Harris-Todaro Model

“The Harris-Todaro model is useful in explaining internal migration but cannot explain international migration.” (a) Discuss the statement above, with a focus on the assumptions of the model. (b) Is the available empirical evidence consistent with the statement? Discuss. (c) Discuss the implications of migration restrictions and wage subsidies in achieving an efficient allocation of labour across sectors. Would reducing the inequality in land holdings promote efficiency in allocation?

The Harris-Todaro model was created to explain how internal migration occurs from rural to urban sectors through the difference in the expected wage. Pritchett points out that migration can benefit developing countries and their population much more significantly than any aid attempts. Industrial world transfer are around $70bn a year in aid, but by simply allowing a 3% rise in their labour force (taken up by migrants), the gains would be $300 billion: 4.5x greater. Fundamentally it was used to explain migration within an economy, but we attempt to expand the model to an international level. The model begins by accepting that the assumption of (near) full employment in urban labour markets isn’t particularly appropriate for developing countries which are beset by a chronic (under/)unemployment problem whereby many uneducated and unskilled rural migrants cannot find a job in the formal sector so become unemployed or join the informal sector. Thus in deciding whether to move to the city or stay at home on the farm, an individual has to weigh up the probability and risks of being unemployed for a considerable period of time against the positive urban-rural real income differential.

The graph above shows the AA line – the MPL of the rural sector – which is hence the demand for rural labour, whilst the MM line gives demand for manufacturing labour. The total labour force is of size OAOM. The efficiency wage Wm is paid in the manufacturing sector which is higher than the market clearing wage rate of w*. Due to the efficiency wage only LM workers are employed in the urban sector than the L* under a market clearing wage. If we assume that there is no-unemployment then OMLM workers would be employed in the urban sector whilst OALM would be employed in the rural sector at a wage of w’A. This would mean that a rural-urban wage gap would exist and some rural workers would wish to migrate. If we let LUS be the total urban labour pool then workers from the rural sector would migrate to the urban sector until the wage rate in agriculture equilibrated with the probability of finding a job in the manufacturing sector times the wage in the manufacturing sector:

wA = (LM/LUS)*wM

We would end up at a situation where now only LA workers are employed in the rural sector and LM are employed in the manufacturing sector, meaning that the difference (OMLA-OMLM) are unemployed workers. We should note that it wasn’t irrational for these workers to migrate: they rationally decided that it made sense – based on the rural-urban wage differential and the probability of them finding a job – to move. Unfortunately our model is constrained in assuming that these workers are completely unemployed, whereas in reality they may receive an informal sector wage and this would increase their expected income and thus means it makes more sense for rural migrants to migrate. Hence if we included this in our model we would see even greater “unemployment”, i.e. more migrants would move from the country to the city and end up in the informal sector.

Probably the most fundamental assumption in this model is that migration is an economic phenomenon in response to urban-rural differences in the expected income. This assumes that people only move for monetary gains, when in reality there are many other factors involved in this decision. For example, a lot of migration occurs due to humanitarian reasons as a result of conflict or disease – for example, the huge influx of migrants from the Middle East to Europe in the summer of 2015 is unlikely to be as a result of economic motives, but more for a desire of safety and a better standard of living. Therefore if we use the Harris-Todaro model to try and explain international migration (internal migration based on humanitarian/ethical grounds is perhaps unlikely, but not equal to zero: e.g. ethnic minorities may be more welcome in cities than rural areas and hence migrate) then we would be omitting a large chunk of migrants who move in order to escape persecution and death. Thus any further discussion on the use of the Harris-Todaro model implicitly assumes this factor, and acknowledges that a proportion of migration is outside the scope of our current model.

It may seem unrealistic for manufacturing firms to pay an efficiency wage, after all they can attract labour at the equilibrium rate. But this can be thought of as a wage necessary to ensure that workers have better nutrition (and so have higher productivity); reduce staff turnover; and ensure workers don’t shirk. If we try and explain the international migration process in a Harris-Todaro model we would say that rich countries (the “urban sector”) offer an efficiency wage which is higher than poor countries (the “rural sector”) in order to encourage them to migrate. So long as this expected wage difference is great enough (i.e. it includes the possibility that migrants will be unable to find jobs, as well as the costs of moving) then individuals from poor countries should move to rich countries in search for a job. In reality, the expected wage difference would be even greater than the market rate, due to the existence of unemployment benefits which means that developing country nationals would continue to migrate to the rich world, so long as unemployment insurance was sufficiently greater than rural wages and the cost of moving. This thus leads to political motives, in the developed world, to limit the amount of assistance given to migrant workers and perhaps curtail the amount of unemployment insurance they can receive.

The most fundamental criticism with this model is the barriers which exist preventing labour from migrating to rich (urban sector) countries from poor (rural sector). This makes it incredibly difficult to model international migration in a Harris-Todaro framework, simply because there are barriers to entry from workers wanting to move and not being able to do so. Furthermore, there are other barriers to entry, such as not speaking the language, cultural issues, not having a social or business network and needing sufficient capital to afford to physically move and then set up in a far away land.

Moreover, the model assumes that costs are given in a monetary sense, whereas in reality it might be quite difficult to put a value on leaving your family in a distant country to go and work abroad. Similarly, the model assumes that individuals can rationally calculate the economic gains from migration, but by moving individuals would be imposing a cost upon themselves, and would have to include the value of living abroad (i.e. even though wages are higher they are eaten up by housing, food, clothing and other living costs) which may be quite difficult to calculate.

Other issues with the model, in both an internal and international perspective, are that it doesn’t include human capital, there are no externalities and it treats workers and citizens as homogenous. On the first issue, including human capital in the model is quite relevant, especially in an internationally empirical sense as developed countries allow more skilled workers than they do unskilled workers. Fundamentally this is because it is more politically feasible to do so, as skilled workers (e.g. doctors and electrical engineers) are often in short supply in the UK and the US and so are accepted by the public as a necessity. Also, skilled workers are (a) less numerous and (b) are less likely to compress the wages of the unskilled domestic residents in a developed country, and hence cause less concern that inequality will rise and that there will be problems associated with cultural assimilation and a burden on infrastructure. On the second issue, Carrington, Detragiache and Vishwanath, develop a model which incorporates a positive externality associated with earlier people moving from nearby villages and the probability of a rural citizen migrating. Because this increases the social network of a migrating individual it may increase the probability that he decides to move. This is anecdotally evidence in the UK through the clustering of nationals in certain parts of the country: in order to improve their social network and chance of acquiring employment. The third issue is a more interesting point, in that cities aren’t homogenous: different cities develop different industrial sectors, and over time some of these sectors will boom whilst others will decline. This may mean that unemployment rates between cities vary and not only does a potential migrant have to decide whether he ought to move from agriculture to industry, but has to chose to which city he ought to move based on distance (and other costs), and returns (seeing which city is the most prosperous). This adds an even greater complex nature to such a model, especially with the large distances associated with cities in developed countries, and the different opportunities within them (e.g. Cardiff and New York). However, some would counter-argue that even the poorest cities in the developed countries, are much better off than the richest areas in developing countries.

To summarise, we see that the Harris-Todaro model is very limited in its scope in both an international and internal setting due to its narrow-mindedness assumption on economic values, which don’t incorporate emotional, social and humanitarian costs/benefits. More fundamentally, it isn’t an appropriate model in an international setting due to the barriers to entry which are erected by the developed world. By not incorporating human capital into our model, we are missing any migrants which may well be allowed into the developed world as high skilled workers can sometimes (but not always, even highly skilled workers can be limited to entering a country) get past the developed countries’ quota barriers. Todaro and Smith suggest that education for the sake of education should be restricted as a policy in developing countries, as often the urban sector can only ration jobs through education as a signalling effect. Whilst this seems like a bizarre idea, given that this would mean only the rich – who are generally the ones able to afford education in developing countries – would be able to attain jobs, and not poor, but clever productive individuals; it contradicts the policy prescription in an international setting, which ought to be for developing countries to increase their education so that workers become skilled and can improve their chances of migrating to developed country.

The movement of migrants from developing countries to developed countries, shouldn’t necessarily be seen as detrimental to the plight of developing countries, as proponents of “brain drain” theory suggest. Remittances sent by migrants to their families at home amount to $328bn, this can help developing countries provide education, health and give them a vital source of foreign exchange for the purchase of capital which can help them get out of poverty and low income traps.

Empirically we would expect most migrants to be of working age (i.e. between 18-50) and we would expect a lot more males to migrate than females, as there job – unfortunately – tend to be better. Whilst this may be the case overall, there is still substantial evidence that women, children and the elderly migrate, more than the economic model would suggest.

Furthermore, the fact that a significant proportion of migrants are not economic, but asylum seekers on humanitarian grounds would suggest that the Harris-Todaro model isn’t particularly useful in explaining world migration patterns.

Migration restrictions are imposed both in an international sense and sometimes internally – for example, see China, where nationals have to get permits (hukou) to reside in urban areas. The effect of this is to keep workers in rural areas to prevent a large source of unemployed workers in urban areas. The main reason for this is to prevent the social issues associated with overcrowding and the development of slums in urban areas. If deployed successfully – whilst being normatively unfair and ethically wrong – this could be quite successful at solving the issues associated with a swelling of urban populations and would maintain an equitable distribution of labour in rural areas. However this can be achieved, perhaps more effectively, and certainly more humanely, by increasing the benefits to staying in rural areas. For example by increase agricultural non-farm jobs. On the other hand wage subsidies are ineffective. A wage subsidy would increase the rural-urban expected wage differential (by either initially reducing unemployment, or through a higher urban wage) and thus encourage even more workers to migrate from farms to the city – in hope for a better life – creating even greater unemployment and would thereby fail in attempting to achieve an equitable labour distribution across sectors.

Reducing inequality in land holdings would only promote efficiency in allocation of workers between sectors if it increased the wages in rural areas. This may be unlikely if there are increasing returns to scale, but under the assumption of constant returns to scale it may be possible if we assume that tenants are more likely to invest in their own land (and hence increase returns and rural wages) than if they were working on somebody else’s land.

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