The impact of risk and mobility in dualistic models: Migration under random shocks

Abstract

In this paper we present and confront the expected outcome of an increase in risk on the regional or sectoral allocation of labor force and employment. The basic frameworks are the benchmark dualistic scenarios. A single-input analysis of a homogeneous product economy is provided. Uncertainty is modeled as localized Bernoulli random experiments, additively affecting either labor demand or labor productivity, unilaterally, or in a perfectly (positive and negative) correlated fashion in both regions providing a stage from which conclusions on the expected consequences of random shocks (or of changes in workers’ heterogeneity) to the economy can be drawn. A (deterministic) differentiated natural appeal of —an intrinsic imbalance between, a compensating income differential required by affiliates of one sector— the two regions is allowed to interact with equilibrium formation.We report the main effects on equilibrium local expected wages, supply, employment and aggregate welfare surplus of a unilateral as well as a simultaneous increase of labor demand dispersion in the (a) basic two-sector model in four different scenarios: free market; partial (one-sector) coverage with perfect inter-sector mobility; partial (one-sector) coverage with imperfect mobility (Harris-Todaro); multiple (two-sector) coverage with imperfect mobility (Bhagwati-Hamada).Importance of convexity of local labor demands was invariably recognized. A localized increase in risk does not always repel the labor force in the long-run. This statement would hold even if individuals were not risk-neutral, as assumed in the research.