Basic elements of Harris-Todaro model
The Harris-Todaro model of rural-urban migration is usually studied in the context of employment and unemployment in developing countries. In the model, the purpose is to explain the serious urban unemployment problem in developing countries.
The applicability of this model depends on the development stage and economic success in the developing country.
The distinctive concept in the model is that the rate of migration flow is determined by the difference between expected urban wages and rural wages. The model is applicable to less successful developing countries or to countries at the earlier stages of development.
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The policy implications are different from those of the LRF model. One implication in the model is that job creation in the urban sector worsens the situation because more rural migration would thus be induced. In this context, China’s policy of rural development and rural industrialisation to deal with urban unemployment provides an example.
The only limitation of this model is that it assumes the potential migrants as risk neutral, as in they are indifferent between a certain expected rural income and an uncertain expected urban income of the same magnitude.
The reflection of this assumption of economic realities is questionable; poor migrants will likely be risk averse and require a significantly greater expected urban income in order to migrate.
However, the Harris-Todaro model can be adjusted to reflect the 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.
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Recent research in the Harris-Todaro (HT) tradition has added an important new element to the model by incorporating an urban land market. Brueckner and Zenou argue that a model where migration equalizes expected wages between city and countryside may overlook another important force that equilibrates the process of rural-urban migration.
This force is the migration-induced rise in the urban cost of living, which occurs principally through escalation of urban land rents as the city population expands. Land-rent escalation, which tends to limit rural-urban migration, provides an important additional force that may help determine city sizes in developing countries.
The present paper provides a simpler alternative to BZ’s analysis by assuming that urban residents smooth their income as the cycle between formal and informal employment. This allows migration decisions to be based on the expected wage, as in the usual HT framework, in a model that includes a land mark.