HARRIS TODARO MODEL OF URBAN UNEMPLOYMENT

Harris Todaro Model Of Urban Unemployment-Free PDF

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1 INTRODUCTION,2 1 General Assumptions,2 2 Variables and Parameters. 2 3 Basic equations, 2 4 The expected urban wage and the unemployment pool. 3 SIMULATION AND INTERPRETATION OF THE RESULTS, 3 1 Policy 1 Subsidizing employment in manufacturing. 3 2 Policy 2 Subsidizing agricultural employment,3 3 First best policy. 4 SUBSIDY FINANCING PROBLEM,5 CONCLUSION,6 REFERENCES.
1 INTRODUCTION, Since the wage in cities is higher than one in village people migrate into the cities hoping. to get urban job The probability to get a job depends on the size of unemployment pool in. relation to the number employed in industries Therefore in many mostly less developed. countries urban unemployment is a big issue W Max Corden in his book Trade Policy and. Economic Welfare claims that the possible reason for urban unemployment is the wage. differential This coexists with usually high minimum wage in industries and with a marginal. product of labor in agriculture less than the urban minimum wage1. The model presented is derived from Migration Unemployment and Development A. Two Sector Analysis original article by John R Harris and Michael P Todaro 1970 2 and W M. Corden s book mentioned above In our approach we will assume as Harris and Todaro did that. the expected urban wage is equal to the average wage of both urban employed and. unemployed Authors main claim is that the best policy to improve employment is to protect. agricultural sector rather that manufacturing sector of the country In this paper we will build a. Harris Todaro model of urban unemployment discuss two cases 1 subsidizing manufacturing. and 2 subsidizing agriculture and test Harris and Todaro s claim For that purpose we will run. simulations for both cases in MS Excel and try to analyze outcomes and suggest possible. policies The approach of the project will be comparative static. 2 1 GENERAL ASSUMPTIONS, Two sectors urban manufacture and rural agriculture. Rural urban migration condition when urban real wage exceeds real agricultural product. No migration cost,Perfect competition,Cobb Douglas production function. Static approach,Low risk aversion,2 2 VARIABLES AND PARAMETERS. Exogenous variables,total labor force workers,minimum wage rate in manufacturing dollars.
Endogenous variables,urban labor in manufacturing workers. unemployed labor force workers,rural labor force in agriculture workers. wage rate in agriculture dollars,expected wage rate in manufacturing dollars. Parameters,Parameters Definition Value,M elasticity of urban labor demand 1. A elasticity of rural labor demand 1 0 1 5000, share of employed in manufacturing in urban labor force 0 5.
share of unemployed in total urban force 0 5,share of unemployed in total labor force 0 25. share of employed in manufacturing in total labor force 0 25. share of employed in agriculture in total labor force 0 5. 2 3 BASIC EQUATIONS,1 Expected wage in manufacturing sector. 2 Wage in agricultural sector,3 Labor force in manufacturing sector. 4 Total labor force in the country,5 Equilibrium condition. Note in our simulations in Excel we will use the differential form of these five equations. 2 4 THE EXPECTED URBAN WAGE AND THE UNEMPLOYMENT POOL. In Figure 1 there are two sectors agriculture and manufacturing Each sector has a. specific factor agriculture land manufacturing capital and labor which is mobile between. these two sectors In this model we assume that prices of agricultural and manufacturing goods. are constant, The horizontal axis shows total labor force The marginal product curves are LL for agriculture.
and MM for manufacturing O W is the fixed minimum wage in manufacturing and. corresponding employment is given at NO According to Harris and Todaro s approach in. equilibrium the expected urban wage must be equal to the agriculture wage We draw a. rectangular hyperbola through J and let it intersect LL at R This gives agricultural wage OV and. rural employment OG The remained part GN will be an unemployment pool Manufacturing. wage bill NJWO rectangular area is spread over the whole urban labor force and we get the. expected urban wage GR which is the average of the minimum wage O W received by the. employed and the zero wage received by the unemployed Since two shaded areas are equal. the expected urban wage is equal to the rural wage. 3 SIMULATIONS AND INTERPRETATION OF THE RESULTS, 3 1 POLICY 1 SUBSIDIZING EMPLOYMENT IN MANUFACTURING. When we subsidize manufacturing as it can be seen from Figure 2 by QJ per man we. expand manufacturing output by N N The shaded area N QJN is the value of extra output in. manufacturing Then we draw a new rectangular hyperbola R J and get the new equilibrium. allocation Labor in agriculture declines by G G and the output also declines by the area of the. shaded area G R RG So we need to compare the two shaded areas in order to measure effect. on total output This depends on the size of the unemployment pool The flatter the slope of LL. and steeper the slope of MM the bigger number of the unemployment people and lower real. Can we restore full employment subsidizing manufacturing Yes More and more workers. will leave agriculture increasing marginal product in agriculture till it reaches the fixed minimum. wage in industry Here both wages are equalized so there will be no unemployment In Figure. 2 agricultural output declines by OG Because marginal product of labor in manufacturing will. be below that in agriculture this would not be first best solution and not even second best. solution However a very low wage subsidy may maximize real output. If the marginal product of labor in agriculture stayed unchanged horizontal line LL when. labor leaves agriculture a wage subsidy lowers real output as it is demonstrated in Figure 3. By the properties of rectangular hyperbolae the two shaded areas increases output in. industry and decreased output in agriculture must be equal However there is the output fall. in manufacture QJ J which caused by the wage subsidy. We put this model in Excel and did computer simulations of two policies subsidizing. manufacturing and subsidizing agriculture Also we had three cases in each policy inelastic. unity elasticity and elastic urban labor demand,Results of simulation. Case 1 Unity elasticity of labor demand,Lbar WM SM. LA equals 1 0 5,Case 2 Inelastic labor demand,Lbar WM SM. LU 3 636363636 1 8 181818182,LA equals 0 181818182 0 0 909090909.
WA 1 818181818 0 9 090909091,EWM 1 818181818 0 9 090909091. Case 3 Elastic labor demand,Lbar WM SM,LU 0 00079984 1 9 9960008. LA equals 1 99960008 0 9 9980004,WA 0 00039992 0 0 0019996. EWM 0 00039992 0 0 0019996,Economic explanation, An increase in the population causes an increase in the level of unemployment for all. three cases The largest effect is observed for the inelastic case and the smallest effect occurs. for the elastic case When population increases wage decreases because more people are. willing to work If labor demand is elastic the sector demands more workers and is able to hire. the available ones If labor demand is inelastic production is already set and not as many. workers are necessary So more people are out of jobs and employment increases by a large. An increase in the population has no effect on the labor employed in manufacturing. because the demand for labor in manufacturing is unit elastic. An increase in the population causes an increase in the level of employed in agriculture. which is larger for more elastic demands in agriculture The elastic sector is more sensitive to. wages which fall as labor supply increases and can absorb more of the workers. An increase in the population causes a fall in the wage in the agricultural sector which is. larger for inelastic conditions This comes from equation 2 for a given change in La wage must. fall by a larger amount to balance the equation that has a smaller elasticity In equilibrium. expected manufacturing wage must be equal to the agricultural wage. An increase in the urban minimum wage impacts only the urban sector decreasing labor. and increasing unemployment proportionately There are no changes in the agricultural sector. because we move along the manufacturing labor demand curve there is no shift. An 10 subsidy of wage in manufacturing decreases unemployment for the inelastic. case but increases it for the elastic case This is the Todaro Paradox This peculiar result occurs. because the rural to urban migration induced by the subsidy outweighs the number of jobs. A 10 subsidy of wage in manufacturing causes a proportional increase in the number. of laborers in manufacturing This comes from the equation for urban labor which depends. directly on the wage and the subsidy This increase is the same for all of our cases because the. manufacturing sector is unit elastic, A 10 subsidy of wage in manufacturing causes a decrease in the number of laborers in.
agriculture The decrease is larger for the elastic case than for the inelastic case If the. agricultural sector is inelastic there is a smaller difference between the rectangular hyperbolas. due to the steep slope of the labor demand in agriculture Hence the effect is smaller. A 10 subsidy of wage in manufacturing causes a rise in the wage in the agricultural. sector which is larger for inelastic conditions This comes from equation 2 for a given decrease. in La wage must rise by a larger amount to balance the equation that has a smaller elasticity In. equilibrium expected manufacturing wage must be equal to the agricultural wage. 3 2 POLICY 2 SUBSIDIZING AGRICULTURAL EMPLOYMENT, Subsidizing agriculture rather than manufacturing would reduce the wage differential. which will employ some of the urban unemployed reducing thus unemployment pool In Figure. 4 TJ is the wage subsidy in agriculture per man Employment in manufacturing stays unchanged. at NO but employment in agriculture rises from OG to ON absorbing all the unemployed. The shaded area GRTN is the extra agricultural output and pure gain Thus the author. claims that agriculture rather than manufacturing must be subsidized Even though there is a. gain this policy is still not the first best because if there is no unemployment it will lead to. excessive movement of labor into agriculture compared to the first best solution. Results of simulation,Case 1 Unity elasticity of labor demand. Lbar WM SA,LA equals 1 0 5,Case 2 Inelastic labor demand. Lbar WM SA,LU 3 636363636 1 1 818181818,LA equals 0 181818182 0 0 909090909. WA 1 818181818 0 0 909090909,EWM 1 818181818 0 0 909090909.
Case 1 Elastic labor demand,Lbar WM SA,LU 0 00079984 1 19 9960008. LA equals 1 99960008 0 9 9980004,WA 0 00039992 0 9 9980004. EWM 0 00039992 0 9 9980004,Economic explanation, The results of changes in Lbar and WM are the same as before our simulation shows that none. of the numbers change, An 10 subsidy on the wage in agriculture decreases the unemployment level in every. case though the effect is more pronounced for the elastic case than the inelastic case If the. demand for labor in agriculture is elastic the sector can absorb more workers In the case of an. agricultural subsidy there is no Todaro Paradox regardless of elasticity. A 10 subsidy on the wage in agriculture has no effect on the labor in manufacturing. because the demand for labor in manufacturing is unit elastic. A 10 subsidy on the wage in agriculture increases the labor in agriculture and the. effect is more pronounced for an elastic labor demand than for an inelastic one because the. elastic sector can absorb more workers, A 10 subsidy on the wage in agriculture increases the wage in the agriculture sector as.
a positive beneficial effect of the subsidy In equilibrium expected manufacturing wage must. be equal to the agricultural wage,3 3 FIRST BEST POLICY. According to the first best solution labor should be allocated such that. a marginal products in agriculture and manufacturing must be equal. b no unemployment, This solution is represented by the point Z in Figure 5. As Harris and Todaro stated the first best solution is to subsidize manufacturing at the. rate ZZ per man and restrict migration out of agriculture Or subsidize both sectors equally by. ZZ per man To finance this subsidy we need to find some sectors that are taxable either. directly or indirectly through trade policy so that it will not affect supplies of the taxed factors. as a result,4 SUBSIDY FINANCING PROBLEM,So who pays taxes. The author implies that a subsidy to labor in manufacturing cannot be financed by a tax on. labor in agriculture because this tax will increase the wage differential assuming that potential. migrants compare their after tax wage with expected urban wage and move to cities This will. lead to unemployment increase, If the subsidy is financed by taxing labor in manufacturing the after tax real wage in. manufacturing will fall With tax illusion the real disposable wage falls which will lead to. decrease of wage differential and as a result decreases unemployment This might solve. problem of unemployment However in absence of tax illusion taxing manufacturing will lead. to a rise of pre tax wage which will reduce employment Therefore it will worsen the situation. at the labor market, It implies that in absence of tax illusion a wage subsidy must be financed by taxes on.
Harris Todaro model of urban unemployment discuss two cases 1 subsidizing manufacturing and 2 subsidizing agriculture and test Harris and Todaro s claim For that purpose we will run simulations for both cases in MS Excel and try to analyze outcomes and suggest possible policies The approach of the project will be comparative static

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