Promotion of the informal sector is not, however,

without its disadvantages.

One of the major disadvantages in promoting the informal sector lies in

the strong relationship between rural-urban migration and labor
absorption in the informal sector.

Migrants from the rural sector have both a lower unemployment rate and
a shorter waiting period before obtaining a job in the informal sector.
Promoting income and employment opportunities in the informal sector
could therefore aggravate the urban unemployment problem by
attracting more labor,

than either the desirable parts of the informal or the formal sector could
absorb.

Furthermore, there is concern over the environmental consequences of a

highly concentrated informal sector in the urban areas.

ex. pollution and congestion inconvenience to pedestrians, increased

densities in slums.
 Any policy measures designed to promote the informal sector must be
able to cope with these various problems.

There has been little discussion in the literature as to what sorts of

measures might be adopted to promote the informal sector.

The International Labor Organization has made some general suggestions.

 To begin with, governments will have to abandon their hostility

toward the informal sector and adopt a more positive and sympathetic
posture.
Because access to skills plays an important role in determining the
structure of the informal sector,

governments should facilitate training in the areas that are most

beneficial to the urban economy.

In this way, the government can play a role in shaping the informal
sector so that it contains production and service activities that provide the
most value to society.

Such measures might promote legal activities and discourage illegal

ones by providing proper skills and other incentives.

It could also generate taxes that now go unpaid.

•The lack of capital is a major constraint on activities in the informal
sector.

The provision of credit would therefore permit these enterprises to

expand, produce more profit, and hence generate more income and
employment.

Access to improved technology would have similar effects.

Providing infrastructure and suitable locations for work could help

alleviate some of the environmental and congestion consequences of an
expanded informal sector.
Finally, better living conditions must be provided,

if not directly then by promoting growth of the sector

on the fringes of urban areas or in smaller towns,

where the population will settle close to its new area of work, away from
the urban density.

Promotion of the informal sector outside the urban areas may also help,

redirect the flow of rural-urban migration.

Women in the Informal Sector

•In some regions of the world, women predominate among rural-urban

migrants,
and may even comprise the majority of the urban population,

except for the export enclaves of East Asia and a few other cities, where
everything from computers to running shoes are manufactured.

Consequently, women often

• represent the bulk of the informal-sector labor supply,
• working for low wages at unstable jobs
• with no employee or social security benefits.

Dropout rates among children from households headed by women are

much higher,
because the children are more likely to be working to contribute to
household income.

Many women run small business ventures or microenterprises that

require little or no start-up capital,

and often involve in the marketing of home-made foodstuffs and

handicrafts.
Though women’s restricted access to capital leads to high rates of return
on their tiny investments,

the extremely low capital-labor ratios confine women to low-productivity

undertakings.

And because women are able to make more productive use of capital and
start from a lower investment base,

their rates of return on investments surpass those for men.

The legalization and economic promotion of informal-sector activities,
where most of the urban female labor force is employed,

could greatly improve women’s financial flexibility and the productivity

of their ventures.

•However, to enable women to reap these benefits,

governments must repeal laws

that restrict women’s rights to own property, conduct
financial transactions or limit their fertility.
Likewise,
barriers to women’s direct involvement in technical training programs
and extension services must be eradicated.

Finally,
the provision of affordable childcare and family-planning services would
lighten the burden of women’s reproductive roles,

and permit them a greater degree of economic participation.

***Migration and Development

As noted earlier, rural-urban migration has been dramatic,

and urban-development plays an important role in economic development.

However,
rates of rural-urban migration in developing countries

have exceeded rates of urban job creation, and thus,

surpassed greatly the absorption capacity of both industry

and urban social services.
Migration worsens rural-urban structural imbalances in two direct
ways.

First, on the supply side,

internal migration disproportionately increases the growth rate of urban
job seekers relative to urban population growth,

which itself is at historically unprecedented levels because of the high

proportion of well-educated young people in the migrant system.

Their presence tends to swell the urban labor supply while depleting
human capital of rural countryside.
Second, on the demand side,
urban job creation is generally more difficult and costly to accomplish
than rural job creation,

because of the need for substantial complementary resource inputs for

most jobs in the industrial sector.

Migration patterns are complex.

The most important type of migration from the standpoint of long-run

development is rural-urban migration,

but a great deal of rural-rural, urban-urban, and even

urban-rural migration also takes place.
We need to understand better,

not only why people move and what factors are most important in their decision-
making process,

but also, what the consequences of migration are for rural and urban economic and
social development.

In addition to wage differentials, age, and education, migration

is also explained partly by:

relocation upon remarrying;

prior emigration of family members;

distance and costs of relocation;

occurrence of famine, disease, violence, and other disasters;
and

relative standing in the original community, those lower on

the social order are more likely to migrate.

Migration can also be a form of portfolio diversification,

for families who seek to settle some members,

in areas where they may not be affected by economic

shocks in the same way as if they had stayed at home
Toward an Economic Theory of Rural-Urban Migration: Lewis’ Model
of Rural-Urban Migration

 In the Lewis model, migration is the result of concerted effort on the

part of the state,
to transfer surplus rural labor to the industrial sector by developing the
latter for capital formation.
Harris-Todaro Model Of Rural-Urban Migration:

A Verbal Description of the Todaro Model


One theory to explain the apparently paradoxical relationship of,
accelerated rural-urban migration in the context of rising urban
unemployment has come to be known as,

the Todaro migration model, and

in its equilibrium form as the Harris-Todaro model.


A theory that explains rural-urban migration
as an economically rational process,
despite high urban unemployment.
Migrants calculate (present value of) urban expected income (or its
equivalent),
and move if this exceeds average rural income.

Prof. J.R. Harris and P. M. Todaro, in an article

“Migration, Unemployment and Development: A Two-Sector Analysis” in
1970,
presented a model on rural-urban migration in underdeveloped
countries.
The main idea of the Harris-Todaro model is that,
labor migration in underdeveloped countries is

due to rural-urban differences,

in average expected wages rather than actual wages.

The migrants consider the various opportunities of employment

available to them in rural and urban sectors,

and choose the one that maximizes their expected wages from migration.

The minimum urban wage is substantially higher than the rural wage.
If more employment opportunities are created in the urban sector at the minimum
wage,
the expected will rise, and rural-urban migration will increase.

Expected wages are measured by,

the difference in real urban income and rural agricultural
income,
and the probability of a migrant’s getting an urban job.

In fact, a migrant compares,

expected income for a given time horizon in the urban sector
with prevailing average rural income
and migrates if the former is more than the latter.
Thus, migration in the Harris-Todaro model is viewed as the wage or
income gap between the urban and the rural sectors.

But all migrants cannot be absorbed in the urban sector at high wages.

Many fail to find a job and get employment in the informal urban sector
at wages which are even lower than in the rural sector.

Thus, they join the queue of the underemployed or disguised

unemployed in the urban sector.
***Assumptions of the Model:

The Harris-Todaro model is based on the following assumptions:

1. There are two sectors in the economy –

the rural or agricultural sector (A)
and the urban or manufacturing sector (M).

2. The model operates in the short run.

3. The marginal production of labor in agriculture (MPLA) and of industry

(MPLM),
are determined by their respective technologies.
4. Capital is available in fixed quantities in the two
sectors.

5. There are L workers in economy with

LA numbers employed in the rural sector, and
LM numbers employed in the urban sector.

6. The number of urban jobs available (LM) is exogenously

fixed.

In the rural sector some work is always available.

Therefore, the total urban labor force LM comprises L - LA along with an

available supply of rural migrants.
7. The urban wage is fixed at WM and
the rural wage at WA,

WM > WA.

8. The rural wage equals the rural marginal product of labor,

and the urban wage is exogenously determined.

9. Rural-urban migration continues,

so long as the expected urban real income is more

than the real agricultural income.
The Model:

The Harris-Todaro model is explained in Fig. 4.

with,
total labor force in the two sectors is measured along
the horizontal axis.

Employment
in the agricultural sector (A) to the left starting from OA
and in the industrial sector (M) to the right starting from OM.
Vertical axis from OA upwards measures,
the MP and wages of labor in agriculture (MPLA and WA).

The right vertical axis measures

the MP and wages of labor in industry (MPLM and WM).

AA1 is the MP of labor curve in agriculture.

It slopes downwards to the right as employment in agriculture (LA)
increases.

Similarly, MM1 is the MP of labor curve in industry which slopes

downward to the left as LM increases.
WM is the wage level at which OMLM workers are employed in the urban
sector.

The remaining OALA workers are employed in the rural sector at OAWA
wage level.

So, the rural-urban wage gap is WM – WA,

with WM wage fixed.

This wage gap attracts rural workers to the urban sector

even in the face of urban unemployment and under-employment.

The rural jobseekers are willing to take their chance in the “urban job
lottery” to find their favored jobs.
 If the probability (chances) of getting the favored jobs is the
ratio of employment in manufacturing, LM, to the total
urban labor pool Lu, then the expression

WA = (LM/LU) W

shows the agricultural wage at which the potential migrant equates the urban
expected wage
and is indifferent about job location.

The locus of such points of indifference is given by the I1I1 curve.

The unemployment equilibrium point is given by point Z.

The equilibrium agricultural wage is WA

The new urban-rural wage gap is WM - WA.
OALAworkers are working in the agricultural sector
instead of OALM before migration.

OMLM workers in the manufacturing urban sector are still employed at

the institutionally fixed wage WM.

But Lu= OALA – OMLM migrants to the urban sector are engaged in low-
wage jobs in the informal sector,

getting even less than OAWA wage rate which they would have received in
the rural sector.
Conclusion:

The main drawback of this model is that,

it does not incorporate the costs of rural-urban migration or the
relatively higher costs of urban living,
which the migrants must incur in the urban sector.

To sum up, the Todaro migration model has four basic characteristics:
1. Migration is stimulated primarily by rational economic
considerations of relative benefits and costs,
mostly financial but also psychological.
2. 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.

3. The probability of obtaining an urban job is

directly related to the urban employment rate and,
thus, inversely related to the urban unemployment rate.
4. 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.
Five Policy Implications

• The Todaro theory does have important policy implications for

development strategy regarding
wages and incomes,
rural development,
and industrialization.

First, imbalances in urban-rural employment opportunities caused by

the urban bias,
particularly first-city bias of development strategies must be reduced.
 Second, urban job creation is an insufficient solution for the urban
unemployment problem.

The traditional (Keynesian) economic solution to urban unemployment

(the creation of more urban modern-sector jobs without simultaneous
attempts to improve rural incomes and employment opportunities),

can result in the paradoxical situation where more urban employment

leads to higher levels of urban unemployment.

i.e., the process in which the creation of urban jobs raises expected
incomes and induces more people to migrate from rural areas (called
induced migration.)
Third, indiscriminate educational expansion will lead to further
migration and unemployment.

The Todaro model also has important policy implications for curtailing
public investment in higher education.

The basic Todaro model therefore provides an economic explanation for the
observed fact in most developing countries,

that rural inhabitants with more education are more likely to migrate
than those with less.
Fourth, wage subsidies and traditional scarcity factor pricing can be
counterproductive.

Although such policies can generate more labor-intensive modes of

production,
they can also lead to higher levels of unemployment in accordance with
our argument about induced migration.

Finally, programs of integrated rural development should be encouraged.

Policies that operate only on the demand side of the
urban employment picture, such as

wage subsidies,
direct government hiring,
elimination of factor price distortions,
and employer tax incentives,

are probably far less effective in the long run in alleviating the unemployment
problem than policies designed directly to regulate the supply of labor to urban
areas.

Clearly, however, some combination of both kinds of policies is most

desirable.
 Summary and Conclusions:
A Comprehensive Migration and Employment Strategy

We conclude with a summary of what appears to be the consensus of

most economists on the shape of a comprehensive migration and
employment strategy.

This would appear to have seven key elements:

1. Creating an appropriate rural-urban economic balance
to ameliorating both urban and rural unemployment problems
and to slowing the pace of rural-urban migration
2. Expansion of small-scale, labor-intensive industries.

3. Eliminating factor price distortions

There is ample evidence to demonstrate that correcting factor price

distortions

— primarily by eliminating various capital subsidies and,

curtailing the growth of urban wages through
market-based pricing—

would increase employment opportunities and make better use of scarce

capital resources
5. Modifying the linkage between education and employment

6. Reducing population growth

7. Decentralizing authority to cities and neighborhoods.

Choosing appropriate labor-intensive technologies of

production