Harris-Todaro model
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1-Suppose the rural wage is $1 per day. Urban modern sector employment can be obtained with .25 probability and pays $3 per day. The urban traditional sector pays 40 cents per day.
-Will be any rural â?"urban or urban â?"rural as things stand? Explain your reasoning, stating explicitly any simplifying assumptions, and show all work.
-What would be the urban traditional sector daily income have to be to induce no net rural â?" urban migration? If wages in all sectors are inflexible, what else adjusts in this model to lead the equilibrium ( be specific â?" how much does it adjust and what is the intuition).?
2.Suppose that potential rural-urban migrant would work for two periods ( of some length) in either the rural or the urban area. In this first period, she has 15% chance of getting a modern job, which pays $4 per day. In the second period, her chance of getting this job rises to 50%, if she has been there in the first period (learning about the job market)
However , the present value of $1 received in second period is just $.50, i.e the discount factor is .5 .
The urban informal wage is 0. The rural wage is $1 per day. Will she migrate( in the first period)? Show how you arrived at your answer.
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Solution Summary
Harris-Todaro model is carefully applied.
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Urban migration
1-Suppose the rural wage is $1 per day. Urban modern sector employment can be obtained with .25 probability and pays $3 per day. The urban traditional sector pays 40 cents per day.
-Will be any rural-urban or urban-rural as things stand? Explain your reasoning, stating explicitly any simplifying assumptions, and show all work.
Answer:
According to Harris-Todaro model, there will be migration between rural and urban as long as the rural wage (Wr) is different from the expected urban wage (E(Wu)).
Here, we have, Wr= $1.00
Now calculate the expected urban wages
E(Wu) = p*Wum+(1-p)*Wut
Where p=probability of finding an urban modern sector employment = 0.25
Wum = Wages for urban modern sector employment = $3.00
Wut = Wages for urban traditional sector employment = $0.40
Hence, E(Wu) = 0.25*$3.00+0.75*$0.40=$1.05
Since E(Wu) > Wr, there will be migration from rural areas ...
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