Question

Consider the simple Harris-Todaro framework. What does it predict about how rural development policies will change rural wage, the size of the labor force and the informal sector in cities? Draw a graph and explain in two or three sentences.

Answer 1

Considering Harris Todaro model, the main reason for urban unemployment is the excess migration of labor from rural to urban areas as there is a lack of rural development and wages are at subsistence levels. When excessive labor migrates to the urban sector with low skills remain unemployed and part of the informal sector in cities. If rural development policies are created which are effective in raising rural wages and migration to the urban sector is reduced that would reduce unemployment in the informal urban sector as people would return to the rural sector.