CHAPTER 10.

3 RURAL-URBAN MIGRATION
The purpose is to discuss patterns of rural-urban migration.
The classic theory about this issue is based on Harris and Todaro work.
Main idea: the Formal Urban sector pays a high wage to workers and obviously it attracts workers from
other sectors migration.
Why does it pay a higher wage? It may be unionized, subject to collective bargaining over wages; it can be
treated as the showcase of government policy, so that minimum wage laws, pension schemes,
unemployment benefits and other facilities (they could not raise the wage directly as well, but they
increase workers utility) may be required by law; finally, it may well be the case that firms in the formal
urban sector pay deliberately higher wages so they can hire workers of the best quality (and if they reveal
being bad, they can be fired).
In contrast, the Informal Urban sector and the Agricultural sector have low wages that fluctuate according
to the supply and demand curves. No unionization and government policy here. Little incentive for
employers to pay deliberately higher wages as incentive or potential threat as well.
Migration is the response to that significant wage gap, but obviously not everyone can be absorbed
into the formal sector migration decision is a sort of gamble: leaving behind a sure wage for the
uncertainty. Who fails can be added to the Unemployed also in a disguised form that is the
Informal sector.
Lets analyze the model:

Assumption: only 2 sectors in the economy a rural sector (denoted with A) and a formal urban
one (denoted with F).
Assumption: wages in both sectors are fully flexible.

Horizontal axis: the width represents the entire labor force of the economy and it is divided
between the Agricultural sector ( ) and the Formal Urban sector ( ).
Vertical axes: they represent wages paid. The left one relative to the Formal sector, the right one
relative to the Agricultural one.
The curves are to be intended as demand curves for labor, so they are downward sloping (more
workers hired only at lower wages).
CD captures the absorption of labor in Agriculture whereas AB in the Formal Urban sector.

To alleviate persistent migration between the 2 sectors, the wages must be equalized and it occurs
at the intersection of the curves AB and CD (see green arrow) that is related to the wage rate
with individuals in the Agricultural sector and individuals in the Formal Urban sector.
What is wrong in that argument? The problem is that it assumes that the urban wage rate is perfectly
flexible. So lets imagine that the wage rate in the formal sector is fixed in a point higher than market
equilibrium
(higher than the intersection of the two curves) see graph 10.5 and formal wage .
Obviously formal firms are going to hire less people than before and we call now this amount

The remainder are employed in the agricultural sector, so because of the increase in the amount of hired
workers the wage drops to

and only

workers can work in agricultural sector.

This cannot be an equilibrium state for the economy because obviously workers will wish to
migrate to the sector with the higher wage (the formal one) but not every worker can be absorbed
by the two sectors (if absorbed by agriculture the wage would drop even more) we must have a
pool of unemployed people (U) that we consider located in the Urban sector.

Now we have a situation in which workers face a significant risk in migrating because they choose between
a relatively safe option (staying in the agricultural sector) and the gambling of moving to the Urban sector
that has higher-paying formal jobs but also the danger of being unemployed instead.
We are speaking about a probabilistic outcome and the probability of getting a formal job is denoted by p
that we compute as the ratio

(the higher the number of formal jobs relative to the total number of

potential job seekers, the higher the chances of getting a formal (so good) job).
Conversely, the probability of getting a bad job is

and it represents the probability (1-p).

N.B. The probabilities p and 1-p are endogenous because they depend on the shares of
created a dynamic feedback.

and

so it is

Lets consider the options open to a potential migrant (because now its a rational and probabilistic choice):
p is the probability to find a Formal job
and so to earn a higher wage that we
denoted as .
1-p is the probability to be caught in the
Informal Urban sector and earn the
informal and lower wage .
Once we understand that, it is easy to
include more possibilities, in fact it is
reasonable to suppose that not everyone
is guaranteed to receive even the lower
income in the informal sector,
because there may be some individuals
openly unemployed and this is indicated
by wage equal to zero.
In this case 1-p includes both q that is
the probability of getting an informal job
and (1-q) that is the probability of
remaining unemployed.
The point is that it is a probabilistic choice, so we have to compare the agricultural wage with the Expected
Urban wage (because it is a gamble, a probabilistic event).
Expected wage is p* + (1-p)*
If we consider also unemployment:
expected wage is p* + (1-p)*

p* + (1-p)*

We compute the expected value in order to understand why people migrate from Agriculture to the Urban
sector. Only when the agricultural wage is equal to the expected value of the urban wage theres
equilibrium and consequently NO migration.

Now we can put everything together and work toward the equilibrium concept introduced by Harris and
Todaro:
* +

this is the Harris-Todaro equilibrium condition

We must consider the expected income from migration and compare it with the actual income received in
agriculture in equilibrium NO person wishes to migrate from one sector to the other.
Some remarks:
1) The equilibrium condition an ex ante situation where people are indifferent between migrating and
not migrating BUT ex post they will not be indifferent (the lucky that get a formal job will be
pleased, the unlucky that are in the informal sector will regret their choice).
2) The equilibrium concept implies a particular allocation of labor between the three sectors of the
economy. It is the allocation of labor that affects the perceived probabilities of getting a job (see
dynamic feedback concept: N.B. The probabilities p and 1-p are endogenous because they depend
on the shares of
and so it is created a dynamic feedback).
3) The equilibrium concept doesnt require that we have only two subsectors of the urban sector or
one in agriculture: It is sufficient that the fundamental requirement is respected (expected wages
are equalized)
4) The Harris-Todaro equilibrium has a problem: we know that is too high and is too low, we
are not able to fix a point, we have a range instead (because we use probability and not
determinism).
Government policy: to the government official the informal sector is a problem because unregulated
economic activities are responsible for congestion, pollution, etc
A way of dealing with the problem is the implementation of a policy that promote the rate of absorption of
labor in the Formal sector (generating additional demand for formal labor by offering for ex. incentives to
formal firms such as tax holidays or even by the government itself hiring people in the public sector
enterprises).
At the end of the process formally well have:

Check what happens:

increases and as a consequence decreases (in the short run)

Remember that our probabilities are endogenous (the size of the urban sector is endogenous)
p=

increases (there is more possibility of getting a formal job because the number of such

jobs has increased)

So in the short run this policy decreases the size of the Informal sector what the officiers
wanted!
In the long run: people in Agriculture are attracted by this higher probability of getting a formal job,
so they migrate to the Urban less people in Agriculture means that Agricultural wage must
increase and how much it depends from elasticity of demand (from

to

) obviously well

have more people in the Urban sector so

increases because both
and have increased
as a consequence, after this new fresh migration p decreases (so less probability of getting a
formal job).
Question: at the end of the process whats the magnitude of the change?
In order to have an equilibrium also the left part of the equation has to be higher than before
(remember that Agricultural wage has increased from

) so

Thats why it is called Todaro Paradox the policy is able to reduce the relative size of the
Informal sector (measured as a fraction of the Total urban sector) BUT the absolute number of
people in the Informal sector is higher than before (because policy induced more migration, the
size of the labor force went up that is

to

).

There are 2 forces at work:

1) Migration Effect: migration will rise in response to the policy
2) Soak-up Effect: it is the ability of the firms to absorb more and more workers.
An actual good policy must be able to decrease both relative and absolute size of the Informal
sector and so that Soak-up effect > Migration effect.
The paradox rises because in the long run Soak-up effect < Migration effect.
It is a sort of dynamic feedback.
It is impossible to eradicate completely the Informal sector (ex. lets consider current issues about
migration in Europe) it is an observation that we see repeated in one developing country after
another: attempts to increase the demand for formal labor may enlarge the size of the informal
sector, as migrants respond to the better job conditions that are available; this is the migration
effect dominating the initial soak-up effect.