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Harris-Todaro Chapter 10 D Ray
Harris-Todaro Chapter 10 D Ray
Harris-Todaro Chapter 10 D Ray
If wages were perfectly flexible equal wages would be paid in industry and agriculture and there would be no unemployment
For a variety of reasons however workers in the urban formal sector are paid higher than equilibrium wages Unions government policy incentives to workers to expend effort when labor cannot be directly supervised without tremendous costs. The threat being fired. Then one would have to return to the country or find work in the urban informal sector.
At the same time, in the rural sector and the informal urban sector wages rise and fall according to supply and demand.
Here LF workers find employment in good jobs in the cities, LA remain behind in the countryside working at a lower wage of wA. Those who migrated from the countryside to the city find themselves employed in the urban informal sector
As a result, many people end up in relatively unproductive deadend service sector jobs in the cities.
Urban overcrowding due to high rates of migration from rural areas to cities and high informal sector employment is a fact of life in many low and middle income countries. (review table 2.4, page 39)
Definition of terms
PA=agricultural prices P=general price level QTA=total agricultural production.
Definition of terms
WF =the wage paid for good jobs in the city. N=the number of hours worked per period per worker u=the formal sector unemployment rate (other terms defined in class).
It is sensible to assume that migration continues as long as urban incomes are significantly higher than rural incomes. Or in otherwords migration occurs when wFn(1-u)+wInu >k[(PA/P)(QTA/NTR)]
The main point of Harris-Todaro is that if the expected urban wage ...
equals rural income there is no incentive to migrate. is greater than rural income there is a great incentive to move from country to city were less than rural incomes there would be an incentive to move in the other direction. (South Korea in recent years)
The expected urban wage depends on what type of job you land, that depends on probabilities and these are linked to current urban unemployment rate as defined above.
Therefore to understand the model set rural and expected urban incomes equal and solve the above for u, the urban unemployment rate
U={wFn- (k[(PA/P)(QTA/NTR)]} /n(WF-WI)
In other words, every one knows your business in a small village and it is hard to move.
This social capital will be eroded and thus, all else equal, lowers the cost of migrating since local rural support breaks down.