STEADY-STATE GROWTH OF AN ECONOMY WITH INTERSECTORAL MIGRATION 1

Abstract

DEVELOPMENT literature is replete with special explanations of 'pathological' manifestations accompanying the process of development and of urbanization. Thus Lewis (1954), and after him Fei and Ranis (1961), developed the 'disguised rural unemployment' theory to explain the ruralurban wage gap, while Harris and Todaro (1970) blamed artificially high urban wages for the presence of urban unemployment. Our purpose is to show that 'pathological phenomena' of growing economies such as ruralurban wage differentials may be explained simply in terms of a standard neo-classical two-sector model. If we assume, in line with numerous empirical investigations, that the natural growth rate of the rural population tends to be faster than that of the urban population, and also that people tend to migrate in response to economic incentives, then it can be shown that even at steady state the urban wage exceeds the rural wage. If we build union power into our model we can show why urban services become overcrowded with marginally employed individuals. Our model can readily be used to show how the Lewis-type rural organization impedes industrialization. The Harris-Todaro-type creation of an artificially high urban wage sector has a similar effect. Paradoxically, the neo-classical model indicates that an effort to raise the wages of a single group of workers results in the long run in a reduction in the over-all wage level, including the wages of the workers whose welfare was to have been increased. Selective union action results in a wage differential, not in a wage increase. The neo-classical model can also be modified to take into account the fixed factor proportions case. All the main conclusions still hold. This gives us confidence that the results are robust and that our findings have a broader relevance.