings. By this a segment of the labor force

directly benefits by realizing gains in wages or

earnings. This coupled with a rise in demand of the raw

materials or commodities that are inputs into the

production process can create pressure on the aggregate

price of an economy due to the rising aggregate demand.

This rising aggregate price or inflation then results

in the erosion of the real incomes, having a greater

influence on the incomes of that segment of the labor

force which is not employed in the these undertakings.

If this process is allowed to continue unhindered, the

individuals not employed by the undertakings will

continue to disproportionately face adverse effects of

inflation and the wider economy will struggle due to

the continued rise in prices. This will then result in

such undertakings, or rises in the units of output

through such undertakings, to become inefficient as the

costs imposed on society will exceed the benefits.

Also, the rising prices of inputs can hinder the

expansion of the production process along with


increasing the levels of dissatisfaction among the

segment of the labor force not employed in these

undertakings and demand implementation of measures that

may have adverse consequences on the growth process or

demand that the entire process of industrialization or

measures by which growth is pursued, be called off.

This highlights the need for addressing these trade-

offs to continue the process of growth and

industrialization.

The initiation of the process of industrialization is

not a sufficient condition by itself to realize the

goal of an industrialized economy, and requires the

trade-offs arising from this process to be addressed to

continue with the overall process. But simply

addressing the societal side effects of the process of

industrialization is also not sufficient by itself to

ensure the continuation of this process either. There

are also implications for the pursuit of economic

development of the population of a country with such

spurts in inflation, resulting in sharper declines of

real incomes of poorer individuals than on the incomes

of those that are relatively better off. Suppose that

the monetary authority increases the policy interest

rates to counter the effects of rising inflation and

reduce the money supply in the economy. By how much

should a country’s central bank raise the policy


interest rate, and seek to restrain the availability of

credit for businesses seeking to expand? How will it

mitigate the challenges of a rise in the prospects of

adverse selection due to the rate hikes? And how will

it make sure that by raising rates it does not result

in diminishing the incentive schemes put in place to

initiate the process of industrialization in the first

place? Will such a measure not affect the continuation

of the process of industrialization, still in its

infant stages and is there no policy alternative to

such a measure of that will better manage this trade-

off?

These issues highlighted here show the need for

balancing the various challenges an economy faces as

economic growth and development are both essential

components of the larger growth process. While there

may be a trade-off between these two objectives in the

short-run, in the long-run there exists a simultaneous

and pro-cyclical relationship between the two

objectives. This characteristic of a pro-cyclical

relationship implies that the failure to acquire one or

diminishment in the units acquired of one of these

objectives results in a failure or diminishment in the

units acquired of the other objective as well. This

simultaneous process, of dual causality, plays out over

multiple time periods and render itself to a dynamic


economic analysis. Given such simultaneity, what would

be the direction of causation to initiate the overall

growth process? I propose that it can be either one,

growth or development, as long as there remain

sufficient incentives to continue the growth process.

As per our earlier example, it could be growth, which

is the result of individuals taking advantage of the

incentive scheme created with the intent of initiating

the process of industrialization. But it could very

well also be that development of the population of a

country, acquired through international aid and poverty

alleviation efforts, initiates the process of growth.

Keeping this simultaneous and pro-cyclical relationship

over the long-run and the associated trade-offs that

need to be addressed to successfully manage the

adversarial relationship over the short-run so as to

attain that limited set of efficient and sustainable

outcomes, among all possible outcomes, in the path

towards attaining growth and becoming and

industrialized country, a policy framework is required

to address all these related issues. A policy framework

that allows the implementation of one particular

policy, among a range of potential policy prescriptions

on the basis of prevalent economic conditions and the

nature of the problem at hand would allow us to

consider the various issues that aid as well as hinder


the attainment of that limited set of efficient and

sustainable outcomes. To address the adverse effects of

industrialization or one such trade-off that arises

from this process, it is important that the policy

solution that is prescribed balances the need for

addressing the problem along with ensuring the

continuation of the process of growth. The failure to

address the latter and only focus on the former

objective can lead to unintended consequences. A policy

prescription based on a holistic approach will ensure

that both objectives are considered and neither one

completely ignored, which lead to jeopardizing the

entire process of industrialization.

In the remainder of this essay I will attempt to pursue

this holistic approach by addressing the societal

trade-off associated with labor and the impact of the

process of industrialization has on this critical

sector of the economy. I attempt to balance the two

objectives in my policy prescriptions, where I attempt

to address the implications of the trade-off while also

attempting to ensure that the pursuit of the process of

industrialization is not sacrificed in the process. I

start of by describing the manner in which labor is

impacted by the process of industrialization over time

and how its relationship with the other factors of

production are altered as the economy continues to


evolve. I further address how this transformation over

the course of industrialization results in trade-offs

associated with labor and how this has implications for

sustaining the process of industrialization. After this

analysis I recommend policies that seeks to balance the

two objectives of addressing the trade-offs as well as

sustenance of the process of industrialization to

ensure that the economy continually transitions towards

higher living standards and reaching the state of

becoming an industrialized economy.

As a country begins on the path towards becoming a

fully industrialized country, it is more likely to have

an abundance of labor resources relative to its capital

resources. This relative abundance of labor resources

implies that the cost of labor, the wages paid, will be

relatively lower than the cost of capital due to the

lower market clearing price of the labor market. In

this context, it will be more efficient to pursue labor

intensive production processes or industries that are

relatively more labor intensive. This pursuit of labor

intensive production processes will result in the

demand for labor to rise, and as a result the price of

labor, or wages paid to rise as well. This can result

in the efficiency, arising from the lower cost of

labor, to gradually diminish with the rise in wages.

The extent to which the rise in wages will result in


the diminishment of relative efficiency of labor will

depend on the extent to which a firm’s proportion of

total costs, that labor represents, will increase. The

smaller the proportion of labor costs, of the total

costs of a firm, the smaller the influence will be on

rising wages on the total cost structure of that firm

and hence the declines in the relative efficiency of

labor over the short-term.

As wages represent the price of labor, from a firm’s

perspective the demand for labor would be expected to

decline with rising wages. But the extent of the

decline in labor demanded to a rise in prices will

depend on the wage elasticity of labor demand. The

determinants of the elasticity of labor demand are (i)

availability of substitutes to labor as factor inputs

in the production process, (ii) the substitutability

among the factor inputs in a particular production

process, (iii) the price elasticity of demand for the

final product, in whose production the labor has been

employed, (iv) the proportion of total costs that labor

represents in the cost structure of a firm. Among these

determinants the most relevant in this scenario are the

proportion of total costs that labor represents and the

substitutability of among the factors of production. As

we had mentioned earlier, due to the relative abundance

of labor, compared to capital, and its lower relative

price will result in labor representing a smaller


proportion of the total costs of a firm. But

considering the aggregate economy wide demand for

labor, we would have to consider the wage elasticity of

labor demand for the aggregate demand curve and not

just that of a firm.

Considering the stage of industrialization process a

country is at and our conclusion that at this stage it

would be more efficient for industries to engage in

labor intensive production processes due to the

relative abundance of labor in the whole economy, the

relevance of the determinants we mentioned above for

the elasticity of labor demand for a firm would also

hold for the aggregate labor demand, as it is the

individual firms’ demand for labor that is summed up to

arrive at the aggregate demand for labor. Therefore,

because the proportion of total costs attributable to

labor is relatively lower and the impact of wage

increases on the total cost structure will not be very

great, these factors will result in relatively lower

elasticity, or relative inelasticity in labor demand.

The demand for labor will not be greatly influenced by

a hike in the wage rate in the short-term. Further the

substitutability or how easily one can substitute among

the factors of production, specifically capital and

labor in the short-term is low. This arises due to the

various factors such as difficulty in instantly


acquiring additional units of capital or relative

difficulty of incorporating them into the production

process along with constraints that may arise from

contractual obligations towards the units of labor

currently employed. These result in the firm’s and the

aggregate labor demand curve to be relatively inelastic

in the short-term. Thus, the demand for labor will not

drastically change or fall due to increments observed

in the wage rate over the short-term.

This coupled with a firm’s desire to pursue

profitability and increasing returns to scale in its

production processes will seek to add to its production

capacity. Due to the diminishing returns acquired on

acquiring additional units of labor beyond a certain

threshold at the firm’s current capital stock, the firm

will seek to add to its production capacity by

employing more units of capital. This low

responsiveness in the decline of units of labor

demanded with wage increments as well as various firms

adding to their capital stock will result in the

development of a complementary relationship between

capital and labor at an aggregate level. Further rises

in wages will spur individuals not already in the labor

market and engaged in other sectors of the economy,

which would be less productive than working at a

factory in terms of output per worker, to seek to enter

the labor force so as to attempt to reap rewards from


the rising wages in the labor market. Assuming that

these individuals that remain engaged in the less

productive areas of the economy is due to their

circumstances rather than choice, and that their

financial circumstances being vulnerable and earning

or producing only enough to meet subsistence levels or

little above that, to enable them to enter the labor

market would require large trade-offs in their personal

finances. In order to encourage their transition into

more productive areas of the economy, a policy to

encourage them to make this transition over the short

term will be discussed later.

The maintenance of this complementary relationship,

will over time result in marginal reductions in the

relative efficiency of hiring labor. With each marginal

increment in the wage rate, the potential for a rise in

the units of labor supply will also be gradually

exhausted. As the number of individuals who were

previously not in the labor force respond to the

incentive of rising wages and continue to enter the

labor force, the prospective entrants will being to

decline in numbers over the short and medium term.

Along with limits to how many additional units of labor

can be supplied by those already employed. This will

result in the relative abundance of labor to gradually

decline as the slack in the labor force of unemployed


units decline over the short to medium term. Declining

labor abundance and rising wage-rate will lead to

marginal declines in the efficiency associated with

hiring additional units of labor. This will directly

impact the costs a firm faces. With every marginal

increment in the wage rate, the labor costs as a

proportion of total costs of a firm will rise and start

assuming a larger share of the cost structure of that

firm. Over time, with further hikes in the wage rate,

the relative price of labor (compared to capital)

continues to rise. This has implications for the

profitability of the firm as well as the nature of the

relationship between the factors of capital and labor.

The rising costs of labor, a firm employs, results in

it reducing a firm’s profitability levels. A firm’s

share price, which reflects all future expected profits

discounted in present value terms, will reflect these

reduced profits in the present term along with the

impact these rising labor costs will have on future

expected profitability. These declines in future

profitability levels will result in investors losing

interest in this firm and either stop buying additional

shares of this firm or start selling its shares

altogether. At this point in order to revamp its cost

structure and regain profitability firms can pursue one

of three options or some combination of them. First,

start making adjustments to the production process such


that the efficiency and productivity of currently

employed laborers increases by investing in more units

of capital and reducing its reliance on labor. By

employing more units of capital at the same levels of

labor inputs, the firm can seek to acquire higher

levels of labor productivity. Second, firms can

substitute its units of labor for capital. The two

determinants of the elasticity of labor demand that in

the short-term prevented the decline in labor demanded

when there were hikes in the wage rate due to the

relative inelasticity of labor demand curve, now

results in the demand for labor being relatively more

elastic. As with rising wage rates and declining levels

of labor abundance over time, the share of labor costs

in the total cost structure of firms would have risen

to a substantial level such that further hikes in the

wage would result in there being a great impact on the

overall costs of the firm. This along with the relative

ease in which the factors can be substituted for one

another rises the constraints that operated over the

short-term gradually diminish with the passage of time.

This substitution of capital for labor will result in

previously employed laborers to become unemployed as

they are laid off. The third alternative, would be for

the firm to exit the industry and reorganize itself to

enter a different industry so as to keep its assets

operating in an industry for which it is better suited


for exploit new opportunities which are presented so as

to earn economic profits, beyond mere accounting

profits. This reorganization may require a change in

the asset structure where capital begins to assume a

larger share while labor diminishes. This will be even

more applicable with regard to industrialization, as

there will be opportunities to earn economic profits in

industries that rely more on capital and whose

production processes are capital intensive in nature.

All of these options require substituting away from

units of labor in favor of capital. Here the terms of

trade-off would be in terms of the units of labor that

are let go. To address this gradually levels of

unemployment and the adverse shocks this has on their

incomes would result in the temptation to make policy

choices that would seek to contain the adverse effects

on laborers but could hurt the continuation of the

process of industrialization and hamper the evolution

of a country’s economy towards being fully

industrialized. The primary motivation behind these

policy actions would be to protect laborers from

adverse shocks or attempt to address the consequences

of these trade-offs such as reduced incomes. These

policies, undertaken with these objectives and little

regard for ensuring the continuation of the process of

industrialization manifest themselves in the shape of

legislation that is pro-union or policies that limit


the ability of firms to make the necessary adjustments

to their asset structures, so as to either employ units

of productivity enhancing capital or adjust their

production processes in a manner that may replace the

units of labor that are currently employed. Such

policies can have a significant adverse impact on the

process of industrialization as it will hamper not only

the natural evolution towards a fully industrialized

state but also prevent the pursuit of productivity, of

the most important determinants in the process of

economic growth and long term living standards (Abel et

al., 2008) of a country.

Legislation that is pro-union or strengthens the

ability of unions to dictate terms of the production

process will ultimately result in attempts to reduce

the ease with which labor can be substituted for other

factors of production. These attempts will either

obstruct adoption of productivity enhancing technology

or attempt to enforce terms that limit the elasticity

of the labor demand curve. By doing so the impact on

employment of wage rate hikes is largely limited to a

relatively small impact, while the effect of these

hikes on the income of the laborers will be relatively

larger and beneficial to the laborers. Policy that aims

to regulate the ability of a firm to reorganize by

limiting the adoption of new productivity enhancing


technology, in the form of mandating a certain fixed

ratio of the factors of production employed by the

firm, will also seek to reduce the response of a firm

to a hike in the wage rate, which will take the form of

reduction in the units of labor demanded. These

policies prevent adoption of measure that will enhance

the productivity of the production process by either

increasing the productivity of labor, by raising the

capital stock per unit of labor, or by preventing an

improvement or hike in the production function, through

technological improvements, that will raise the amount

of output acquired from fixed units of capital and

labor. Rise in the labor productivity along with a rise

in the labor force participation rate are significant

aspects of and determinants in the long-term potential

GDP of a country (Taylor, 1997). Preventing these

productivity enhancing transformations will only result

in the process of growth and industrialization to slow

down or stagnate altogether. This will have a negative

impact on the long-term standards of living of a

country, precisely what policymakers sought to avoid

with the adoption of these policies, an unintended

consequence.

Along with policies that seek to limit the adverse

effects of industrialization, there will be attempts to

provide a mechanism by which laborers can smooth out


their consumption when faced with an adverse life

event. As discussed earlier, there is a case, in the

short-term, for the provision of a consumption

smoothing mechanism which will allow for individuals to

make a transition from less productive sectors of the

economy to those sectors where industrialization is

resulting in gains in productivity in certain sectors

of the economy and certain kinds of economic activity,

such as manufacturing. This was done with the intent to

make individuals shift from sectors of the economy

where are self-employed or other relatively

unproductive activities into the labor force so as to

be employed in the industrial activities with

relatively greater productivity levels. But in the

long-term, the case for policies that enable

individuals to smooth out consumption levels from

events such as getting unemployed is on the basis for

allowing them to manage these shocks until they are

able to find alternate employment. If individuals are

not equipped or enabled so as to deal with these

negative consequences, the resentment towards the

process of growth and industrialization will only grow

and demands will be made for preventing the further

pursuit of this process or for conditions that limit

the ability of firms substitute units of labor for

capital. Thus while it is required we address this

issue of smoothing out consumption, the manner in which


it is pursued can also have consequences on the

continuity of the process of industrialization.

To deal with the issue of substitution of labor in

favor of capital, to ensure that productivity enhancing

transformations are made to continue the process of

industrialization as well as the issue of adverse

effects on individuals’ incomes along the accompanying

rising unemployment is addressed in an appropriate

manner, the policies that are implemented needs to

balance these two objectives. Towards this purpose we

recommend policies to address each objective.

For the purpose of ensuring that productivity enhancing

transformations are pursued, we need to ensure not only

are the measures that hinder this are avoided but

rather an incentive scheme put in place to allow firms

to reorganize in a way that they can make the required

productivity enhancing transformations. The purpose of

an incentive scheme that encourages these

transformations is to formally institutionalize the

policy of encouraging such transformations rather than

the government choosing in which industries

productivity enhancing measures need to be taken. There

are certainly exceptions to this such as industries of

national interest and critical to the nation’s security

(for example), where government intervention is


justified. But beyond that it should be up to the firm

which transformations it wants to pursue. The scope of

policy in this regard is to only ensure relative non-

hindrance and an incentive scheme that encourages such

activity when it is in the firm’s best interest to do

so. This is not to say that the role of government

should be explicitly ban formation of unions, as in

specific industries and the associated labor units

employed by it may contain features such as relative

scarcity of the kind of labor (specific skill sets)

that the industry requires providing the laborers with

a degree of market power, but it should rather seek to

prevent them from being able to dictate the terms of

the production process or support such efforts by

providing legal sanction to efforts to dictate limits

on the production process.

An incentive scheme that would encourage such

productivity enhancing transformations will counter any

efforts that are made to dictate the production process

when the labor employed by the industry possesses a

degree of market power. The incentive scheme would take

the form of reductions in the marginal tax rates for

certain units of gains in output, at constant levels of

capital and labor, acquired from a transformation in

the production processes. By tying these reductions in

marginal tax rates, or on the amount paid in taxes for


every additional dollar (in the case of the US)

acquired as revenue, to gains in output arising from

demonstrable transformations in the production process;

we are rewarding firms for truly enhancing gains in

productivity rather than simply accumulating capital

for short periods to exploit the associated benefits.

These gains in output may not be acquired in the same

period as the transformations are made or even directly

attributable to changes made in the production

processes by the firm. The latter also reduces the

desired characteristic of simplicity in tax policy due

to the additional paperwork that would be needed to

demonstrate gains in output, but the benefits in the

form of productivity enhancing transformations would

exceed the costs these transformations impose. The

reduction in the level of marginal taxes, paid by a

firm, would take place as per a specific schedule which

explicitly states how much of a gain in output levels,

at constant levels of capital and labor, or specific

ranges of gains in output acquired would reduce the

marginal tax rate on the revenue earned by a firm.

Because different industries would experience the

benefits of productivity enhancing changes differently,

it is fundamentally the firm that will decide upon

whether to pursue or how much to pursue of these

productivity enhancing transformation. Also by

comparing the cost imposed to the benefits acquired in


those industries, where suppliers of labor enjoyed a

degree of market power, the firm can themselves decide

whether to take steps to counter any efforts made by

the latter to dictate terms of the production process.

Also, tax breaks for research and development along

with employee training efforts would also assist with

the adoption of productivity enhancing transformations,

as simply changing the production process or making

acquisitions of technology is not sufficient in

ensuring these materialize as productivity gains. These

tax breaks would take the form of reduction in the

average tax rates instead of marginal tax rates, as in

the previous example, and consequently not affect the

quantity chosen for production but certainly

incentivize the desirable activities that it seeks to

reward. This is also why gains in output may not be

acquired in the same period as the one in which

transformations are made, as firms and its employees

learn how to most effectively take advantage of these

transformations.

The need for addressing adverse effects on labor,

arising from unemployment, so as to ensure that these

individuals can smooth out their consumption also needs

a balanced policy response. This response must not seek

to create a culture of entitlements or expenditures

that can balloon the debts and deficits of a country.


While the policy must provide laborers with a sense of

security in being able to manage adverse effects

arising from industrialization, it must not seek to

create a “culture” of dependence or entitlements or

skew the incentives in a manner that would encourage

them permanently reduce their labor supply. By

providing a support system, laborers would be more

willing to accept economy wide transformations as they

could then better manage adverse effects they may

experience. Apart from saving and access to credit,

most mechanisms that attempt to smooth out bumps in an

individual’s consumption levels would be through social

insurance programs. These social insurance programs

resemble private insurance practices in that they take

in contributions from the “policy holders” and pool

risks of these individuals together and make payments

out to these individuals when faced with an adverse

life event. An example of a social insurance program

that behaves like this are the unemployment insurance

programs where a portion of each taxpayers’ income is

withheld and put in this collective pool to reduce the

risk associated with one particular individual and then

are paid out according to their contributions, or

previous income level, when faced with an adverse event

such as becoming unemployed. Which mechanism is relied

upon to smooth out the consumption levels of


individuals would be associated with which kind of

adverse event we are trying to address.

As discussed, in the short-term to encourage

individuals who are poor and rely on economic

activities that just allows them to meet their basic

requirements, such as subsistence agriculture, and are

usually characterized by low productivity levels, a

choice between engaging in low-productivity activities

but ability to satisfy their basic requirements and

entering the relatively more uncertain labor market but

which are more productive and where they can earn more,

represent a large trade-off. Many poor individuals

would be hesitant to gamble away their fundamental

source of earnings, no matter how low, for a source of

earnings or incomes that are unstable but higher. This

is also an issue that or trade-off that needs to be

addressed when greater units of farmland are acquired

by firms to place their plants and facilities there. To

be willing to give up their holdings in farmland,

farmers would not only have to be compensated for the

market value of that piece of land but a premium or

other form of compensation that would compensate them

for the risk which is associated with them selling

their farmland. This needs to be kept in mind as

efforts are made to encourage people to enter the labor

force and leaving their relatively low productivity


activities in which they were previously employed. This

trade-off can be addressed by allowing individuals to

develop savings or access to credit, beyond the

compensation they receive, so as to better manage the

uncertainty associated with such transitions. By

allowing for policies that encourage financial

inclusion, these individuals would be better able to

and hence more willing to make the transition from

their previous economic activities and sources of

incomes and enter the labor force. These would also

enable them to make the necessary migration from rural

areas to areas where there are jobs and participate in

the labor force.

The trade-off that is imposed in the longer term in the

form of dealing with the adverse effects of

unemployment, at the stage of the industrialization

process where labor becomes a substitute to capital and

more units of capital are acquired by the firms at the

expense of units of labor, can also be dealt with by

providing greater financial access to individuals

allowing them to rely on these resources to smooth out

shocks to their income until find employment again. But

the more popular and preferred way of dealing with this

kind of trade-off is to provide them with unemployment

benefits. This allows them to smooth out their

consumption without adding to their debt levels during


periods of declines in their incomes. There is the

potential for undesirable effects with unemployment

benefit provision as well, especially with regard to

moral hazard. Among these are that this will allow

individuals to delay their entry into the labor force

until the last minute, as they can satisfy their needs

through receipts of unemployment benefits. During this

period not only are they not participating in the labor

force, which has an impact on output levels, they also

risk the sustainability of the pool, where different

individuals’ tax contributions are stored so as to

reduce risk by sharing them among all potential

contributors, by pursuing prolonged periods in which to

not re-enter the labor force and not contributing

towards sustaining this pool of contributions. To

prevent this kind of behavior, one would have to set

strict limitations on the period for which individuals

can continue to acquire unemployment benefits as well

as if possible a system of monitoring whether or not

individuals are spending their time in finding

alternate job opportunities.

To conclude, if policy attempts to not only deal with

the societal side effects of the process of

industrialization but also prescribe policy that would

not hamper further pursuit of this growth in the future

is necessary to acquire the natural evolution of an


economy towards the state of becoming an industrialized

one. Addressing these trade-offs would demonstrate to

individuals, who may be adversely affected by these

trade-offs, a willingness to address their concerns

with this process of industrialization would be more

willing to cooperate and even engage in the process

rather than grow resentful of this process. Addressing

trade-offs when coupled with policy making that would

also ensure the continuation of this process, would

encourage all economic agents to make the right

decisions and further propel the process of

industrialization and ensure an investment climate

favorable to this process. When these two objectives,

which may at times be at a conflict, are satisfied over

multiple periods and an expectation of such performance

by the policymakers takes root in the various economic

agents’ expectations, they would not only be willing to

engage in the process but start demanding similar

levels of performance in their policymaking and

administrative performance over future time periods as

well. Once an expectation for such type of performance

takes hold and is expected among the various

participants at times of elections or from those who

hold the prospect of being able to form a government,

the latter will begin to respond to these demands and

will attempt to meet and satisfy these expectations

over time. Such a transformation in the governance as


well as the institutions and institutional framework of

a country, will then result in meeting and satisfying

these objectives as the benchmark of good governance

and will be the goal to pursue for every

administration, regardless of the kind of

administration or political parties involved in the

formation of a government as these will then become

requirements the parties have to face in order to

regain control of the government. Of course, there will

always be vested interests who will attempt to obstruct

this process so as to safeguard their own, but these

will decline in relevance if individuals believe that

governments are committed to the process of growth and

industrialization in a sustainable manner where the

adverse effects from this process fall on the set of

individuals who are disproportionately affected by it,

are addressed.


References

Abel, A., Bernanke, B., Croushore, D. (2007).

Macroeconomics. Boston: Addison-Wesley, Pearson PLC.

Benjamin, D., Gunderson, M., & Riddell, C. (2002).

Demand for Labour in Competitive Labour

Markets – Chapter Notes. In Labour Market Economics

(5/e)

Retrieved from

highered.mcgraw-hill.com/sites/0070891540/student_view0

/

chapter7/chapter_notes.html

Taylor, J. (1997). A Core of Practical Macroeconomics.

AEA Papers and Proceedings, 87(2)

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