Question

Here, the basic (Harris-Todaro) model, also shown in the class slides, is shown:  

M = β(W_U^e – W_R), where

M = migration from the rural to the urban sector

W_U^e= the expected urban wage = pW_U, where W_U is the actual urban wage,

p is the probability of finding an urban job, i.e., the employment rate measured as E/(E+U),

where E = employed and U = unemployed.

W* = the subsistence wage in the rural sector that exists in the present of surplus labor.  

W_R = the actual rural wage, which = w* in the presents of surplus labor.

β = a coefficient that represents the responsiveness of migration to rural-urban wage disparities, e.g. if the hukou (household registration) system is

      rigorously enforced, then β is small).

Now use the migration model to explain the following (a diagram is optional):

1. The known agricultural wage is 10. With robust productivity growth, the industrial wage rises to 20.   Rural workers anticipate that if they migrate, the fixed probability of finding a job is 75%.  How is the new equilibrium achieved?

2. Now suppose that the economy is initially in equilibrium. The Chinese government raises the minimum wage in the urban-industrial sector by 20%. However, the number of jobs in the urban industrial sector is fixed.  How is the new equilibrium achieved?

Answer 1