Harris-Todaro Model
Encyclopedia
The Harris–Todaro model, named after John R. Harris and Michael Todaro
, is an economic model used in development economics
and welfare economics
to explain some of the issues concerning rural-urban migration
. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
is reached when the expected wage in urban areas (actual wage adjusted for the unemployment
rate), is equal to the marginal product
of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive
. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector.
Rural to urban migration will take place if:
Conversely, urban to rural migration will occur if:
At equilibrium,
The with random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.
Rural to urban migration causes overcrowding and unemployment in cities as migration rates exceed urban job creation rates, with many people ending up in unproductive or underproductive employment in the informal sector. However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
, as in they are indifferent between a certain expected rural income and an uncertain expected urban income of the same magnitude. This assumption's reflection of economic realities is questionable; poor migrants will likely be risk averse and require a significantly greater expected urban income to migrate. However, the Harris–Todaro model can be adjusted to reflect risk aversion through alteration of the expected urban income calculation. When the model assumes risk aversion instead of risk neutrality, the results are virtually identical.
Michael Todaro
Michael P. Todaro is an American economist and a pioneer in the field of development economics.Michael P. Todaro was Professor of Economics at New York University for eighteen years and Senior Associate at the Population Council for thirty years. He lived and taught in Africa for six years. He...
, is an economic model used in development economics
Development economics
Development Economics is a branch of economics which deals with economic aspects of the development process in low-income countries. Its focus is not only on methods of promoting economic growth and structural change but also on improving the potential for the mass of the population, for example,...
and welfare economics
Welfare economics
Welfare economics is a branch of economics that uses microeconomic techniques to evaluate economic well-being, especially relative to competitive general equilibrium within an economy as to economic efficiency and the resulting income distribution associated with it...
to explain some of the issues concerning rural-urban migration
Human migration
Human migration is physical movement by humans from one area to another, sometimes over long distances or in large groups. Historically this movement was nomadic, often causing significant conflict with the indigenous population and their displacement or cultural assimilation. Only a few nomadic...
. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
Overview
In the model, an equilibriumEconomic equilibrium
In economics, economic equilibrium is a state of the world where economic forces are balanced and in the absence of external influences the values of economic variables will not change. It is the point at which quantity demanded and quantity supplied are equal...
is reached when the expected wage in urban areas (actual wage adjusted for the unemployment
Unemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...
rate), is equal to the marginal product
Marginal product
In economics and in particular neoclassical economics, the marginal product or marginal physical product of an input is the extra output that can be produced by using one more unit of the input , assuming that the quantities of no other inputs to production...
of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive
Perfect competition
In economic theory, perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets...
. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector.
Formalism
The formal statement of the equilibrium condition of the Harris–Todaro model is as follows:- Let wr be the wage rate (marginal productivity of labor) in the rural agricultural sector.
- Let le be the total number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
- Let lus be the total number of job seekers, employed and unemployed, in the urban sector.
- Let wu be the wage rate in the urban sector, which could possibly be set by government with a minimum wage law.
Rural to urban migration will take place if:
Conversely, urban to rural migration will occur if:
At equilibrium,
The with random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.
Conclusions
Therefore, migration from rural areas to urban areas will increase if:- Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
- Agricultural productivityAgricultural productivityAgricultural productivity is measured as the ratio of agricultural outputs to agricultural inputs. While individual products are usually measured by weight, their varying densities make measuring overall agricultural output difficult...
decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
Rural to urban migration causes overcrowding and unemployment in cities as migration rates exceed urban job creation rates, with many people ending up in unproductive or underproductive employment in the informal sector. However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
Limitations
One limitation of this model is that it assumes potential migrants are risk neutralRisk neutral
In economics and finance, risk neutral behavior is between risk aversion and risk seeking. If offered either €50 or a 50% chance of each of €100 and nothing, a risk neutral person would have no preference between the two options...
, as in they are indifferent between a certain expected rural income and an uncertain expected urban income of the same magnitude. This assumption's reflection of economic realities is questionable; poor migrants will likely be risk averse and require a significantly greater expected urban income to migrate. However, the Harris–Todaro model can be adjusted to reflect risk aversion through alteration of the expected urban income calculation. When the model assumes risk aversion instead of risk neutrality, the results are virtually identical.