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  • Title: Rural-urban migration, informal sector and development policies: a theoretical analysis.
    Author: Gupta MR.
    Journal: J Dev Econ; 1993 Jun; 41(1):137-51. PubMed ID: 12344755.
    Abstract:
    "A theoretical model of rural-urban migration has been developed with special reference to the informal sector. The wage rate and employment in the informal sector are determined endogenously. The paper shows the simultaneous existence of open unemployment and informal sector in the urban area in migration equilibrium. The effects of alternative subsidy policies on unemployment and welfare of the workers are studied." The model is intended primarily for use in analyzing trends and policies in developing countries. A Harris-Todaro type of dual economy model, with the urban sector consisting of a formal and an informal subsector, has been refined to include open urban unemployment, even in migration equilibrium, despite the existence of the informal sector, in order to study the effects of alternative development policies of the informal sector on the open unemployment in the urban sector. In addition, the effects of different policies on the welfare of Indian society are examined using the welfare measure suggested by Sen. The model uses four income groups. The production function of the urban formal sector is set equal to the level of employment, the amount of intermediate input, and the capital stock. Further specifications are made for cost, equilibrium conditions, and input demand functions. Wages are considered a policy variable. Informal sector demand function of the product is set equal to two positive constants and price subsidies. The formula is further specified by the wage rate and the total labor cost, capital borrowed at a rate of interest, and additional loans at a higher interest rate. The rural sector uses labor for production, and an assumption is made about the marginal productivity pricing of labor. The marketable surplus is determined, with the selling price of food as the policy variable. Price subsidy policy for the informal sector reduces unemployment as product prices rise and wages decline. Capital subsidy to the informal sector exacerbates unemployment as product prices decline and wages rise. Wage subsidy policy relating to the urban formal sector reduces the level of open unemployment as informal wages decline; but price or wage subsidy policy related to the rural sector aggravates open unemployment as product prices and wages rise. Additional wage subsidies to the rural sector create an equilibrium which includes higher informal sector prices, wages, and unemployment. The impact on the welfare of workers shows that price subsidies to the informal sector improves the welfare of society. The model is suitable for a closed economy such as India's where food imports are minimal.
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