Urbanization and RuralUrban Migration: Theory and Policy

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Urbanization and Rural-Urban Migration Theory
and Policy

• Chapter 7

• Facts
• Benefits Costs of Urbanization
• Theory of Rural-Urban Migration
• Policy Implications

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As predicted by the 2-sector model of growth
(why?), the developing countries are where most
urbanization is occurring
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Benefits Costs of Urbanization

• Agglomeration economies
• Urbanization Localization economies
• Spillovers, learning, information costs
• Transport cost
• Input output markets
• Efficient urban scale density
• Efficiency of infrastructure investment
• Butopen access leads to congestion
• Urban giantism problem if slums are so bad, why
  are people living in them?
• First city bias political factors, rent seeking
• Access to private and public goods services

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Importance of the informal sector
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Choosing where to live rural vs urban poverty
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Despite high urban unemployment rates, people
continue to migratecan we explain this as
rational behavior? (recall 2-sector model assumed
no unemployment)
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Economic Theory of Migration(not only
rural-urban)

• Migration as a rational economic choice
• Migrants base decisions on expected income gains
  less migration costs
• Reduced costs of social services etc in urban
  areas add benefits to rural-urban
• Increased costs of pollution, crime, etc add to
  costs of migration

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Analyzing the Migration Decision Benefits and
Costs
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Economic Theory of Migration

• Migration as a rational economic choice
• Example two period model, move in period 1 at
  cost M1, earn U2 in period 2 with probability P.
• NPVM - M1 (1/1r) PU2
• If the person stays in the rural area, earnings
  are
• NPVN R1 (1/1r)R2
• So migration is chosen if NPVM NPVN gt 0, or if
• - M1 - R1 (1/1r) (PU2 R2) gt 0
• Or (1/1r) (PU2 R2) gt R1 M1
• (expected future net income gain) gt (lost rural
  income moving cost)

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• (1/1r) (PU2 R2) gt R1 M1
• (expected future net income gain) gt (lost rural
  income moving cost)
• Implications
• rational to migrate even if employment not
  guaranteed (expected future gains)
• factors reducing costs of moving, increasing
  probability of employment encourage migration
  (e.g., social networks)
• better access to public services, lower risk of
  food insecurity in urban area increases benefits
  of migration

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The Harris-Todaro Model of Rural-Urban
Migration(expected urban income proportional to
likelihood of urban employment)
Where WA is agricultural income, LM is
employment in manufacturing LUS is total urban
labor pool WM is the urban minimum wage
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The Harris-Todaro Migration Model
Migration indifference curve (equal expected
incomes in A M)
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• Implications
• Migration depends on benefits and costs
• Migration depends on expected, not actual, net
  benefits
• Probability of an urban job is related to the
  urban unemployment rate
• Migration rates will tend to exceed urban job
  growth, and this is a consequence of rational
  decision making by migrants. High rates of urban
  unemployment are expected.

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• Does the Todaro model make sense?
• Why is M-wage higher than A-wage?
• Alternative explanation is labor market
  segmented by skills
• low-skilled workers migrate into informal
  sector, attracted by urban services, lower risk
  of malnutrition and famine, etc.
• higher-skilled workers migrate into formal
  sector
• Are workers in informal sector unemployed or
  under-employed?

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Policy Implications

• Create incentives to balance rural urban
  incomes
• Invest in rural infrastructure
• Roads, communications
• Improve markets for ag to raise rural incomes
• Expand labor intensive industries in rural areas
  (appropriate technology)
• Improve public services in rural areas (health,
  education)