Harris-Todaro Model


Harris-Todaro Model

The Harris-Todaro Model is an economic model used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main result of the model is that the migration decision is based on expected income differentials between rural and urban areas, not wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.

Overview

Essentially, the model asserts that an equilibrium will be reached when the expected wage in urban areas, adjusted for the unemployment rate, is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. Also, it is assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income.

Formalism

The formal statement of the equilibrium condition of the Harris-Todaro model is as follows:
*Let wr be the wage rate (marginal productivity of labor) in the rural agricultural sector.
*Let le be the total number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
*Let lus be the total number of job seekers, employed and unemployed, in the urban sector.
*Let wu be the wage rate in the urban sector, which could possibly be set by government with a minimum wage law.

At equilibrium, : w_r = frac{l_e}{l_{us w_u

In other words, the expected agricultural wage rate equals the expected urban wage rate, which is the urban wage multiplied by the number of available urban jobs over the total number of urban employment seekers.

Rural to urban migration will take place if:: w_r < frac{l_e}{l_{us w_u

Conversely, urban to rural migration will occur if:: w_r > frac{l_e}{l_{us w_u

Conclusions

Therefore, migration from rural areas to urban areas will increase if:
*Urban wages (wu) increase, increasing the expected urban income.
*Urban unemployment (lus) decreases, increasing the expected urban income.
*Urban job creation increases the number of available jobs in the urban sector (le), increasing the expected urban income.
*Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.

Rural to urban migration causes overcrowding and unemployment in cities as migration rates exceed urban job creation rates, with many people ending up in unproductive or underproductive employment in the informal sector. However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris-Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.

Limitations

One limitation of this model is that it assumes potential migrants are risk neutral, as in they are indifferent between a certain expected rural income and an uncertain expected urban income of the same magnitude. This assumption's reflection of economic realities is questionable; poor migrants will likely be risk averse and require a significantly greater expected urban income to migrate. However, the Harris-Todaro model can be adjusted to reflect risk aversion through alteration of the expected urban income calculation. When the model assumes risk aversion instead of risk neutrality, the results are virtually identical.

References

Harris J. and M. Todaro (1970). "Migration, Unemployment & Development: A Two-Sector Analysis". American Economic Review, March 1970; 60(1):126-42.


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