Rural-urban migration,informal sector and development policies: a theoretical analysis

"A theoretical model of rural-urban migration has been developed with special reference to the informal sector. The wage rate and employment in the informal sector are determined endogenously. The paper shows the simultaneous existence of open unemployment and informal sector in the urban area in migration equilibrium. The effects of alternative subsidy policies on unemployment and welfare of the workers are studied." The model is intended primarily for use in analyzing trends and policies in developing countries.     

INFLOW OF FOREIGN CAPITAL AND TRADE LIBERALIZATION IN A MODEL WITH AN INFORMAL SECTOR AND URBAN UNEMPLOYMENT

Abstract.  The paper has made an attempt to analyse the effects of liberalized trade and investment policies on welfare and open unemployment in a developing economy in terms of a three sector Harris-Todaro type general equilibrium model. Following empirical evidence it is assumed that there is wage rigidity in urban sectors, which leads to the simultaneous existence of open unemployment and an urban informal sector in the migration equilibrium. The paper deserves special attention for its interesting results which are completely opposite to those generated by the standard Harris-Todaro model.     

Job-search and foreign capital inflow — A three-sector general equilibrium analysis

The purpose of this paper is to extend the Fields' (1989) multi-sector job-search model in a three-sector general equilibrium framework by introducing international trade and capital as input. The three sectors are the rural sector, the urban informal sector and the urban formal sector. The rural sector and the urban informal sector use one type of mobile capital while the urban formal sector uses a sector-specific capital. We find that the effects of an inflow of foreign capital in the urban formal sector on unemployment and social welfare crucially hinge on the relative factor intensities of the rural sector and the urban informal sector. We show that there is a possibility of trade-off between the government's twin objectives of improvement in social welfare and mitigation of the urban unemployment problem. These results are extremely crucial from the view point of policymaking in an unemployment plagued, low-income developing economy.     

A note on the shadow wage in LCDs with migration and formal and informal urban sectors

Given induced rural-to-urban migration, the social cost of (unskilled) labour for urban public sector projects is shown to be lower than the formal-sector, exogenously-determined wage. This result is valid not only when the urban alternative to formal employment is unemployment but also (and more realistically) when the relevant alternatives are formal employment, informal employment and unemployment.     

Rural–Urban Migration, the Informal Sector, Urban Unemployment, and Development Policies: A Theoretical Analysis

This paper develops a theoretical model like Gupta's to show the simultaneous existence of the urban informal sector and open unemployment in the urban sector in a Harris–Todaro type of model of rural–urbanmigration. A wage or a price subsidy policy to the rural sector, or a demand management policy like an export promotional scheme in the manufacturing sector, reduces the urban unemployment level, and provides a theoretical basis for the introduction of export promotional measures like the formation of duty-free Export Processing Zones (EPZs) to solve the urban unemployment problem. The policy conclusions of the present paper are different from those found in Gupta's 1993 model.     

Urban informal sector and poverty

Many studies have explored the connection between trade and poverty theoretically and empirically for the developing world. We offer another look at the possible implications of trade liberalization on urban poverty by using the urban informal sector as a catalyst. The theory shows that trade liberalization in the import competing sector raises informal wage across occupational types, and expands production and employment in the informal industrial segment. Further, using Indian provincial data on wage, capital stock and value added in the informal sector we show that real informal wage increased with trade reform and transmitted favorable impact on urban poverty reduction.     

Unemployment and Economic Integration for Developing Countries

While financial or trade integration between countries may increase the size of the market and aid the adoption of more advanced technologies, will it also increase the level of urban unemployment for a developing country? In this model, there is unemployment in the urban sector. Manufacturing firms engage in oligopolistic competition and choose increasing returns technologies to maximize profits. Financial firms provide capital to manufacturing firms and they also engage in oligopolistic competition. We show that an increase in the wage rate in the manufacturing sector changes neither the level of technology nor the level of employment in the manufacturing sector. While financial or trade integration between developing countries leads manufacturing firms to adopt more advanced technologies, the level and rate of employment in the manufacturing sector will not deteriorate.     

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.     

Monopolistic Competition and North–South Trade

This paper examines the consequences of opening to international trade for a developing economy with open urban unemployment and rural–urban migration, where the urban sector is monopolistically competitive. It is shown that there exists a threshold level of urbanization prior to which increases in product variety will be reflected in increased urban unemployment, that opening to intra‐industry trade with a high‐wage economy (i.e. North–South trade) will reduce the rate of urban unemployment by a greater amount than intra‐industry trade with a similar economy, and that trade intervention in the South may lower welfare by reducing varieties produced in the North.     

Optimal Urban Employment Policies: Notes on Calvo and Quibria

We show that Quibria's insightful observation on the efficacy of urban policy in a model with an urban trade union and an urban informal sector holds, but with a revenue-neutral employment tax-subsidy combination levied on the urban employer. We also draw the relevance of the generalized Harris–Todaro model in providing intuition for the validity of this surprising result.     

Migration,unemployment and development: a dynamic two-sector analysis

"A time-minimizing problem of attaining a full employment state is solved in a dual-economy model with [the] Harris-Todaro migration mechanism and with a positive level of urban unemployment in the starting period. It appears that the optimum solution lies in the specialization of investment in the urban sector at least in the initial stage of development if the per-capita stock in the urban sector is very small in the starting period."     

Terms of Trade Shocks and Endogenous Search Unemployment: A Two‐Sector Model with Non‐Traded Goods

We develop a simple and tractable two‐sector search model featuring a non‐traded sector and endogenous search unemployment to examine the impact of terms of trade shocks on unemployment. We show that changes in terms of trade will not only lead to employment reallocation across sectors, as in the traditional trade models, but, more importantly, impact upon search unemployment within each sector. Specifically, we show that an improvement (deterioration) of terms of trade reduces (increases) unemployment rates in both traded and non‐traded sectors.     

Regulation of entry, labor market institutions and the informal sector

This paper develops a two-sector matching model that incorporates the main features of Latin American labor markets. It has an innovation in its matching structure that makes it more consistent with some key stylized facts of the informal sector in these countries. The model is numerically solved using Brazilian data and several policy simulations are performed. Reducing formal sector's entry cost significantly reduces the size of the informal sector and improves overall labor market performance. Increasing enforcement significantly reduces informality but has strong adverse effects on unemployment and welfare. Thus, the results indicate that the tradeoff between lower informal employment and higher unemployment rates is not present when one looks at policies that aim at reducing the costs of being formal, as opposed to policies that simply increase the costs of being informal.     

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.     

Urban unemployment, informal sector and development policies

We analyze the effects of wage subsidy policies on unemployment and welfare in the model that is characterized by the existence of both open unemployment and the informal sector that producesfinal goods. Our main findings are as follows. Wage subsidies to the agricultural and informal sectors increase welfare and decrease urban unemployment. The effects of a wage subsidy to manufacturing sector on welfare and unemployment are conditional. We identify some sufficient conditions for the definite results and interpret them.     

A general equilibrium analysis of production subsidy in a Harris-Todaro developing economy: an application to India

Since 1950s India has advocated import substituting industrialization policies to promote its manufacturing sector. The end result was creation of a dual economy: highly favored manufacturing sector with high and rigid wages and neglected agricultural sector with low wages and poverty. Because of the higher wages in the manufacturing sector, the rural laborers migrate to the urban sector, a typical characteristic of the Harris-Todaro developing economy. Realizing this crisis, the Indian government recently initiated policies to boost agricultural production to curb the labor migration and improve the welfare of the rural population. In this study, we develop a computable general equilibrium (CGE) model for India by incorporating Harris-Todaro economic characteristics of unemployment, labor migration, farm dependant population, and labor-intensive agriculture. We use the model to analyze the effects of agricultural production subsidy policies on employment, factor price, output price, output levels, and welfare in agricultural and manufacturing sectors. Our findings show that agricultural production subsidy increases agricultural production, reduces unemployment, raises the wage rate in the agriculture sector, augments the consumption among the rural and urban households, and increases the rental rate for capital in agricultural sector.     

Employment,output and the choice of techniques: The trade-off revisited

In this paper we explore the choice of techniques issue in a dual economy model with unemployment in the urban sector. Conventional wisdom suggests that developing societies attempting to modernize and transform backward sectors into advanced ones do so by choosing labor-intensive technologies to avoid rising unemployment. We analyze the effect of labor-intensive technology on (a) the level of urban unemployment, and (b) the relationship between the levels of urban employment and unemployment. We show under quite reasonable conditions that choosing a labor-intensive technology will actually aggravate the unemployment problem. We also show that the nature and pattern of the trade-off between modernization and employment are crucially dependent on the existing agricultural technology.     

Job search and mobility in developing countries. Theory and policy implications

A labor market model is developed in which the formal sector is characterized by search frictions whereas the informal sector is competitive. We show that there exists a unique steady-state equilibrium in this dual economy. We then consider different policies financed by a tax on firms' profits. We find that reducing the unemployment benefit or the firms' entry cost in the formal sector induces higher job creation and formal employment, reduces the size of the informal sector but has an ambiguous effect on wages. We also find that an employment/wage subsidy policy and a hiring subsidy policy have different implications. In particular, the former increases the size of the informal sector while the latter decreases it.     

"城中村"非正规部门形成发展机制——以深圳市蔡屋围为例

非正规部门以其就业门槛低、方便灵活等特点成为城市边缘阶层就业和消费的主要部门,“城中村”既是城市低收入群体和流动人口的聚居区,也是非正规部门相对集中的区域。文章通过对位于深圳市中心区的“城中村”———蔡屋围的案例研究,探讨了非正规部门非正规化、半正规化和正规化的三种发展过程及其形成原因和内在机制,指出由于现阶段“城中村”特殊的经济社会体系和管理体制以及非正规部门在城市发展中承担着为低收入人口提供就业和服务的特殊功能,城市政府应降低门槛,允许非正规部门以非正规化的形式存在,但应纳入管理;对处于不同发展阶段的非正规部门采取不同的政策,使之有序发展,最终步入正规化的轨道。     

Informal employment in developing countries : Opportunity or last resort?

There is an ongoing debate among researchers and policy makers, whether informal sector employment is a result of competitive market forces or labor market segmentation. More recently it has been argued that none of the two theories sufficiently explains informal employment, but that the informal sector shows a heterogenous structure. For some workers the informal sector is an attractive employment opportunity, whereas for others - rationed out of the formal sector - the informal sector is a strategy of last resort. To test the empirical relevance of this hypothesis we formulate an econometric model which allows for several unobserved segments within the informal sector and apply it to the urban labor market in Côte d'Ivoire.