CHAPTER THREE

Rural-Urban Interaction, Migration, and

Unemployment
Contents.
• The economic models of Rural- Urban migration
• migration and urbanization dilemma,
• urban informal sector and urban unemployment,
• policy interventions for employment and
migration.
The Role of Cities and Urban Giantism
• What explains the strong association between
urbanization and development?
• To a large degree, cities are formed because they
provide cost advantages to producers and
consumers through what are called
agglomeration economies.
• As noted by Walter Isard, these agglomeration
economies come in two forms.
Cont..
• Urbanization economies are effects associated
with the general growth of a concentrated
geographic region.
• The economies arises from the general
advantages of being in a large area, regardless of
the industries involved.
• Localization economies are effects captured by
particular sectors of the economy, such as finance
or automobiles, as they grow within an area.
Cont.…
• Localization economies arises from clusters of the
similar firms.
• Business in similar fields can share resources, labor
and knowledge.
• An economic definition of a city is “an area with
relatively high population density that contains a set of
closely related activities.”
• Firms often also prefer to be located where they can
learn from other firms doing similar work.
Cont.
The causes of Urban Giantism ( expansion):
• Import substitution industrialization:
• less trade, incentive to concentrate in a single city
largely to avoid transportation costs
• “Bread and circuses” to prevent unrest (evidence:
stable democracies vs unstable dictatorships).
• Governments, especially in unstable political
environments, often concentrate resources, subsidies,
and entertainment in the largest city to prevent social
unrest.
Cont.
• Evidence suggests that stable democracies have more
balanced urban development, while unstable
dictatorships tend to centralize power in one city.
• Hub and spoke transportation system (rather than web)
make transport costs high for small cities.
• Compounding effect of locating the national capital in
the largest city.
• Because the city is center of economic, political
centers, this further reinforces to urban giantism
because the investment and services is concentrated in
the city.
 Cont..
• In general, urban Giantism problems are:
• There may be general urban bias.
• Cities are capital intensive so may expect large cities
commonly located in developed countries.
• But urbanization in developing countries has taken
place at unexpectedly rapid pace.
• Huge informal sectors in shantytowns, favelas.
• Large fraction of workers outside formal sector.
• Much urban growth is in mid-size cities, but urban bias
remains a serious issue in many developing countries
 Urban informal sector and urban unemployment
• One of the major focuses of development theory has been on
the dualistic nature of developing countries' national economies
• the existence of a modern urban capitalist sector geared toward
capital-intensive, large-scale production
• and traditional rural subsistence sector geared toward labor-
intensive, small-scale production.
• The existence of an unorganized, unregulated, and mostly legal
but unregistered informal sector was-recognized in the early
1970s, following observations in several developing countries
that massive additions to the urban labor force failed to show up
in formal modern sector employment statistics.
 Cont..
• Studies reveal that the share of the urban labor force
engaged in informal-sector activities is growing and
now ranges from 30% to 70%, the average being around
50%.
• With the unprecedented rate of growth of the urban
population in developing countries expected to continue
and with the increasing failure of the rural and urban
formal sectors to absorb additions to the labor force,
more attention is being devoted to the role of the
informal sector in serving as a panacea for the growing
unemployment problem.
Cont..
• The informal sector is characterized by a large number
of small-scale production and service activities that are
individually or family owned and uses labour intensive
and simple technology.
• The usually self-employed workers in this sector have
little formal education, are generally unskilled, and
lack access to financial capital.
• As a result, worker productivity and income tend to be
lower in the informal sector than in the formal sector.
• The formal sector in developing countries has a small
base in terms of output and employment.
 Cont..
• Thus the burden on the informal sector to absorb more labour
will continue to grow unless other solutions to the urban
unemployment problem are provided.
• evidences indicate that the informal sector generates surplus
even under the currently hostile policy environment.
• Thus the informal sector's surplus could provide an impetus to
growth in the urban economy. Disadvantage of informal;
• Promoting income and employment opportunities in the
informal sector could aggravate the urban unemployment
problem by attracting more labour than either the informal or
the formal sector could absorb.
 Cont.
• Furthermore, there is concern over the environmental
consequences of a highly concentrated informal sector in
the urban areas.
• Many informal-sector activities cause pollution and
congestion and inconvenience to pedestrians.
• Moreover, increased densities in slums and low- income
neighbourhoods, coupled with poor urban services, could
cause enormous problems for urban areas.
• Any policy measures designed to promote the informal
sector must be able to cope with these various problems.
 Economic model of Rural- Urban Migration
• For the most part, with a rural sector dominate by
agricultural activities and an urban sector focusing on
industrialization overall economic development in these
countries was characterized by the gradual reallocation of
labor out of agriculture and in to industry through rural-
urban migration, both internal and international.
• A model of rural – urban migration to explain the
apparently paradoxical relationship of accelerated rural –
urban migration in the context of rising urban
unemployment has been developed.
• Todaro migration model and in its equilibrium form as
the Harris – Todaro model.
 The Harris-Todaro model of Migration
• A Verbal Description of the Todaro Model
• Todaro model postulates that migration proceeds in
response to urban rural differences in expected income
rather than actual earnings.
• The fundamental premise is that migrants consider the
various labor market opportunities available to them in the
rural and urban sectors and choose the one that maximizes
their expected gains from migration.
• Expected gains are measured by the difference in real
incomes between rural and urban work and the probability
of a new migrant's obtaining an urban job.
 Cont..
• Starting from the assumption that migration is primarily
an economic phenomenon, which for the individual
migrant can be a quite rational decision despite the
existence of urban unemployment.
• The Todaro model postulates that migration proceeds in
response to urban rural differences in expected income
rather than actual earnings.
• Expected gains are measured by the difference in real
incomes between rural and urban work and the
probability of a new migrant's obtaining an urban job.
 Cont..
• In essence, the theory assumes that members of the
labor force compare their expected incomes for a given
time horizon in the urban sector (the difference between
returns and costs of migration) with prevailing average
rural incomes and migrate if the former exceeds the
latter.
• It is important to recognize, however, that these
migration models were developed largely in the context
of advanced industrial economies and hence implicitly
assume the existence of full or near full employment.
Cont..
• In a full-employment environment, the decision to
migrate can be based solely on the desire to secure the
highest-paid job wherever it becomes available.
• Unfortunately, such an analysis is not realistic in the
context of the institutional and economic framework of
most developing nations.
• First, these countries are beset by a chronic
unemployment problem that a typical migrant cannot
expect to secure a high - paying urban job
immediately.
 Cont.
• Consequently, in deciding to migrate, the individual must balance
the probabilities and risks of being unemployed or
underemployed for a considerable period of time against the
positive urban rural real income differential.
• Thus if the actual probability of his being successful in securing
the higher-paying urban job is 20%, and therefore his expected
urban income for the one-year period is in fact 20 units and not
the 100 units that an urban worker in a full- employment
environment would expect to receive.
• So with a one-period time horizon and a probability of success of
20%, it would be irrational for this migrant to seek an urban job,
even though the differential between urban and rural earnings
capacity is 100%.
Cont..
• However, if the probability of success were 60% and
the expected urban income therefore 60 units, it would
be entirely rational for our migrant with his one period
time horizon to try his luck in the urban area, even
though urban unemployment may be extremely high.
• If we now approach the situation by assuming a
considerably longer time horizon-a more realistic
assumption, the decision to migrate should be
represented on the basis of a longer-term, more
permanent income calculation.
Cont..
• If the migrant anticipates a relatively low
probability of finding regular wage employment
in the initial period but expects this probability to
increase over time as he is able to broaden his
urban contacts, it would still be rational for him
to migrate, even though expected urban income
during the initial period or periods might be
lower than expected rural income.
Cont..
Cont.…
• Assume only sectors: Rural agriculture and urban
manufacturing.
• AA’ demand for labor in agricultural sectors
• MM’ labor demand in manufacturing sector
• OAOM Total labor force
• In neoclassical , flexible wage, full employment
market equilibrium wage is WA* = WM*
• OALA* workers in agriculture and
• OMLM* workers in manufacturing employed
• All are employed and efficient equilibrium.
Cont..
• But what if urban wage is not flexible or institutionally
determined?
• WM (wage in manuf) greater than WA (wage in agri)
• They assume also urban formal wage are fixed and
above agricultural wage.
• This is because due to efficiency wage, bargaining
power and labor market regulation.
• If we assume no unemployment OMLM workers at
wage WM would get urban jobs and OALM workers
in rural job at wage OAWA*
 Cont..
• Therefore, there is wage gap of WM-WA* with WM
institutionally fixed.
• If rural workers freely migrate to urban to take their chance
in the urban job despite the availability job is only OMLA
• Then the chance of securing jobs in urban is the ratio of
employment in manufacturing ( LM) to total urban pool (
LUS) i.e. group of workers who are available to fill job
within a particular urban area.
• Then the expression shows the probability urban job success
necessary to equate agricultural income (WA) with expected
income (LM/LUS) (WM).
 Cont..
• If agricultural wage is less than expected they decide to
migrate.
• The locus of such points becomes at qq*
• The new unemployment equilibrium occurs at point Z
• The urban rural wage gap is WM-WA
• OALA are employed still in agricultural sectors
• OMLM are in modern sectors
• OMLA-OMLM unemployed or are in the informal
sectors
Cont..
• This shows the existence of urban unemployment.
• A simple numerical example illustration of the basic
Harris-Todaro model
• Rural wage=$1.5 per day
• Urban modern wage= $3 per day
• Suppose there is 0.5 probability of getting a modern
job Will there be migration?
• Calculate expected urban income and compare to rural
income 0.5*0.3 = 1.5 dollar ( indifferent decision)
• If probability is 0.7 it becomes 0.7*3 = 2.1 and > 1.5
 Cont..
• 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.
Cont..
• 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.
Comprehensive strategies for employment and
migration
We now conclude with the shape of a comprehensive
migration and employment strategy.
This would appear to have six key elements:
1. Creating an appropriate rural-urban economic
balance.
A more appropriate balance between rural and urban
economic opportunities appears to be in dispensable to
ameliorating both urban and rural unemployment
problems and to slowing the pace of rural-urban
migration.
Cont..
• 2. Expansion of small-scale, labour-intensive industries.
• This is expansion of these mostly small-scale and
labour-intensive industries in both urban and rural areas
can be accomplished in two ways:
• directly, through government investment and incentives,
particularly for activities in the urban informal sector,
• and indirectly through income redistribution to the rural
poor, whose structure of consumer demand is both less
import intensive and more labour -intensive than that of
the rich.