Urban job creation and unemployment in LDCs: Todaro vs. Harris and Todaro

Overwhelming urban migration occurred so rapidly in many developing countries that widespread unemployment and squalid living conditions are commonplace. For many of these countries, stopping urban migration has become a major policy. Two models propose 2 different theories of urban unemployment. Todaro's short-term effects model concludes that job creation actually causes unemployment. Todaro and Harris formulated a long-term effects model in which welfare subsidies create more employment and stimulate the economy. A real solution to urban job creation would include optimal allocation of investment between the rural and labor sectors. A once and for all hiring tax would reduce replacement hiring. It is impossible to design an optimal tax subsidy package for urban unemployment unless it includes knowledge of the dynamic response of migration and unemployment to the rate of net and gross hiring of labor. If subsidy taxes are levied on the agricultural sector, the net result may be a higher rate of capital formation in the (low social return) manufacturing sector and a lower one in the agricultural sector.     

Unemployment,rural–urban migration and environmental regulation

This paper develops a general equilibrium model that incorporates specific features pertaining to developing countries: a large informal sector and rural–urban migration. A calibrated version of the model is used to study the effects of energy tax changes and a reduction in agricultural‐sector energy subsidies on labor market outcomes. The results indicate that the incidence of energy taxes is partly shifted on to the rural sector through rural–urban migration. The results thus highlight the importance of modeling the features particular to developing countries and the economic general equilibrium effects when assessing the impact of environmental taxation in those countries.     

Factor Market Oligopsony and the Production Possibility Frontier

The authors consider a model with two final goods, one intermediate good, and two primary factors. One final good and the intermediate good are produced using primary factors, labor and capital. The other final good is produced using labor and the intermediate input. Producers of the second final good exert oligopsonistic market power on the intermediate input, which captures real world phenomena prevalent in the food processing and other manufacturing industries. If the capital/labor ratio in one final‐good sector is in between those of the intermediate‐input sector and the combined intermediate‐input and the other final‐product sectors, and if the oligopsony power is sufficiently large, the model generates results that are not adherent to the standard two‐sector Heckscher–Ohlin model. Results that deviate from the H–O model include the relationships between factor prices and commodity prices, the price–output effect, tangency between the price line and the PPF, and the curvature of the PPF.     

Differential Migration Prospects,Skill Formation,and Welfare

This paper develops a one sector, two‐input model with endogenous human capital formation. The two inputs are two types of skilled labor: “engineering,” which exerts a positive externality on total factor productivity, and “law,” which does not. The paper shows that a marginal prospect of migration by engineers increases human capital accumulation of both types of workers (engineers and lawyers), and also the number of engineers who remain in the country. These two effects are socially desirable, since they move the economy from the (inefficient) free‐market equilibrium towards the social optimum. The paper also shows that if the externality effect of engineering is sufficiently powerful, everyone will be better off as a consequence of the said prospect of migration, including the engineers who lose the migration “lottery,” and even the individuals who practice law.     

Rural-urban migration,urban unemployment and underemployment,and job-search activity in LDCs

A quantity adjustment framework is used to analyze unemployment and underemployment in less developed countries (LDCs). The basic premise of the formal theoretical model presented is that the same kinds of forces that explain the choices of workers between the rural and urban sectors can also explain thier choices between 1 labor market and another within an urban area and are most likely made simultaneously. The decision makers, whether family units or individuals, are presumed to consider the various labor market opportunities available to them and to choose the one which maximizes their expected future income. In the model the primary equilibrating force is taken to be the movement of workers between labor markets, not changes in wages. The point of departure is the received theory of rural urban migration in LDS, which is the model of Harris and Todaro (1970). The 1st step is a summary of the basic features of the model. While accepting their basic approach emphasizing movement of workers rather than changes in wages, it is shown that the particular implication of the model with respect to the equilibrium urban unemployment rate substantially overstates the rates actually observed by Turnham (1971) and others. The analysis is then extended to consider several important factors which have previously been neglected--a more generalized approach to the job search process, the possibility of underemployment in the so-called urban "murky sector," preferential treatment by employers of the better educated, and consideration of labor turnover--and demonstrate that the resulting framework gives predictions closer to actual experience. Harris and Todaro in their original discussion concluded that a combination of a wage subsidy in the modern sector and physical restriction of migration would be required to realize a first best state lying on the economy's production possibility frontier. Subsequently Bhagwati and Srinivasan (1974) challenged them and demonstrated that a first best solution can be achieved by means of a variety of alternative tax or subsidy schemes, none of which require migration restriction. This analysis suggests 3 additional policy variables, beyond those considered by either pair, which might be expected to have an important effect on the volume of unemployment and underemployment in LDCs: a smoothly functioning labor exchange would reduce the incentive to remain unemployed while searching for a superior job; the size of the educational system would also influence the amount of unemployment; and it is job hiring in the modern sector, more than the number of jobs, which primarily influences workers' locational decisions.     

Efficiency Gains from Liberalizing Labor Mobility

In this paper, we quantify the effect of a complete liberalization of cross‐border migration on the world GDP and its distribution across regions. We build a general equilibrium model, endogenizing bilateral migration and income disparities between and within countries. Our calibration strategy uses data on effective and potential migration to identify total migration costs and visa costs by education level. Data on potential migration reveal that the number of people in the world who have a desire to migrate is around 400 million. This number is much smaller than that predicted in previous studies, and reflects the existence of high “incompressible” migration costs. In our benchmark framework, liberalizing migration increases the world GDP by 11.5–12.5 percent in the medium term. Our robustness analysis reveals that the gains are always limited, in the range of 7.0 percent (with schooling externalities) to 17.9 percent (if network effects are accounted for).     

Entrepreneurial Migration in an Integrated World

A growing number of developed countries offer entrepreneurial visas as a means of attracting entrepreneurial talent and capital. In this paper, we use a simple two‐sector model of international trade with heterogeneous agents and financial frictions to show that entrepreneurial migration can contribute to the international efficiency of production, even when capital also flows internationally through borrowing and lending and foreign direct investment. In our model, all cross‐border transactions are motivated by cross‐country variations in the quality of financial institutions.     

Does the Gap in Family‐friendly Policies Drive the Family Gap?*

Segregation of the labour market into a family‐friendly and a non‐family‐friendly sector implies that women self‐select into sectors depending on institutional constraints, preferences for family‐friendly working conditions and expected wage differences. We take this sector dimension into account and find a severe penalty after birth‐related leave in the non‐family‐friendly sector, so that women who would be affected by this penalty self‐select into the family‐friendly sector. The penalty is a combination of a large human‐capital depreciation effect, a child penalty and no recovery.     

Internal migration and youth entrepreneurship in the Democratic Republic of the Congo

This paper analyzes youth internal migration in the Democratic Republic of the Congo (DRC) and its impact on entrepreneurship startup in a fresh post‐conflict context. Building on a national representative survey conducted in 2005, a recursive bivariate probit specification is used to jointly estimate the decision models of both migration and entrepreneurship. To evaluate the robustness of results, the propensity score matching method is used to test the concordance of the results after eliminating the redundant impact of unobserved factors. The two main conclusions are that youth migration increases the probability of being an entrepreneur, but in the informal sector. In addition, like secondary and post‐secondary education, the duration of stay after migrating is an important factor to being an entrepreneur in the formal sector. These conclusions are expected to enlighten policy‐makers as to the importance of promoting secondary and post‐secondary education as well as inclusive growth investments that may absorb more youth labor in formal sectors. This is the first exercise in the case of the DRC and since it focuses on youth, the paper makes a unique contribution to the literature related to the link between migration and entrepreneurship in a post‐war context.     

Welfare and equity impacts of cross-border factor mobility in Bangladesh: A general equilibrium analysis

We develop a dynamic computable general equilibrium model with cross-border factor mobility to assess the impacts of a foreign wage shock and the effects of counteractive policy measures in Bangladesh. The model features migration of workers and foreign direct investment (FDI) in the ready-made garments (RMG) sector. Our simulation results show that returning migrants induced by a foreign wage fall would reduce household welfare by lowering wages and increasing unemployment, particularly for unskilled workers in the domestic labor market. To counteract this negative shock, FDI promotion in the RMG sector and a human-capital development program are considered. The former policy minimizes the negative impacts of the foreign labor market shock, while a combination of both policies is more equitable.     

Growth of business services: A supply‐side hypothesis

This paper aims to explain why and how the service sector may grow faster than manufacturing. It develops a two‐sector, closed‐economy model, having a manufacturing sector and a service sector. Accumulation of human capital serves as the basis of growth. The analysis focuses on business services, while household services are also considered. It is argued that differences in returns to scale between the two sectors and employment frictions in manufacturing explain why the growth rate of the service sector may be higher. The model also features that within the service sector the business services sub‐sector may grow faster than household services.     

Labour migration in a model of North-South trade

A dynamic general eqilibrium model of the world economy is adopted to examine the benefits and drawbacks of labour migration to each of the participatingregions. It is demonstrated that, especially in the long term, the migration of workers may be mutually beneficial: the region of immigration making production gains, while that of emigration perceives a higher demand for its products. In contrast to previous results, it is shown that no immigration limits would be imposed even if migrants' incomes were taxed and, indeed, differentiated payments to immigrants is suboptimal     

MODELING INVESTMENT‐SECTOR EFFICIENCY SHOCKS: WHEN DOES DISAGGREGATION MATTER?

The most straightforward way to analyze investment‐sector productivity developments is to construct a two‐sector model with a sector‐specific productivity shock. An often used modeling shortcut accounts for such developments using a one‐sector model with shocks to the efficiency of investment in a capital accumulation equation. This shortcut is theoretically justified when some stringent conditions are satisfied. Using a two‐sector model, we consider the implications of relaxing several of the conditions that are at odds with the U.S. Input–Output Tables, including equal factor shares across sectors. The effects of productivity shocks to an investment‐producing sector of our two‐sector model differ from those of efficiency shocks to investment in a one‐sector model. Notably, expansionary productivity shocks boost consumption in every period, whereas expansionary efficiency shocks cause consumption to fall substantially for many periods.     

Effect of World Fertility Scenarios on International Living Standards

This paper applies a two good, multi‐region Ramsey‐Solow model of the world economy to determine the impact that alternative world fertility rates would have on international capital markets and living standards. Notable features of the model include: relative consumption demands and relative employment efficiencies that vary by age, traded and non‐traded goods, vintage technology, outward‐looking reference consumption, a proportion of non‐optimising rule‐of‐thumb consumers and imperfect capital mobility due to asymmetric information. The model suggests that projected demographic change will imply a flow of international capital from the ageing regions to the younger regions; and that the world interest rate will fall. The lower world interest rate will cause a loss in living standards for ageing regions, the lenders, and a gain for the younger regions, who are borrowers.     

North–South Trade Liberalization and Economic Welfare

We consider a general equilibrium model of a developing economy (the South) that opens to trade with a developed economy (the North). The southern economy is characterized by open urban unemployment and rural–urban migration, a competitive agricultural sector and a monopolistically competitive manufacturing sector. Hence, there is potential for both inter‐ and intra‐industry trade to arise on liberalization, in addition to distortionary effects of duality. Southern comparative advantage in agriculture may arise from the labor market distortion and the basis for intra‐industry trade is love for variety. We characterize various configurations of the trade pattern, and the resulting welfare consequences of opening to trade in this context. We illustrate a new mechanism under which in some circumstances it may be possible for trade liberalization to lower economic welfare in the South.     

ECONOMIC DEVELOPMENT UNDER ALTERNATIVE TRADE REGIMES*

How does openness affect economic development? This question is answered in the context of a dynamic general equilibrium model of the world economy, where countries have technological differences that are both sector neutral and specific to the investment goods sector. Relative to a benchmark case of trade in credit markets only, consider (i) a complete restriction of trade and (ii) a full liberalization of trade. The first change decreases the cross‐sectional dispersion of incomes only slightly, and produces a relatively small welfare loss. The second change, instead, decreases dispersion by a significant amount, and produces a very large welfare gain.     

Estimating the impacts of eliminating fisheries subsidies on the small island economy of the Azores

A major problem affecting world fisheries today is overcapacity of which overfishing is both a cause and a consequence. There is a general consensus that fisheries subsidies cause great harm to the resource by exacerbating the problems resulting from the common resource issues of fisheries leading to overexploitation of the resource through a new set of perverse incentives. Many now advocate that subsidies should gradually be terminated, and that capacity enhancing and fuel subsidies should be terminated immediately. On account of the global fisheries crises, highly subsidised fisheries and the anticipated reforms of the European Union's Common Fisheries Policy this study aimed to estimate the impact of eliminating fisheries subsidies on various macro and micro economic variables pertaining to the regional economy of the Azores using a dynamic computable general equilibrium model based on a social accounting matrix. The simulation results suggest that reduction, and in particular, elimination of fisheries subsidies would have a substantial effect on the region, however, the negative social and economic effects would be largely confined to the fishing sector. Conversely, the augmentation of fishery subsidies would benefit the fishing sector with an overall adverse effect on the rest of the economy.     

TRANSPORTATION COSTS,AGRICULTURAL PRODUCTIVITY,AND CROSS‐COUNTRY INCOME DIFFERENCES*

I study the role of transportation for development by introducing regional trade and a transportation sector into the standard two‐sector model of agriculture–nonagriculture. Low transport productivity can distort the allocation of resources across geographically dispersed production units within sectors and between agriculture and nonagriculture. I infer cross‐country transport productivity disparities from observed domestic transport costs and transport infrastructure stocks. “Endowing” rich countries with the transport productivity of poor countries would reduce their income by 10%. Combining transport productivity disparities with disparities in nonagricultural productivity and arable land the model yields a 50% higher rich–poor income ratio than the two‐sector model.     

Convergence in a Dynamic Heckscher–Ohlin Model with Land

Convergence among nations that share the same preferences and technologies is a key result of the closed‐economy neoclassical growth framework that has received substantial support in the data. However, Heckscher–Ohlin versions of the two‐sector neoclassical growth model predict that nations that differ in their capital–labor ratios may not converge to the same steady state, even if they are identical in all other aspects. This is a puzzling result that warns us about potential dangers of international trade. In this paper we show that when land, an input in fixed supply, is introduced into the model, international trade in goods no longer limits the capacity of poor nations to catch up with the advanced world.     

Brain Drain,Fiscal Competition,and Public Education Expenditure

A two‐country model is developed in this paper to examine the implications of fiscal competition in public education expenditure under international mobility of high‐skilled labor. The authors allow for educational choice, asymmetry of countries with respect to total factor productivity, and tax base effects of migration in source and host country. As the latter may give rise to multiplicity of equilibrium, alternative belief structures of mobile high‐skilled workers are carefully taken into account. The paper also looks at the consequences of bilateral policy coordination. While in line with other studies on tax competition, bilateral coordination can reduce the under‐investment problem in public education spending, it also tends to hinder migration or may even reverse the direction of the migration flow that materializes under non‐cooperative policy setting. As a result of its potentially adverse effects on migration patterns, bilateral coordination may therefore reduce global welfare and bring the world economy further away from the social planner's solution.