Migration, Trade Unions, and the Informal Sector: A Note on Calvo

Abstract

tends to be very sticky, a feature which renders some of the standard policies for reducing urban unemployment (or underemployment) totally ineffective. In particular, it is observed that in the Calvo model, a first-best optimum cannot be obtained without the imposition of some migration barriers. In this note, we attempt to generalize the Calvo model by incorporating the following new features. First, we distinguish between the two components of the urban sector the modern formal part and the traditional informal part. Secondly, the individuals are assumed to migrate from the rural to the urban sector in response to a differential in expected utility rather than in expectedincome, thereby highlighting the role of risk-aversion in individual migration decisions. Finally, following the new literature on trade union behavior,2 the present model posits a utilitarian objective function for the trade union, a formulation which is considered an improvement over the one put forward by Calvo. An important conclusion of the present exercise, which sharply contrasts Calvo's conclusion, is that the government, by setting its policies correctly, can achieve a first-best optimum for the economy. This difference in result is due obviously to the differences in specification, in particular, of the objective function of the trade union.