Migration - Week 7 ECON1910 - Poverty and distribution in developing - - PowerPoint PPT Presentation

Migration - Week 7

ECON1910 - Poverty and distribution in developing countries

Readings: Ray chapter 10 & Banerjee et al chapter 8

• 19. February 2010

(Readings: Ray chapter 10 & Banerjee et al chapter 8) Migration - Week 7

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Introduction

The literature on economic growth might tempt you to view economic development as a process that transforms all income and all sectors of the economy in an even fashion. This is seldom the case Most often we have uneven growth –> Growth that …rst proceeds by bene…tting some groups in society. More often than not, economic development entails the rapid growth

• f some parts of the economy, while other parts are left behind.

We must look at economies and development in a more disaggregated form.

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Rural and Urban

The most important structural feature of developing countries is the distinction between the rural and the urban sector. As economic development proceeds, individuals move from rural to urban Agriculture acts as a supplier of labor to industry. Agriculture acts as a supplier of food to industry These twin resources –food and labour–need to move together if developments is to proceed.

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Formal urban sector

Firms that operate under accepted rules and regulations imposed by governments. The workers often belong to a union. Firms are required to pay minimum wages and must conform to certain standards of safety, rules of compensation for workers, pension schemes, and the like. Firms pay taxes, may receive infrastructure facilities, and may have access to foreign exchange quotas or the right to import certain inputs.

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Informal urban sector

The informal sector is characterized by a large number of small-scale production and service activities that are individually or family owned and use simple, labor intensive technology. The informal sector enterprises have lower productivity. The workers have low human capital Firms are unregulated and do not receive access to privileged facilities. The informal sector usually does not adhere to norms of minimum wages, retirement plans, or unemployment compensation.

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Agriculture

In most cases agriculture is a giant informal sector in itself. The primary occupation in agriculture is farming. Production is organized in many ways:

Family farms Large owner-cultivations or capitalist farms. Tenant farmers who lease land Laborers who work for wages or a commission on the land of others.

The notion of risk and uncertainty is central to the concept of agricultural organization in developing countries.

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Stylized facts:

Urban areas are growing rapidly Urban wages are higher than rural wages Urban unemployment / underemployment is high What models can explain these patterns?

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The Symptoms of Dualism

Development often proceeds unevenly and results in a dual economy consisting of a modern sector and a traditional sector. The modern sector typically di¤ers from the traditional sector in that it has:

Higher value of output per worker Higher wages Lower returns to capital Higher capital intensity Persistent unemployment (especially in urban areas)

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Dual model –Lewis 1954

The …rst theoretical discussion of internal movements is due to Lewis (1954). He describes developing countries as dual economies, i.e. economies where two sectors coexist of di¤erent nature and functioning. A “traditional” sector, often equated to the agricultural sector, labour intensive, using old production techniques, with a family-based

• rganization implying output sharing rather than wage payment.

A “modern” sector, with opposite characteristics: industrial, intensive in capital and using “new” technologies, organized on capitalist principles, with wage payment.

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Dualism

A high-wage, capital-intensive industrial sector coexists with a low-wage traditional sector. Dualism is a sign of markets working poorly (market failure case for deviating from free trade).

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The Lewis Model

The general idea is that the traditional sector supplies labour to the modern

• ne.

Obviously, for this to be possible, it requires that the agricultural sector with less workers can still produce su¢cient food surplus to feed the whole economy. Lewis’ idea is that there exist a labour surplus in the traditional sector, that can be removed at little or no cost in terms of lost output from this sector. i.e. the marginal productivity of labour is nearly nil in this sector. This might be possible in economies where there is a high population pressure for available arable land.

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The Lewis model

Because in the traditional sector, one is not paid at its marginal productivity but by output or income sharing (i.e. at average productivity), it is possible for workers to earn a living even in a sector where marginal productivity of labour is nil. The concept of surplus labour can be extended:

1

By considering the possibility that marginal product in the traditional sector is lower than wage in the modern sector, but not 0.This leaves a margin for e¢ciency gain by reallocation of labour among sectors.

2

By distinguishing surplus labourer from surplus labour: remaining workers adapt their labour supply.

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The Lewis model

Lewis uses this model to describe the development process:

It proceeds by the transfer of surplus labour (along with surplus food necessary to sustain modern workers) from the agriculture to industry. As long as there is surplus labour in agriculture, the agricultural wage doesn’t increase when labour is withdrawn. When the entire surplus is soaked up by the modern sector, wages start to rise in agriculture and dualism disappears.

In this model, labour moves because of higher wages in the modern sector that can attract workers.

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Harris–Todaro (1970)

Model that is dedicated to explaining rural-urban migration. It assumes a formal urban sector with higher wage than the rural sector. In the formal urban sector, wage is not only high, but also rigid downward due to unionization, legal framework (minimum wage law for example) or e¢ciency wage payment. In the rural sector, conversely, wage is fully ‡exible. Migration is viewed as a response to the wage gap between the two sectors. Those who migrate and are not absorbed in the formal sector join either the pool of the unemployed or the informal sector.

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Harris-Todaro Model

Original focus: rural-urban migration in LDC Rural residents move to urban regions despite already high unemployment there Puzzle: migration continues although it makes (some) rural migrants worse o¤ HT model: migrants motivated by expected returns Expected returns may be di¤erent from actually realized returns

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Harris-Todaro Model

Two locations: Urban and Rural In the rural location – one sector: agriculture (A) In the urban location – two sectors: formal urban sector (F) and informal urban sector (I) LA - labour in the agriculture sector LF - labour in the formal urban sector LI - labour in the informal urban sector

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Demand curves with ‡exible wages

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Minimum wage in the formal sector

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Harris-Todaro Model

The formal urban sector will hire no more than the amount

_

LF Where do the remainder go?

If all go to the agricultural sector ) wA = w

• This cannot be an equilibrium: No unemployment but di¤erent wages,

people will move

If both sectors pay the same wage,

• w ) unemployment if formal and

agriculture are the only two sectors.

This cannot be an equilibrium: wages in agriculture are ‡exible and unemployed people would go to agriculture and drive down the wage.

They cannot be in agriculture = ) must be in urban sector but not in formal urban )Informal urban sector

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Harris-Todaro Model

Worker choose between remaining in the rural/agricultural sector and a sure wage and moving to the urban area with a positive probability of landing a job in the formal sector, but also with a positive probability of ending up unemployed or working for a pittance in the informal sector. The expected wage in the urban sector is neither

• w nor w

but somewhere in

between given by:

p

• w+ (1 p) wI

wI - urban informal wage, exogenous p - probability of …nding a job in formal sector

This is the expected wage that is compared to the wage in the agricultural sector.

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Harris-Todaro Model

Harris-Todaro sees the probability of getting a formal job as the number of formal positions over the number of urban dwellers: p = LF LF + LI Then 1 p = LI LF + LI

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Harris-Todaro Model

Because the fate of a potential migrant is not known, we must consider the expected income from migration and compare it with the actual income received in agriculture. If p

• w + (1 p) wI =

_

LF

_

LF + LI

• w +

LI

_

LF + LI wI = wA we are at an equilibrium where no person wishes to migrate from one location to the other. This is the Harris-Todaro equilibrium condition.

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Harris-Todaro equilibrium

We can think of the line PP as combinations of formal sector wage and the probability of obtaining a formal sector job where the expected wage is constant.

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The paradox of job creation

This simple model is enough to explain the observed puzzling fact that policies aiming at reducing the size of the informal sector through job creation in the formal one lead to an increase in unemployed or informal employment (ex: Kenya, end of the 60’s, when Harris and Todaro were working there). The increased number of jobs, increase p and hence increase the expected urban earning, driving additional migration.

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The paradox of job creation

Due to migration, w 0

A > wA, so that p0 > p.

The fraction for formal jobs in the urban sector has therefore increased, but since the size of the urban labour force has increased, this is compatible with an increase in the absolute size of the informal sector (or of the pool of unemployed). In the new equilibrium: p0wF +

• 1 p0

wI =

_

L

F _

L0F + LI

• w +

LI

_

L

F + LI

wI = w 0

A

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The paradox of job creation

If the policy objective is to curb unemployment in urban areas, what are the policy options left?

Migration restrictions Wage subsidies

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Migration restrictions need not lead to an e¢cient allocation of the labour force

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A subsidy s is paid for each unit of formal sector work. Allocation of labour not e¢cient in this case either.

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Policy mix

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Avoiding migration restrictions require to subsidies wage in the rural sector as well.

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If the subsidy is too generous, equilibrium is reached as well

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Extensions

Harris-Todaro model tends to overestimate actual migration ‡ows. Various extensions have been proposed to make it more realistic:

Introduce risk aversion: Risk averse workers will not migrate for an expected wage equal to the certain earning in agriculture. Introduce heterogeneity in the probability of landing a job in the formal sector (better access for insiders). Introduce migration costs.

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