Harris-todaro Model Pdf

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In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments' main concern in many cities.[1]

With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.

In the HT model, workers determine migration between the sectors based on their expected wages. Thus, the workers decide to migrate to the urban sector when their expected wages there are higher than those in the rural sector. It is assumed in the HT model that the urban wage is institutionally and legally fixed, so that as a result of the migration of workers, if there are more workers than the number of new jobs, some workers would necessarily be unemployed. They have to enter the urban informal sector and be unemployed or underemployed there.

Improvements in social infrastructure, such as airports, loading and port facilities, and industrial parks including the SEZs tend to attract capital from advanced foreign countries. Still, does the improvement of social capital necessarily increase unemployment in urban areas? In other words, does new job creation in urban areas always result in the Todaro paradox?

If the Todaro paradox occurs, even if the urban development is carried out, per-capita income in the urban area does not increase, and the urban informal sector expands. In the previous studies, there was not an idea to promote an agricultural development for the purpose of controlling the labor migration to the urban area. In this paper, to succeed in developing the urban area without the Todaro paradox, we develop an argument focusing on the relations between the institutional minimum wages in the urban and the agricultural productivity in the rural.

We examine this subject using the method of comparative static in the HT model. Based on this analysis, we derive a necessary and sufficient condition which concerns the relation between the urban minimum wage and agricultural productivity in the rural. Another purpose of this paper is to illustrate this condition with a diagram. The condition itself is simple, but it offers significant suggestions for policy design.

Section 2 introduces the HT model and a list of theoretical contributions applying the HT model, and Sect. 3 discusses some effects of capital accumulation in the urban sector with the institutional minimum wage (e.g., the legal minimum wages). Finally, a single necessary and sufficient condition is derived from this analysis and illustrated with a diagram.

This section briefly summarizes the theoretical model known as the HT model, and introduces representative contributions applying the HT model in the theoretical stream. The HT model is a pioneering general equilibrium model describing the labor migration mechanism from rural to urban areas due to a wage gap and the existence of urban unemployment and underemployment in developing countries. Since the publication of Todaro (1969), Harris and Todaro (1970), this model has been used as the basis for much research by mainly theoretical economists concerned with both development economics and international economics.

The most significant feature of this model is that it made it possible for analysts to deal with unemployment, within the framework of general equilibrium, by including still unemployed workers who were waiting for job opportunities in the urban sector, a factor that had previously been difficult to assess. It gave rise to a more realistic description of developing economies and helped to explain migration between urban and rural areas theoretically.

This section outlines assumptions in the HT model and the equations that describe it. The structure of the HT model is based on the premise that a fixed wage leads to an outbreak of distortion and urban unemployment. By introducing the concept of expected wage in the urban sector, the HT model presupposes that the fixed wage in one sector is added to the assumptions of the SF model.

The economy considered in the HT model is a small open economy. In the HT model, the economy consists of two sectors, one is an agricultural rural sector, sector 1, and the other is a manufacturing urban sector, sector 2. There are three kinds of production factors, specific production factor in sector 1, K1, specific production factor in sector 2, K2, and labor, L, which is employed in both sectors and mobile between sectors. In this paper, the specific production factor in the urban sector, K2, includes not only equipment and facilities for production but also social infrastructure, such as airports, roads, and industrial parks, which are related to production. Therefore, an improvement of the social infrastructure means an increase in K2. Accordingly, those specific production factors are immobile between the sectors.

It is possible for workers to move freely due to the wage gap between sectors. In other words, workers move to the higher wage sector by comparing their expected wages in sectors 1 and 2. In both sectors, the expected wage is defined by multiplying w i (i = 1, 2) by the probability of finding a job in the sector. In the HT model, the probability of finding a job is assumed to be equal to the rate of employmentFootnote 3. In the rural sector, it is assumed that wages are flexible and equal to the marginal product of labor according to profit maximization. There is, therefore, no unemployment in the rural sector. This means that in the rural sector, workers can be always employed, so that the probability of finding a job in the rural sector equals unity. In the urban sector, however, the probability of finding a job is less than unity because of the existence of unemployment.

This section deals with some of the effects that capital accumulation in the urban sector has influence on the economy. In general, the improvement of social infrastructure such as securing of water for industrial uses, ports, airports and roads contributes to lowering the production cost and the transportation cost for the companies operating in the area. In addition, the creation of the SEZs where the corporation tax is treated well is effective to invite the foreign firms there.Footnote 8 The invested foreign capital forms production bases in those SEZs and creates new job opportunities there. Once new jobs are created, workers who are seeking employment emigrate from the rural area. However, if the number of workers emigrating is greater than the number of new jobs, some would necessarily have to be unemployed or underemployed in the urban informal sector. Does the creation of new jobs, therefore, lead to an increase in urban unemployment? Previous studies concerning whether the creation of new employment in urban areas that also increases urban unemployment have yielded ambiguous results (Corden and Findlay 1975; Neary 1981). In this section, using the HT model and the neo-classical production functions, we propose a necessary and sufficient condition for the unemployment fluctuation affected by the creation of the new employment in the urban area.

Within the framework of the HT model, improvements of infrastructure in the urban sector may be captured as an increase in the specific factor in the production function in the manufacturing sector, K2, in the sense that they may indirectly contribute to the efficiencies of production and the reduction of production costs.

According to the properties of the production function, the sign of dL e /dK2 is positive. Hence, the increase in the specific factor, K2, creates additional urban employment. It is understood that, under the assumption that the improvement of social infrastructure succeeds in attracting foreign capital, new production bases built with that foreign capital will create new jobs.

As (3.1.3) and (3.1.4) indicate, it is clear that the increase in urban employment decreases the number of workers in the rural sector, and increases the number of workers in the urban sector. As the probability of urban employment increases, so does the expected wage in the urban sector. And when the expected wage in the urban sector exceeds the rural wage, migration from the rural to the urban will occur.

This section analyzes how an increase in specific factors in the urban sector affects urban unemployment. In Harris and Todaro (1970), wage subsidy policies in both the rural and urban sectors are discussed in terms of policies to reduce urban unemployment. These policy discussions are an important feature that enhances the significance of the paper. The primary policy recommendation derived in the paper is to grant both sectors a wage subsidy of the same amount. According to a proposal made by Bhagwati (1971), the first best policy for solving the distortion is to offset the distortion itself directly. In this instance, since distortion emerging in the economy is urban unemployment, the first best policy to reduce urban unemployment is to offset a wage differential between the rural and urban sectors by wage subsidy.

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