Specific and mobile capital, migration and unemployment in a Harris-Todaro model

Abstract

Specific- and mobile-capital versions of the Harris-Todaro model are compared in a simple algebraic formulation. The former focuses on wage elasticity of demand in the minimum-wage ( M ) sector ( m M ), whereas the latter also considers elasticities of substitution ( σ s). By relating m M and σ M , similarities between the conclusions of the two models can be clearly obse M rved and M many of them can be restated as exogenous conditions on the substitution elasticities. A single σ , for which econometric estimates are readily available, can drive some key results. Elasticity of substitution in the non-minimum-wage sector, which is rarely discussed in the literature because of its emphasis on the minimum-wage sector, plays an important part. Among the new results, in the mobile-capital formulation, 'large' values of this elasticity ( σ A , for which precise, quantifiable expressions are derived) are sufficient to cause outmigration from the M -sector when the minimum wage is increased, irrespective of σ M and m M . Numerical examples from a computable general equilibrium model for Mexico illustrate, and in some cases flesh out, some analytical propositions for both versions of the HT model in a small open economy.