Harris-Todaro Model

(1969, 1970)
Background
 Introduction
• While the problem of underemployment in the agrarian and subsistence
sectors has for long been a major focus in the economic analysis of LDCs, the
subject of urban unemployment has been relatively neglected.

• The issue of urban unemployment is important because conventional

remedies often surprised govt.s by accentuating rather than curing the
problem.

• For exmple, in 1964 the Kenyan Govt., in an effort to reduce urban

unemployment, particularly in Nairobi and its outskirts, entered into a pact
with capitalist and trade unions which, among other things, call on both public
and private sectors to increase their employment by 15%.

• However, the effect turned out to be quite the reverse of what was expected.
The possibility of new jobs caused migration from rural regions to Nairobi in
such numbers that the end result was higher urban unemployment.

• Similarly, it has been observed in many other places, an attempt to remove

urban unemployment directly, by creating more jobs, has had the opposite
effect.
 H-T model
Todaro (1969) and Harris-Todaro (1970) provides an
interesting analysis of migration and unemployment in LDCs.

Assumptions:
• Number of total workers in the economy is L with LR and LM
are employed in rural and modern sectors i.e. L = LR + LM

• The urban wage is fixed at w and the rural marginal product

of labour is fixed at wR, where wR <w.

• Number of urban jobs available (LM) is exogenously fixed.

• Thus, if there are more workers than LM in the urban sector,

some would have to be unemployed whereas in rural sector
workers can find work.
• Total urban labour force: L-LR
• Urban unemployed: (L-LR) – LM

• Most important assumption of the H-T model is that workers base their
migration decision on their expected incomes.

• The expected rural income is wR (finding a job in the rural sector is

ensured)

• The expected urban income is determined by multiplying w by the

probability of finding a job there, which the model assumes to be equal to
the rate of urban employment, LM/(L-LR)

• Hence, as long as w[LM/(L-LR)] > wR, there will be rural-urban migration.

• At equilibrium (no migration), w[LM/(L-LR)] = wR

• Rewriting the equilibrium condition we get,
LR = L – (w/wR) LM

i.e.,
Diagrammatic Representation:
• The demand for labour (the marginal product of labour curve)
in agriculture is given by the negatively sloped line AA.

• Labour demand in manufacturing is given by MM′ (reading

from right to left).

• The total labour force is given by line OAOM.

• In a neoclassical, flexible-wage, full-employment market

economy, the equilibrium wage would be established at W*A
W*M , with OAL*A workers in agriculture and OML*M workers
employed in urban manufacturing.

• All available workers are therefore employed.

• There are many ways to extend the model.

• First, H-T equation simplifies by assuming that those who migrate and do not get a
modern job receive no income; but if they instead receive urban informal-sector
income, we modify expected income accordingly.

• Second, note that if instead of assuming that all urban migrants are the same, we
incorporate the reality of different levels of human capital (education), we can
understand why a higher proportion of the rural educated migrate than the
uneducated—because they have a better chance (a higher probability) of earning
even higher urban wages than unskilled migrants.

• Third, we often observe that migrants from the same rural region tend to settle in
common cities, even the same neighbourhoods of cities, that are relatively distant
from the migrants’ place of origin. In a model proposed by William Carrington,
Enrica Detragiache, and Tara Vishwanath, earlier migrants create a positive
externality for later potential migrants from their home region by lowering their
costs of moving by helping with resettlement and lowering their probability of
unemployment by providing them with jobs or information about available jobs.
Thus, the search for employment, selection into the migration decision, and
forward-looking behaviour may all be incorporated into an equilibrium migration
model.
 Summary
To sum up, the Todaro migration model has four basic characteristics:

• Migration is stimulated primarily by rational economic considerations of

relative benefits and costs—mostly financial but also psychological.

• The decision to migrate depends on expected rather than actual urban-rural

real-wage differentials, where the expected differential is determined by the
interaction of two variables, the actual urban-rural wage differential and the
probability of successfully obtaining employment in the urban sector.

• The probability of obtaining an urban job is directly related to the urban

employment rate and thus inversely related to the urban unemployment rate.

• Migration rates in excess of urban job opportunity growth rates are not only
possible but also rational and even likely in the face of wide urban-rural
expected income differentials. High rates of urban unemployment are
therefore inevitable outcomes of the serious imbalance of economic
opportunities between urban and rural areas in most underdeveloped
countries.