Briefly discuss each of the following models and how they apply to the Nigerian Economy
- Lewis-Fei-Ranis Model of Economic Growth
- Haris-Todaro Model of Migration
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The Harris – Todaro Theory
This is a theory of rural-urban migration that is usually studied in the context of employment and unemployment in developing countries. The purpose of this model or theory is to explain the reason why there is seriously urban unemployment problem in developing countries. The model also is applicable only to less successful developing countries or to countries at their earlier stages of development. The difference in this model is that the rate of migration flow is mainly determined by the difference between expected urban wage which is no actual and rural wages. One disadvantages to this model is that job or work creation in urban sector worsens the situation in rural migration as many people will start moving to urban areas in terms of finding greener pastures.The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
Assumptions of Harris – Todaro model
1. The model is a study of migration of workers in two sectors economic system which are rural and urban sectors. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods while that of urban sector is specialized in manufactural goods. Both of these sectors can be described using Cobb-Douglas production function: Ya=AaNa
2. Temporary Equilibrium
3. Long Run Equilibrium
My view
Having studied Harris -Todaro model and knowing it as the theory of rural-urban migration of employment and unemployment of developing countries, it is necessary that both sectors are developed at same time so as to prevent the creation of unemployment in other sector. Once both are simultaneously develop, it will reduces the rate of unemployment in both sectors and there will be a moderate or balance of economic growth of the nation
Conclusion
Therefore migration from rural areas to urban areas will increase if:
– Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
-Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision
Lewis-Fei-Ranis Model(surplus of labour)
The model is made up of three authors in whom Lewis is the chief proponent of the model. Lewis (1954) proposed a seminal theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. FeiRanis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial. In the Lewis theory, an economy transits from the first, labour-surplus stage to the second, labour-scarce stage of development. Later, Ranis and Fei (1961) formalized the Lewis theory and defined three phases of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labor-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model. These three phases, illustrated in Diagram below, are distinguished by the marginal productivity of agricultural labor. The entry into each phase is marked three turning points: The breakout point leads to phase one growth with redundant agricultural labor. The shortage point leads to phase two growth with disguised agricultural unemployment. The commercialization point leads to phase three of self-sustaining economic growth with the commercialization of the agricultural sector.
At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the HarrodDomar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Assumptions of the Lewis Model: Surplus Labour in the Subsistence Sectors
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural laborers, petty traders domestic servants and women.
(1) The assumption that disguised unemployment exists in the agriculture sector has not been accepted by many economists. Schultz, Viner, Heberler and Hopper are a few of such economists. According to them, the production in the subsistence sector will be affected when labour is withdrawn from it.
(2) Lewis ignored the cost involved in training the unskilled worker transferred from the subsistence sector. Even if it is obtained at a constant wage rate, so for as its transfer from the subsistence sector is concerned, the supply curve may slope upwards so far as the capitalist, sector is concerned if the cost of training rises as more and more labour is transferred.
(3) When labour is transferred from the subsistence sector share of agricultural output falling to each one left in the agricultural sector will go a rising. This means the institutional wage will go on rising with every transfer and so will be the wages paid in the capitalist sector.
(4) The model assumes that, besides labour, there is unlimited supply of entrepreneurs in the capitalist sector. This is not true in the case of many of the underdeveloped countries.
(5) It is wrong to assume that a capitalist will always re-invest their profits. They are to indulge in un-productive pursuits. They can use their profits for speculative purposes.
(6) It is also wrong to assume that landlords always squander away their savings. The role of landlords of Japan in industrialization of the country is well known.
(7) The model assumes that there already exists a market for the industrial products in the country. This is wrong. People of an underdeveloped country may not be able to purchase the products perturbed by the expanding capitalist sector. Foreign markets, too, may not be available to the capitalist sector in the beginning.
(8) Inflation is not liquidating, as has been assumed by Lewis, Experience of various, countries shows that if once prices start rising, it, becomes difficult to control them.
(9) It is not easy to transfer labour from the subsistence Sector to the capitalist sector by offering them an incentive of a little higher wage.
Mobility of labour is very low. Many factors like family affection, difference in language, caste, religion etc. affect it adversely.
(10) Every underdeveloped country does not have surplus labour in the subsistence sector. As such, the model does not apply to countries which are sparsely populated.
The only positive point in the model is its general emphasis on the role of saving in economic development and on the potential that overpopulated countries have in developing themselves with the help of surplus labour.
Ugwu Kingsley ugochukwu
2017/249585
INTRODUCTION
Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Basic of the model
Depiction of Phase1, Phase2 and Phase3 of the dual economy model using average output.
One of the biggest setbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development. In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
Using the figure above:
Phase 1: AL (from figure) = MP = 0 and AB (from figure) = AP
According to Fei and Ranis, AD amount of labor (see figure) can be shifted from the agricultural sector without any fall in output. Hence, it represents surplus labor.
Phase 2: AP MP
After AD, MP begins to rise, and industrial labor rises from zero to a value equal to AD. AP of agricultural labor is shown by BYZ and we see that this curve falls downward after AD. This fall in AP can be attributed to the fact that as agricultural laborers shift to the industrial sector, the real wage of industrial laborers decreases due to shortage of food supply, since less laborers are now working in the food sector. The decrease in the real wage level decreases the level of profits, and the size of surplus that could have been re-invested for more industrialization. However, as long as surplus exists, growth rate can still be increased without a fall in the rate of industrialization. This re-investment of surplus can be graphically visualized as the shifting of MP curve outwards. In Phase2 the level of disguised unemployment is given by AK. This allows the agricultural sector to give up a part of its labor-force until
MP = Real wages = AB = Constant institutional wages (CIW)
Phase 3 begins from the point of commercialization which is at K in the Figure. This is the point where the economy becomes completely commercialized in the absence of disguised unemployment. The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor.
Phase 3: MP CIW
The amount of labor that is shifted and the time that this shifting takes depends upon:
1. The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits
2. The nature of the industry’s technical progress and its associated bias
3. Growth rate of population.
So, the three fundamental ideas used in this model are:
1. Agricultural growth and industrial growth are both equally important
2. Agricultural growth and industrial growth are balanced;
3. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap.
However, this shifting of labor can take place by the landlords’ investment activities and by the government’s fiscal measures. However, the cost of shifting labor in terms of both private and social cost may be high, for example transportation cost or the cost of carrying out construction of buildings. In addition to that, per capita agricultural consumption can increase, or there can exist a wide gap between the wages of the urban and the rural people. These three occurrences- high cost, high consumption and high gap in wages, are called as leakages, and leakages prevent the creation of agricultural surplus. In fact, surplus generation might be prevented due to a backward-sloping supply curve of labor as well, which happens when high income-levels are not consumed. This would mean that the productivity of laborers with rise in income will not rise. However, the case of backward-sloping curves is mostly unpractical.
ASSUMPTIONS OF THE LEWIS MODEL
(A). Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural laborers, petty traders’ domestic servants and women.
The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wage. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
Lewis calls it as institutional wage because every worker gets this wage because of some institutional arrangements. This wages is equal to an average share of each worker in the total output in the subsistence sector. If market forces were allowed to operate in the subsistence sector labourers with zero margin productivity or those with a very low marginal productivity would not have received this wage.
(B). Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests its entire savings for its further expansion.
Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery and for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector.
Lewis in fact so much fascinated by the higher propensity to save of the capitalist sector that he even advocates a transfer of income from the subsistence sector to the capitalist sector. He feels that steps have to be taken to raise the rate of savings from 10% to 15% if the development of the economy has to be smooth.
CRITICISM OF THE MODEL
1. The assumption that disguised unemployment exists in the agriculture sector has not been accepted by many economists. Schultz, Viner, Heberler and Hopper are few of such economists. According to them, the production in the subsistence sector will be affected when labour is withdrawn from it.
2. Lewis ignored the cost involved in training the unskilled worker transferred from the subsistence sector. Even if it is obtained at a constant wage rate, so for as its transfer from the subsistence sector is concerned, the supply curve may slope upwards so far as the capitalist, sector is concerned if the cost of training rises as more and more labour is transferred.
3. When labour is transferred from the subsistence sector share of agricultural output falling to each one left in the agricultural sector will go a rising. This means the institutional wage will go on rising with every transfer and so will be the wages paid in the capitalist sector.
4. The model assumes that, besides labour, there is unlimited supply of entrepreneurs in the capitalist sector. This is not true in the case of many of the underdeveloped countries.
5. It is wrong to assume that a capitalist will always re-invest their profits. They too can indulge in un-productive pursuits. They can use their profits for speculative purposes.
6. It is also wrong to assume that landlords always squander away their savings. The role of landlords of Japan in industrialization of the country is well known.
7. The model assumes that there already exists a market for the industrial products in the country. This is wrong. People of an underdeveloped country may not be able to purchase the products perturbed by the expanding capitalist sector. Foreign markets, too, may not be available to the capitalist sector in the beginning.
8. Inflation is not liquidating, as has been assumed by Lewis, Experience of various, countries shows that if once prices start rising, it becomes difficult to control them.
9. It is not easy to transfer labour from the subsistence Sector to the capitalist sector by offering them an incentive of a little higher wage. Mobility of labour is very low. Many factors like family affection, difference in language, caste, religion etc. affect it adversely.
10. Every underdeveloped country does not have surplus labour in the subsistence sector. As such, the model does not apply to countries which are sparsely populated.
The only positive point in the model is its ‘general’ emphasis on the role of saving in economic development and on the potential that overpopulated countries have in developing themselves with the help of surplus labour.
CONCLUSION
This model divides the economy in an underdeveloped country in two sectors which are the Subsistence sector and the capitalist sector. Subsistence sector is identified with the agricultural sector of the economy while the capitalist sector implies mainly the manufacturing sector of the economy. Capitalist sector also includes plantations and mining where hired labour is employed for purposes of production. The capitalist sector can either be private or public in nature. Subsistence sector, that the agricultural sector is considered to be labour intensive. It does not use reproducible capital. It uses poor techniques of production and has very low productivity. Therefore, when the subsistence (rural area) sector produces, its sent it surplus to the capitalist sector (urban area) for further production. This can provide employment in both sectors when more workers are employed in the subsistence sector so as to produce more agricultural surplus which will also lead to increase in labour in the capitalist sector. In my opinion this can work in real life if there is a limited number of labour that migrate from the rural area to the urban area.
Name: Chukwudi Christopher
Reg Number: 2017/249489
Dept: Economics
LEWIS-FEI-RANIS MODEL
Prof. Lewis developed a very systematic theory of economic development with unlimited
supplies of labour. The theory focuses on structural transformation of a subsistence economy into a modern industrial economy. The theory was later modified by John Fei and Gustar Ranis in the 1950s. Lewis believes that in many undeveloped countries an unlimited supply of labour is available at a subsistence age. The Lewis two-sector model became the general theory of development process in surplus labour. Economic development takes place when capital accumulates as a result of withdrawal of surplus labour from the subsistence sector to the modern sector (capitalist sector). In the Lewis theory the underdeveloped economy consist of two sectors. i. A traditional – over populated rural subsistence sector characterized by zero marginal labour productivity (surplus labour) which can be withdrawn from agriculture without any loss of output. ii. A high productivity modern urban industrial sector into which labour from the subsistence sector is gradually transferred. The primary focus of the model is on both the process of labour transfer and modern sector employment growth brought about by output expansion on that factor.
• The speed at which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector
• Such investment is made possible by the excess of modern sector profits on the assumptions that capitalists invests all the profits.
• It is assumed that wages in the modern sector are higher than in the subsistence sector.
Depiction of Phase1, Phase2 and Phase3 of the dual economy model using average output.
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.[4] They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development[5] In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages. Using the help of the figure on the left, we see that
Phase 1: AL = MP
According to Fei and Ranis, AD amount of labor (see figure) can be shifted from the agricultural sector without any fall in output. Hence, it represents surplus labour
PHASE 2: AP > MP
After AD, MP begins to rise, and industrial labor rises from zero to a value equal to AD. AP of agricultural labor is shown by BYZ and we see that this curve falls downward after AD. This fall in AP can be attributed to the fact that as agricultural laborers shift to the industrial sector, the real wage of industrial laborers decreases due to shortage of food supply, since less laborers are now working in the food sector. The decrease in the real wage level decreases the level of profits, and the size of surplus that could have been re-invested for more industrialization. However, as long as surplus exists, growth rate can still be increased without a fall in the rate of industrialization. This re-investment of surplus can be graphically visualized as the shifting of MP curve outwards. In Phase2 the level of disguised unemployment is given by AK. This allows the agricultural sector to give up a part of its labor-force until
MP = REAL WAGE = MP = CONSTANT
Phase 3 begins from the point of commercialization which is at K in the Figure. This is the point where the economy becomes completely commercialized in the absence of disguised unemployment. The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor.
PHASE 3: MP = CIW
(I) The amount of labor that is shifted and the time that this shifting takes depends upon:The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits;
(III)The nature of the industry’s technical progress and its associated bias;
(III)Growth rate of population.
So, the three fundamental ideas used in this model are:
1) Agricultural growth and industrial growth are both equally important;
2) Agricultural growth and industrial growth are balanced;
3) Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap.
This shifting of labor can take place by the landlords’ investment activities and by the government’s fiscal measures. However, the cost of shifting labor in terms of both private and social cost may be high, for example transportation cost or the cost of carrying out construction of buildings. In addition to that, per capita agricultural consumption can increase, or there can exist a wide gap between the wages of the urban and the rural people. These three occurrences- high cost, high consumption and high gap in wages, are called as leakages, and leakages prevent the creation of agricultural surplus. In fact, surplus generation might be prevented due to a backward-sloping supply curve of labor as well, which happens when high income-levels are not consumed. This would mean that the productivity of laborers with rise in income will not rise. However, the case of backward-sloping curves is mostly unpractical.
THE AGRICULTURAL SECTOR
Fei and Ranis emphasized strongly on the industry-agriculture interdependency and said that a robust connectivity between the two would encourage and speedup development. If agricultural laborers look for industrial employment, and industrialists employ more workers by use of larger capital good stock and labor-intensive technology, this connectivity can work between the industrial and agricultural sector. Also, if the surplus owner invests in that section of industrial sector that is close to soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized. They took the example of Japan’s dualistic economy in the 19th century and said that connectivity between the two sectors of Japan was heightened due to the presence of a decentralized rural industry which was often linked to urban production. According to them, economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision-making powers and use industrial capital and consumer goods for agricultural practices.
In (A), land is measured on the vertical axis, and labor on the horizontal axis. Ou and Ov represent two ridge lines, and the production contour lines are depicted by M, M1 and M2. The area enclosed by the ridge lines defines the region of factor substitutability, or the region where factors can easily be substituted. Let us understand the repercussions of this. If the amount of labor is the total labor in the agricultural sector, the intersection of the ridge line Ov with the production curve M1 at point s renders M1 perfectly horizontal below Ov. The horizontal behavior of the production line implies that outside the region of factor substitutability, output stops and labor becomes redundant once land is fixed and labor is increased
INDUSTRIAL SECTOR
Like in the agricultural sector, Fei and Ranis assume constant returns to scale in the industrial sector. However, the main factors of production are capital and labor. In the graph (A) right hand side, the production functions have been plotted taking labor on the horizontal axis and capital on the vertical axis. The expansion path of the industrial sector is given by the line OAoA1A2. As capital increases from Ko to K1 to K2 and labor increases from Lo to L1 and L2, the industrial output represented by the production contour Ao, A1 and A3 increases accordingly.
According to this model, the prime labor supply source of the industrial sector is the agricultural sector, due to redundancy in the agricultural labor force. (B) shows the labor supply curve for the industrial sector S. PP2 represents the straight line part of the curve and is a measure of the redundant agricultural labor force on a graph with industrial labor force on the horizontal axis and output/real wage on the vertical axis. Due to the redundant agricultural labor force, the real wages remain constant but once the curve starts sloping upwards from point P2, the upward sloping indicates that additional labor would be supplied only with a corresponding rise in the real wages level.
MPPL curves corresponding to their respective capital and labor levels have been drawn as Mo, M1, M2 and M3. When capital stock rises from Ko to K1, the marginal physical productivity of labor rises from Mo to M1. When capital stock is Ko, the MPPL curve cuts the labor supply curve at equilibrium point Po. At this point, the total real wage income is Wo and is represented by the shaded area POLoPo. λ is the equilibrium profit and is represented by the shaded area qPPo. Since the laborers have extremely low income-levels, they barely save from that income and hence industrial profits (πo) become the prime source of investment funds in the industrial sector.
Here, Kt gives the total supply of investment funds (given that rural savings are represented by So)
Total industrial activity rises due to increase in the total supply of investment funds, leading to increased industrial employment.
CRITICISM OF THE MODEL
The assumptions of this model do not fit the institutional and economic realities of most contemporary developing countries. 1. The model assumes that the rate of labour transfer and employment creation is proportional to the rate of modern sector capital accumulation. The faster the rate of capital accumulation, the higher the growth rate of the modern sector and the faster the rate of new job creation. At times capitalists do not reinvest their profits proportionately – capital flights.
2. The assumption of surplus labour in the rural areas might not hold seasonal
3. It is not always given that there is the tendency of increased urban wage rates. Institutional factors such as trade unions, bargaining power, service wage scales and multi-national corporate tend to negate competitive forces in LDCs modern sector, labour markets.
4. The concerns of diminishing returns in the modern industrial sector
5. Fei and Ranis assume a close model and hence there is no presence of foreign trade in the economy, which is very unrealistic as food or raw materials can not be imported.
This theory concludes that for a country to developed there must be balance between the agricultural and industrial sector, that labour can be utilized to get the efficient amount of output in both sectors, The theory has been used and tested by several countries namely England and japan
The Harris-Todaro Model
This model of economic development was developed by J. R. Harris and M. P. Todaro which is relevant for labour surplus countries like India. It is the best known model of internal migration in the context of present-day developing countries. The model has focused on migration of labour from rural to urban areas induced by certain incentives. They have referred to two types of migration—induced migration and internal migration. In the Harris-Todaro model, the probability of obtaining an urban job is defined as the number of urban jobs divided by the urban labor force. Implicitly, this specification assumes that persons living in rural areas have no chance whatever of finding urban job.
Harris-Todaro Model is bounded by the following assumptions:
• Two sectors: urban (manufacture) and rural (agriculture)
• Rural-urban migration condition: when urban real wage exceeds real agricultural product• No migration cost: there is little to no cost on migrating from one sector to another.• Perfect competition in the two sectors: Both the agricultural and manufacturing sectors are perfectly competitive in nature.
• Cobb-Douglas production function
• Static approach• Low risk aversion: the Migrants are not risk averse. That is, they are risk takers.
Under the Harris-Todaro Model, the decision to migrate is made upon differences in expected income between rural and urban areas. On a fundamental level, expected income accounts for the wage differential between urban and rural areas. The existence of a higher wage in urban areas compared to rural areas is a relatively constant observation. Rural to urban migration, however, does not clear the wage differential between the two labor markets as designated by demand and supply fundamentals. The reason for this is the lack of full employment in urban areas. The probability of finding a job in an urban area (i.e. the inverse of the unemployment rate) is never 100%. In other words, the urban labor market never fully clears due to institutionally determined urban wages; there will always be unemployment. This provides a technical rational to the reason why there is rural to urban migration amidst unemployment.
Lewis-Fei-Ranis model recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries
.
LEWIS -FEI-RANIS THEORY(SURPLUS LABOUR THEORY)
Lewis (1954) proposed a seminal theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development.The central idea behind the Lewis model is fairly simple. Lewis divided labour force into two differentiated groups – “subsistence sector” and “capitalist sector” where the former is assumed to contain unlimited supply and consequently, a pool of surplus labour that sets labour-supply conditions for the latter.
Assumptions of the Lewis Model
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the laissez faire sector and in the subsistence sector. The laissez faire sector invests all its savings for its further expansion. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector.
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.Ranis and Fei (1961) formalised the Lewis theory and defined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model. These three phases, illustrated in Diagram 1below, are distinguished by the marginal productivity of agricultural labour. The entry into each phase is marked three turning points:
• The breakout point leads to phase one growth with redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural unemployment.
• The commercialisation point leads to phase three of self-sustaining economic growth with the commercialisation of the agricultural sector.One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development.
Under competitive assumptions, the real wage rate would fall to zero, but due to the presence of institutional or non-market forces, the institutional wage is sustained. Therefore, there are gains to be had by switching resources away to the industrial sector. Nevertheless, it is generally not likely to happen because the market, left on its own, does not change. If the industrial sector does pay according to marginal product, then, as noted by Ray (1998), there would efficiency gains available as long as the marginal product of the agricultural labour is Gless than the wage, whether it is zero or not. By decreasing the labour force in agriculture by a small amount (whilst still remaining in the surplus labour area), provided that the wage in agriculture does not rise. Since output does not fall, the reduction in the total wage bill gives an economy an agricultural surplus.
RELATING THE MODEL TO NIGERIA ECONOMY
Nigeria has both rural and urban sectors that provide for each forward and backward linkages and as such, the two sectors are not mutually exclusive in promoting the economic growth of the country and improving the standard of living of citizens. However, the Federal Government of Nigeria does not necessarily have to move surplus labour that exists in the rural areas to the urban areas but instead infrastructural facilities should be provided equally to both the rural and urban areas of the country.
HARRIS-TODARO THEORY OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration.
The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migraton decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage. From this crucial assumption as denominated by Harris-Todaro , is deduced that the migratory dynamics leads the economic system toward an equilibrium with urban concentration and high urban unemployment.
ASSUMPTIONS OF THE MODEL
i. Two sectors: urban (manufacture) and rural (agriculture)
ii. Rural-urban migration condition: when urban real wage exceeds real agricultural product
iii.No migration cost
iv. Perfect competition
e. Cobb-Douglas production function.
RELATING THE MODEL TO NIGERIA’S ECONOMY
In cases of pro-poor economic growth, the Harris-Todaro model and other multisector-labor-market models can help policy makers avoid two mistakes. One is to assume that development efforts should be channeled to the sectors where the poor are. The other is to assume that efforts should always be focused on getting the poor out of the sectors in which they now are.
Okonkwo okechukwu Benjamin
Economics
2017/251833
Two Economists, John E. H Fei and Gustav Ranis, developed the model now known as the Fei-Ranis model of dual economy to explain how an increased productivity in agricultural sector would become helpful in promoting industrial sector, due to the fact that Lewis model did not pay enough attention to the importance of agricultural sector in promoting industrial growth.
The above model provides three stages whereby an Under Developed Country can move from stagnation to self-sustained economic growth. This model I treated as an improvement over Lewis model of Unlimited Supply of Labour.
The Assumptions of the Model
There is abundance of labour in such Under Developed Countries and shortage of Natural Resources.
The population growth rates are very high which results in Mass Unemployment in the Economy.
Agricultural sector generates surplus to finance the development of industrial sector.
The model is based on a closed economy unlike the Lewis model that is based on both Closed and open economy.
There is dynamic industrial sector in the Economy.
According to them, the Central problem of dual economy is transfer of labour from agricultural to non-agricultural sector.
The main social problem is over-population.
Industrial workers absorb the maximum number of agriculture workers.
The population rate is very high which results in Mass Unemployment in the Economy.
The major share of population is engaged in Agriculture. But agriculture sector is stagnant, hence, the marginal productivity of labour is zero and negative in agricultural sector.
The Model therefore suggests that Economic development would be taking place if agricultural labourers are transferred to industrial sector where their productivity will increase.
Honestly, the model is about a stagnant agricultural sector and dynamic industrial sector. The situation where Marginal Productivity of Labour is equal to zero i.e. (MPL)=0, labour can be transferred to industrial sector without any loss in agricultural output. Thus; the real wages in Industrial Sector remains fixed and it is equal to the initial level of real income in agricultural sector. Such wages are given the name of institutional wages.
Due to the fact that Lewis model did not pay enough attention to the importance of agricultural sector in promoting industrial growth, two Economists, John E. H Fei and Gustav Ranis, developed the model now known as the Fei-Ranis model of dual economy to explain how an increased productivity in agricultural sector would become helpful in promoting industrial sector.
In respect to this, it presents three stages whereby an Under Developed Country can move from stagnation to self-sustained economic growth. This model I treated as an improvement over Lewis model of Unlimited Supply of Labour.
The Assumptions of the Model
There is abundance of labour in such Under Developed Countries and shortage of Natural Resources.
The population growth rates are very high which results in Mass Unemployment in the Economy.
Agricultural sector generates surplus to finance the development of industrial sector.
The model is based on a closed economy unlike the Lewis model that is based on both Closed and open economy.
There is dynamic industrial sector in the Economy.
According to them, the Central problem of dual economy is transfer of labour from agricultural to non-agricultural sector.
The main social problem is over-population.
Industrial workers absorb the maximum number of agriculture workers.
The population rate is very high which results in Mass Unemployment in the Economy.
The major share of population is engaged in Agriculture. But agriculture sector is stagnant, hence, the marginal productivity of labour is zero and negative in agricultural sector.
The Model therefore suggests that Economic development would be taking place if agricultural labourers are transferred to industrial sector where their productivity will increase.
As we know, the model is about a stagnant agricultural sector and dynamic industrial sector. The situation where Marginal Productivity of Labour is equal to zero i.e. (MPL)=0, labour can be transferred to industrial sector without any loss in agricultural output. Thus; the real wages in Industrial Sector remains fixed and it is equal to the initial level of real income in agricultural sector. Such wages are given the name of institutional wages.
Two Economists, John E. H Fei and Gustav Ranis, developed the model now known as the Fei-Ranis model of dual economy to explain how an increased productivity in agricultural sector would become helpful in promoting industrial sector, due to the fact that Lewis model did not pay enough attention to the importance of agricultural sector in promoting industrial growth.
The above model provides three stages whereby an Under Developed Country can move from stagnation to self-sustained economic growth. This model I treated as an improvement over Lewis model of Unlimited Supply of Labour.
The Assumptions of the Model
There is abundance of labour in such Under Developed Countries and shortage of Natural Resources.
The population growth rates are very high which results in Mass Unemployment in the Economy.
Agricultural sector generates surplus to finance the development of industrial sector.
The model is based on a closed economy unlike the Lewis model that is based on both Closed and open economy.
There is dynamic industrial sector in the Economy.
According to them, the Central problem of dual economy is transfer of labour from agricultural to non-agricultural sector.
The main social problem is over-population.
Industrial workers absorb the maximum number of agriculture workers.
The population rate is very high which results in Mass Unemployment in the Economy.
The major share of population is engaged in Agriculture. But agriculture sector is stagnant, hence, the marginal productivity of labour is zero and negative in agricultural sector.
The Model therefore suggests that Economic development would be taking place if agricultural labourers are transferred to industrial sector where their productivity will increase.
Honestly, the model is about a stagnant agricultural sector and dynamic industrial sector. The situation where Marginal Productivity of Labour is equal to zero i.e. (MPL)=0, labour can be transferred to industrial sector without any loss in agricultural output. Thus; the real wages in Industrial Sector remains fixed and it is equal to the initial level of real income in agricultural sector. Such wages are given the name of institutional wages.
Ugwoke Cornelius Esomchi
2017/249581
Economic Growth
One of the best known early theoretical models of development that focused on the structural transformation of a primarily subsistence economy was that formulated by Nobel Laureate W. Arthur Lewis in the mid-1950s, and later modified, formalized, and extended by John Fei and Gustav Ranis. The Lewis two-sector model became the general theory of the 1960s and early 1970s, and it is sometimes still applied, particularly to study the recent growth experience in China and labor markets in other developing countries.
The Fei-Ranis model is an improvement over the lewis model. John Fei and Gustav Ranis analyze the transition process through which an underdeveloped economy hopes to move from a condition of stagnation to one of self-sustained growth.
The theory relates to underdeveloped labor surplus and resources; poor economy in which the vast majority of the population is engaged in agriculture amidst widespread unemployment and high rates of population growth.
ASSUMPTIONS OF THE MODEL
1. There is a dual economy divided into a traditional and stagnant agricultural sector and an active industrial sector.
2. The output of the agricultural sector is a function of land and labor alone.
3. There is no accumulation of capital in agriculture except in the form of land reclamation.
4. Land is fixed in supply.
5. Population growth is taken as an exogenous phenomenon.
The real wage in the industrial sector remains fixed and is equal to the initial level of real income in the agricultural sector. It is called an institutional wage.
6. Workers in either sector consume only agricultural products.
Given these assumptions, Fei and Ranis analyze the development of a labor surplus economy into three phases;
In the first phase, the disguised unemployed workers who are not adding to agricultural output are transferred to the industrial sector at a constant institutional wage.
In the second phase, agricultural workers add to agricultural output but produce less than the institutional wage they get. Such workers are shifted to the industrial sector. If the migration of the workers to the industrial sector continues, a point is eventually reached when farmworkers produce output equal to the institutional wage.
In the third phase, which makes the end of the take-of and the beginning of the self-sustained growth when farmworkers produce more than the institutional wage they get. In this phase, the surplus labor is exhausted and the agricultural sector becomes commercialized.
. HARRIS-TODARO AGENT-BASED MODEL
In this section we describe the implementation of the computational model we proposed, as well as the aggregate patterns obtained numerically and the comparison with the respective analytical results.
A. Computational Implementation
Initially, workers are randomly placed in a square lattice with linear dimension L = 500. The reference values of the parameters used for these simulations are the same done to evaluate the equilibrium of the Harris-Todaro model, namely, Aa = 1.0, Am = 1.0, f = 0.3, a = 0.7, r = 1.0 and g = 1.0. The value of the minimum wage used is wm = 0.8 and the initial urban fraction of the total population is nu = 0.2, where nu = Nu/N is the normalized urban population also called urban share. The initial value nu = 0.2 is in agreement with historical data of developing economies. Given these parameters, one can calculate the vector which characterizes temporary equilibrium of the system by using eqs. (7 – 12).
By using eq. (7), the employment level of the urban sector, Nm, is obtained. If nu Nm/N there will be a fraction of Nm/Nu workers employed, which earn the minimum wage, wi = wm, and (1-Nm/Nu) workers unemployed, which earn a wage wi = 0.
Each worker can be selected to review his sectorial location with probability a, called activity . Therefore, in each time step only a fraction of workers becomes potential migrants, going through the sectorial location reviewing process. Potential migrants will determine their satisfaction level of being in the current sector by comparing their earnings, wi, among nearest neighbors.
The potential migrant starts the comparison process with a initial satisfaction level si = 0. When wi > wneighbor the satisfaction level si is added in one unit; if wi < wneighbor, si is diminished in one unit; if wi = wneighbor, si does not change. After the worker has passed through the reviewing process his/her satisfaction level is checked. The migration will occur only if si < 0, what means that the worker's i earnings is less than the most of his/her nearest neighbors.
After all the potential migrants complete the reviewing process and have decided migrate or not, a new configuration of the system is set. Therefore, once again a new temporary equilibrium of the system is calculated by using eqs. (8 – 12). The whole procedure is repeated until a pre-set number of steps is reached. It is important to emphasize that Nm is kept constant throughout the simulation. Its given by eq. (7) which depends on the technological parameters, a,Am, and the minimum wage, wm, which are constants too.
B. Analysis of the Emergent Properties
In this section we develop the analysis of the long run aggregate regularities of Harris-Todaro agent-based computational model. These long run properties will be compared between the solution of the analytical model and simulations.
show the basic characteristics of the transitional dynamics and long run equilibrium generated by simulations. When the economic system has a low initial urban share, nu = 0:2 or nu = 0:3, there is a net migration toward urban sector. This migration takes the urban sector from a full employment situation to an unemployment one. The positive differential of expected wages that pulls workers to the urban sector diminishes. However, if the economic system initiates with a high urban share, nu = 0:8, or nu = 0:9 there is net flow of migration toward rural sector in such a way that the unemployment rate of the urban sector decreases
In this case, the differential of expected wages is negative. In an economy mainly rural (nu < 0:5), the transitional dynamics characterized by a continuous growth of population of the urban sector with a differential of expected wages relatively high is followed by the stabilization of rural-urban differential of expected wages. In other words, the generalized Harris-Todaro condition, eq. (15), arises as a long run equilibrium result of the agent-based migratory dynamics.
Figure 3 also shows that even after the urban share has reached an stable average value, there are small fluctuations around this average. Therefore, differently from the original Harris-Todaro model, our computational model shows in the long run equilibrium the reverse migration. This phenomenon has been observed in developing countries.
for a given value of a, the variation of wm practically does not change the equilibrium values of the urban share, the differential of expected wages and the unemployment rate. However, for a given wm, higher values of a make the urban sector less attractive due the reduction of the employment level. This causes a lower equilibrium urban share, a higher unemployment rate and a gap in the convergence of the expected wages.
The equilibrium values of the urban share, the differential of expected wages and unemployment rate do not have a strong dependence with wm. However, variations in g for a fixedwm, dramatically change the equilibrium values of the variable mentioned before. Higher values of g generate a lower urban concentration, a higher gap in the expected wages and a higher unemployment rate in the equilibrium.
The convergence of migratory dynamics for a urban share, compatible with historical data, is robust in relation to the variation of the key technological parameters, a and f. The impact of the variation of these parameters in the values of the equilibrium differential of expected wages, ( – wa), and the equilibrium urban unemployment rate, (1-Nm=Nu).
CONCLUSION
The dispersed and non-coordinated individual migration decisions, made based on local information, generate aggregate regularities. Firstly, the crucial assumption of Harris and Todaro, the principle that rural-urban migration will occur while the urban expected wage exceed the rural wage, comes out as spontaneous upshot of interaction among adaptative agents.
Name: Ahamefula miracle Chisom
Reg no: 2017/249478
Dept Economics
Level:300 level
Email: ahamefulamiracle1@gmail
Lewis Fei Ranis model of economic development
After a long experience of military dictatorship, civilian rule in 1999 brought high expectations for peace and progress. However, democracy has failed so far to deliver good governance and in its place, insecurity, poverty, economic crisis and social problems have become the fate of Nigerians. The liberalization of the political atmosphere in 1999 brought by civil rule was used for the mobilization of primordial sentiments and identity politics (Alubo 2011). Therefore, insecurity and violence with its dire consequences in terms of loss of lives, properties has become the order of the day. According to Alubo (2011) in the first fifty-five months of civil rule December 2003, about 80 major violent eruptions were recorded. The economists reported that as at 2001, more than 6000 people have been killed. For instance, the cases of armed robbery on Nigeria’s high ways, banks, and households, the Niger Delta militants, the ethnic and religious crises as witnessed in Maiduguri (Bok o haram), Jos, Ibadan, and other parts of the country that claimed a lot of innocent souls and destroyed properties worth billions of naira are pointers to security lapses in the country. The cases of electoral violence in 2003, 2007 and 2011 elections and the recent by-election in Gombe, Bauchi, other parts of the state, the cases of kidnapping citizens and demand of ransom and worst of all the brutal killings of Nigerians by the police that are saddled with the primary responsibility of protecting the property and lives of citizens through torture in the name of investigation and direct shooting on the excuse of accidental discharge, as indicated by the Human Rights Report 2010, are all evidence their insecurity is in vogue in Nigeria. Security, including “human security”, is a critical foundation for sustainable development. This implies protection from systemic human rights abused, physical threats, violence, and extreme economic, social, and environmental risks, territorial and sovereignty threats. It is a primary prerequisite and goal for poor people to make a lasting improvement in their lives (UNIDIR, Report 2008). Cited by Ahmadu (2013)
Nigeria as a nation has had a long, history of religious upheavals. Religious uprising that gave birth to problem of insecurity especially the current Boko Haram insurgeney and others before it started in the northern city of Kano in 1980 and later spread to other cities, mostly in the north. The emergence and growth of the Boko haram sect has been attributed mainly to social malaise and absence of effective engagement of the nation’s youths. In an editorial (The Guardian 11/02/2011) newspaper noted that Boko Haram has a social root. It is largely populated by young and often educated but unemployed believers who are, in the circumstance, restless and disenchanted with a life of idleness and hopelessness. According to the National Bureau of Statistics (NBS) over the last decade, Nigeria’s infrastructure spending Ahamefumirac a 1.9% (approximately $4 billion) per annum to GDP.
The Harris–Todaro model of migration
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function: where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a 0 and g > 0 are a parametric constants. g is the elasticity of p with respect to the ratio Ym/Ya
The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified:
Umeozulu Donald Chinedu
2017/241439
Economics
donaldumeozulu@gmail.com
To begin with the Surplus Labour theory which was proposed by Arthur Lewis and later modified by Fei and Ranis. The model describes a dual system of economy in which the Agricultural sector was seen as dominant in any developing nation and the Industrial sector was taken to be dominant in the developed nation. Lewis and Fei – Ranis model assumed that the agricultural sector has a surplus unproductive labour, and that this surplus labour is absorbed by the industrial sector due to it better wage rate.
According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Surplus value, Marxian economic concept that professed to explain the instability of the capitalist system. Adhering to David Ricardo’s labour theory of value, Karl Marx held that human labour was the source of economic value. The capitalist pays his workers less than the value their labour has added to the goods, usually only enough to maintain the worker at a subsistence level. Of the total worth of the worker’s labour, however, this compensation, in Marxian theory, accounts for only a mere portion, equivalent to the worker’s means of subsistence. The remainder is “surplus labour,” and the value it produces is “surplus value.” To make a profit, Marx argued, the capitalist appropriates this surplus value, thereby exploiting the labour.II. THE HARRIS-TODARO MODEL
A. Assumptions
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 0 are a parametric constants. g is the elasticity of p with respect to the ratio Ym/Ya.
Basics of the model
Depiction of Phase1, Phase2 and Phase3 of the dual economy model using average output.
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
According to Fei and Ranis, AD amount of labor (see figure) can be shifted from the agricultural sector without any fall in output. Hence, it represents surplus labor. After AD, MP begins to rise, and industrial labor rises from zero to a value equal to AD. AP of agricultural labor is shown by BYZ and we see that this curve falls downward after AD. This fall in AP can be attributed to the fact that as agricultural laborers shift to the industrial sector, the real wage of industrial laborers decreases due to shortage of food supply, since less laborers are now working in the food sector. The decrease in the real wage level decreases the level of profits, and the size of surplus that could have been re-invested for more industrialization. However, as long as surplus exists, growth rate can still be increased without a fall in the rate of industrialization. This re-investment of surplus can be graphically visualized as the shifting of MP curve outwards. In Phase2 the level of disguised unemployment is given by AK. [4] This allows the agricultural sector to give up a part of its labor-force until
Phase 3 begins from the point of commercialization which is at K in the Figure. This is the point where the economy becomes completely commercialized in the absence of disguised unemployment. The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor.
The amount of labor that is shifted and the time that this shifting takes depends upon:
1. The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits;
2. The nature of the industry’s technical progress and its associated bias;
3. Growth rate of population.
NAME :Ozumba Rachel Chidinma
REG NO:2017/249573
EMAIL:chidinma.ozumba.249573@unn.edu.ng
BLOG:Chinmaoz.blogspot.com
DEPARTMENT:Economics
THE HARRIS –TODARO MODEL OF MIGRATION
INTRODUCTION
Migration from rural informal sector-urban formal sector is driven by wage differentials and the rational postulations by the rural worker .Given this wage differentials, people rationally migrate into the cities hoping to get an urban job. But the probability of getting an urban job is not completely dependent on that rational move ,rather it depends on the size of unemployment existing in the city in relation to the number of people employed in the urban manufacturing sector. Hence, under-developed countries are faced with the problem of urban unemployment which is caused majorly by rural-urban migration. The Todaro Paradox can equally occur when job creation in urban area further leads to unemployment. Generally,this essay attempted to expound the assumptions, characteristics and the core arguments of Harris –Todaro model of Migration, Initiate a comparison between the Harris-Todaro model with other models and more specifically, compare the model with the real world while drawing opinions ..
ASSUMPTIONS OF THE HARRIS –TODARO MODEL OF MIGRATION
The following are the assumptions underlying the Harris -Todaro migration Model ;
(1) Urban wage is institutionally and legally fixed .
(2)Small open economy; the economy considered in Harris -Todaro model is a small open economy.
(3) Two sector economy; apart from the assumption of small open economy , the model further assumes two sectors economy. One an agricultural rural sector and the other , manufacturing urban sector economy.
(4) There three(3 )kinds of production factors , specific production factor in sector 1,K1 ,Specific production factor in sector 2, K2 and labour ,L, which is employed in both sectors and is mobile between sectors.
(5) The capital –labor ratio and the factor reward ratio are in one to one relation with the relative price of the product.
(6) There is equality between the probability of finding a job and the existing rate of employment.
(7) In the rural agricultural sector, it is assumed that wages are flexible and equal to the marginal product of labor according to profit maximization.
THE HARRIS-TODARO MODEL OF MIGRATION
The Harris-Todaro model of migration named after John R.Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and Welfare Economics to explain the issues concerning rural –urban Migration. The Harris-Todaro model is a pioneering general equilibrium model describing the labour migration mechanism from rural to Urban areas due to wage gap and the existence of urban unemployment and underemployment in developing countries.
Historically, the Harris- Todaro Model can be traced to the 1960s , when the government of newly independent Kenya faced a difficult situation: Unemployment in Nairobi and other major cities was high and obviously rising. In other to cope with this problem, a cross sectional agreements were reached between the private-sector and public-sector which the employers agreed to increase employment in exchange for unions agreeing to hold wages at their present levels. The newly created jobs was expected to reduce unemployment. Nevertheless, urban unemployment appeared to have increased rather than decreased.
Consequent of this paradoxical event, John Harris and Michael Todaro theorized the Harris-Todaro model to explain the puzzle. At the core of the Harris-Todaro model were the following features. First, wages are higher in urban manufacturing-sector jobs than in rural agricultural-sector jobs. Second, to be hired for a manufacturing-sector job, one has to be physically present in the urban areas where the manufacturing-sector jobs are situated . Third, and as a result of the first two features, more workers search for manufacturing-sector jobs than are hired, employers hire some of the migrant but not all of them, and those not hired end up unemployed. Fourth, for equality to be maintained between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting is characterized by urban unemployment.
The Harris-Todaro model formulated two policy results. The first concerns the policy of manufacturing-sector job creation to employ the unemployed – (say migrants from the rural sector). This policy, they proposed, would increase the formal sector labor force by more than the number of new jobs created, thereby raising the number of urban unemployed. Hence, the solution to urban unemployment is not creation of urban employment.
The second policy option that Harris and Todaro considered was a policy of rural development. If such a program could increase the rural agricultural-sector wage, unemployment would then fall. Thus, in the Harris-Todaro model, the solution to urban unemployment is rural development. Soon after the publication of the model, the government of Kenya followed the Harris-Todaro prescriptions by putting into place a program of rural development. The result was a sharp decline in level unemployment in Kenya.
Harris and Todaro’s fundamental contribution was a building model that fits the intrigues of the labor market that was based on sound micro-economic foundations. The relevance of this model today as a part of the economist’s intellectual toolkit is a tribute to its basic insight and enduring analytic power.
Harris and Todaro formulated general processes for determining prices of the products produced by the two sectors and also for determining a rural-sector wage that varies inversely with the number of people in the rural sector. A simplified version of the Harris-Todaro model was developed in which product prices and rural-sector wages are taken as constant. Numerous additional analytic and policy results were derived in the simplified Harris-Todaro model. At the same time, some of the assumptions of the Harris-Todaro model were judged to be too restrictive, and so the model was generalized in the years that followed to annex their specific formulation within a broader framework. The initial Harris-Todaro model has been extended to allow for on-the-job search from a rural agriculture setting, the existence of an urban informal sector, preferential hiring of the better-educated, employment fixity, duality of production conditions and earnings levels within the rural sector, capital mobility, endogenous urban wage setting, risk aversion, and a system of demand for goods, among other factors.
As an early two-sector labor-market model, the Harris-Todaro model set forth a principal alternative framework for policy analysis. It showed how employment and wage levels in one labor market reflect supply, demand, and institutional conditions not only in that labor market but also in other labor markets.
In terms of pro-poor economic growth, the Harris-Todaro model and other two-sector-labor-market models can help policy makers avoid two mistakes. One is to assume that development efforts should be channeled to the sectors where the poor are. The other is to assume that efforts should always be focused on getting the poor out of the sectors in which they now are. Careful cost-benefit analysis based on well-specified labor-market models is required to decide among such alternatives.
The Harris –Todaro model is a specific form of the neoclassical two sector model , represented by the Heckscher-Ohlin and Samuelson Model and it can be understood as a specific factor model (S-F Model), proposed by Jones (1971). In the S-F model , each sector has its own specific production factor which cannot move between sectors , and the specific factor endowments are also fixed. The Harris-Todaro model is a shortrun model with specific capital endowment in each sector.
Given the wage rigidity in the urban area ,flexibility of wage in rural area and the mobility of labour assumptions, it is possible for workers to move freely due to wage gap between sectors. Put differently, workers move to the higher wage sector by comparing their expected wages in both sectors. The probability of finding a job equals the rate of employment. Since the rural area is agrarian , there is therefore no unemployment in the rural sector. Given this, the workers in the rural sector can always be employed, so that the probability of finding a job in the rural sector equals unity.
The Harris-Todaro migration Model assumes wage differential as the basis of migration ,hence in equilibrium migration between the rural and urban sectors will cease since the urban expected wage is equal to the rural-expected wage which is the same as the rural real wage.
Migration in any given time time depends on three factors;(a) The urban-migration wage gap (b) The urban employment rate and (c)The responsiveness of potential migrants to the resulting opportunities.
The Harris-Todaro Equilibrium as shown in figure 1. There are two sectors :agriculture and manufacturing. Each sector has a specific factor and labor which is mobile between these two sectors. There is the assumption of constant. The horizontal axis shows labor force. The marginal product curves are LL for agriculture and MM’ for manufacturing. OW* is the fixed minimum wage in the manufacturing sector, while corresponding employment is given at NO*According Harris-Todaro model the equilibrium the expected urban wage must be equal to the agricultural wage.
Since agricultural wage presented by ‘OV’ and then urban wage represented by ‘GR’ equal, we thus conclude that the Point ‘R’ in the graph fulfills the condition for equilibrium since the two rectangular are equal to each other.
LEWIS- FEI-RANIS MODEL OF ECONOMIC GROWTH
According to Todaro ,the Lewis-Fei model explains the historical scenario of migration obtainable in the western socio-economic milieu but is insufficient in explaining the trends of rural-urban migration in less developed countries.
The lewis’ surplus labour makes the assumption that faster capital accumulation will be invested in modern industry causing new jobs in abundance. It implies that there would be labour transfer at the rate proportional to capital accumulation.
Lewis’ assertion that rural sector has surplus labour and urban areas have full employment,does not hold true necessarily .In less developed countries particularly, there is less than full employment. According to reports M .S Smianthian Research Foundation and World Food Programme in 2002 unemployment was on the rise in urban india and the rate of urban unemployment was 9.5% for the lower expenditure classes.
NAME :Ozumba Rachel Chidinma
REG NO:2017/249573
EMAIL:chidinma.ozumba.249573@unn.edu.ng
BLOG:Chinmaoz.blogspot.com
DEPARTMENT:Economics
THE HARRIS –TODARO MODEL OF MIGRATION
INTRODUCTION
Migration from rural informal sector-urban formal sector is driven by wage differentials and the rational postulations by the rural worker .Given this wage differentials, people rationally migrate into the cities hoping to get an urban job. But the probability of getting an urban job is not completely dependent on that rational move ,rather it depends on the size of unemployment existing in the city in relation to the number of people employed in the urban manufacturing sector. Hence, under-developed countries are faced with the problem of urban unemployment which is caused majorly by rural-urban migration. The Todaro Paradox can equally occur when job creation in urban area further leads to unemployment. Generally,this essay attempted to expound the assumptions, characteristics and the core arguments of Harris –Todaro model of Migration, Initiate a comparison between the Harris-Todaro model with other models and more specifically, compare the model with the real world while drawing opinions ..
ASSUMPTIONS OF THE HARRIS –TODARO MODEL OF MIGRATION
The following are the assumptions underlying the Harris -Todaro migration Model ;
(1) Urban wage is institutionally and legally fixed .
(2)Small open economy; the economy considered in Harris -Todaro model is a small open economy.
(3) Two sector economy; apart from the assumption of small open economy , the model further assumes two sectors economy. One an agricultural rural sector and the other , manufacturing urban sector economy.
(4) There three(3 )kinds of production factors , specific production factor in sector 1,K1 ,Specific production factor in sector 2, K2 and labour ,L, which is employed in both sectors and is mobile between sectors.
(5) The capital –labor ratio and the factor reward ratio are in one to one relation with the relative price of the product.
(6) There is equality between the probability of finding a job and the existing rate of employment.
(7) In the rural agricultural sector, it is assumed that wages are flexible and equal to the marginal product of labor according to profit maximization.
THE HARRIS-TODARO MODEL OF MIGRATION
The Harris-Todaro model of migration named after John R.Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and Welfare Economics to explain the issues concerning rural –urban Migration. The Harris-Todaro model is a pioneering general equilibrium model describing the labour migration mechanism from rural to Urban areas due to wage gap and the existence of urban unemployment and underemployment in developing countries.
Historically, the Harris- Todaro Model can be traced to the 1960s , when the government of newly independent Kenya faced a difficult situation: Unemployment in Nairobi and other major cities was high and obviously rising. In other to cope with this problem, a cross sectional agreements were reached between the private-sector and public-sector which the employers agreed to increase employment in exchange for unions agreeing to hold wages at their present levels. The newly created jobs was expected to reduce unemployment. Nevertheless, urban unemployment appeared to have increased rather than decreased.
Consequent of this paradoxical event, John Harris and Michael Todaro theorized the Harris-Todaro model to explain the puzzle. At the core of the Harris-Todaro model were the following features. First, wages are higher in urban manufacturing-sector jobs than in rural agricultural-sector jobs. Second, to be hired for a manufacturing-sector job, one has to be physically present in the urban areas where the manufacturing-sector jobs are situated . Third, and as a result of the first two features, more workers search for manufacturing-sector jobs than are hired, employers hire some of the migrant but not all of them, and those not hired end up unemployed. Fourth, for equality to be maintained between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting is characterized by urban unemployment.
The Harris-Todaro model formulated two policy results. The first concerns the policy of manufacturing-sector job creation to employ the unemployed – (say migrants from the rural sector). This policy, they proposed, would increase the formal sector labor force by more than the number of new jobs created, thereby raising the number of urban unemployed. Hence, the solution to urban unemployment is not creation of urban employment.
The second policy option that Harris and Todaro considered was a policy of rural development. If such a program could increase the rural agricultural-sector wage, unemployment would then fall. Thus, in the Harris-Todaro model, the solution to urban unemployment is rural development. Soon after the publication of the model, the government of Kenya followed the Harris-Todaro prescriptions by putting into place a program of rural development. The result was a sharp decline in level unemployment in Kenya.
Harris and Todaro’s fundamental contribution was a building model that fits the intrigues of the labor market that was based on sound micro-economic foundations. The relevance of this model today as a part of the economist’s intellectual toolkit is a tribute to its basic insight and enduring analytic power.
Harris and Todaro formulated general processes for determining prices of the products produced by the two sectors and also for determining a rural-sector wage that varies inversely with the number of people in the rural sector. A simplified version of the Harris-Todaro model was developed in which product prices and rural-sector wages are taken as constant. Numerous additional analytic and policy results were derived in the simplified Harris-Todaro model. At the same time, some of the assumptions of the Harris-Todaro model were judged to be too restrictive, and so the model was generalized in the years that followed to annex their specific formulation within a broader framework. The initial Harris-Todaro model has been extended to allow for on-the-job search from a rural agriculture setting, the existence of an urban informal sector, preferential hiring of the better-educated, employment fixity, duality of production conditions and earnings levels within the rural sector, capital mobility, endogenous urban wage setting, risk aversion, and a system of demand for goods, among other factors.
As an early two-sector labor-market model, the Harris-Todaro model set forth a principal alternative framework for policy analysis. It showed how employment and wage levels in one labor market reflect supply, demand, and institutional conditions not only in that labor market but also in other labor markets.
In terms of pro-poor economic growth, the Harris-Todaro model and other two-sector-labor-market models can help policy makers avoid two mistakes. One is to assume that development efforts should be channeled to the sectors where the poor are. The other is to assume that efforts should always be focused on getting the poor out of the sectors in which they now are. Careful cost-benefit analysis based on well-specified labor-market models is required to decide among such alternatives.
The Harris –Todaro model is a specific form of the neoclassical two sector model , represented by the Heckscher-Ohlin and Samuelson Model and it can be understood as a specific factor model (S-F Model), proposed by Jones (1971). In the S-F model , each sector has its own specific production factor which cannot move between sectors , and the specific factor endowments are also fixed. The Harris-Todaro model is a shortrun model with specific capital endowment in each sector.
Given the wage rigidity in the urban area ,flexibility of wage in rural area and the mobility of labour assumptions, it is possible for workers to move freely due to wage gap between sectors. Put differently, workers move to the higher wage sector by comparing their expected wages in both sectors. The probability of finding a job equals the rate of employment. Since the rural area is agrarian , there is therefore no unemployment in the rural sector. Given this, the workers in the rural sector can always be employed, so that the probability of finding a job in the rural sector equals unity.
The Harris-Todaro migration Model assumes wage differential as the basis of migration ,hence in equilibrium migration between the rural and urban sectors will cease since the urban expected wage is equal to the rural-expected wage which is the same as the rural real wage.
Migration in any given time time depends on three factors;(a) The urban-migration wage gap (b) The urban employment rate and (c)The responsiveness of potential migrants to the resulting opportunities.
The Harris-Todaro Equilibrium as shown in figure 1. There are two sectors :agriculture and manufacturing. Each sector has a specific factor and labor which is mobile between these two sectors. There is the assumption of constant. The horizontal axis shows labor force. The marginal product curves are LL for agriculture and MM’ for manufacturing. OW* is the fixed minimum wage in the manufacturing sector, while corresponding employment is given at NO*According Harris-Todaro model the equilibrium the expected urban wage must be equal to the agricultural wage.
Since agricultural wage presented by ‘OV’ and then urban wage represented by ‘GR’ equal, we thus conclude that the Point ‘R’ in the graph fulfills the condition for equilibrium since the two rectangular are equal to each other.
LEWIS- FEI-RANIS MODEL OF ECONOMIC GROWTH
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.
According to Todaro ,the Lewis-Fei model explains the historical scenario of migration obtainable in the western socio-economic milieu but is insufficient in explaining the trends of rural-urban migration in less developed countries.
The lewis’ surplus labour makes the assumption that faster capital accumulation will be invested in modern industry causing new jobs in abundance. It implies that there would be labour transfer at the rate proportional to capital accumulation.
Lewis’ assertion that rural sector has surplus labour and urban areas have full employment,does not hold true necessarily .In less developed countries particularly, there is less than full employment. According to reports M .S Smianthian Research Foundation and World Food Programme in 2002 unemployment was on the rise in urban india and the rate of urban unemployment was 9.5% for the lower expenditure classes.
The Fei–Ranis model of economic growth is a dualism model in developmental economicsor welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
The three fundamental ideas used in this model are:
1. Agricultural growth and industrial growth are both equally important;
2. Agricultural growth and industrial growth are balanced;
3. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap.
Fei and Ranis emphasized strongly on the industry-agriculture interdependency and said that a robust connectivity between the two would encourage and speedup development. If agricultural laborers look for industrial employment, and industrialists employ more workers by use of larger capital good stock and labor-intensive technology, this connectivity can work between the industrial and agricultural sector. Also, if the surplus owner invests in that section of industrial sector that is close to soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized. They took the example of Japan’s dualistic economy in the 19th century and said that connectivity between the two sectors of Japan was heightened due to the presence of a decentralized rural industry which was often linked to urban production. According to them, economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision-making powers and use industrial capital and consumer goods for agricultural practices.
The Lewis model is criticised on the grounds that it neglects agriculture. Fei–Ranis model goes a step beyond and states that agriculture has a very major role to play in the expansion of the industrial sector. In fact, it says that the rate of growth of the industrial sector depends on the amount of total agricultural surplus and on the amount of profits that are earned in the industrial sector. So, larger the amount of surplus and the amount of surplus put into productive investment and larger the amount of industrial profits earned, the larger will be the rate of growth of the industrial economy. As the model focuses on the shifting of the focal point of progress from the agricultural to the industrial sector, Fei and Ranis believe that the ideal shifting takes place when the investment funds from surplus and industrial profits are sufficiently large so as to purchase industrial capital goods like plants and machinery.
It has been asserted that Fei and Ranis did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed. While mentioning the important role of high agricultural productivity and the creation of surplus for economic development, they have failed to mention the need for capital as well. Although it is important to create surplus, it is equally important to maintain it through technical progress, which is possible through capital accumulation, but the Fei-Ranis model considers only labor and output as factors of production, also the reluctant expansionary growth in the industrial sector of underdeveloped countries can be attributed to the lagging growth in the productivity of subsistence agriculture. This suggests that increase in surplus becomes more important a determinant as compared to re-investment of surplus, an idea that was utilized by Jorgenson in his 1961 model that centered around the necessity of surplus generation and surplus persistence, finally Stagnation has not been taken into consideration, and no distinction is made between labor through family and labor through wages. There is also no explanation of the process of self-sustained growth, or of the investment function. There is complete negligence of terms of trade between agriculture and industry, foreign exchange, money and price.
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
The formal statement of the equilibrium condition of the Harris–Todaro model is as follows:
• Let wr be the wage rate (marginal productivity of labor) in the rural agricultural sector.
• Let le be the total number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
• Let lus be the total number of job seekers, employed and unemployed, in the urban sector.
• Let wu be the wage rate in the urban sector, which could possibly be set by government with a minimum wage law.
Rural to urban migration will take place if:
Wr Le/Lus(Wu)
At equilibrium
Wr = Le/Lus(Wu).
With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.
Therefore, migration from rural areas to urban areas will increase if:
• Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
• Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
Eke promise chinaza
2017/241531
Economic Education
300level
THE CRITICISM OF THE HARRIS-TODARO MODEL OF MIGRATION
The most fundamental criticism with this model is the barriers which exist preventing labor from migrating to rich (urban sector) countries from poor (rural sector). This makes it incredibly difficult to model international migration in a Harris-Todaro framework, simply because there are barriers to entry from workers wanting to move and not being able to do so. Furthermore, there are other barriers to entry, such as not speaking the language, cultural issues, not having a social or business network and needing sufficient capital to afford to physically move and then set up in a far away land.
Moreover, the model assumes that costs are given in a monetary sense, whereas in reality it might be quite difficult to put a value on leaving your family in a distant country to go and work abroad. Similarly, the model assumes that individuals can rationally calculate the economic gains from migration, but by moving individuals would be imposing a cost upon themselves, and would have to include the value of living abroad (i.e. even though wages are higher they are eaten up by housing, food, clothing and other living costs) which may be quite difficult to calculate.
Other issues with the model, in both an internal and international perspective, are that it doesn’t include human capital, there are no externalities and it treats workers and citizens as homogenous. On the first issue, including human capital in the model is quite relevant, especially in an internationally empirical sense as developed countries allow more skilled workers than they do unskilled workers.
On the second issue, Carrington, Detragiache and Vishwanath, develop a model which incorporates a positive externality associated with earlier people moving from nearby villages and the probability of a rural citizen migrating. Because this increases the social network of a migrating individual it may increase the probability that he decides to move.
The third issue is a more interesting point, in that cities aren’t homogenous: different cities develop different industrial sectors, and over time some of these sectors will boom whilst others will decline. This may mean that unemployment rates between cities vary and not only does a potential migrant have to decide whether he ought to move from agriculture to industry, but has to chose to which city he ought to move based on distance (and other costs), and returns (seeing which city is the most prosperous). This adds an even greater complex nature to such a model, especially with the large distances associated with cities in developed countries, and the different opportunities within them (e.g. Cardiff and New York). However, some would counter-argue that even the poorest cities in the developed countries, are much better off than the richest areas in developing countries.
To summarise, we see that the Harris-Todaro model is very limited in its scope in both an international and internal setting due to its narrow-mindedness assumption on economic values, which don’t incorporate emotional, social and humanitarian costs/benefits. More fundamentally, it isn’t an appropriate model in an international setting due to the barriers to entry which are erected by the developed world. By not incorporating human capital into our model, we are missing any migrants which may well be allowed into the developed world as high skilled workers can sometimes (but not always, even highly skilled workers can be limited to entering a country) get past the developed countries’ quota barriers. Todaro and Smith suggest that education for the sake of education should be restricted as a policy in developing countries, as often the urban sector can only ration jobs through education as a signalling effect. Whilst this seems like a bizarre idea, given that this would mean only the rich – who are generally the ones able to afford education in developing countries – would be able to attain jobs, and not poor, but clever productive individuals; it contradicts the policy prescription in an international setting, which ought to be for developing countries to increase their education so that workers become skilled and can improve their chances of migrating to developed country.
The movement of migrants from developing countries to developed countries, shouldn’t necessarily be seen as detrimental to the plight of developing countries, as proponents of “brain drain” theory suggest. Remittances sent by migrants to their families at home amount to $328bn, this can help developing countries provide education, health and give them a vital source of foreign exchange for the purchase of capital which can help them get out of poverty and low income traps.
Empirically we would expect most migrants to be of working age (i.e. between 18-50) and we would expect a lot more males to migrate than females, as there job – unfortunately – tend to be better. Whilst this may be the case overall, there is still substantial evidence that women, children and the elderly migrate, more than the economic model would suggest.
Furthermore, the fact that a significant proportion of migrants are not economic, but asylum seekers on humanitarian grounds would suggest that the Harris-Todaro model isn’t particularly useful in explaining world migration patterns.
Migration restrictions are imposed both in an international sense and sometimes internally – for example, see China, where nationals have to get permits (hukou) to reside in urban areas. The effect of this is to keep workers in rural areas to prevent a large source of unemployed workers in urban areas. The main reason for this is to prevent the social issues associated with overcrowding and the development of slums in urban areas. If deployed successfully – whilst being normatively unfair and ethically wrong – this could be quite successful at solving the issues associated with a swelling of urban populations and would maintain an equitable distribution of labour in rural areas. However this can be achieved, perhaps more effectively, and certainly more humanely, by increasing the benefits to staying in rural areas. For example by increase agricultural non-farm jobs. On the other hand wage subsidies are ineffective. A wage subsidy would increase the rural-urban expected wage differential (by either initially reducing unemployment, or through a higher urban wage) and thus encourage even more workers to migrate from farms to the city – in hope for a better life – creating even greater unemployment and would thereby fail in attempting to achieve an equitable labour distribution across sectors.
Reducing inequality in land holdings would only promote efficiency in allocation of workers between sectors if it increased the wages in rural areas. This may be unlikely if there are increasing returns to scale, but under the assumption of constant returns to scale it may be possible if we assume that tenants are more likely to invest in their own land (and hence increase returns and rural wages) than if they were working on somebody else’s land.
THE APPLICATION AND THE IMPLICATION OF THE HARRIS-TODARO MODEL OF MIGRATION TO OUR EVERY DAY LIFE
According to the model, the rising urban wage pushes up the expected wage in the urban sector and consequently encourages workers to migrate from the rural sector to the urban sector., this phenomenon is referred to as Todaro paradox. The possibility of obtaining an urban job divided by the urban labor force. They believe that unemployment is in no existence in the rural areas but in real sense, there are some rural residents that are unemployed.
Todaro have developed a new model of economics development which is relevant for labour surplus countries like Nigeria. There is always a migratory flow from the rural sector of the economy to the urban sector of the economy. The model states that creating urban jobs is an insufficient solution to the urban unemployment and this is applicable in Nigeria.
Name: Asogwa Arinze Godwin
Reg no: 2016/235173
Department: Economics
The Harris Todaro model of migration
The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migraton decision. The economic system simulated is characterized by the assumption originally made by Harris and Todaro.The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. What are the main features of the Harris-Todaro model of rural-urban migration? Rational economic decision of individual migrants. Their decision is based on expected rather than actual wage differentials. They are also well aware of employment situation in cities. In the Harris–Todaro model, the rising urban wage pushes up the expected wage in the urban sector and consequently encourages workers to migrate from the rural sector to the urban sector. This phenomenon is referred to as Todaro paradox.
The Lewis FEI RANIS model
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. Ranis and Fei, assumed that the labour in the industrial sector will be paid, in terms of the industrial products and they had to bring the hanging terms of trade into the picture.
So we find that whereas according to Ranis and Fei, Lewis’ turning point appears as soon as phase in their model ends, according to Lewis himself, the turning point will appear at the end of the phase II. If i.e. upto the point where labour in the agricultural sector is paid institutional wages. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Name: MMADU JOY UKAMAKA
DEPARTMENT: ECONOMICS
REG NO:2017/249528
EMAIL: joymmadu5@gmail.com
REASONS WHY THE IMPOVERISHED HAVE MORE KIDS THAN THE RICH
1. High child mortality rates. In many developing countries like Nigeria where the lives of the new born babies are being threatened due to some factors and important life enhacing facilities that are not in place like not having enough nutritious food, limited access to clean water, inadequate housing, poor health care and minimal government support. All of these factors contribute to child mortality andparents in poverty know this keenly. According to the World Health Organization, 5.4 million children under five are dying every year, with most of these children in developing countries. Faced with this reality, parents may decide to have more kids, understanding the heartbreaking truth that some of their children might not survive.
2. Misconceptions about family planning. In some communities, there is still cases where stigmas against contraception still exist. These beliefs can can emernate from different sources, including breakdowns in public health education, cultural biases and even scepticism about the motives of the government in controlling family size. Often, these above listed factors contributes in cultivating the fear and confusion over using
certain family planning methods.
3. Limited access to education: Generally, the higher the degree of education and GDP per capita a country has, the lower the birth rate. In Burkina Faso, one of the world’s poorest countries, less than one-third of the country can competently read and write .Here, the average number of kids a mum has is between five and six. In Australia, where the literacy rate is 99 per cent, the average couple has 1.77 children. Women who are opportuned to have some formal education are more likely than uneducated women to use contraception, marry later, and have fewer children.
4. Early marriage and gender roles
In many developing countries, a woman’s role is expected to be as a wife and mother. This may often mean she gets married youngerand begins having children earlier enough. In developing countries, one in every three girls is married before age 18 . Married girls are often under pressure to become pregnant as soon as possible. This typically means an end to a girl’s education, which can limit her life choice expectations and help perpetuate the cycle of poverty.
5. Care for elders
In some developing countries, like Nigeria where the
government doesn’t provide a pension or social security benefit, so parents must rely
on their children to care for them in their old age. Couples may choose to have more
kids to ensure they are properly taken care of when they’re older. For example, in India, children and grandchildren are legally required to provide food, accommodation, and health care for their parents at their old age when they are unable to provide for themselves.
6. Need for extra labour
HARRIS TODAROS MODEL
The Harris Todaros model also known as the Harris Todaros Migration Model is a model of developed by John Rees Harris and Michael Todaro in the 1970s . It explains issues relating to rural Urban migration and main assumption that movements or migration of people from the rural to the urban centers is chiefly as a result of what is called the expected wage/income differences. This further turns to explain that as people will tend to migrate to urban centers from the rural areas due to the expected wage difference, it also justify unemployment increase or high presence in the urban areas as economically rational. The migration activities at equilibrium rate between the two sector is equal and thus zero, but not without a positive unemployment presence in the urban areas. In this view have China emerged to bridge the gap explained by this model seeing that in many cities urban unemployment is a major problem and through attempts in technology is creating a possible habitual rural sector such that will minimize choices and chances for migration of persons from the rural to the urban centers.
LEWIS FEI RANIS MODEL
The Lewis fei Rani’s Model unlike the Harris Todaros Migration Model is a two way model recognising two distinct economy which is comprised of the primitive and the morden sectors.
It is concerned with the issues of unemployment and underemployment of resources in both economic sectors. The model explains that the primitive sector has in it the usual agricultural sector and and that the urban sector or the morden sector is the fast growing little industrial sectors and that they both exist side by side in the economy. It is in this coexistence that the economic problem of development is situated. However on like in other models which sees the less developed or developing areas/countries as homogeneous entity, the Lewis fei Rani’s Model acknowledge the interdependence and coexistence of both sector in an economy. The way to development in this model is suggesting a total shift from agricultural economy, even though not to mean an aboundonment of the agricultural sector but a sustainable practices that would guarantee economic security to the industrial economy such that the output of the industrial sectors is greatly increased.
NAME: IJE VORDA GOODNESS
REG NO: 2017/249514
EMAIL: vordagoodness78@gmail.com
HARRIS-TODARO MODEL OF MIGRATION AND THE LEWIS-FEI-RANIS MODEL OF ECONOMIC GROWTH AND HOW IT APPLIES TI THE NIGERIA. HARRIS-TODARO MODEL OF MIGRATION The Harris-Todaro model is an economic model developed in 1970, named after John R.Harris and Micheal Todaro. It is used in development economics and welfare economics to explain rural-urban migration within a country. It arose in criticism of the Lewis model. Harris and Todaro model holds that earnings differentials, economic incentives and the probability of getting a job at the destination have key influence on the migration decision of migrants. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage. More than one rural worker is likely to migrate to the urban sector for a single job created. So the agricultural output of 2 or more labourers is lost for each job created in the urban sector. This migration can be internal migration or international migration. Internal migration is movement within a country. The potential migrant first calculates the real income which he or she would get in the urban area for a job with his/her present effort. A subjective judgement of the probability of obtaining such a job. Comparison is made between the expected income with that which he/she hopes to obtain in the rural area. Migrants decision is based on the difference. For example, suppose the expected rural income is #10,000 per month, and that real income of an urban job which is commensurate with her qualification is #20,000. However, this information alone is not sufficient to make the migration decision. If the subjective probability of getting the urban job is 0.45, than the expected income would be #9000 (i.e 0.45 * #20,000) and no migration would take place on this case expected urban wage = actual urban wage x the probability of getting a job. If the migrant moves with his or her family members, it will be almost impossible for them (migrants family members) to get jobs since they don’t own lands in the urban area. If the subjective probability of getting a job in the city is 0.9, then the expected wage rate is #18,000 ( 0.9 * 20,000 ) since it is high there’s incentive to move to the city and migration will likely take place till the point were urban and rural wages are equal. It is important to note that the difference between the rural agricultural sector and the urban industrial sector are the type of goods produced, the technology used in production and the process of wage determination. The rural sector is specialized in the production of agricultural goods, production is labour intensive and wages are much lower relative to the urban sector. In contrast the urban sector specializes in the production of industrial goods, is capital intensive, wages are higher than the rural sector and is much smaller in developing countries. Therefore, migration from the agricultural sector to urban areas will increase if: ▪️ Urban wages represented by (wu) increase in the urban sector represented by (le), increasing the expected urban income. ▪️ Agricultural productivity reduces, lowering marginal productivity and wages in the rural sector (wr), decreasing the expected rural income. ▪️ The responsiveness of potential migrants to the resulting opportunities in the urban areas is high. As long as the rural wage rate (Wr) expected urban wages (Weu) there will be a reverse migration i.e a flow of disappointed urban jobseekers back to the rural areas. As migration continues a point is reached where expected urban wages and rural income is equal. When that point is reached we have an equilibrium. ASSUMPTIONS OF THE HARRIS-TODARO MODEL ▪️ This model assumes that there are only 2 sectors in the economy ( the rural agricultural sector and the urban indundustrial sector). ▪️ Migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This means that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income is greater than expected rural income. ▪️ This model assumes that no form of unemployment exist in the rural-agricultural sector. ▪️ Rural agricultural production and the subsequent labour market is perfectly competitive i.e agricultural rural wages equals agricultural marginal productivity. ▪️ The overall population of workers in the economy is kept constant during the whole period of study and is represented by N. ▪️ The relative price of the agricultural good in terms of the industrial good, p, varies according to the relative scarcity between industrial and agricultural goods. ▪️ In the Harris-Todaro model it is assumed that the urban wage is institutionally and legally fixed, so that as a result of the migration of workers, if the number of migrant workers exceed the number of new jobs created, some workers would necessarily be unemployed, underemployed or will be forced into the urban informal sector RELEVANCE OF THE HARRIS-TODARO MODEL IN DEVELOPING COUNTRIES Rural-urban migration has over the years been an important part of urbanization in developing nations. The Harris-Todaro model was used to explain migration patterns in China. Nigeria as a developing country over the years we have experienced rural urban migration since wages are relatively higher in the cities than the rural areas. This over the years has led to a loss in rural manpower and reduction in agricultural output but matching growth has not been seen in the industrial sector rather an exponential increase in unemployment and underemployment. The Harris-Todaro model explains this phenomenon. Nigeria is considered the Urban giant of Africa. Urban natural population increase has been the dominant characteristic of urban growth in the Nigeria post-colonial period and will likely continue in the immediate future period. As at 2010 Nigeria is said to have added about 62.5 million individuals to it’s urban population and is estimated to be 226 million in 2050. Historical account of urban rural migration state a positive relationship between urbanization and economic growth, however this has not been the case in Nigeria. It is important to note that this is not peculiar to Nigeria. During the period 1970 to 2010 agricultural employment fell by 19% with the service sector growing by 21% and a 5% decline in the manufacturing sector. LIMITATIONS OF THE HARRIS-TODARO MODEL ▪️ Some of the assumptions of the Harris-Todaro’s model were seen to be too restrictive. ▪️ The assumption that there is a perfect competition in the rural sector is not realistic. ▪️ The Harris-Todaro model also assumes that potential migrants are risk neutral where the migrants will likely be risk averse i.e they are indifferent between a certain expected rural income and an uncertain expected urban income of the same magnitude. ▪️ It thought that the only factor influencing migration was economic no reference to better education or healthcare. ▪️ Rural migrants don’t necessarily migrate back to the rural areas if they don’t get job in the cities instead there’s an increase in the urban informal sector. Furthermore, the migration dynamics generated by migrants that seek to adaptate to the economic environment that they co-create leads the economy toward a long run equilibrium characterized by urban concentration characterized by underemployment and unemployment. When this long run equilibrium is reached, the Harris-Todaro condition is therefore satisfied. There is a stabilization of the rural-urban expected wage differential. CONCLUSIONS DRAWN FROM THE HARRIS-TODARO MODEL. This model explains migration in developing nations and it makes us understand that:- ▪️ So long as expected urban wages exceeds rural agricultural wages migration to the cities will continue. ▪️ When rural wages (wr) exceed expected urban wages the there’ll be a reverse migration i.e people will move back to the villages. ▪️ At equilibrium the rural wages and expected urban wages are equal and so therefore there’s a no incentives to move to the cities or rural areas. For government to reduce rural urban migration policies that encourage and increase agricultural production should be encouraged. This is fine through the introduction of technology to the brutal agricultural sector. This will create incentives for migrants to remain in the rural areas moreover rural wage rate will be giving a boost. So while agricultural is developed the industrial sector is developed simultaneously. If the number of labour in the rural sector continues to decrease then the price of Agricultural products will increase because it will become scare since production will drop. THE LEWIS-FEI- RANIS MODEL. The Lewis-Fei-Ranis model is a dualism model developed by John.C. Fei and Gustav Ranis. It is understood as an extension of the Lewis model. It is also known as the surplus labour model. This model recognizes the presence of the modern and the primitive sector. In this model there’s existence of unemployment and underemployment of resources. The primitive sector is already existing agricultural sector and the modern sector is the rapidly emerging but still small sector. According to this model development is brought about by a transfer of labour from the primitive sector to the modern sector but warns that while there’s a shift in the focal point of progress in the economy from the agricultural to the modern sector, the agricultural sector growth should not be negligible and output should be adequate to support the whole economy with food and raw materials. Savings and development is also a driving force in economic development in developing countries.one of the drawback of Lewis was that although the model didn’t advocate for complete abandonment of the agricultural sector it undermined the role of agriculture in industrial growth. This model recognizes 3 stages in development. Phase 1: the agricultural labour force is infinite elastic and suffers from disguised unemployment and MP=0. Phase 2: there is a fall in average product since agricultural labourers have more the industrial sector. The real wage of industrial labourers reduces due to shortage of food supply, since there are lesser agricultural labourers. The decrease in real wage reduces the level of profit and surplus size that could be re-invested to further boost industrialization. It is important to note that so long as surplus exists, growth rate can still be increased without a full in industrialization. Phase 3: the amount of labour that moves from the agricultural to the modern sector depends on. ▪️The level of surplus growth generated within the primitive sector, the growth of industrial capital stock depends on industrial profit growth. ▪️ Population growth rate ▪️ The nature of industry’s progress and its associated bias. From the Lewis-Fei-Ranis model we understand that agricultural growth is equally as important as industrial growth, agricultural growth and industrial growth are balanced, the economy will be able to overcome the Malthusian population tarp only if the rate of labour shift from the primitive to the modern sector is larger than population growth rate. Landowners investment and government fiscal measures influence the shifting of labour. The private and social cost of shifting labour can be very high. Per capital agricultural consumption can increase and there is a wide gap between urban and rural wages. This changes leads to leakages that prevents the creation of agricultural surplus. Fei and Ranis strongly emphasize the interdependency of the industrial-agricultural sector and holds that a strong connection between the 2 sectors will speed up development. According to them economic growth is brought about in developing countries through the work of few numbers of entrepreneurs who have access to land and decision making powers and use industrial capital and consumer goods for agricultural practices. Fei and Ranis assume that there’s constant returns to scale in the industrial and agricultural sector and the main factors of production are capital and labour. In the Lewis-Fei-Ranis model the major source of labour supply to the industrial sector is the agricultural sector. Since Lewis placed little emphasis on agriculture sector Fei and Ranis placed greater value on agricultural and stated that the rate of industrial growth depends on the total amount of agricultural surplus and on the amount of Profit earned in the industrial sector. As a developing country advances there’s reallocation of labour from the agricultural to the modern sector. The essence of labour reallocation has lies in Engel’s law that states that the proportion of income spent on food decreases with an increase in the individual’s income level. Assuming 80% of labour force is involved in agricultural, 20% is left to the industrial sector. As productivity of agriculture increases it becomes possible for just 36% labour population to meet food supply satisfactory and as a result 64% of labour is now in the industrial sector. This is very much desired for an economy since the growth of industrial goods depends on the rate of per capital income and the growth of agriculture goods subject to the population growth rate. Labour reallocation is also important because with time consumers begin to want more consumer goods. Labour reallocation is necessary for producing more capital investment good. The Lewis-Fei-Ranis model also emphasise that government has a major role to play in the initial stages of growth. Government also need to work on the social and economic overheads by the construction of roads,bridges, railways and other capital projects. In the model we understand that there’s a possibility of growth without development. As technology led to a shift in labour saving production technique, growth of the economy takes place with increase in profit but no really economy development. CRITICISM OF LEWIS-FEI-RANIS MODEL ▪️It is emphasized that Fei and Ranis did not really understand the sluggish economic situation prevailing in developing countries. Feudalism inhibited development in developing countries. ▪️Fei-Ranis was criticised on the grounds that it assumed that the MPP of labour is zero during the early stage of Economic development, this is only true when agricultural labour is very large this therefore leads to a shift of labour to the cities. When labour in the cities is excess then they are absorbed in the informal sector. RELEVANCE OF THE LEWIS-FEI-RANIS MODEL IN NIGERIA This model is very important for developing nations as it explains the stages of economic development and why there’s a shift of labour concertration from the agricultural to the industrial sector. Although this is a slowing process. In Nigeria it’s no news that the majority of labour is employed in the agricultural sector. If this model is applied in understanding the Nigerian situation then we understand that when Economic development is happening in Nigeria they’ll be a shift of labour from the agric sector to the industrial sector. From this model we understand that government also has a major role to play in the Economic development of Nigeria by providing capital goods. Capital accumulation will also give the Nigerian economy a boost.
NAME: IJE VORDA GOODNESS
REG NO: 2017/249514
EMAIL : vordagoodness78@gmail.com
BRIEF DISCUSSION ON THE HARRIS-TODARO MODEL OF MIGRATION AND THE LEWIS-FEI-RANIS MODEL OF ECONOMIC GROWTH AND HOW IT APPLIES TI THE NIGERIA.
HARRIS-TODARO MODEL OF MIGRATION
The Harris-Todaro model is an economic model developed in 1970, named after John R.Harris and Micheal Todaro. It is used in development economics and welfare economics to explain rural-urban migration within a country. It arose in criticism of the Lewis model.
Harris and Todaro model holds that earnings differentials, economic incentives and the probability of getting a job at the destination have key influence on the migration decision of migrants. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage. More than one rural worker is likely to migrate to the urban sector for a single job created. So the agricultural output of 2 or more labourers is lost for each job created in the urban sector.
This migration can be internal migration or international migration. Internal migration is movement within a country.
The potential migrant first calculates the real income which he or she would get in the urban area for a job with his/her present effort. A subjective judgement of the probability of obtaining such a job. Comparison is made between the expected income with that which he/she hopes to obtain in the rural area. Migrants decision is based on the difference. For example, suppose the expected rural income is #10,000 per month, and that real income of an urban job which is commensurate with her qualification is #20,000.
However, this information alone is not sufficient to make the migration decision. If the subjective probability of getting the urban job is 0.45, than the expected income would be #9000 (i.e 0.45 * #20,000) and no migration would take place on this case expected urban wage = actual urban wage x the probability of getting a job. If the migrant moves with his or her family members, it will be almost impossible for them (migrants family members) to get jobs since they don’t own lands in the urban area.
If the subjective probability of getting a job in the city is 0.9, then the expected wage rate is #18,000 ( 0.9 * 20,000 ) since it is high there’s incentive to move to the city and migration will likely take place till the point were urban and rural wages are equal.
It is important to note that the difference between the rural agricultural sector and the urban industrial sector are the type of goods produced, the technology used in production and the process of wage determination. The rural sector is specialized in the production of agricultural goods, production is labour intensive and wages are much lower relative to the urban sector. In contrast the urban sector specializes in the production of industrial goods, is capital intensive, wages are higher than the rural sector and is much smaller in developing countries.
Therefore, migration from the agricultural sector to urban areas will increase if:
▪️ Urban wages represented by (wu) increase in the urban sector represented by (le), increasing the expected urban income.
▪️ Agricultural productivity reduces, lowering marginal productivity and wages in the rural sector (wr), decreasing the expected rural income.
▪️ The responsiveness of potential migrants to the resulting opportunities in the urban areas is high.
As long as the rural wage rate (Wr) expected urban wages (Weu) there will be a reverse migration i.e a flow of disappointed urban jobseekers back to the rural areas.
As migration continues a point is reached where expected urban wages and rural income is equal. When that point is reached we have an equilibrium.
ASSUMPTIONS OF THE HARRIS-TODARO MODEL
▪️ This model assumes that there are only 2 sectors in the economy ( the rural agricultural sector and the urban indundustrial sector).
▪️ Migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This means that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income is greater than expected rural income.
▪️ This model assumes that no form of unemployment exist in the rural-agricultural sector.
▪️ Rural agricultural production and the subsequent labour market is perfectly competitive i.e agricultural rural wages equals agricultural marginal productivity.
▪️ The overall population of workers in the economy is kept constant during the whole period of study and is represented by N.
▪️ The relative price of the agricultural good in terms of the industrial good, p, varies according to the relative scarcity between industrial and agricultural goods.
▪️ In the Harris-Todaro model it is assumed that the urban wage is institutionally and legally fixed, so that as a result of the migration of workers, if the number of migrant workers exceed the number of new jobs created, some workers would necessarily be unemployed, underemployed or will be forced into the urban informal sector
RELEVANCE OF THE HARRIS-TODARO MODEL IN DEVELOPING COUNTRIES
Rural-urban migration has over the years been an important part of urbanization in developing nations. The Harris-Todaro model was used to explain migration patterns in China. Nigeria as a developing country over the years we have experienced rural urban migration since wages are relatively higher in the cities than the rural areas. This over the years has led to a loss in rural manpower and reduction in agricultural output but matching growth has not been seen in the industrial sector rather an exponential increase in unemployment and underemployment. The Harris-Todaro model explains this phenomenon. Nigeria is considered the Urban giant of Africa. Urban natural population increase has been the dominant characteristic of urban growth in the Nigeria post-colonial period and will likely continue in the immediate future period. As at 2010 Nigeria is said to have added about 62.5 million individuals to it’s urban population and is estimated to be 226 million in 2050. Historical account of urban rural migration state a positive relationship between urbanization and economic growth, however this has not been the case in Nigeria. It is important to note that this is not peculiar to Nigeria. During the period 1970 to 2010 agricultural employment fell by 19% with the service sector growing by 21% and a 5% decline in the manufacturing sector.
LIMITATIONS OF THE HARRIS-TODARO MODEL
▪️ Some of the assumptions of the Harris-Todaro’s model were seen to be too restrictive.
▪️ The assumption that there is a perfect competition in the rural sector is not realistic.
▪️ The Harris-Todaro model also assumes that potential migrants are risk neutral where the migrants will likely be risk averse i.e they are indifferent between a certain expected rural income and an uncertain expected urban income of the same magnitude.
▪️ It thought that the only factor influencing migration was economic no reference to better education or healthcare.
▪️ Rural migrants don’t necessarily migrate back to the rural areas if they don’t get job in the cities instead there’s an increase in the urban informal sector.
Furthermore, the migration dynamics generated by migrants that seek to adaptate to the economic environment that they co-create leads the economy toward a long run equilibrium characterized by urban concentration characterized by underemployment and unemployment. When this long run equilibrium is reached, the Harris-Todaro condition is therefore satisfied. There is a stabilization of the rural-urban expected wage differential.
CONCLUSIONS DRAWN FROM THE HARRIS-TODARO MODEL.
This model explains migration in developing nations and it makes us understand that:-
▪️ So long as expected urban wages exceeds rural agricultural wages migration to the cities will continue.
▪️ When rural wages (wr) exceed expected urban wages the there’ll be a reverse migration i.e people will move back to the villages.
▪️ At equilibrium the rural wages and expected urban wages are equal and so therefore there’s a no incentives to move to the cities or rural areas.
For government to reduce rural urban migration policies that encourage and increase agricultural production should be encouraged. This is fine through the introduction of technology to the brutal agricultural sector. This will create incentives for migrants to remain in the rural areas moreover rural wage rate will be giving a boost. So while agricultural is developed the industrial sector is developed simultaneously. If the number of labour in the rural sector continues to decrease then the price of Agricultural products will increase because it will become scare since production will drop.
THE LEWIS-FEI- RANIS MODEL.
The Lewis-Fei-Ranis model is a dualism model developed by John.C. Fei and Gustav Ranis. It is understood as an extension of the Lewis model. It is also known as the surplus labour model. This model recognizes the presence of the modern and the primitive sector. In this model there’s existence of unemployment and underemployment of resources. The primitive sector is already existing agricultural sector and the modern sector is the rapidly emerging but still small sector.
According to this model development is brought about by a transfer of labour from the primitive sector to the modern sector but warns that while there’s a shift in the focal point of progress in the economy from the agricultural to the modern sector, the agricultural sector growth should not be negligible and output should be adequate to support the whole economy with food and raw materials. Savings and development is also a driving force in economic development in developing countries.one of the drawback of Lewis was that although the model didn’t advocate for complete abandonment of the agricultural sector it undermined the role of agriculture in industrial growth.
This model recognizes 3 stages in development.
Phase 1: the agricultural labour force is infinite elastic and suffers from disguised unemployment and MP=0.
Phase 2: there is a fall in average product since agricultural labourers have more the industrial sector. The real wage of industrial labourers reduces due to shortage of food supply, since there are lesser agricultural labourers. The decrease in real wage reduces the level of profit and surplus size that could be re-invested to further boost industrialization. It is important to note that so long as surplus exists, growth rate can still be increased without a full in industrialization.
Phase 3: the amount of labour that moves from the agricultural to the modern sector depends on.
▪️The level of surplus growth generated within the primitive sector, the growth of industrial capital stock depends on industrial profit growth.
▪️ Population growth rate
▪️ The nature of industry’s progress and its associated bias.
From the Lewis-Fei-Ranis model we understand that agricultural growth is equally as important as industrial growth, agricultural growth and industrial growth are balanced, the economy will be able to overcome the Malthusian population tarp only if the rate of labour shift from the primitive to the modern sector is larger than population growth rate.
Landowners investment and government fiscal measures influence the shifting of labour. The private and social cost of shifting labour can be very high. Per capital agricultural consumption can increase and there is a wide gap between urban and rural wages. This changes leads to leakages that prevents the creation of agricultural surplus.
Fei and Ranis strongly emphasize the interdependency of the industrial-agricultural sector and holds that a strong connection between the 2 sectors will speed up development. According to them economic growth is brought about in developing countries through the work of few numbers of entrepreneurs who have access to land and decision making powers and use industrial capital and consumer goods for agricultural practices.
Fei and Ranis assume that there’s constant returns to scale in the industrial and agricultural sector and the main factors of production are capital and labour. In the Lewis-Fei-Ranis model the major source of labour supply to the industrial sector is the agricultural sector. Since Lewis placed little emphasis on agriculture sector Fei and Ranis placed greater value on agricultural and stated that the rate of industrial growth depends on the total amount of agricultural surplus and on the amount of Profit earned in the industrial sector.
As a developing country advances there’s reallocation of labour from the agricultural to the modern sector. The essence of labour reallocation has lies in Engel’s law that states that the proportion of income spent on food decreases with an increase in the individual’s income level. Assuming 80% of labour force is involved in agricultural, 20% is left to the industrial sector. As productivity of agriculture increases it becomes possible for just 36% labour population to meet food supply satisfactory and as a result 64% of labour is now in the industrial sector. This is very much desired for an economy since the growth of industrial goods depends on the rate of per capital income and the growth of agriculture goods subject to the population growth rate. Labour reallocation is also important because with time consumers begin to want more consumer goods. Labour reallocation is necessary for producing more capital investment good.
The Lewis-Fei-Ranis model also emphasise that government has a major role to play in the initial stages of growth. Government also need to work on the social and economic overheads by the construction of roads,bridges, railways and other capital projects.
In the model we understand that there’s a possibility of growth without development. As technology led to a shift in labour saving production technique, growth of the economy takes place with increase in profit but no really economy development.
CRITICISM OF LEWIS-FEI-RANIS MODEL
▪️It is emphasized that Fei and Ranis did not really understand the sluggish economic situation prevailing in developing countries. Feudalism inhibited development in developing countries.
▪️Fei-Ranis was criticised on the grounds that it assumed that the MPP of labour is zero during the early stage of Economic development, this is only true when agricultural labour is very large this therefore leads to a shift of labour to the cities. When labour in the cities is excess then they are absorbed in the informal sector.
RELEVANCE OF THE LEWIS-FEI-RANIS MODEL IN NIGERIA
This model is very important for developing nations as it explains the stages of economic development and why there’s a shift of labour concertration from the agricultural to the industrial sector. Although this is a slowing process. In Nigeria it’s no news that the majority of labour is employed in the agricultural sector. If this model is applied in understanding the Nigerian situation then we understand that when Economic development is happening in Nigeria they’ll be a shift of labour from the agric sector to the industrial sector. From this model we understand that government also has a major role to play in the Economic development of Nigeria by providing capital goods.
Capital accumulation will also give the Nigerian economy a boost.
Name:ALI CHUKWUEMEKA JAPHET
Reg no:2017/242427
Japhet4chukwuemeka@gmail
Dept: Economics
THE HARRIS –TODARO MODEL OF MIGRATION
INTRODUCTION
Since the wage in cities is higher than one in rural area ,people migrate into the urban area hoping to get urban job. However, the probability of getting an urban job depends on the rate of employment in the urban area. However, given that the migrants are greater than the available job opportunities created , this will further create unemployment in the urban. Therefore, in many less-developed countries urban unemployment is a big issue. This essay attempted at expounding the Harris-Todaro Model of migration ,enumerating it’s basic characteristics, assumptions and core arguments .Furthermore, the policy and theoretical implications were delineated while relating it to the real world.
BASIC CHARACTERISTICS OF HARRIS-TODARO MODEL OF RURAL-URBAN MIGRATION:
1. Migration is stimulated primarily by rational economic consideration.
2. Migration is decided on the basis of expected, rather than actual, urban-rural wage differentials.
3. Probability of obtaining urban job is inversely related to the urban unemployment rate.
ASSUMPTIONS OF THE HARRIS –TODARO MODEL OF MIGRATION
The following are the underlying assumptions of the Harris -Todaro migration Model ;
(1)Urban wage is institutionally and legally fixed .
(2)Small open economy; the economy considered in Harris -Todaro model is a small open economy.
(3)Two sector economy; One an agricultural rural sector and the other , manufacturing urban sector economy.
(4)The capital –labor ratio and the factor reward ratio are in one to one relation with the relative price of the product.
(5)There is equality between the probability of finding a job and the existing rate of employment.
(6)In the rural agricultural sector, it is assumed that wages are flexible and equal to the marginal product of labor according to profit maximization.
(7)The equilibrium is reached when the expected wage in urban areas is equal to the marginal product of an agricultural worker.
(8)The Harris- Todaro model assumes the existence of perfect competition in the labour market.
THE HARRIS-TODARO MODEL OF MIGRATION
Historically, the Harris-Todaro Model can be traced to 1960s when the government of newly independent Kenya faced a difficult situation: Unemployment in Nairobi and other major cities was high and apparently rising. To cope with this problem, Agreements were reached in which private-sector and public-sector employers agreed to increase employment in exchange for unions agreeing to hold wages at their current levels. The larger number of jobs was expected to reduce unemployment. However, in the event, urban unemployment appeared to have increased following the Tripartite Agreements rather than decreased, as far as anyone could tell.
In light of these events, John Harris and Michael Todaro formulated the Harris-Todaro model to explain the puzzle. Soon after the model was published, the government of Kenya followed the Harris-Todaro precepts by putting into place an integrated program of rural development. The result was that unemployment in Kenya fell .At the core of the Harris-Todaro model were the following features. First, real wages (adjusted for cost-of-living differences) are higher in urban formal-sector jobs than in rural traditional-sector jobs. Second, to be hired for a formal-sector job, one has to be physically present in the urban areas where the formal-sector jobs are located. Third, and as a consequence of the first two features, more workers search for formal-sector jobs than are hired, employers hire some of the job seekers but not all of them, and those not hired end up unemployed. The Harris-Todaro model produced two powerful policy results. The first concerns the policy of formal-sector job creation to employ the unemployed (who, in the Harris-Todaro model, are all in urban areas, because that is where the formal-sector jobs are assumed to be located). Such a policy, they concluded, would increase the formal sector labor force by more than the number of new jobs created, thereby raising the number of urban unemployed. Thus, the solution to urban unemployment is not to create urban employment.
The second policy option that Harris and Todaro considered was a policy of rural development. If such a program could increase the rural traditional-sector wage, unemployment would then fall. Thus, in the Harris-Todaro model, the solution to urban unemployment is rural development.
Harris and Todaro’s fundamental contribution was building a model that fit the stylized facts of the labor market they were analyzing and that was based on sound micro foundations. The fact that the model remains part of the economist’s intellectual toolkit today is a tribute to its basic insight and enduring analytic power. Harris and Todaro formulated general processes for determining prices of the products produced by the two sectors and also for determining a rural-sector wage that varies inversely with the number of people in the rural sector. A simplified version of the Harris-Todaro model was developed in which product prices and rural-sector wages are taken as constant. Numerous additional analytic and policy results were derived in the simplified Harris-Todaro model. At the same time, some of the assumptions of the Harris-Todaro model were judged to be too restrictive, and so the model was generalized in the years that followed to nest their specific formulation within a broader framework. The initial Harris-Todaro model has been extended to allow for on-the-job search from a rural agriculture setting, the existence of an urban informal sector, preferential hiring of the better-educated, employment fixity, duality of production conditions and earnings levels within the rural sector, capital mobility, endogenous urban wage setting, risk aversion, and a system of demand for goods, among other factors.
In terms of pro-poor economic growth, the Harris-Todaro model and other multisector-labor-market models can help policy makers avoid two mistakes. One is to assume that development efforts should be channeled to the sectors where the poor are. The other is to assume that efforts should always be focused on getting the poor out of the sectors in which they now are. Careful cost-benefit analysis based on well-specified labor-market models is required to decide among such alternatives.
fI1:Equilibrium in Harris-Todaro model
In Harris –Todaro Model, Equilibrium is attained when the expected rural wage is equal to the rural wage.fom our diagram , equilibrium is attained at ‘E’ where the demand for labour in rural-agricultural area equals demand for labour in urban-manufacturing area.
THE HARRIS –TODARO MODEL OF MIGRATION :A CASE STUDY OF BOTSWANA
A study of migration behavior conducted by Robert E. B. Lucas in Botswana addressed such problems in one of the most careful empirical studies of migration in a developing country. His econometric model consisted of four groups of equations—for employment, earnings, internal migration, and migration to South Africa. Each group was estimated from microeconomic data on individual migrants and non migrants. Very detailed demographic information was used in the survey. Rural migrants in Botswana moved to five urban centers as well as to neighboring South Africa. Lucas found that unadjusted urban earnings were much higher than rural earnings—68% higher for males—but these differences became much smaller when schooling and experience were controlled for. Lucas’s results confirm that the higher a person’s expected earnings and the higher the estimated probability of employment after a move to an urban center, the greater the chances that the person will migrate. And the higher the estimated wage and probability of employment for a person in his or her home village, the lower the chances that the person will migrate. This result was very “robust”—not sensitive to which subgroups were examined or the way various factors were controlled for—and statistically significant. It represents clear evidence in support of Todaro’s original hypothesis. Moreover, Lucas estimated that at current pay differentials, the creation of one job in an urban center would draw more than one new migrant from the rural areas, thus confirming the Harris-Todaro effect. Earnings were also found to rise significantly the longer a migrant had been in an urban center, holding education and age constant. But the reason was because of increases in the rate of pay rather than in the probability of modern-sector employment. Taken together, the best-conducted studies of urbanization confirm the value of probabilistic migration models as the appropriate place to start seeking explanations of rural-to-urban migration in developing countries. But these studies underscore the need to expand these explanations of migration, considering that many people today migrate to participate in the informal rather than the formal urban sector and that workers may face a variety of risks.
THE POLICY IMPLICATIONS OF THE HARRIS-TODARO MODEL OF MIGRATION:
The Harris-Todaro model has far-reaching implications from the policy point of view. For example, if the government of the country concerned were successful in fostering industrial development in an urban area, employment would increase there.
The effect would be to increase the subjective productivity of getting urban employment in the minds of rural inhabitants. Migration would increase and the eventual effect of the new industrial development could be that urban unemployment becomes higher that the level prevailing before the new development took place.
There will be some level of urban employment which ensures equilibrium in the sense that no further migration takes place. Potential migrants may take a long-term view in arriving at a decision. They may consider that their desireness of obtaining an urban job will be higher after a waiting period of some months. Thus they will compare the present value of the sum of expected urban earnings with that of expected rural earnings.
They may be content to accept a low wage in the urban informal sector for some time. This might be a rational decision on a long-term basis. The root of the problem is the large difference between earnings in the modern industrial sector and those in the rural areas.
Often the former are well above the market clearing levels for varies reasory. The long-term solution to the problem lies in adopting policies for both urban and rural areas which reduces the real income differences between the two areas.
THEORETICAL IMPLICATION OF THE HARRIS-TODARO MODEL OF MIGRATION
There is no denying the fact that any development project can be evaluated using social cost- benefit analysis. An important part of the social cost of any input is opportunity cost, its value in its next best alternative use. Labour hired for an urban formal-sector project might well be drawn from the urban informal sector also.
The worker who moves out of the urban informal sector may, in turn, be replaced by someone from the rural sector. In this case, the output lost is that of the worker who was formerly in the rural sector, i.e., the worker at the end of the employment chain. For this reason, some analysts believe that the wage paid to casual agricultural laborers provides a good measure of the social cost of unskilled labour.
However, this measure, although a good indicator of output foregone through labour reallocation, probably understates the true social cost of employing labour, which has other components that are likely to be significant. One such component is induced migration. No doubt there are both pull and push factors behind internal labour migration that occurs in the course of economic development from rural to urban areas.
Such migration can result either from favourable economic developments in the towns or from adverse developments in the rural areas. The Harris-Todaro model integrates these two sets of forces in their analysis of the process of labour reallocation that is likely to occur during economic development. This is why the model was sort of innovation in the literature of development economics when it appeared for the first time in 1970’s.
CONCLUSION
Harris – Todaro model explains some issues of rural-urban migration. This migration happens in case when expected rural income is higher than rural wages. In this case economy may have high rates of unemployment. The equilibrium condition of this model is when expected rural wage is equal to rural wage. When government subsidize manufacturing sector Harris Todaro effect may happen. According to the authors job creation instead of dealing with unemployment problem actually may cause increase of unemployment. This happens when urban-rural wage differential is high enough, so rural workers move to the cities hoping to find a job with high wage. Obviously, not all these workers succeed in finding jobs which leads to unemployment.As Harris and Todaro suggested the first-best policy would be subsidizing manufacturing along with restrictions of rural migration.
ASSUMPTIONS OF HARRY’S AND TODARO MODEL OF MIGRATION (DEVELOPMENT ECONOMICS)
AYOGU UCHECHI EUPHEMIA
2017/244738
ASSUMPTIONS OF THE LEWIS FEI-RANIS MODEL
Lewis in 1954 proposed a seminal theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development. Later, Ranis and Fei in 1961 formalised the Lewis theory and defined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model. These three phases, are distinguished by the marginal productivity of agricultural labour.
The entry into each phase is marked three turning points:
• The breakout point leads to phase one growth with redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural unemployment and
• The commercialisation point leads to phase three of self-sustaining economic growth with the commercialisation of the agricultural sector.
The Lewis-Ranis-Fei theory of dualistic economic development therefore provides a suitable theoretical framework for studying the growth path of labour-surplus developing economies such as China.
ASSUMPTIONS OF THE MODELS
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage.
Lewis model makes the following assumptions:
(i) There is a duel economy i.e., the economy is characterized by a traditional, over-populated rural subsistence sector furnished with zero MPL, and the high productivity modern urban industrial sector.
(ii) The subsistence sector does not make the use of ‘Reproducible Capital’, while the modern sector uses the produced means of capital.
(iii) The production in the advanced sector is higher than the production in traditional and backward sector.
(iv) According to Lewis, the supply of labor is perfectly elastic. In other words, the supply of labor is greater than demand for labor.
The followings are the sources of unlimited supply of labor in China.
(i) Because of severe increase in population, more than required number of labors are working with lands, the so called disguised unemployed.
(ii) In China, so many people are having temporary and part time jobs, as the shoe-shines, loaders, porters and waiters etc. There will be no fall in the production even their number are one halved.
(iii) The landlords and feudals are having an army of tenants for the sake of their influence, power and prestige. They do not make any contribution towards production, and they are prepared to work even at less than subsistence wages.
(iv) The women in China do not work, but they just perform house-hold duties. Thus they also represent unemployment.
(v) The high birth rate in UDCs leads to grow unemployment.
Basic Thesis of the Lewis Model
Lewis model is a classical type model which states that the unlimited supplies of labor can be had at the prevailing subsistence wages. The industrial and advanced modern sector can be developed on the basis of agri. to traditional sector. This can be done by transferring the labor from traditional sector and modern sector.
Lewis says that the wages in industrial sector remain constant. Consequently, the capitalists will earn ‘surplus’. Such surplus will be re-invested in the modern sector leading to absorb the labor which are migrated from subsistence sector. In this way, the surplus labor or the labor which were prey to disguised unemployment will get the employment. Thus both the labor transfer and modern sector employment growth are brought about by output expansion in that sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector. Though the wages have been assumed constant, yet Lewis says that the urban wages are at least 30% higher than average rural income to induce the workers to migrate from their home areas.
In the fig., the production function regarding traditional sector has been demonstrated. Here in the upper part of the fig., by employing LF of labor, the OT of food production has been produced, while the amount of capital is fixed here. In the lower part of figure we have APL and MPL in the subsistence farming sector which have been derived from the TPF curve in the upper part of the fig. This is the behavior of a UDC where 80% to 90% of population lives and works in rural areas.
Lewis makes two assumptions regarding traditional sector:
(i) There is surplus labor because MPL = 0 (as MPLF curve cuts x-axis).
(ii) All rural workers share equally in the output so that rural real wage is determined by the APL, and not by MPL. Thus it is OA, which has been attained by dividing OT by OLF labor in subsistence sector.
the upper segment we have the production functions regarding modern industrial sector. In case OL, labor are employed, having the production function TPM(K1), TP1 is being produced. In the lower segment of fig., the demand for labor is D1(K1) at the constant wages (OW) which are 30% higher than the average rural wages.
In the Lewis model, the modern sector capital stock is allowed to increase from K1 to K2 and K3 as a result of reinvestment of profits by capitalist industrialists. This causes the TP curve in the upper part of fig., to shift upward from TPM(K1) to TPM(K2) and to TPM(K3).
The process that will generate these capitalistic profits for reinvestment and growth is illustrated in the lower part of fig. (b).
The modern sector MPL curves have been derived from the TPM curves of the upper part of the fig. (b).
These curves are demand for labor curve because of assumption of perfect competition.
The OA in both lower parts of fig (a) and (b) represents the average level of real subsistence income in the traditional rural sector. But in the modern sector the real wages have been represented by OW (the 30% higher than rural wages).
At such wages the supply of rural labor is assumed to be unlimited or perfectly elastic as shown by WSL curve in fig (b). This means that modern sector employer can hire as much labor as he likes without any fear of rise in wages. It is also told that in traditional sector the supply of labor is in the millions, while the employment in modern sector is in thousands. In the modern sector the employment is made by the employer to the point where MPL = W. (the point F in the lower part of fig. (b). Thus the basic employment is OL1, with this employment of labor CD1FL, output in manufacturing sector is being produced. While the share of such employed labor will be OWFL1.
The balance of output shown by the shaded area WD1F would be the total profits (surplus) that accrue to the capitalists. As Lewis assumes that all of these profits are reinvested, the total stock of capital in the modern sector will rise from K1 to K2. As a result, TPM will shift from TPM(K1) to TPM(K2) which in a turn leads to increase MPL. In other words, the demand for labor will increase as shown by the curve D2(K2) in the lower part of fig (b).
Now the new equilibrium in the modern sector takes place at point G where OL2 labor are being employed. The total output rises to OTP2 or OD2GL2 while total wages and profits increase to OWGL2 and WD2G, respectively. Once again, these larger (WD2G) profits are reinvested, the total stock of capital will increase to K3. Again the TP curve will shift upward, as the TPM(K3), and demand for labor curve will shift to D3(K3).
CONCLUSION
From the assumptions of the model, the process of modern self sustaining growth and employment expansion will continue till all the surplus rural labor is absorbed in the new industrial sector. Thereafter, additional workers can be withdrawn from agri. sector only at a higher cost of lost food production because this will decrease the labor to land ratios. In this way, the MPL will be no more zero. Here, labor supply curve will become positively sloped along with the growth of modern sector. The structural transformation of the economy will take place through shifting traditional rural agriculture to modern urban industry.
UNIVERSITY OF NIGERIA, NSUKKA
FACULTY OF EDUCATION
DEPARTMENT OF EDUCATION ECONOMICS
TOPIC
HARRY’S AND TODARO MODEL OF MIGRATION
AN
ASSIGNMENT WRITTEN IN PARTIAL FULFILMENT OF THE COURSE ECO 361 (DEVELOPMENT ECONOMICS)
BY
AYOGU UCHECHI EUPHEMIA
2017/244738
LECTURER: OLISA EMEKA
MARCH, 2021
ASSUMPTIONS OF THE LEWIS FEI-RANIS MODEL
Lewis in 1954 proposed a seminal theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development. Later, Ranis and Fei in 1961 formalised the Lewis theory and defined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model. These three phases, are distinguished by the marginal productivity of agricultural labour.
The entry into each phase is marked three turning points:
• The breakout point leads to phase one growth with redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural unemployment and
• The commercialisation point leads to phase three of self-sustaining economic growth with the commercialisation of the agricultural sector.
The Lewis-Ranis-Fei theory of dualistic economic development therefore provides a suitable theoretical framework for studying the growth path of labour-surplus developing economies such as China.
ASSUMPTIONS OF THE MODELS
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage.
Lewis model makes the following assumptions:
(i) There is a duel economy i.e., the economy is characterized by a traditional, over-populated rural subsistence sector furnished with zero MPL, and the high productivity modern urban industrial sector.
(ii) The subsistence sector does not make the use of ‘Reproducible Capital’, while the modern sector uses the produced means of capital.
(iii) The production in the advanced sector is higher than the production in traditional and backward sector.
(iv) According to Lewis, the supply of labor is perfectly elastic. In other words, the supply of labor is greater than demand for labor.
The followings are the sources of unlimited supply of labor in China.
(i) Because of severe increase in population, more than required number of labors are working with lands, the so called disguised unemployed.
(ii) In China, so many people are having temporary and part time jobs, as the shoe-shines, loaders, porters and waiters etc. There will be no fall in the production even their number are one halved.
(iii) The landlords and feudals are having an army of tenants for the sake of their influence, power and prestige. They do not make any contribution towards production, and they are prepared to work even at less than subsistence wages.
(iv) The women in China do not work, but they just perform house-hold duties. Thus they also represent unemployment.
(v) The high birth rate in UDCs leads to grow unemployment.
Basic Thesis of the Lewis Model
Lewis model is a classical type model which states that the unlimited supplies of labor can be had at the prevailing subsistence wages. The industrial and advanced modern sector can be developed on the basis of agri. to traditional sector. This can be done by transferring the labor from traditional sector and modern sector.
Lewis says that the wages in industrial sector remain constant. Consequently, the capitalists will earn ‘surplus’. Such surplus will be re-invested in the modern sector leading to absorb the labor which are migrated from subsistence sector. In this way, the surplus labor or the labor which were prey to disguised unemployment will get the employment. Thus both the labor transfer and modern sector employment growth are brought about by output expansion in that sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector. Though the wages have been assumed constant, yet Lewis says that the urban wages are at least 30% higher than average rural income to induce the workers to migrate from their home areas.
the production function regarding traditional sector has been demonstrated. Here in the upper part of the fig., by employing LF of labor, the OT of food production has been produced, while the amount of capital is fixed here. In the lower part of figure we have APL and MPL in the subsistence farming sector which have been derived from the TPF curve in the upper part of the fig. This is the behavior of a UDC where 80% to 90% of population lives and works in rural areas.
Lewis makes two assumptions regarding traditional sector:
(i) There is surplus labor because MPL = 0 (as MPLF curve cuts x-axis).
(ii) All rural workers share equally in the output so that rural real wage is determined by the APL, and not by MPL. Thus it is OA, which has been attained by dividing OT by OLF labor in subsistence sector.
the upper segment we have the production functions regarding modern industrial sector. In case OL, labor are employed, having the production function TPM(K1), TP1 is being produced. In the lower segment of fig., the demand for labor is D1(K1) at the constant wages (OW) which are 30% higher than the average rural wages.
In the Lewis model, the modern sector capital stock is allowed to increase from K1 to K2 and K3 as a result of reinvestment of profits by capitalist industrialists. This causes the TP curve in the upper part of fig., to shift upward from TPM(K1) to TPM(K2) and to TPM(K3).
The process that will generate these capitalistic profits for reinvestment and growth is illustrated in the lower part of fig. (b).
The modern sector MPL curves have been derived from the TPM curves of the upper part of the fig. (b).
These curves are demand for labor curve because of assumption of perfect competition.
The OA in both lower parts of fig (a) and (b) represents the average level of real subsistence income in the traditional rural sector. But in the modern sector the real wages have been represented by OW (the 30% higher than rural wages).
At such wages the supply of rural labor is assumed to be unlimited or perfectly elastic as shown by WSL curve in fig (b). This means that modern sector employer can hire as much labor as he likes without any fear of rise in wages. It is also told that in traditional sector the supply of labor is in the millions, while the employment in modern sector is in thousands. In the modern sector the employment is made by the employer to the point where MPL = W. (the point F in the lower part of fig. (b). Thus the basic employment is OL1, with this employment of labor CD1FL, output in manufacturing sector is being produced. While the share of such employed labor will be OWFL1.
The balance of output shown by the shaded area WD1F would be the total profits (surplus) that accrue to the capitalists. As Lewis assumes that all of these profits are reinvested, the total stock of capital in the modern sector will rise from K1 to K2. As a result, TPM will shift from TPM(K1) to TPM(K2) which in a turn leads to increase MPL. In other words, the demand for labor will increase as shown by the curve D2(K2) in the lower part of fig (b).
Now the new equilibrium in the modern sector takes place at point G where OL2 labor are being employed. The total output rises to OTP2 or OD2GL2 while total wages and profits increase to OWGL2 and WD2G, respectively. Once again, these larger (WD2G) profits are reinvested, the total stock of capital will increase to K3. Again the TP curve will shift upward, as the TPM(K3), and demand for labor curve will shift to D3(K3).
CONCLUSION
From the assumptions of the model, the process of modern self sustaining growth and employment expansion will continue till all the surplus rural labor is absorbed in the new industrial sector. Thereafter, additional workers can be withdrawn from agri. sector only at a higher cost of lost food production because this will decrease the labor to land ratios. In this way, the MPL will be no more zero. Here, labor supply curve will become positively sloped along with the growth of modern sector. The structural transformation of the economy will take place through shifting traditional rural agriculture to modern urban industry.
LEWIS FEI RANIS MODEL
A prominent Economist Lewis was well known with his model “Economic Development with unlimited supplies of Labour”. This model pictured the capital accumulation in the modern industrial sector with the aim of getting labour from the subsistence agricultural sector. The model was further modified by Fei and Ranis, but the essence of the two models is the same. The Lewis model and that of Fei-Ranis assume the existence of surplus labour in the economy, the main component of which is the enormous disguised unemployment in agriculture. Further they visualize ‘dual economic structure’ with manufacturing, mines and plantations representing the modern sector, the salient features of which are the use of reproducible capital, production for market and for the profit, employing labour on wage payment basis and modern methods of industrial organization. Furthermore, agriculture represents the subsistence sector using non-reproductive land on self-employment basis and producing mainly for self-consumption with inferior techniques of production and containing surplus labour in the form of disguised unemployment. Hence, the productivity or output per head in the modern sector is much longer than that in agriculture. Though the marginal productivity in agriculture over a wide range is taken to be zero, the average productivity is assumed to be positive and equal to the bare subsistence level.
ANALYSIS OF THE LEWIS MODEL
The authenticity of the Labour-surplus model of Lewis for developing countries like Nigeria; depend of course on the extent to which their underlying assumptions, explicitly or implicitly, made in this model. In our views the basic premise of this model is wrong and that it unrealistic and irrelevant for framing a suitably development strategy to solve the problem of surplus labour and unemployment. The basic premise of the model is that industrial growth can generate adequate employment opportunities so as to draw away all the surplus labour from agriculture in an overpopulated developing country like Nigeria where population is currently increasing at the annual rate of around 1.6%. This premise has been proved to be a myth in the light of generation of little employment opportunities in the organized industrial sector during over sixty years of economic development in India, Latin American and African countries.
Putting India into consideration, for instance, in the 30 years (1951-81) of industrial development in India during which fairly good rates of industrial production had been achieved, the organized industrial employment increased by any 3 million which was too meager to make any significant impact on the urban unemployment situation far from providing a southern to rate labour-surplus problem in agriculture. Thus the generation of adequate employment opportunities and as a result the absorption of surplus labour from agriculture in the expanding industrial sector has not proceeded as predicted by the Lewis model.
One can notice that the migration of workers for example in Nigeria has occurred as a result of urbanization in the various censuses but these immigrants to the urban area has not been absorbed into modern high productivity employment, as pictured by Lewis Fei Rranis. These immigrants to urban areas have been mainly employed in petty trade and domestic services in the country.
THE MODEL WITH SURPLUS LABOUR
In the model, the wage rate is put into consideration; such wage in the modern industrial sector is determined by the average productivity in the agriculture. To this average productivity is added a margin, According to Lewis this margin is fixed at 30% which is required for furnishing an incentive for labourers to transfer themselves from the countryside to the urban industries as well as for melting the higher cost of urban living. In this setting, the model shows how the expansion in the industrial investment and production or, in other words, capital accumulation outside agriculture will generate sufficient employment opportunities so as to absorb all the surplus labour from agriculture and elsewhere.
Furthermore, profit in the Lewis ‘unlimited supply of labour constitutes the main source of capital formation. The greater the share of profits in national income,the greater the rate of savings and capital accumulation. Thus with the expansion of the modern or capitalist sector, the rate of saving and investments as percentage of national income will continuously rise. As a result rate of capital accumulation will also increase relative to national income. It is of course assumed that all proofs or a greater part of the profits is saved and automatically invested. It will be important to note that as the capitalist expands, the share of profits in national product will rise. The rise in the share of profits in national product is due to the assumption of the model that wage rate remains constant and prices of the products produced by the capitalist sector do not fall with the expansion in output. To quote Lewis himself, “If unlimited supplies of labour are available at constant real wage rate, and if any part of the profits is reinvested in productive capacity, profits will grow continuous relative to the national income.”
ASSUMPTIONS AND CRITICISM OF THE MODEL
Labour-absorptive capacity of the modern industrial sector: Lewis Fei and Ranis assumed that the growth of industrial employment will be greater than the growth in labour force. This is one of their shortcomings, they believed only then the organized industrial sector can absorb surplus labour from agriculture. The employment far from withdrawing labour currently employed in the organized industries and services, in the basis to absorb the new entrants to the labour force.
One of the important setbacks of the Lewis model is that it has neglected the important of agricultural growth in sustaining capital formation in the modern industrial sector. When as a result of the expansion of capitalist modern sector, transfer of labour form agriculture to industry takes place, the demand for food grains will rise. If the output of food grains does not increase through agricultural development to meet the additional demand for food grains wages of industrial labour will slow down or even choke off the process of capital accumulation and economic development. Thus, if no allowance is made for agricultural growth, the expansion of modern sector and capital accumulation is bound to be halted.
Lewis model neglects the importance of Labour Absorption in Agriculture: We can find weaknesses in the models of Lewis and Fei-Ranis in the scenario that they have ignored the generation of productive employment in agriculture. No doubt, Lewis is this later writings and Fei-ranis in their modified and extended version of Lewis model have pictured and important role for agricultural development so as to sustain industrial growth and capital accumulation. But they visualize such an agricultural development strategy that will release labour force form agriculture rather than absorbing them in agriculture. Thus, to quote Fei and Ranis: “In such a dualistic setting the heart of the development problem lies in the gradual shifting of the economy’s centre of gravity from the agricultural to the industrial sector through labour reallocation.” In this process each sector is call upon to perform a special role: productivity in the agricultural sector must rise sufficiently so that “smaller fraction of the total population can support the entire economy” with food and raw materials, thus enabling agricultural workers to released; simultaneously, the industrial sector must expand sufficiently to provide employed opportunities for the released workers….labour reallocation must be rapid enough to swamp massive population increase if the economy’s centre of gravity is to be shifted over time.”
The above shows that employment potential of organized industrial sector is so little that labour reallocation between agriculture and industry and “smaller fraction of the total population being employed in agriculture” is just not possible in labour-surplus developing countries like India. Indeed, a good amount of employment opportunities can be generated in agriculture itself by capital accumulation in agriculture, adoptive proper agricultural technologies and making appropriate institutional reforms in the pattern of land ownership. Even about the African countries most of which do not suffer from the Malthusian problem of overpopulation but are currently faced with acute urban unemployment (especially of what is known as “UNEMPLOYMENT OF SCHOOL LEAVERS” majority of which have migrated from the villages to the urban areas) the expert opinion was veered round to the view of seeking solution of labour-surplus problem within agriculture.
CONCLUSIONS
In the above explanations, we could figure out difference lapses of the model, other than that, the model still maintains high degree of analytical value. It clearly points out the role of capital accumulative in raising the level of output and employment in labour-surplus developing countries. The model stipulates the systematic analysis of the growth problem of dual economies and brings out some of crucial importance of such factors as profits and wages rate of capital accumulation and economic growth. It also stipulates relationship in growth process most
TODARO MODEL OF MIGRATION .
Prominent men behind this model are John R. Harris and Michael Todaro, this model was developed in 1970 and used in development economics and welfare economics to undertand issues con.cerning rural-urban migration. Major assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. In the model, an equilibrium is attained when the expected wage in urban areas is equal to the marginal product of an agricultural worker. Partially like the classical, the model assumes that unemployment does not exist in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labour market is perfectly competitive, because of this the wage equals the marginal productivity.In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban inomes.
ASSUMPTIONS OF THE MODEL, TOGETHER WITH IT’S APPLICATION TO REAL LIFE SITUATIONS
Here, we discuss the assumptions together with the equations that describes them. The structure of the model is based on the assumption that a fixed wage leads to an outbreak of distortion and urban unemployment. In the model, we have two sectors , Sector one Agricultural rural sector, sector two manufacturing urban sector.There are three kinds of production factors, specific production factor in sector 1, K1, specific production factor in sector 2, K2, and labor, L, which is employed in both sectors and mobile between sectors.The specific production factor in the urban sector, K2, includes not only equipment and facilities for production but also social infrastructure, such as airports, roads, and industrial parks, which are related to production. Therefore, an improvement of the social infrastructure means an increase in K2.
Quoting Harris Todaro,”In the Harris–Todaro model, the necessary and sufficient condition for the increase in the specific production factor in the urban sector to decrease urban unemployment is that the slope of the marginal product curve of labor in the rural sector exceeds the per-capita wage difference between the institutional minimum wage and the expected wage in the urban sector”.
Putting agricultural productivity into consideration, if the productivity of Agricultural products rises together with the income of the individual,invariably, there would be no need for the rural workers to migrate to the urban area. Mostly in some of the Asian countries developing infrastructurrs such as industrial parks, roads e.t.c gives rise to the model. In the case of metro cebu, in Philippines, the Todaro paradox occurred in 1990s. As the Metro Cebu economy developed with ODA projects supported by the Japanese Government, workers from surrounding areas migrated to the region and increased urban unemployment.
CONCLUSIONS
Talking about the economy of the less developed country, the capital accumulation is very important, The accumulated capital forms many production bases and creates job opportunities in the urban sector.At the same time, the increase in employment raises the wage level in the urban sector. In the Harris–Todaro model, the rising urban wage pushes up the expected wage in the urban sector and consequently encourages workers to migrate from the rural sector to the urban sector.
Harrod of England and Professor Evesey Domar of the United States. They were of the view that a country’s level of output was being influenced or determined directly by the net-savings ratio (s) and inversely by the capital-output ratio (c). That is, ∆Y/Y = s/c. This growth model was however criticized in the issue that it only focused on the capital-output ratio which is how many units of capital could be used to produce a unit of output. It did not take into consideration those poor countries with low capital formation as their growth was actually limited to the amount or level of capital that country had or could raise. These growth models were known as or referred to as “orthodox” by Corden and Findley (1971).
Asides this model, there is also the most influential dualistic framework which is that of Lewis (1954). The idea of surplus labour, subsistence wages in the development of a dualistic economy in Lewis (1954) was later diagrammatically formalized by Ranis and Fei (1961). These two also showed how agricultural surplus could lead to the growth of industries. The common characteristics of the dualistic theories brought up as well as other alike models include the following:
No unemployment in the modern sector.
The sectoral wage differential is assumed fixed or proportional to the wage level in the urban sector.
The new or modern thinking were later brought up of the notable was the one propounded by Michael Todaro (1969) and John Harris (Harris and Todaro 1970). The Harris-Todaro Model is an equilibrium version of the Todaro Migration Model which forecasts and explains the rural-urban migration as an economically rational process despite the high urban unemployment. The migrants calculate the value of the urban expected income or its equivalent and move of it is more than the average rural income. The importance of this was as a result of the Keynesian Revolution is that “equilibrium could occur or come about even when there is a chronic level of unemployment in the urban sector”. This implies that the economy would still or could still be in balance even with the existence of a severe urban unemployment. It has also been deduced that the most important factor why urban population was more than of the rural sector was due to the fact that labour from the rural sector moved to the urban sector in search of “greener pastures”.
In the situation of a dualistic model, the rural sector is letting go of much labour too quickly while the urban sector is hiring or accepting labour too slowly as it is assumed that the urban sector is capital-intensive (Lewis 1965). The manifestations of the employment problem in the urban areas as much labour get unemployed is the outcome of the poverty and underemployment in the Third World Countries (Lubell 1988). It has also been recognized that labour migration was due to the fact that the rural-urban wages were different compared to each other. The contribution of Todaro is the introduction of the possibility of employment as a factor in the decision-making process of a potential migrant. He devised what he called a two-stage process in the less-developed countries.
The first stage is characterized by where the labour migrant decides to move from the rural sector for a period of time (that is, from the traditional informal sector). The second stage is then reached when that labour migrant has gotten a more permanent job in the modern or urban sector. So the two-stage process is simply involving first, when the labour migrant resolves to leave his place in the rural sector for a certain time period and second, the labour migrant finds a more permanent job in the urban sector. However, Todaro and some others did not take into consideration the informal urban sector explicitly as its employees were usually underemployed as they were not distinguished from the unemployed as they made no income of their own but relied on their relatives as explained of the informal sector by Lewis (1954).
According to Todaro, the probability or tendency of getting a job depends on the size of the urban population that is employed, number of newly created jobs in the urban sector, as well as the length or duration a labour migrant has been in that sector. Consequently it implied that according to Todaro, the longer a labour migrant has been in the manufacturing sector, the more likely he or she is to get a job there. An extension of this was done by Harris and Todaro (1970), where they explained that the urban wage is equal or equivalent to the expected value of the urban wage and this formed the notable Harris-Todaro Equation which is of the form:
Wa = βWm where,
Wa = Flexible wage in the agricultural sector is equal to the value of the marginal product in that sector, β = Probability of employment (dependent on the three (3) factors listed earlier), and Wm = Wage in the manufacturing sector which is assumed fixed or constant institutionally either because of the involvement of the union’s activities or a friendly government towards the workers in the modern sector. This is unlike in the orthodox models where the wage difference in the rural-urban sectors is not fixed or constant.
THE BASIC MODEL
The Harris-Todaro Model would be referred to as the H – T Model from henceforth, assume that migration from the rural to the urban areas depends primarily on the difference in wages between the rural and urban labour markets (which is the wage differential). That is the expected urban wage is the actual urban wage multiplied by the probability of getting a job, or Weu = PWu where,
Weu = Expected Urban Wage and P = Probability of getting a job where P is expressed as: P = where,
Eu = Urban Employment, Uu = Urban Unemployment and L = Total Labour Force. Another assumption of the Harris-Todaro is that all the members of the urban labour force have equal chances of obtaining or getting the jobs available for them. So Weu = Urban Wage multiplied by the Urban Employment Rate.
POLICY IMPLICATIONS OF THE H – T MODEL
The H – T Model has some impressing implications from the policy point of view. Let’s take for an instance, if the government of a country is concerned with fostering industrial development in an urban area, employment would increase and this would lead to an increase in productive of getting urban employment in the minds of the rural inhabitants. Migration to the urban area would then increase and the outcome would be that the unemployment rate in the urban areas would rise more than how it was before the development industrially occurred. Due to this, labour migrants would prefer to accept the wage in the urban informal sector than going back to wait for long for jobs that would not come in time as urban employment is now in equilibrium. However, the effect of this is that the earnings in the urban modern industrial sectors would be more or higher than those in the rural traditional sectors. The long-term solution to this issue would be to fix a wage policy for the two sectors that would reduce the real income differences between the two sectors.
THE ASSUMPTIONS OF THE MODEL
In analyzing the H – T Model, there are some assumptions alongside those listed before which include:
There is fixed amounts of labour (L) and capital (K) factor inputs.
Capital is fully employed but labour unemployment exists in the urban sector due to the fixed urban wage, W is higher than the flexible rural wage, w.
The economy is small and imports the urban output, X and exports the agricultural output, Y which is used as a numeraire.
MATHEMATICAL EXPRESSION OF THE MODEL
Let Lj and Kj represent the labour and capital factor inputs employed in the sectors respectively, we then have the output of the urban manufacturing sector to be of the form: X = F (Lx, Kx) and the output of the rural agricultural sector to be of the form: Y = G (Ly, Ky).
Due to the wage inflexibility in the manufacturing sector, some form of unemployment would exist in the urban sector. The profit of the urban sector would therefore equal: Πx = PF – WLX – rKx, where P = Producer’s price of the urban output and W = Fixed value of urban wage. The profit of the rural sector would be of the form: Πy = G – wLY – rKY, where w = Flexible value of rural wage and the price of the numeraire Y is unity or equal to one (1). The first-order conditions for the optimal labour employment are: PFL – W = 0; GL – w = 0. These give the conditional labour demand functions: Lx = Lx (Kx, P, W) and LY = LY (KY, P, w).
The rural wage w = the expected urban wage. Therefore, the relationship between the two wages in the two sectors is explained by the H – T conditions which are:
w = βW = where β = which is the probability of getting
employed and λ = Lu/Lx = Relative Unemployment in the urban sector.
COMPARISON WITH THE REAL WORLD
The successful East Asian Countries of Taiwan, Korea, and Singapore, as well as the not-so successful countries like Brazil, Chile, and several others, is usually the example that is given to explain the comparison of this model with the real world. It is argued (Balassa 1989) that the import-substitution policies in many less-developed countries are based against the primary agricultural sector which is the exporting sector while the export-oriented polices provide similar incentives to the two sectors. Countries that adopt inward-looking strategies, the limitation of the domestic markets and the lack of competition leads to the allocative and technological inefficiency. As in contrast with the onward-looking countries which are able to mobilize domestic resources effectively in the production if goods that are in competition in the wide markets worldwide which would result in technology. It is now in our own opinion that majority of the less-developed countries have approached what is said to be the take-off stage as described by Lewis (1954) and Fei and Ranis (1961) characterized by the rapidly growing economies, transfer of labour from the traditional sector, and the persistent or continuous problems of the high urban unemployment and underemployment rates
OBI PROSPER UCHE
REG NO: 2017/241318
THE HARRIS-TODARO MODEL
Harris-Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain the issues concerning rural-urban migration. An assumption of the model suggest that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This somply implies that rural-urban migration in the context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income. A typical dualistic model in development economics contains exactly two sectors, an agricultural or traditional sector in the rural area and a modern or manufacturing sector in the urban area. The most familiar single-sector model is the growth theory of Harrod-Domar (1946), also the most representative and influential dualistic framework is that of Lewis (1954) which has the idea of surplus labor, subsistence wages, and turning points in the development of a dualistic economy. The work of Lewis (1954) wasa later rigorously and diagrammatically reformed by Ranis and Fei (1961). Their work (Ranis and Fei) showed how agricultural surplus could lead to the growth of industries. According to Jorgenson (1961), the production relations of a dual economy is characterized by an asymmetry.
If the formal sector and the rural sector are assumed to be fully flexible, then wages must be equalized at equilibrium in order to make all workers indifferent to migration.
Basic Assumptions
➢ Migration is a primarily economic decision.
➢ There is no unemployment in the rural sector and it is perfectly competitive such that wage is equal to marginal product
➢ Members of the labor force rationally compare the expected value of potential wages to current wages to make the decision to migrate or not.
Let’s represent the two sector capital version of the HarrisTodaro (1970) model which is also known as the Corden and Findlay (1975) model. A small open economy with two sectors, rural (sector X) and urban(sector Y), is considered. Sector X produces an agricultural commodity using labour and capital while sector Y produces a manufacturing good using the same two inputs. Capital is perfectly mobile between the two sectors and its economy-wide return is r. On the contrary, labour is imperfectly mobile between the sectors. Workers in the urban sector are unionised and receive a higher wage, WY, than their counterparts in the rural sector who receive a low competitive wage, WX. So WY > WX and this intersectoral wage differential leads to ruralurban migration of labour. Markets are perfectly competitive except in the urban labour market. It is assumed that neoclassical production functions exhibit constant returns to scale with positive but diminishing marginal productivity to each factor.
Application of Harris-Todaro model to the Nigerian Economy
Throughout the developing world, countries are experiencing rapid rates of urbanization. In Africa using Nigeria as a case study, urban growth rates are among the highest in the world averaging about 7 percent annually, with several cities having growth rate in excess of 10 percent. Association with this urbanization has been a large increase in the open urban unemployment which generally exceeds 10 percent of the urban labor force and consists largely of young school leavers.
Although rapid urbanization and it’s associated unemployment is due partly to high population growth rates, rural-urban migration accounts for over half the growth of most African cities. At the same time, out-migration of labor from agriculture has been one factor leading to national food do and rising food prices in many African countries.
For these reasons, there is a widespread concern that the rate of rural-urban migration should be slowed. From Nigeria’s economic view point, the mass of unemployed coupled with at least seasonal labor deficits in rural areas represents under- utilization of resources and contributes to inequitable distribution of income.
Therefore, migration from rural areas to urban areas will increase if:
Urban wages increase in the urban sector, increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector, decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
LEWIS-FEI-RANIS MODEL
Current literature on growth and development continues to be influenced by the one sector Solow-type models or the two-sector Uzawa-type models, both of which have now been complemented by endogenous growth. While these endogenous growth models have recently begun to confront such issues as poverty traps at a theoretical level, they generally share the neoclassical feature of full employment and market clearing. In contrast, the surplus labor models advanced by Lewis (1954), and expanded upon by Ranis and Fei (1961, 1964, 1997), described a two-sector economy depicting an initially large traditional sector and a relatively small commercialized sector, with the key feature that the traditional sector does not adhere to the neoclassical full employment labor market clearing assumption. While various micro foundations can be constructed to detail why this might be so, at the macro level, which was the focus of these early dual economy models, it was sufficient to posit that labor was in excess supply relative to cooperating factors at the prevailing wage and technology, and thus that the commercialized sector faced an essentially infinitely elastic labor supply at any moment in time.With unskilled rural labor the abundant resource in many developing countries, especially at an early stage of their development, what determines the price of labor has continued to be a controversial issue, although it is clear that, in recent years, the neoclassical model and market clearing approaches have enjoyed increasing popularity in not only the theoretical but also the applied literature. The notion of an institutional or bargaining wage not based on marginal productivity fundamentals has been especially repugnant to orthodox economists. The rejection of the labor surplus model has, in part, been due to some confusion as to which of its assumptions are necessary as opposed to which are sufficient.
Assumptions of the lewis-fei-ranis model
1. There is a presence of dual economy. Traditional or agriculture sector is passive and stagnant in nature while the capitalist sector is active and progressive in nature.2. Supply of land is fixed, and both A sector and K sector makes use of the land. 3. Population is an exogenous factor i.e. it is determined by factors other than those present in the model. 4. Real wage rate in the industrial sector is fixed. This wage rate is equal to initial level productivity and is also called constant institutional wage rate.
5. There are constant returns to scale with respect to labour where labour acts as a variable factor in both A Sr and K Sr. 6. There is no accumulation of K in the A Sr. except in one form, i.e., land reclamation. It means that if there is no technological breakthrough in agriculture, the sector will become non-remunerative and it will be characterized by fatigue. Therefore, land’s fertility has to be maintained. 7. Output of the A Sr. depends upon land and labour, while that of the K Sr. depends upon labour and capital.8. Marginal product of labour is zero at some points and such labour force can be transferred from A Sr to K Sr, where the productive capacity is more without any loss to A Sr.
Application of the lewis-fei-ranis model to the Nigerian economy
The per capita income (in local currency unit – naira) rose at decreasing rate from 1981 to 1998, rising at increasing rate from 1999 till 2014. However, the agricultural contribution to productivity was rising and falling but fell in most of the years from 1981 to 2014. This suggests that agricultural productivity might not be responsible for the increase in income per head in Nigeria during the period
NAME: TARGEMA JOSIAH TERZARMO
REG NO: 2017/249457
DEPARTMENT: ECONOMICS
THE LEWIS FEI RANIS MODEL (SURPLUS LABOUR THEORY)
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It’s recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
In 1954. In his model Lewis divides the economy in an underdeveloped country in two sectors namely the Subsistence sector and the capitalist sector. Subsistence is identified with the agricultural sector of the economy while the capitalist sector implies mainly the manufacturing sector of the economy. Capitalist sector also includes plantations and mining where hired labour is employed for purposes of production. The capitalist sector can either be private or public in nature. Subsistence sector, that the agricultural sector is considered to be labour intensive. It does not use reproducible capital. It uses poor techniques of production and 8 very low productivity.
Assumptions of the Lewis Model:
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets. Lewis calls it as institutional wage because every worker gets this wage because of some institutional arrangements. This wages is equal to an average share of each worker in the total output in the subsistence sector. If market forces were allowed to operate in the subsistence sector labourers with zero margin productivity or those with a very low marginal productivity would not have received this wage.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion.
Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector. Fei and Ranis emphasized strongly on the industry-agriculture interdependency and said that a robust connectivity between the two would encourage and speedup development. If agricultural laborers look for industrial employment, and industrialists employ more workers by use of larger capital good stock and labor-intensive technology, this connectivity can work between the industrial and agricultural sector. Also, if the surplus owner invests in that section of industrial sector that is close to soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized. They took the example of Japan’s dualistic economy in the 19th century and said that connectivity between the two sectors of Japan was heightened due to the presence of a decentralized rural industry which was often linked to urban production. According to them, economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision-making powers and use industrial capital and consumer goods for agricultural practices.
HARRIS TODARO MODEL OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities. In the Harris–Todaro model, the rising urban wage pushes up the expected wage in the urban sector and consequently encourages workers to migrate from the rural sector to the urban sector. … This phenomenon is referred to as Todaro paradox. Harris and Todaro subsequently formulated amodelto explain rural-urban economic preferences to migrate. The distinctive concept in the model is that the rate of migration flow from rural (agricultural) areas to urban (industrial) areas is determined by the difference between expected urban wages and rural wages.The hypothesis and predictions of Harris-Todaro model have been subjected to econometric evaluation and have been corroborated by several studies. The key hypothesis of Harris-Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migraton decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage. From this crucial assumption, as denominated by Harris-Todaro, is deduced that the migratory dynamics leads the economic system toward an equilibrium with urban concentration and high urban unemployment.
In our previous works we analyzed the rural-urban migration by means of an agent-based computational model taking into account the influence of the neighborhood in the migration decision. The inclusion of the influence of neighbors was done via an Ising like model. The economic analogous to the external field in the Ising hamiltonian was the differential of expected wages between urban and rural sectors.
ASSUMPTIONS OF HARRIS-TODARO MODEL OF MIGRATION MAY INCLUDE
1.Two sectors: urban (manufacture) and rural (agriculture).
2· Rural-urban migration condition: when urban real wage exceeds real agricultural product.
3· No migration cost
4· Perfect competition
5· Cobb-Douglas production function
6· Static approach
7· Low risk aversion
VARIABLES AND PARAMETERS
Exogenous variables
LM- total labor force (workers)
WM– minimum wage rate in manufacturing (dollars)
Endogenous variables
LM – urban labor in manufacturing (workers)
LU – unemployed labor force (workers)
LA – rural labor force in agriculture (workers)
WA – wage rate in agriculture (dollars)
EWM– expected wage rate in manufacturing (dollars).
Uwaezuoke Stephen Chinonso
2017/242432
Economic Department
The Fei–Ranis model of economic growth is a dualism model in developmental economicsor welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
The three fundamental ideas used in this model are:
1. Agricultural growth and industrial growth are both equally important;
2. Agricultural growth and industrial growth are balanced;
3. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap.
Fei and Ranis emphasized strongly on the industry-agriculture interdependency and said that a robust connectivity between the two would encourage and speedup development. If agricultural laborers look for industrial employment, and industrialists employ more workers by use of larger capital good stock and labor-intensive technology, this connectivity can work between the industrial and agricultural sector. Also, if the surplus owner invests in that section of industrial sector that is close to soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized. They took the example of Japan’s dualistic economy in the 19th century and said that connectivity between the two sectors of Japan was heightened due to the presence of a decentralized rural industry which was often linked to urban production. According to them, economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision-making powers and use industrial capital and consumer goods for agricultural practices.
The Lewis model is criticised on the grounds that it neglects agriculture. Fei–Ranis model goes a step beyond and states that agriculture has a very major role to play in the expansion of the industrial sector. In fact, it says that the rate of growth of the industrial sector depends on the amount of total agricultural surplus and on the amount of profits that are earned in the industrial sector. So, larger the amount of surplus and the amount of surplus put into productive investment and larger the amount of industrial profits earned, the larger will be the rate of growth of the industrial economy. As the model focuses on the shifting of the focal point of progress from the agricultural to the industrial sector, Fei and Ranis believe that the ideal shifting takes place when the investment funds from surplus and industrial profits are sufficiently large so as to purchase industrial capital goods like plants and machinery.
It has been asserted that Fei and Ranis did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed. While mentioning the important role of high agricultural productivity and the creation of surplus for economic development, they have failed to mention the need for capital as well. Although it is important to create surplus, it is equally important to maintain it through technical progress, which is possible through capital accumulation, but the Fei-Ranis model considers only labor and output as factors of production, also the reluctant expansionary growth in the industrial sector of underdeveloped countries can be attributed to the lagging growth in the productivity of subsistence agriculture. This suggests that increase in surplus becomes more important a determinant as compared to re-investment of surplus, an idea that was utilized by Jorgenson in his 1961 model that centered around the necessity of surplus generation and surplus persistence, finally Stagnation has not been taken into consideration, and no distinction is made between labor through family and labor through wages. There is also no explanation of the process of self-sustained growth, or of the investment function. There is complete negligence of terms of trade between agriculture and industry, foreign exchange, money and price.
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
The formal statement of the equilibrium condition of the Harris–Todaro model is as follows:
• Let wr be the wage rate (marginal productivity of labor) in the rural agricultural sector.
• Let le be the total number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
• Let lus be the total number of job seekers, employed and unemployed, in the urban sector.
• Let wu be the wage rate in the urban sector, which could possibly be set by government with a minimum wage law.
Rural to urban migration will take place if:
Wr Le/Lus(Wu)
At equilibrium
Wr = Le/Lus(Wu).
With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.
Therefore, migration from rural areas to urban areas will increase if:
• Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
• Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
Name:Idoko Ukamaka Blessing
Reg No: 2017/249510
Dept:Economics
Email Address:idokoukamaka0701@gmail.com
Harris_Todaro Migration Model
The Harris–Todaro model , named after John R. Harris and Michael Todaro , is an economic model developed in 1970 and used in development economics to explain some of the issues concerning rural- urban migration. Todaro migration model is a theory that explains rural-urban migration as an economically rational process despite high urban unemployment. Migrants calculate(present value of) urban expected income (or its equivalent) and move if this exceedsaverage rural income.
The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income. Overview In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non- existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive . As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
Therefore, migration from rural areas to urban areas will increase if: Urban wages increase in the urban sector, increasing the expected urban income. Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector, decreasing the expected rural income. However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
For a developing country like Nigeria, the Harris_ TODARO migration model goes a long way in explaining the cause of constant influx of labor in urban centers from the rural areas. Due to the high wage expectations in urban areas, labor migrate from in search of greener pastures in the cities. This it is imperative to ensure local growth and development of the rural economy, and this can be achieved by;
1: Creating an appropriate rura_urban economic balance to ameliorate both urban and rural unemployment and slow the pace of rural_urban migration.
2: Expansion of small scale labor intensive industries to reduce dependance on foreign machines.
3: Choosing appropriate labor intensive method of production.
4: Modify the linkage between education and employment. All the educated should be employed
SOURCE:
Wikipedia
Todaro.
LEWIS_FEI_RANIS MODEL (SURPLUS LABOR THEORY)
The Lewis_Fei_Ranis model or surplus labor Theory also known as the Lewis two_sector model is a theory of development in which surplus labor from the traditional agricultural sector is transformed to the modern industrial sector, the growth of which absorb the surplus labor, promote industrialization, and stimulate sustained development.
The Lewis_fei_Ranis model is one of the best known early theoretical model of development that focused on structural transformation of a primary subsistence economy . The model was formulated by Nobel Laureate W. Arthur Lewis in the midst 1950s and was later modified, formalised and extended by John Fei and Gustav Ranis. The model became the general theory of development process in surplus_labor developing nations during the early 1970s and it is sometimes still applied to study the recent growth experience in China and labor market in other developing countries.
Basic Assumptions
In the Lewis model, the underdeveloped economy consist of two sectors: a traditional, overpopulated rural subsistence sector characterised by zero marginal labor productivity (surplus labor) and a high_productivity modern Urban industrial sector into which labor from the subsistence sector is gradually transformed. The primary focus of the model is on both the process of labor transfer and the growth of output and employment in the modern sector. Both labor transfer and modern sector employment growth are brought about by output expansion in that sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector. Such investment is made possible by the excess of modern sector profit over wages on the assumption that capitalist reinvest all their profits. Lastly, Lewis assumed that the levels of wages in the urban industrial sector was constant, determined as a given premium over a fixed average subsistence level of wages in the traditional agricultural sector. At the constant urban wage, the supply curve of rural labor to the modern sector is considered to be perfectly elastic.
Criticism of The Lewis_Fei_Ranis Model
Although the Lewis two_sector model is simple and roughly reflect the historical experience of economic growth in the West, four of it’s key assumptions do not fit the institutional and economic realities of developing countries.
First the model implicitly assumed that the rate of labor transfer and employment creation in the modern sector is proportional to the rate of modern sector capital accumulation. The faster the rate of capital accumulation, the higher the growth rate of modern sector and the faster the faster the rate of new job creation. But what if capitalist profit are reinvested in more sophisticated laborsaving capital equipment rather than just duplicating the existing capital as it is implicitly assumed in the Lewis model? (accepting the debatable assumption that capitalist profit are not sent abroad as a form of “capital flight” to be added to the deposit of Western Bank.
The second criticism of the model assumption is the notion that surplus labor exist in rural areas while there is full employment in the urban areas. Most contemporary
research indicate that there is little surplus labor in the rural locations. True there are both seasonal and geographic exception to this rule (example, at least until recently in part of China and the Asian subcontinent, some Caribbean islands and isolated regions of Latin America where land ownership is very unequal), but by and large, development economists today agree that Lewis’s assumption of rural surplus labor is not generally valid.
The third doubtful assumption is the notion of a competitive modern_sector labor market that guarantees the continued existence of constant real urban wages up to the point where supply of rural surplus labor is exhausted. Prior to the 1980s, a striking feature of urban labor markets and wage determination in almost all developing countries was the tendency for these wages to rise substantially over time, both in absolute terms and relative to average rural incomes, even in the presence of rising levels of open modern sector unemployment and low or zero marginal productivity in agriculture. Institutional factors such as union bargaining power, civil service wage scales, and multinational corporations’ hiring practice tends to negate competitive forces in modern sector labor markets in developing countries.
The last concern with this model is it’s assumption of deminishing returns in the modern industrial sector. Yet there is much evidence that increasing returns prevail in that sector, posing special problems for development policy making.
We study the Lewis model because as many development specialist still think about development in this way either explicitly or implicitly, it helpsstudents participate in the debates. Moreover, the model is widely considered relevant to recent experiences in China, where labor has been steadilyabsorbed from farming to manufacturing and a few other countries withsimilar growth patterns. The Lewis turning point at which wages in manufacturing start to rise was widely identified with China’s wage increases of2010.However, when we take into account the laborsaving bias of most moderntechnological transfer, the existence of substantial capital flight, the widespread nonexistence of rural surplus labor, the growing prevalence of urbansurplus labor, and the tendency for modern-sector wages to rise rapidly even where substantial open unemployment exists, we must acknowledge that theLewis two-sector model—though valuable as an early conceptual portrayal ofthe development process of sectoral interaction and structural change and adescription of some historical experiences including some recent ones such asChina—requires considerable modification in assumptions and analysis to fitthe reality of most contemporary developing nations.
Since the model does not suit developing countries, it is definitely not suitable for Nigeria (which is also a developing country)
SOURCE: TODARO
Name: Ike Godswill Chinedu
Reg no: 2017/249515
Dept: Economics
Answer;
The Lewis Fei-Ranis Model of (Surplus
Labour Theory).
The Fei-Ranis model of economic growth was developed by John C. H. Fei and Gustar Ranis, and can also be regarded as the surplus labour model. It has also been understood to be a dualism model in development economics. It is an extension of the Lewis model. The model takes into consideration the presence of a dual economy, which comprises of the modern and primitive sectors and takes into account an economic situation of unemployment and underemployment. According to this theory, the primitive sector comprises of existing agricultural sector and considers the modern sector as rapidly growing but small industrial sector. The both sector exist together in the economy, such that there is augmentation of the industrial output. This was done through the transfer of labour supplied. And at the same stance, growth in agricultural sector must not be ignored or neglected and its output must be sufficient enough to support the whole economy with food and raw materials.
The assumptions of the model was rooted on the falls of the Lewis model in which; one, he underestimated the role of agriculture in boosting the growth of the industrial sector. It also did not acknowledge the fact that an increase in productivity of labour should take place as regards to the shift in labour between the two sectors. These two ideas were taken into considerations in the Fei-Ranis dual economy model of three growth stages. They further propose that the model lacks in their application of concentrated analysis to the changes that takes place with agricultural development. In phase one of the Fei-Ranis model, the elasticity of the agricultural labour force is infinite and thus suffers from a disguised unemployment. The marginal product of labour (MPL) is zero. This phase is therefore similar to the Lewis model. In the phase two of the model, there is a rise in agricultural productivity which leads to industrial growth such that it prepares the base for the next stage. In this stage there may be agricultural surplus, as average product (AP) increases, higher than marginal product and not also equal to the subsistence level of wages. Note that in phase one; MPL = 0 and thus, an actual amount of labour can be shifted from the agricultural sector without any fall in output. This therefore shows the surplus labour. While in the phase two, AP>MP and industrial labour rises to a value greater than zero and APL begins to fall. This fall in the APL is due to the agricultural labourers shift to the industrial sector, the real wage of the industrial labourers’ decreases due to shortage of food supply, since less labourers are now working in the food sector. The real wage decreases the level of profit and the size of surplus that could have been reinvested for more industrialization. Phase three, is the point of commercialization. This is where the economy becomes completely commercialized in the absence of disguised unemployment. Here the supply curve becomes steeper and both sectors starts equally for labour. In this phase, the amount of labour shifted and the time it takes, depends on; the growth surplus generated within the agricultural sector, and the growth of the industrial capital stock dependent on the growth of industrial profit and; the nature of the industry’s technical progress and its associated bias and; finally the growth rate of population.
The assumptions or fundamental ideas behind the model thus becomes;
Agricultural growth and industrial growth are both important
Agricultural growth and industrial growth are necessarily balanced
Only if the rate at which labour is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself from the Malthusian population trap. This shifting can take place through the landlord’s investment activities and through the government fiscal measures. Moreover, the cost of shifting of labour in terms of both private and social cost may be higher. Also the per capita agricultural consumption can increase, rather there could exist a wide gap between the wages of urban and rural workers. These three scenarios could be referred to as leakages, which prevent the creation of agricultural surplus.
Fei and Ranis laid a strong emphasis on the industry-agriculture relationship and suggested that a healthy relationship between the two would enhance development. They made reference to the japan dualistic economy in the 19th century and argued that connectivity between the two sectors of Japan was promoted by the decentralized rural industry which was linked to urban production. They further posit that economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision making powers and use industrial capital and consumer goods for agricultural practises. They developed a concept they labour utilization ratio R, which they defined as the unit of labour that can be productively employed (without redundancy) per unit of land.
Thus labour utilization is calculated as; R=ts/ot.
They also developed the concept of endowment ratio S, which is a measure of the relative availability of the two factors of production. It is given by; S=te/ot.
Where te is agricultural labour and; ot represents agricultural land. They finally developed the concept of non-redundancy coefficient T, being measured as; T= ts/te
These concepts together forms a relationship between T, R and S. therefore T can then be said to be calculated as; T=ts or ot/te or ot= R/S thus, T = R/S.
The mathematical relation shows that non-redundancy coefficient T, is directly related to labour utilization and inversely related to the endowment ratio. The Fei and Ranis model assumes constant returns to scale in the industrial sector like in the agricultural sector. They assumed the main factors of production to be capital and labour, the expansion path of the industrial sector thus given by a line OA0 A1, A2. As capital increases from K0 to K1 to K2 and labour increases from L0 to L1 to L2, the industrial output thus increases accordingly. According to the model, the main source of labour supply of the industrial sector is the agricultural sector, due to the redundancy in the agricultural labour force. Total industrial activity rises due to increase in the total supply of investment funds, leading increased industrial employment.
Agricultural surplus is seen as the produce from agriculture which surpasses the needs of the society for which it was produced, and may either be exported for income or stored for future use. Fei and Ranis in their model hypothesized that if this agricultural surplus is equivalent to the real wage, it is therefore known as the constant institutional wage hypothesis. It is also equal in value to the ratio of total agricultural output to the total agricultural population. If a section of the redundant agricultural labour force is removed from the total agricultural labour force and absorbed into the industrial sector, now the difference in the output produced by the remaining labour force and the real income of the labour force produces the total agricultural surplus of the economy. This surplus is produced by the reallocation of labour such that it is absorbed by the industrial sector. Thus, it could be seen as the use of hidden rural savings for the expansion of the industrial sector. We can therefore say that, the agricultural sector plays a crucial role of a wage fund. The unproductive labour force from the agricultural sector turns productive once it absorbed by the industrial sector simultaneously and produces an output, earning a total wage income. The agricultural surplus created is needed for consumption by the same workers who left for the industrial sector. The agricultural sector thus provides successfully not only the manpower for the production activities but also the wage funds required to run the process.
Importance of Agriculture in the Fei-Ranis
modell of Surplus Labour.
The model goes beyond, stating that agriculture plays a vital role in the development of the industrial sector unlike the Lewis model. They argued that the rate of growth of the industrial sector depends on the amount of total agricultural surplus and on the amount of profit that are earned in the industrial sector. The model focuses on the shifting of the focal point of the progress from the agricultural to the industrial sector. Fei and Ranis believed that this shifting takes place when investment fund from surplus and industrial profit are sufficiently large so as to purchase industrial capital goods like plants and machinery. Thus, the condition for a successful transformation by Fei and Ranis is that; the rate of increase of capital stock and rate of employment opportunities > Rate of population growth.
The Necessity of Labour Reallocation.
The essence of labour reallocation lies in the Engel’s law which posits that the part of income being spent on food decreases with an increase in the income level of an individual, even if there’s a rise in the actual expenditure on food. As underdeveloped country passes through development processes, labour is reallocated from the agricultural to the industrial sector. This labour reallocation becomes a necessity over time as consumers begin to want more of industrial good than agricultural good on relative terms. Although the Fei-Ranis model noted the importance of labour reallocation being linked to the need to need to produce more capital goods as opposed to the thought of industrial consumer goods following the theory of the Engel’s law. This is due to the fact that the assumption that the demand for industrial good is high seems to be unrealistic, as the real wage in the agricultural sector is very low and this prevents the demand for industrial goods. As the growth process observes a slow-increase in the consumer purchasing power, the dualistic economies follow the path of natural austerity, being characterised by more demand and thus, importance of capital goods industries when juxtaposed to the industrial goods industries.
In the Fei-Ranis model, it’s quite possible that technological progress takes place and there’s a shift to labour-saving production techniques, growth of the economy takes place with increases in profit but no economic development takes place. Since growth takes place with increases in profits but development is at a standstill and since employment and wages of labourers remain the same.
Weaknesses of the Fei and Ranis model.
The Fei and Ranis model failed to take into account the sluggish economic situation prevailing in the developing countries. If not, they would have noticed the backwardness existing in the agricultural sector was due to the institutional structure, primarily the system of feudalism that prevailed.
They assumed that MPPL is zero (I.e. MPPL = 0) during, the early phases of economic development, this has been criticized by Harry T. Oshima and some other economists that MPPL of labour is zero only if the agricultural population is very large and if it is very large, some of that labour will be shift to cities in search of jobs.
In the Fei-Ranis the question of whether MPL = 0 is that of an empirical one. The underdeveloped countries mostly exhibit seasonality in food production, which suggests that especially during favourable climatic conditions, for instance, that of harvesting or sowing, MPL would definitely be greater than zero (i.e. MPL > 0).
Application of the model in the real world.
The Lewis Fei-Ranis model of dualistic economic development was employed in china as a framework to investigate the rapid growth in china in 1965-2002. It discovered that the economic growth of china can be mainly attributed to the development of the non-agricultural sector which was the industrial and service sector, being driven rapid labour migration and capital accumulation.
Conclusion.
We can therefore conclude that since the Lewis Fei-Ranis model was not successful when applied to the study of the success of the rapid growth in China, thus is not applicable in the real world
Harris-Todaro Model of Migration.
The Harris-Todaro model, was named after John R. Harris and Michael Todaro. The model was developed in 1970. It was used in development and welfare economics to explain issues relating to rural-urrban migration. The primary assumption of this model is that, the decision to migrate is based the expected income differentials between rural and urban areas other than just wage differentials alone. This in essence means that rural-urban migration in acontext of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
In the model, equilibrium could be reached if the expected wage or actual wage adjusted for unemployment rate in urban areas is equal to the marginal product of an agricultural worker. It assumes that there’s no unemployment in the rural agricultural sector.it further assumes that rural agricultural production and subsequent labour market is perfectly competitive. Therefore, the agricultural rural wage is equal to agricultural marginal productivity. To be in equilibrium, the rural-urban migration rate will have to be equal to zero, since the expected rural income equals the expected urban income. Thus, in this equilibrium there will be a positive unemployment in the urban sector.
The equilibrium conditions is thus stated as follows;
Let Wr be the wage rate (i.e. marginal productivity of labour) in the rural agricultural sector.
Let Le be the total number of jobs available in the urban sector, which should be equal to the number of employed workers.
Let Lus be the total number of job seekers, both employed and unemployed, in the urban sector.
Let Wn be the wage rate in the urban sector which could possibly be set by government with a minimum wage law.
Therefore, rural to urban migration will take place if:
Wr Le/Lus Wu
And at equilibrium if:
Wr = Le/Lus Wu
Matching workers randomly to the available jobs, the ratio of the available jobs to the overall job seekers thus gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job therefore in equilibrium, the agricultural wage is equal to the expected urban wage rate, which can be calculated as the urban wage multiplied by the employment rate.
In conclusions, migration from rural to urban areas will only increase if:
Urban wages increase the urban sectors, leading to an increase in the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector, leading to a decrease in the expected rural income.
Therefore, though this migration might create unemployment, causing growth in the informal sector, this behaviour is economically rational and maximizes utility in the Harris-Todaro model. Therefore, for the fact that the economic agents migrating are well informed or have complete information about rural and urban wage rates and probabilities of being employed, they will make an expected income maximizing decision
Application to the Real World via Nigeria.
The model was successful in explaining the internal migration within China as the regional income gap has been proved to be a primary drive to rural-urban drift. While urban unemployment is local government main concern in many cities. Therefore it is not applicable to Nigeria
.
LEWIS FEI RANIS MODEL (SURPLUS LABOUR THEORY)
Lewis proposed a seminal theory of economic development for under developed and overpopulated countries with surplus agricultural labour. In Lewis theory, he assumed a two sector economy comprising of Agricultural sector and the industrial sector (non- agricultural sector). The agricultural sector is assumed to contain unlimited supply of labour that results in an extremely low, close to zero marginal productivity of labour. The real wage in the agricultural sector is said to be constant and equal to average productivity of labour. The theory assumed economic growth is achieved in such economy through capital accumulation in the industrial sector. The industrial sector has an abundance of capital and resources relative to labour. The industrial sector accumulates capital by drawing surplus labour out of the agricultural sector. In Lewis theory, he defined two stages of economic development which includes the first labour stage and the second labour scarce stage of development.
The Gustav Ranis and John Fei model is an extension of the Lewis model. They disassembled Lewis two stage of economic growth into three phases, defined by the marginal productivity of agricultural labour. They assume the economy to stagnant in its pre-conditioning stage. The breakout point marks the creation of an infant non-agricultural sector and the entry into phase one. Agricultural labour starts to be reallocated to the non-agricultural sector. Due to the abundance of surplus agricultural labour, its marginal productivity is extremely low and the average labour productivity defines the agricultural institutional wage. When the redundant agricultural labour force has been reallocated, the agricultural marginal productivity of labour starts to rise but is still lower than the institutional wage. This marks the shortage point at which the economy enters phase two of development. During phase two the remaining agricultural unemployment is gradually absorbed. At the end of this process the economy reaches the commercialization point and enters the phase three where the agricultural labour market is fully commercialized.
ASSUMPTIONS OF THE MODEL
1. The model assumes that a developing economy has a surplus of unproductive labor in the agricultural sector.
2. These workers are attracted to the growing manufacturing sector where higher wages are offered.
3. It also assumes that the wages in the manufacturing sector are more or less fixed.
4. Entrepreneurs in the manufacturing sector make profit because they charge a price above the fixed wage rate.
5. The model assumes that these profits will be reinvested in the business in the form of fixed capital. An advanced manufacturing sector means an economy has moved from a traditional to an industrialized one.
7. Full employment in the economy
8. Closed economy. No foreign trade in agricultural goods.
Harris Todaro Model
The model is used in development economics to explain rural-urban migration. The model was propounded by John Harris and Michael Todaro in the 1970s. Harris and Todaro are of the view that labour or people in the rural areas migrate to the urban areas based on expected wage rate in those urban areas. That is to say, that individuals move to cities not based on the actual wage rate prevailing there but based on the wage they expect to earn in the future. The model assumes existence of surplus labor in the rural area which constitutes agricultural labor. The model assumes that there is full market information, this is impractical because there is prevailing illiteracy among people in the rural area. This movement to urban areas causes overcrowding and unemployment eventually in this urban areas.
The model states that,
Wr = (le/lt )Wu
Where,
Wr= wage rate in the rural area
le = labor employed
lt = total labor available
Wu = wage rate in the urban area
Rural Urban migration occurs when the wage rate in the rural area is less than that in the urban area ie Wr (le/lt)Wu ie where wage rate in the rural area is greater than the wage rate in the urban area.
HARRIS-TODARO MODEL OF MIGRATION AND UNEMPLOYMENT
In recent years, the urban areas in less developed countries have grown very rapidly. Between 1950 and 1960, urban areas in Africa grew by 69%, in Latin America by 67%, and in Asia by 51%, while rural areas grew by only 20% over the same period. Since biological growth rates rarely exceed 3% per annum, much of the urban growth is due to rural-urban migration. There is a growing consensus on a number of aspects of the migration question. Both economist and non-economist agree that rural-urban migration can be explained primarily by economic factors: the “push” from agriculture and the “pull” of relatively high urban wages. There is such migration is quite rational despite the existence of urban unemployment. The essence of this relationship is summarized clearly in perhaps the best-known article on the subject, that of Harris and Todaro: “…migration proceeds in response to urban-rural differences in exoected earnings (defined below) with the urban employment rate acting as an equilibrating force on such migration”
The Harris-Todaro model, named after John R. Harris and Michael Todaro is an Economic model developed in 1970 used to explain some issues concerning rural-urban migration in development economics. Todaro migration model seeks to explain rural-urban migration as an economically rational process despite high urban unemployment. Migrants calculate (present value of) urban expected income (or its equivalent) and move if this exceeds average rural income. The Todaro migration model has four(4) basic characteristics:
1. Migration is stimulated primarily by rational economic considerations of relative benefits and costs, mostly financial but also psychological.
2. The decision to migrate depends on expected rather than actual urban-rural real-wage differentials where the expected differential is determined by the interaction of two variables, the actual urban-rural wage differential and the probability of successfully obtaining employment in the urban sector.
3. The probability of obtaining an urban job is directly related to the urban employment rate and thus inversely related to the urban unemployment rate.
4. Migration rates in excess of urban job opportunity growth rates are not only possible but also rational and even likely in the face of wide urban-rural expected income differentials .High rates of urban unemployment are therefore inevitable outcomes of the serious imbalance of economic opportunities between urban and rural areas in most underdeveloped countries.
On the other hand, Harris-Todaro model shows equilibrium version of the Todaro migration model which predicts that expected incomes will be across rural and urban sectors when taking into account informal sector activities and outright unemployment. Its main assumption is that migration decision are based on expected income differentials between rural and urban areas rather than wage differentials.
The Harris-Todaro model produced two powerful policy results. The first concerns the policy of formal-sector job creation to employ the unemployed. Secondly, there (Harris and Todaro) considered a policy of rural development. If such a program could increase the rural traditional-sector wage, unemployment would then fall. Thus, in the Harris-Todaro model, the solution to urban unemployment is rural development.
The Harris-Todaro model is also based on the following assumptions:
1. There are two sectors in the economy; the rural or agricultural sector (A) and the urban or manufacturing sector (M).
2. The rural sector produces XA units of agricultural goods and the urban sector produces XM units of manufactured goods. Each sector produces only one unit.
3.The model operates in the short run and capital is available in fixed quantities (K ) in the two sectors
4. The number of urban jobs available (NM ) is exogenously fixed. In the rural sector some work is always available. Therefore, the total urban labor force comprises N–NA along with an available supply of rural migrants. In other words, the total urban labor force equals N–NA with (N–NA ) – NM unemployed.
5. The urban wage is fixed at WM and the rural wage at WA , WM > WA .
6. The rural wage equals the rural marginal product of labour and the urban wage is exogenously determined.
7. Rural-urban migration continues so long as the expected urban real income is more than the real agricultural income.
8. The expected urban real income is equal to the proportion of urban labour force actually employed multiplied by the fixed minimum urban wage.
THE HARRIS-TODARO MIGRATION MODEL
Assume only two sectors, rural agriculture and urban manufacturing. The demand for labor (the marginal product of labor curve) in agriculture is given by the negatively sloped line AA’. Labor demand in manufacturing is given by MM’. The total labor force is given by line OA OM . In a neoclassical, flexible-wage, full-employment market economy, the equilibrium wage would be established at W*A = W*M, with OA LA workers in agriculture and OM LM workers employed in urban manufacturing. All available workers are therefore employed. But what if urban wages are institutionally determined (inflexible downward) as assumed by Todaro at a level WM , which is at a considerable distance above W*A. If for the moment we continue to assume that there is no unemployment, OMLM workers would get urban jobs, and the rest OALM , would have to settle for rural employment at OAWA** wages (below the free-market level of ). So now we have an urban-rural real wage gap of WM – WA**, with WM institutionally fixed. If rural workers were free to migrate (as they are almost everywhere except China), then despite the availability of only OMLM jobs, they are willing to take their chances in the urban job lottery. If their chance (probability) of securing one of these favored jobs is expressed by the ratio of employment in manufacturing, LM, to the total urban labor pool, LUS, then the expression
WA = LM/LUS (WM)
shows the probability of urban job success necessary to equate agricultural income WA with urban expected income (), thus causing a potential migrant to be indifferent between job locations. The locus of such points of indifference is given by the qq’ curve.
POLICY IMPLICATIONS
MR is the production possibility curve of the manufacturing (urban) and rural sectors. Given the initial minimum wage in the urban sector. The initial equilibrium at point B where OXM output is produced in the rural sector. The rural-urban migration is not possible at point B due to the expected wage differentials. Point E on the production possibility curve is the wage differential point at which OXM output is produced in the urban sector and OXA output in the rural sector.
1. Imbalances in urban-rural employment opportunities caused by the urban bias, particularly first-city bias, of development strategies must be reduced. Because migrants are assumed to respond to differentials in expected incomes, it is vitally important that imbalances between economic opportunities in rural and urban sectors should be minimized. When urban wage rates rise faster than average rural incomes, they stimulate further rural-urban migration in spite of rising levels of urban unemployment.
2. Urban job creation is an insufficient solution for the urban unemployment problem; This follows that for any given positive urban-rural wage differential, higher urban employment rates will widen the expected differential and induce even higher rates of rural-urban migration. For every new job created, two or three migrants who were productively occupied in rural areas may come to the city. Thus if 100 new jobs are created, there may be as many as 300 new migrants and therefore 200 more urban unemployed. Hence a policy designed to reduce urban unemployment may lead not only to higher levels of urban unemployment but also to lower levels of agricultural output due to induced migration.
3. Indiscriminate educational expansion will lead to further migration and unemployment; The heavy influx of rural migrants into urban areas at rates much in excess of new employment opportunities necessitates rationing in the selection of new employees. Although within each educational group such selection may be largely random, many observers have noted that employers tend to use educational attainment or number of years of completed schooling as the typical rationing device. For the same wage, they will hire people with more education in preference to those with less, even though extra education may not contribute to better job performance. Jobs that could formerly be filled by those with a primary education (sweepers, messengers, clerks, etc.) now require secondary training; those formerly requiring a secondary certificate (clerks, typists, bookkeepers, etc.) must now have a university degree. It follows that for any given urban wage, if the probability of success in securing a modern-sector job is higher for people with more education, their expected income differential will also be higher, and they will be more likely to migrate to the urban (cities).
4. Wage subsidies and traditional scarcity factor pricing can be counterproductive; A standard economic policy prescription for generating urban employment opportunities is to eliminate factor price distortions by using “correct” prices, perhaps implemented by wage subsidies (fixed government subsidies to employers for each worker employed) or directs government hiring.
CRITICISM;
The Harris-Todaro model suggest non-distortionary lump sum tax to finance subsidy.
Harris-Todaro model does not take into considerations the generation of saving as a source of financing subsidy. Savings are low in LDCs.
This model does not incorporate the cost of rural-urban migration or the relatively higher cost of urban living which the migrants have to incur in the urban sector.
The model does not specify alternate policy prescriptions such as giving a wage subsidy to the urban sector and the same time restricting the migration of those rural workers.
SUMMARY AND CONCLUSIONS;
With a summary of what appears to be the consensus of most economists on the shape of migration and employment strategy. This would appear to have the following key elements:
1. Creating an appropriate rural-urban economic balance; A more appropriate balance between rural and urban economic opportunities appears to be indispensable to ameliorating both urban and rural unemployment problems and to slowing the pace of rural-urban migration. The main thrust of this activity should be in the integrated development of the rural sector, the spread of rural nonfarm employment opportunities, improved credit access, better agricultural training, the re-orientation of social investments toward rural areas, improving rural infrastructure, and addressing shortcomings of rural institutions (including corruption, discrimination, and stratification), the presence of which has the effect of raising the cost of delaying out-migration.
2. Expansion of small-scale, labor-intensive industries. The composition or “product mix” of output has obvious effects on the magnitude (and in many cases the location) of employment opportunities because some products (often basic consumer goods) require more labor per unit of output and per unit of capital than others. Expansion of these mostly small-scale and labor-intensive industries in both urban and rural areas can be accomplished in two ways: directly, through government investment and incentives and improved access to credit, particularly for activities in the urban informal sector, and indirectly, through income redistribution (either directly or from future growth) to the rural poor, whose structure of consumer demand is both less import-intensive and more labor-intensive than that of the rich.
3. Eliminating factor price distortions; There is ample evidence to demonstrate that correcting factor price distortions primarily by eliminating various capital subsidies and curtailing the growth of urban wages through market-based pricing would increase employment opportunities and make better use of scarce capital resources.
4. Choosing appropriate labor-intensive technologies of production; One of the principal factors inhibiting the success of any long-run program of employment creation in both urban industry and rural agriculture is the almost complete technological dependence on (typically laborsaving) machinery and equipment from the developed countries. Domestic and international efforts can help reduce this dependence by developing technological research and adaptation capacities in developing countries.
5. Modifying the linkage between education and employment; The emergence of the phenomenon of the educated unemployed is calling into question the appropriateness of the massive quantitative expansion of educational systems, especially at the higher levels. Formal education has become the rationing tunnel through which all prospective jobholders must pass.
NAME: OKO NKEM FRANKLINE
REG NO: 2017/243813
EMAIL: okofrankline5@gmail.com
BLOG ADRESS: nkemfrankline.blogspot.com
TOPIC:
LEWIS FEI RANIS MODEL (SURPLUS LABOUR THEORY)And Harris Todaro Model Of Migration
INTRODUCTION
Lewis Fei Ranks model (surplus labour)
is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
Basics of the model/Main Argument
According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector.
Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Depiction of Phase1, Phase2 and Phase3 of the dual economy model using average output.
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development,. In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero In
Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
According to Fei and Ranis, AD amount of labor (see figure) can be shifted from the agricultural sector without any fall in output. Hence, it represents surplus labor.
After AD, MP begins to rise, and industrial labor rises from zero to a value equal to AD. AP of agricultural labor is shown by BYZ and we see that this curve falls downward after AD. This fall in AP can be attributed to the fact that as agricultural laborers shift to the industrial sector, the real wage of industrial laborers decreases due to shortage of food supply, since less laborers are now working in the food sector. The decrease in the real wage level decreases the level of profits, and the size of surplus that could have been re-invested for more industrialization. However, as long as surplus exists, growth rate can still be increased without a fall in the rate of industrialization. This re-investment of surplus can be graphically visualized as the shifting of MP curve outwards. In Phase2 the level of disguised unemployment is given by AK.
Phase 3 begins from the point of commercialization which is at K in the Figure. This is the point where the economy becomes completely commercialized in the absence of disguised unemployment. The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor.
Connectivity between sectors
Fei and Ranis emphasized strongly on the industry-agriculture interdependency and said that a robust connectivity between the two would encourage and speedup development. If agricultural laborers look for industrial employment, and industrialists employ more workers by use of larger capital good stock and labor-intensive technology, this connectivity can work between the industrial and agricultural sector. Also, if the surplus owner invests in that section of industrial sector that is close to soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized. They took the example of Japan’s dualistic economy in the 19th century and said that connectivity between the two sectors of Japan was heightened due to the presence of a decentralized rural industry which was often linked to urban production. According to them, economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision-making powers and use industrial capital and consumer goods for agricultural practices.
Agricultural sector
Land-Labor Production Function
In (A), land is measured on the vertical axis, and labor on the horizontal axis. Ou and Ov represent two ridge lines, and the production contour lines are depicted by M, M1 and M2. The area enclosed by the ridge lines defines the region of factor substitutability, or the region where factors can easily be substituted. Let us understand the repercussions of this. If te amount of labor is the total labor in the agricultural sector, the intersection of the ridge line Ov with the production curve M1 at point s renders M1 perfectly horizontal below Ov. The horizontal behavior of the production line implies that outside the region of factor substitutability, output stops and labor becomes redundant once land is fixed and labor is increased.
If Ot is the total land in the agricultural sector, ts amount of labor can be employed without it becoming redundant, and represents the redundant agricultural labor force. This led Fei and Ranis to develop the concept of Labor Utilization Ratio, which they define as the units of labor that can be productively employed (without redundancy) per unit of land. In the left-side figure, labor utilization ratio
This mathematical relation proves that the non-redundancy coefficient is directly proportional to labor utilization ratio and is inversely proportional to the endowment ratio.
(B) displays the total physical productivity of labor (TPPL) curve. The curve increases at a decreasing rate, as more units of labor are added to a fixed amount of land. At point N, the curve shapes horizontally and this point N conforms to the point G in (C, which shows the marginal productivity of labor (MPPL) curve, and with point s on the ridge line Ov in (A).
Industrial sector.
Capital-Labor Production Function
Like in the agricultural sector, Fei and Ranis assume constant returns to scale in the industrial sector. However, the main factors of production are capital and labor. In the graph (A) right hand side, the production functions have been plotted taking labor on the horizontal axis and capital on the vertical axis. The expansion path of the industrial sector is given by the line OAoA1A2. As capital increases from Ko to K1 to K2 and labor increases from Lo to L1 and L2, the industrial output represented by the production contour Ao, A1 and A3 increases accordingly.
According to this model, the prime labor supply source of the industrial sector is the agricultural sector, due to redundancy in the agricultural labor force. (B) shows the labor supply curve for the industrial sector S. PP2 represents the straight line part of the curve and is a measure of the redundant agricultural labor force on a graph with industrial labor force on the horizontal axis and output/real wage on the vertical axis. Due to the redundant agricultural labor force, the real wages remain constant but once the curve starts sloping upwards from point P2, the upward sloping indicates that additional labor would be supplied only with a corresponding rise in the real wages level.
MPPL curves corresponding to their respective capital and labor levels have been drawn as Mo, M1, M2 and M3. When capital stock rises from Ko to K1, the marginal physical productivity of labor rises from Mo to M1. When capital stock is Ko, the MPPL curve cuts the labor supply curve at equilibrium point Po. At this point, the total real wage income is Wo and is represented by the shaded area POLoPo. λ is the equilibrium profit and is represented by the shaded area qPPo. Since the laborers have extremely low income-levels, they barely save from that income and hence industrial profits (πo) become the prime source of investment funds in the industrial sector.
Here, Kt gives the total supply of investment funds (given that rural savings are represented by So)
Total industrial activity rises due to increase in the total supply of investment funds, leading to increased industrial employment.
Agricultural surplus.
Agricultural surplus in general terms can be understood as the produce from agriculture which exceeds the needs of the society for which it is being produced, and may be exported or stored for future use.
Generation of agricultural surplus.
Agricultural surplus in the dual economy of Fei and Ranis
To understand the formation of agricultural surplus, we must refer to graph (B) of the agricultural sector. The figure on the left is a reproduced version of a section of the previous graph, with certain additions to better explain the concept of agricultural surplus. We first derive the average physical productivity of the total agricultural labor force (APPL). Fei and Ranis hypothesize that it is equal to the real wage and this hypothesis is known as the constant institutional wage hypothesis. It is also equal in value to the ratio of total agricultural output to the total agricultural population. Using this relation, we can obtain APPL = MP/OP. This is graphically equal to the slope of line OM, and is represented by the line WW in (C).
Observe point Y, somewhere to the left of P on the graph. If a section of the redundant agricultural labor force (PQ) is removed from the total agricultural labor force (OP) and absorbed into the industrial sector, then the labor force remaining in the industrial sector is represented by the point Y. Now, the output produced by the remaining labor force is represented by YZ and the real income of this labor force is given by XY. The difference of the two terms yields the total agricultural surplus of the economy. It is important to understand that this surplus is produced by the reallocation of labor such that it is absorbed by the industrial sector. This can be seen as deployment of hidden rural savings for the expansion of the industrial sector. Hence, we can understand the contribution of the agricultural sector to the expansion of industrial sector by this allocation of redundant labor force and the agricultural surplus that results from it.
.
CONCLUSION
Summary and Conclusions We have endeavored to present the basic outlines of the labor surplus model of development and addressed the critiques of that model, some “red herrings,” readily disposed of, and other, more serious challenges from the micro-econometric branch of neo-classical economics.
The central issue is whether wages are determined neo-classically or via a bargaining process at the early stages of development. We conclude that the neo-classical school which finds inelastic supply curves of labor is dealing with a cross-section static analysis of labor supply within the agricultural sector while the labor surplus model is dealing with the tracing of a dynamic reallocation of labor from a subsistence to a neoclassical organized sector in the dual economy. The neo-classical school’s attack on the labor surplus model is thus not warranted. We are dealing with different issues, ships passing in the night. The paper proceeds by marshalling data for a number of labor surplus developing countries showing that institutional wages lag behind productivity changes in the course of the unskilled labor reallocation process en route to a “turning point” when decades of inter-sectoral balanced growth have culminated in an unskilled labor shortage and the economy has lost its dual characteristic.
Reference
1. ^ Sadik-Zada, Elkhan Richard (2020). “Natural resources, technological progress, and economic modernization”. Review of Development Economics. doi:10.1111/rode.12716.
2. ^ a b “Economnics4Development Website”. Surplus Labor Model of Economic Development. Archived from the original on 16 October 2011. Retrieved 12 October 2011.
3. ^ Thirlwall, A.P (2006). Growth and Development: With Special Reference to Developing Economies. Palgrave Macmillan. ISBN 1-4039-9600-8.
Harris Todaro Model Of Migration
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
Overview
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.[1]
The formal statement of the equilibrium condition of the Harris–Todaro model is as follows:
• Let wr be the wage rate (marginal productivity of labor) in the rural agricultural sector.
• Let le be the total number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
• Let lus be the total number of job seekers, employed and unemployed, in the urban sector.
• Let wu be the wage rate in the urban sector, which could possibly be set by government with a minimum wage law.
Rural to urban migration will take place if:
Conversely, urban to rural migration will occur if:
At equilibrium,
With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.
Conclusions
Therefore, migration from rural areas to urban areas will increase if:
• Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
• Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
References
1. ^ Zhao, Zhong (2003). “Rural-Urban Migration in China – What Do We Know and What Do We Need to Know?” (PDF). China Center for Economic Research Peking University.
NAME: UDUMA IKECHUKWU OBASI
REG: 2017/241441
EMAIL: ikechukwuuduma9@gmail.com
Lewis-Ranis-Fei model (surplus labour model):
The Lewis (1954) theory of dualistic economic development provides the seminal
contribution to theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to
comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow
the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent (Lewis, 1954, ). The non-agricultural sector accumulates capital by drawing surplus labour out of the agricultural sector. The expansion of the non-agricultural sector takes advantage of the infinitely elastic supply of labour from the agricultural sector due to its labour surplus.
When the surplus labour is exhausted, the labour supply curve in the non-agricultural
sector becomes upward-sloping. Ranis and Fei (1961) formalised Lewis’s theory by combining it with Rostow’s (1956) three “linear-stages-of-growth” theory. They disassembled Lewis’s two-stage economic development into three phases, defined by the marginal productivity of agricultural labour. They assume the economy to be stagnant in its pre-conditioning stage. The breakout point marks the creation of an infant non-agricultural sector and the entry into phase one. Agricultural labour starts to be reallocated to the non-agricultural sector. Due to the abundance of surplus agricultural labour, its marginal productivity is extremely low and average labour productivity defines the agricultural institutional wage. When the redundant agricultural labour force has been reallocated, the agricultural marginal productivity of labour starts to rise but is still lower than the institutional wage. This marks the shortage point at which the economy enters phase two of development. During phase two the remaining agricultural unemployment is gradually absorbed. At the end of this process the economy reaches the commercialisation point and enters phase three where the agricultural labour market is fully commercialised
Conclusion and policy recommendations:
Having tested the Lewis-Ranis-Fei theory for the Chinese economy over 1965-2002 we will in the case of this study substitute the economy of Nigeria to that of China and implement the policy recommendations therein.The test shows that China’s economic growth is mainly attributable to the development of the non-agricultural sector(which is similar to that of Nigeria). This is driven by rapid capital accumulation as well as
employment growth. The reallocation of labour away from agriculture has made a
positive net contribution to China’s rapid economic growth by around 1.23 percent. The
rise in the marginal productivity of agricultural labour indicates the absorption of
redundant agricultural labour since the 1978 Economic Reform. However, the marginal
productivity of agricultural labour is still lower than the initial low average productivity
of agricultural labour. This implies the continued existence of disguised agricultural
unemployment. This suggests that the Chinese economy has entered the
Lewis-Ranis-Fei phase two of development but has not yet achieved phase three. The
continuing widening productivity gap between the two sectors calls for the removal of
market restrictions and government interventions so as to allow the continued
absorption of surplus labour.
Several policy recommendations are tentatively suggested. First and foremost, more
effort should be made in promoting employment to effectively absorb the remaining
labour surplus and promote China’s economic development. This can be achieved by
further relaxing the Hukou restrictions on migration, increasing labour market flexibility
and improving the allocative efficiency of labour. It can also be achieved by
encouraging the development of private enterprise to create more employment
opportunities. Second, China’s government should continue implementing the Sunshine
Policy, initiated in 2003, designed to provide rudimentary job training, recruitment
information and information about conditions in the destination cities to rural migrants.
This will not only help facilitate employment of rural migrants but also satisfy the
increasing demand for skilled labour in the growing non-agricultural sector. Third,
agriculture could be promoted by tax breaks, direct subsidies and most importantly, by
removing price controls on agricultural products. Agriculture could thus be
commercialised and the economy would enter phase three of economic development.
Harris Todaro migration model:
In the 1960s the government of newly independent Kenya faced a difficult situation: Unemployment in Nairobi and other major cities was high and apparently rising. To cope with this problem, Tripartite Agreements were reached in which private-sector and public-sector employers agreed to increase employment in exchange for unions agreeing to hold wages at their current levels. The larger number of jobs was expected to reduce unemployment. However, in the event, urban unemployment appeared to have increased following the Tripartite Agreements rather than decreased, as far as anyone could tell.
In light of these events, John Harris and Michael Todaro formulated the Harris-Todaro model to explain the puzzle. At the core of the Harris-Todaro model were the following features. First, real wages (adjusted for cost-of-living differences) are higher in urban formal-sector jobs than in rural traditional-sector jobs. Second, to be hired for a formal-sector job, one has to be physically present in the urban areas where the formal-sector jobs are located. Third, and as a consequence of the first two features, more workers search for formal-sector jobs than are hired, employers hire some of the job seekers but not all of them, and those not hired end up unemployed. Fourth, for equality to be maintained between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting is characterized by urban unemployment. And fifth, any temporary difference in the expected wages between one sector and another is eroded as workers migrate from the low-expected-wage labor market to the high-expected-wage labor market.
The Harris-Todaro model produced two powerful policy results. The first concerns the policy of formal-sector job creation to employ the unemployed (who, in the Harris-Todaro model, are all in urban areas, because that is where the formal-sector jobs are assumed to be located). Such a policy, they concluded, would increase the formalsector labor force by more than the number of new jobs created, thereby raising the number of urban unemployed. Thus, the solution to urban unemployment is not to create urban employment.
The second policy option that Harris and Todaro considered was a policy of rural development. If such a program could increase the rural traditional-sector wage, unemployment would then fall. Thus, in the Harris-Todaro model, the solution to urban unemployment is rural development.
Soon after the model was published, the government of Kenya followed the Harris-Todaro precepts by putting into place an integrated program of rural development. The result was that unemployment in Kenya fell.
Harris and Todaros fundamental contribution was building a model that fit the stylized facts of the labor market they were analyzing and that was based on sound micro foundations. The fact that the model remains part of the economists intellectual toolkit today is a tribute to its basic insight and enduring analytic power.
The original model has been both simplified for some purposes and expanded for others by later contributors, including Stiglitz, Bell, Khan, Anand and Joshi, Bourguignon, Corden and Findlay, and others (Fields 2005). Harris and Todaro formulated general processes for determining prices of the products produced by the two sectors and also for determining a rural-sector wage that varies inversely with the number of people in the rural sector. A simplified version of the Harris-Todaro model was developed in which product prices and rural-sector wages are taken as constant. Numerous additional analytic and policy results were derived in the simplified Harris-Todaro model. At the same time, some of the assumptions of the Harris-Todaro model were judged to be too restrictive, and so the model was generalized in the years that followed to nest their specific formulation within a broader framework. The initial Harris-Todaro model has been extended to allow for on-the-job search from a rural agriculture setting, the existence of an urban informal sector, preferential hiring of the better-educated, employment fixity, duality of production conditions and earnings levels within the rural sector, capital mobility, endogenous urban wage setting, risk aversion, and a system of demand for goods, among other factors.
As an early multisector labor-market model, the Harris-Todaro model set forth a principal alternative framework for policy analysis. It showed how employment and wage levels in one labor market reflect supply, demand, and institutional conditions not only in that labor market but also in other labor markets.
In terms of pro-poor economic growth, the Harris-Todaro model and other multisector-labor-market models can help policy makers avoid two mistakes. One is to assume that development efforts should be channeled to the sectors where the poor are. The other is to assume that efforts should always be focused on getting the poor out of the sectors in which they now are. Careful cost-benefit analysis based on well-specified
labor-market models is required to decide among such alternatives.
Findings and recommendations:
The fundamental contribution of Harris and Todaros rural-urban two sector migration model was to build a model that fit the stylized facts of the labour market. On the lines of the theory, developing countries (e.g Nigeria) adopted program on integrated rural development which could encouraged an increase in the rural traditional sector wage. The theory proves that the higher the unemployment rate, the lower is the probability of new migrants from the countryside actively seeking formal sector employment who are unable to find it. The significant findings of the theory are:
first, if the expected urban wage equals rural income, there is no incentive to migrate.
Second, if the expected urban wage is greater than rural income, there is a great incentive to move from rural to urban area.
Third, if the expected urban wage is less than rural incomes, there would be an incentive to move in other direction.
Fourth, the expected urban wage depends on what type of job migrant is engaged in. Therefore, the Haris Todaros model helps policy-makers to avoid two mistakes. One is to assume that development efforts should necessarily be channeled to the sectors where the poor are. The other is to assume that efforts should necessarily be focused on getting the poor out of the sectors in which they presently are.
Thus, recommended policies should be the ones poised to eradicate both poverty level and unemployment rate among the dwellers of rural areas. Reduction/ eradication of poverty in the form of poor wage gain will on the other hand reduce the incentive of moving to the urban areas for greener pasture search such that the problems of high immigration rate will be avoided.
Name: NWACHUKWU MARYJANE
Reg. Number: 2017/249533
Economics Major
LEWIS FEI RANIS MODEL OF SURPLUS LABOR THEORY.
This model was developed by John C. Fei and Gastuv Ranis in the 1980s. It is regarded as a dualistic modeland also can be seen as the extension of the Lewis model. The model is also known as the surplus labor theory and it takes into account the dualistic nature of an economy from primitive to modern sector. It was used to prove unemployment and underemployment of resources, this is what differentiate the model from other growth models who view the underdeveloped countries as homogeneous. The model discribe the primitive sector as characterized by the agricultural sector while the modern sector is noted as the development of industries the two sectors are the the most notable aspect of the economy and they co-exist. They are also seen as where the basis of development lies i.e a fast growing agricultural sector in an economy will be noted as sign of underdevelopment while a high rate of industrial growth will mean a sign of a developing economy. Therefore development can be achieved by redirecting more labor to the industrial sector than in the agricultural sector, this is not I anyway campaigning against the agricultural sector or under estimating it’s relevance to economics growth. The model noted that there is a need to sustain agricultural production so as to ensure adequate good supply and raw material for industry. Though this was mentioned more emphasis was laid on the importance of industry as a draw way to development and this was one of criticism of the Lewis model.
Basics of the Lewis Fei Ranis model
The model’s inability to recognize the important role of agriculture was one of the loop holes more also they failed to acknowledge that increase in productivity of labor should prior to the shift in labor between two sectors. It is important to note that the factors mentioned above where included in the Fei Ranis dual economy model of three growth stage.
Phase one: the elasticity of the agricultural labor work-force is infinity and suffers from a disguised unemployment as a result.
Phase two: the agricultural sector productivity rises and this leads to increase in the industrial growth. In the Fei–Ranis dual economy model of three growth stage agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wage. this can be seen in the as shown below
Phase one: AL=MP here Fei and Ranis argue that aggregate demand (AD) amount of labor may be shifted from agricultural sector to industry without a fall in output, there is surplus labor
Phase two: AP>MP, here when the AD is reached MP will start to increase likewise industrial labor from zero to a value equal to AD. There is a downward fall in AP at this level and the is brought about by shift of laborers from agricultural sector to industry sector and a drop in the industrial output is also notice as a result of shortage in agricultural food supply. Therefore we can say that the tow sectors are interrelated and both as such should be given adequate attention at all level.
ASSUMPTIONS:
They assume the economy has two sectors which are rural and urban sector.
They assume that there is surplus labour in subsistence sector.
They emphasize on the importance of saving in both sector.
Land has no role as a factor of production.
They assume that population growth is an exogenous phenomenon.
They assume that the output in agricultural sector is a function of land and labour only.
CRITICISM
The model ignored the cost involved in training the unskilled workers transferred from the subsistence sector.
The model assumed that besides labour there is an unlimited supply of entrepreneur in the capitalist sector and this is not true in most developed countries.
When labour is transferred from the subsistence sector, share of agricultural output falling to each one left in the agricultural sector will start rising.
The assumption that disguised unemployment exists in the agricultural sector were not accepted by many economists, according to them the production in the subsistence sector will be affected when labour is withdrawn from it.
The model assumed that there already exists a market for the industrial products in the country which is wrong as people of an underdeveloped country may not be able to purchase the products.
It is not easy to transfer labour from the subsistence sector to the capitalist sector by offering them an incentive of a little higher wage and the mobility of labour is very low.
COMPARISON OF THE FEI-RANIS MODEL TO THE REAL WORLD.
The model failed to recognize and put into consideration the sluggish economic situation present in less developing countries (eg Nigeria). If they had considered that they would find out that the agricultural backwardness was a result of the institutional structure that prevailed.The model also did not take into account the difference in natural endowment which varies from country to country.
The model also assumed a closed model i.e there is absence of foreign trade in the economy which is unrealistic as raw materials and other products can’t be imported, an example is Japan.
CONCLUSION
These limitations do not undermine the importance of the Fei-Ranis model for the economic development of labour surplus countries. It systematically analyses the development process from the take-off to self sustained growth through the interaction of the agricultural sectors of an underdeveloped economy.
REFERENCES
1. ^ Sadik-Zada, Elkhan Richard (2020). “Natural
resources, technological progress, and economic
modernization” . Review of Development Economics .
doi :10.1111/rode.12716 .
2. ^ a b “Economnics4Development Website” . Surplus
Labor Model of Economic Development . Archived from
the original on 16 October 2011. Retrieved 12
October 2011.
3. ^ Thirlwall, A.P (2006). Growth and Development: With
Special Reference to Developing Economies . Palgrave
Macmillan. ISBN 1-4039-9600-8 .
4. ^ a b c d e f g h i j k l m Subrata, Ghatak (2003).
Introduction to Developmental Economics . London:
Routledge. ISBN 0-415-09722-3 .
5. ^ “Ranis-Fei model vs. Lewis Model” (PDF).
Developmentafrique.com . Archived from the original
(PDF) on 30 May 2012. Retrieved 14 October 2011.
THE HARRIS TODARO MODEL OF MIGRATION
INTRODUCTION
The Harris Todaro model was named after John R. Harris and Michael. The model was developed in 1970 and has been in use since then in development Economics and welfare economics to explain rural-urban migration. The Harris Todaro model assumes that migration decision is influenced by differences between expected income of the rural and urban areas rather than difference in wage. In other words rural-urban migration will continue to exist even when there exist high unemployment in the urban areas, this is due to difference in expected urban income compare to the expected rural income.
Equilibrium in the model can also be reached when expected wage of the urban area i.e (actual wage adjusted for unemployment rate) is equal to the marginal productivity of agricultural worker. According to the model unemployment is non-existent in the agricultural sector and there exist a perfect competition between agricultural and labor market . In other words the agricultural rural wage is equivalent to agricultural marginal productivity and for equlibrum to exist, the rural urban migration will be equal to zero. Since both the expected income are equal. This will as well mean there is no incentive to migrate from rural area to urban areas. But in a situation where the expected urban wage is greater than rural income, this is an indication that there is great incentive to migrate and vice versa.
THE HARRIS-TODARO MODEL
A. Assumptions
Harris and Todaro studied the migration of workers in a two-sector economic system (rural sector and urbansector). The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized
in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function: where Ya is the production level of the agricultural good, N a is
the amount of workers used in the agricultural production, A a > 0 and 0 < f 0 and 0 < a 0 and g > 0 are parametric constants. g is the elasticity of p with respect to the ratio Y m / Ya . The overall population of workers in the economy is N , which
is kept constant during the whole period of analysis. By the assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following
Equality is verified:
B. Temporary Equilibrium
Given a parametric constant vector (A a , A m ,f,a,r,g), an initial urban population N u , and a minimum wage w m one can calculate the temporary equilibrium of the economic system by using eqs. (1 – 6). From eq. (4) one can find the employment level at the manufacturing sector Replacing eq. (7) in eq. (2) we get the production level of the manufacturing sector From eq. (6) one can obtain the relation which is used with eq. (1) to obtain the agricultural production By using eqs. (5), (8) and (10) the terms of trade are determined Finally, by using eqs. (3), (9) and (11), the rural wage in units
of manufacturated good is obtained In sum, the vector (N m , Ym , N a , Ya , p , w a ) configures a
temporary equilibrium that might be altered whether occurs a migration of workers, induced by the differential of sectorial wages, which changes the sectorial distribution of overall population.
C. The Long Run Equilibrium
Harris and Todaro, in determining the long run equilibrium, i.e., the absence of a net rural-urban migratory flow, argue that the rural workers, in their decision on migrating to the urban area, estimate the expected urban wage, , defined as: The ratio N m / N u , which is the employment rate, is an estimative of the probability that a worker living at urban sector gets a job in this sector.
As mentioned before, the key assumption of the model of Harris and Todaro is that there will be a migratory flow from the rural to the urban sector while the expected urban wage is higher than the rural wage. Thus, the long run equilibrium is attained when the urban worker population reaches a level such that the expected urban wage equates the rural wage: This equality is known in the economic literature as the Harris- Todaro condition . Harris and Todaro argue that the differential
of expected wages in eq. (14) can be a constant value d ¹ 0. When this differential reaches d, the net migration ceases. This generalized Harris-Todaro condition can be expressed as follows: The level of the urban population that satisfies the eq. (15), i.e., the equilibrium urban share = /N , is determined from the solution of the equation resulting from substitution of equations (12), (13) in eq. (15): The solution of eq. (16) is parameterized by the vector ( A a , A m ,r,g,a,f, w m ). Harris and Todaro [1], in order to evaluate the stability of the long run equilibrium, postulate a mechanism of adjustment that is based on the following function of sign preservation: The differential equation that governs the state transition in the model of Harris and Todaro is obtained by replacing equations (12), (13) in eq. (17). Based on this postulated adjustment process, Harris and Todaro [1] show that the long run equilibrium is globally asymptotically stable. This means that the economy would tend to long run equilibrium with unemployment in the urban sector generated by the presence of a relatively high minimum wage for all possible initial conditions. From now on we will refer to the long run equilibrium simply as equilibrium. Based on the numerical solutions of eq. (16) one can evaluate the impact that the variation of the minimum wage and the elasticity of the terms of trade on the equilibrium. In Fig. 1 we see that under the hypothesis of a Cobb-Douglas technology, the equilibrium urban share, does not depend on the minimum wage w m . However, changes in the value of wm reduces the labor demand on the manufacturing sector what results in higher unemployment rates in the equilibrium.
Todaro Migration Model: A Graphical Exposition with a
Numerical Example:
This is a graphical exposition of the model in Todaro’s Economic Development text (5th edition, 1994).
1. Our economy has eight million workers, and consists of two sectors, rural and urban, with demand curves for labor will look like the curve below:
2. Workers can move back and forth freely between town and country. Where will they go? Under conditions of wage flexibility, workers will always look for the highest wage, so that equilibrium will require wage equalization between the two sectors, with the entire workforce of 8 million employed. This can be demonstrated by flipping the urban graph horizontally, like tIn this
Equilibrium both rural and urban employment will pay $1.50 a day, with 4.5 million people in agricultural employment and 3.5 million working in manufacturing. In this case then, the equilibrium condition is simply WA = WM.
3. Suppose that the urban wage (WM) is institutionally set at $4 a day. In other words, the urban wage is no longer flexible. The rural wage remains flexible.
Reading off the demand curve for urban employment, you can see that only 2 million fortunate people will get manufacturing jobs at that wage. What will the remaining 6 million workers in the economy do? Under simple micro assumptions, they will take whatever work they can find in the agricultural sector. So 6 million unlucky people take rural jobs, and the rural wage is $1 a day. Todaro’s key insight is that under these conditions, a $4 a day wage looks awfully good to someone making $1 a day, and such a person might be willing to put up with the prospect of unemployment in order to have a chance at such a job. If that is the case the situation shown at right is not equilibrium, and will not persist for long.
4. Todaro reasoned as follows. Suppose that the person who is considering migrating compares the rural wage to an urban wage that is adjusted by the prospect of getting such a job. A simple way to represent the probability of getting urban employment is the total number of urban employed (LM) divided by the total urban labor force (LU). In other words the equilibrium condition — the point at which a worker would be indifferent between being in the city or the countryside – is actually: number of employed manufacturing
Workers (LM)
WA =
————————————————————– X WM
total number of urban workers
(LU)
In this case the situation represented in (3), in which the entire urban workforce was employed, would suggest to a rural worker a pretty good chance of getting an urban job if he/she move to the city. So if we started with the situation in (3), people would migrate. As they migrated, two things would happen: the rural wage would rise, and the urban workforce (and with it urban unemployment) would also rise. The first change would raise the attractiveness of rural employment, and the second change would reduce the attractiveness of urban employment. Just to be sure we understand the mechanics of the model, suppose that we start with the situation in (3), and 1 million people then leave thecountryside and arrive in the city.
The rural wage will rise to $1.25 a day. Two thirds of the urban workforce will now be employed (the number of employed urban workers does not change because the wage is fixed). Are we in equilibrium? Not yet, according to the model. Plugging in numbers, WA = $1.25 and WM = $4. But rural workers will perceive a 2/3 (LM/LU) chance of getting an urban job, yielding a benefit of $2.33 a day to being in the city. Rural-urban migration will continue.
5. The equilibrium condition WA = (LM/LU) x WM can actually generate for us a set of rural wage rates and rural/urban residence patterns that would make workers indifferent between being in the city or the country. This “locus” of equilibrium points is represented by the purple dashed line below.
As you work down the locus, lower rural wages are compatible, in equilibrium, with more people crowding into the city and creating lower urban employment rates. For example it would have required a rural wage of $2.33, in the example above, to produce an equilibrium (point A). But our rural sector, sadly, cannot employ 5 million workers at $2.33 a day, so that equilibrium is not attainable. The point represented at Z, where our equilibrium locus intersects the demand curve for
rural labor, is attainable: at this point the rural wage of $2 a day and the urban employment rate of 50% fulfill the equilibrium condition stated above:$2 = (2 million/4 million) x $4 No further workers will migrate.
conclusion:
Harris and Todaro used the Rural urban migration model to examine how movement from one location to another affect economics activities of a place. They also looked at the different causes or reasons why people are likely to migrate, i.e if the urban expected wage rate is higher than the rural income, people are likely to relocate from rural area to urban areas, in the other hand if the rural expected wage is equal to urban expected wage then people may not want to move because they have similar chance of survival and this is when we say that the urban rural expected wage is at equilibrium.
References:
.Harris, John R. & Todaro, Michael P. (1970), “Migration,
Unemployment and Development: A Two-Sector
Analysis”, American Economic Review , 60 (1): 126–142,
JSTOR 1807860
. Neary, J. Peter (1981). “On the Harris-Todaro Model with
Intersectoral Capital Mobility”. Economica. 48 (191):
219–234. doi :10.2307/2552914 . JSTOR 2552914 .
Lewis-Fei-Ranis Model of Economic Growth
One of the best known early theoretical models of development that focused on the structural transformation of a primarily subsistence economy was that formulated by Nobel Laureate W. Arthur Lewis in the mid-1950s, and later modified, formalized, and extended by John Fei and Gustav Ranis. The Lewis two-sector model became the general theory of the 1960s and early 1970s, and it is sometimes still applied, particularly to study the recent growth experience in China and labor markets in other developing countries.
The Fei-Ranis model is an improvement over the lewis model. John Fei and Gustav Ranis analyze the transition process through which an underdeveloped economy hopes to move from a condition of stagnation to one of self-sustained growth.
The theory relates to underdeveloped labor surplus and resources; poor economy in which the vast majority of the population is engaged in agriculture amidst widespread unemployment and high rates of population growth.
ASSUMPTIONS OF THE MODEL
1. There is a dual economy divided into a traditional and stagnant agricultural sector and an active industrial sector.
2. The output of the agricultural sector is a function of land and labor alone.
3. There is no accumulation of capital in agriculture except in the form of land reclamation.
4. Land is fixed in supply.
5. Population growth is taken as an exogenous phenomenon.
The real wage in the industrial sector remains fixed and is equal to the initial level of real income in the agricultural sector. It is called an institutional wage.
6. Workers in either sector consume only agricultural products.
Given these assumptions, Fei and Ranis analyze the development of a labor surplus economy into three phases;
In the first phase, the disguised unemployed workers who are not adding to agricultural output are transferred to the industrial sector at a constant institutional wage.
In the second phase, agricultural workers add to agricultural output but produce less than the institutional wage they get. Such workers are shifted to the industrial sector. If the migration of the workers to the industrial sector continues, a point is eventually reached when farmworkers produce output equal to the institutional wage.
In the third phase, which makes the end of the take-of and the beginning of the self-sustained growth when farmworkers produce more than the institutional wage they get. In this phase, the surplus labor is exhausted and the agricultural sector becomes commercialized.
CRITICISMS OF FEI-RANIS MODEL
1. Commercialization of agriculture leads to inflation. According to the model, when the agricultural sector enters the third phase, it becomes commercialized, but the economy is not likely to move smoothly into a self-sustained growth because inflationary pressure will start.
2. Supply of land is not fixed. Fei-Ranis begins with the assumption that the supply of land is fixed during the development process. In the long run, the amount of land is not fixed, as the statistics of crop average in many Asian countries reveal.
3. Institutional wage not constant in the agricultural sector. The model assumes that the institutional wage remains constant in the first two phases even when agricultural productivity increases. This is unrealistic because with a general rise in agricultural productivity farm wages also tend to rise.
CONCLUSION
However, these limitations do not undermine the importance of the Fei-Ranis model for the economic development of labor surplus countries. It systematically analyses the development process from the take-off to self-sustained growth through the interaction of the agricultural and industrial sectors of an underdeveloped economy.
THE HARRIS-TODARO MODEL OF MIGRATION
The Harris-Todaro model is based on the experiences of tropical African facing the problems of rural-urban migration and urban unemployment. The labor migration is due to rural-urban differences in average expected wages. The minimal urban wage is substantially higher than the rural wages. If more employment opportunities are created in the urban sector at the minimum wage, the expected wage shall tend to rise and rural-urban migration shall be induced leading to growing levels of urban unemployment. To remove urban unemployment, Harris and Todaro suggests a subsized minimal wage through a lump sum tax.
ASSUMPTIONS OF THE HARRIS-TODAROS MODEL
1. There are two sectors in the economy: the rural or agricultural sector (A) and the urban or manufacturing sector (M).
2. The model operates in the short run.
3. Capital is available in fixed quantities in the two sectors.
4. The number of urban/manufacturing jobs available is exogenously fixed.
5. Rural-urban migration continues so long as the expected urban real income is more than the real agricultural income.
6. The rural wage equals the rural marginal product of labor and the urban wage is exogenously determined.
7. There is perfect competition among producers in both sectors.
MATHEMATICAL EXPRESSION OF THE HARRIS-TODARO MODEL
Output in the rural sector is suppose to be a function of labour so that the production function for agricultural good is;
Xa = f (Na, L-bar, K-bar) f’>0; f”0; f ” 0.
P is the price of agricultural good in terms of the price of manufactured good which is a function (p) of the relative output of agricultural and manufactured goods.
The agricultural wage equals the value of marginal product (MP) of labor expressed in terms of the manufactured good,
Wa = f’a (Na) = p(f’m).
In the urban sector the producers are wage- takers and they aim at profit maximization which means that the urban market wage is;
Wa = f’m (Nm).
The urban expected wage which leads to the migration of workers from the rural to the urban sector is given as;
Wu = W-bar m x Nm/Nu, Nm/Nu ≤ 1.
Where the expected real wage (Wu) in the urban sector is equal to the urban real minimum wage (Wm) adjusted for the proportion of the total urban labor force (Nu) actually employed.
POLICY IMPLICATIONS OF THE H-T MODEL
Harris-Todaro have drawn a few important policy implications of their model. According to them, the payment of minimum wage to the additional industrial worker will induce more rural-urban migration. To solve this problem of an institutional determined wage that is higher than the equilibrium level, labor should be employed according to a shadow wage and /or at a payroll subsidy wage. Since the opportunity cost (I.e shadow wage) of an agricultural worker is lower than the marginal product of an industrial worker, the implementation of shadow wage criterion will have important effects on the level of agricultural output and on urban unemployment.
CRITICISM OF THE HARRIS-TODARO MODEL
1. The Harris-Todaro model does not specify alternate policy prescriptions such as giving a wage subsidy to the urban sector and at the same time restricting the migration of those rural workers who are not able to find jobs in the urban sector.
2. Harris-Todaro suggest non-distortionary lump sum tax to finance subsidy, but a lump sum tax is seldom non-distortionary.
3. This model does not consider or incorporate the cost of rural-urban migration or the relatively higher costs of urban living which the migrants have to incur in the urban sector.
4. The model does not take into consideration the generation of savings as a source of financing subsidy. Though savings are low in LDCs, yet they are an important source of non-distortionary finance to subsidise wages.
CONCLUSION
Despite these criticisms, the Harris-Todaro model is more realistic than the other dual economy models because it tries to tackle the problem of rural-urban migration that actually exists in LDCs. For instance the Lewis model assumes that there is no unemployment in the urban sector and when rural-urban migration takes place, the number of new jobs created in the urban sector exactly equals the number of migrants. This is unrealistic.
THE LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
The Nobel Laureate, W. Arthur Lewis in the mid 1950s presented his model of supply of labor or of surplus labor economy. By surplus labor it means that part of manpower which even if is withdrawn from the process of production there will be no fall in the amount of output. It is also known as the two sector model, and the surplus labour model. It focused on the need for countries to transform their structures, away from agriculture, with low productivity of labour, towards industrial activity, with a high productivity of labour.
ARGUMENTS OF THE MODEL
In the Lewis model, the underdeveloped economy consists of two sectors; the traditional and the industrial sector. The traditional sector which is the overpopulated rural subsistence sector is characterized by zero marginal productivity; a situation that permits Lewis to classify this as ‘surplus labour’ in the sense that it can be withdrawn from the traditional agricultural sector without any loss of output. On the other hand, the industrial sector is characterized by high productivity which results from gradual transfer of labour from the subsistence (traditional) sector to the modern urban industrialized sector.
The primary focus of the Lewis model is on both the process of labour transfer and the growth of output and employment in the modern (industrial) sector which is brought about by output expansion in the sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern (industrial) sector. Such investment is made possible by the excess of modern sector profits over wages on the assumption that capitalist reinvest all their profits. Lewis also assumed that the level of wages in the industrial sector was constant and determined as a given premium over a fixed average subsistence level of wages in the traditional agricultural sector. At the constant urban wage, the supply curve of rural labour to modern sector labour supply is considered perfectly elastic.
CONCLUSION
To conclude, the Fei-Ranis model is of the opinion that transfer of labour from one sector to another in the economy will lead to economic development of both sectors of the economy, and the wage rate will still be constant between both sectors. If we were to apply such school of thought in the Nigerian economy, this is what is likely to occur; if in Nigeria doctors earn one million naira every month while farmers earn say two hundred thousand naira every month, according to the Fei-Ranis model more people will begin to shift to become doctors reducing the number of farmers and in the long run the wages of farmers will equal that of doctors due to the lower number of farmers there will be hike in food prices which will cause farmers to earn the same amount as doctors. Still using Nigeria as our real world case-study, such a situation will not occur because if more people shift to become doctors, there is no guarantee that even if numbers of doctors increase that the same wage rate will prevail because the country is very populated and usually where there is excess supply of labour real wage rate decreases. So the theory of Fei-Ranis model would not work in a country like Nigeria because it did not take into account the huge population of the country and it also neglected the fact that Nigeria is densely populated, meaning that even if there is a huge shift in labour to study doctors there will also be an equivalent shift from the industrial sector to the agricultural sector. The theory only sees labour shifts from agricultural to industrial, it does not consider the situation of labour shift from industrial to agricultural.
Note that the above conclusion was drawn based on the writer’s thought process when comparing Nigeria’s current economic situation with the criticisms, basic assumptions and arguments of the Fei-Ranis model. No empirical or statistical data was used.
HARRIS-TODARO MODEL OF MIGRATION
It has been realized that in order for an economy to develop or grow, a large amount of labor has to be transferred from the traditional (or backward)
agricultural sector in rural are as where the productivity of labor is low (or negligible, or zero, or even negative) to the modern manufacturing sector where the productivity of labor is higher and rising due to capital accumulation in that
sector.This model of migration by Harris-Todaro is generally an offshoot of the dualistic model of development economics.
TheHarris-Todaro model therefore assume that migration from rural to urban areas depend primarily on the difference in wages between the rural and urban labour markets. An equilibrium is said to be reached in the Harris-Todaro model when the expected wage in urban areas (actual wage adjusted for the unemployment rate) , is equal to the marginal product of an agricultural
worker.The main idea of the Harris-Todaro model is that labour migration in underdeveloped countries is due to rural-urban differences in average expected wages rather than actual wages. The migrants consider the various opportunities of employment available to them in rural and urban sectors and choose the one that maximises their expected wages from migration.
ASSUMPTIONS
1. It is based on the premise that a fixed wage leads to an outbreak of distortion and urban unemployment.
2. The economy consist of two sectors namely agricultural sector and manufacturing sector.
3. Wages are flexible and equal to the marginal product of labour according to profit maximization in the rural sector.
4. Migration between the rural and urban sectors will cease when the urban-expected wage is equal to the rural expected wage.
5. Migration is two stage process. In the first stage, migrant workers find jobs in the informal sector. In the second stage, they move to the formal sector.
CONCLUSION
Application to Nigeria as a developing nation, This phenomenon is obviously seen in a country like Nigeria. There has been a large influx of people migrating from rural areas to urban areas over the years. Individuals who migrate to urban areas hope or expect to get higher incomes than the average wage prevailing in rural areas or villages. Unfortunately, when they migrate to urban areas, the reality is that there is usually less job available to them and this results in rise in unemployment in the urban areas. An example of an urban area where this is evident in Nigeria is the urban area of Lagos where there is high unemployment.
The Lewis Fei-Ranis model is for overpopulated and under developed economy. It is based on dualistic economic development because The theory explains a way the industrial sector and agricultural sector can grow simultaneously without a lapse in the other or in the improvements rather than at its expense. There is always a unique, sole characteristic of surplus agricultural labor found in this kind of economy. The model is an attempt to balance agricultural and industrial growth in these economies. Lewis previously held that Economic growth in such economy can be achieved by investments in the non-agricultural sector by extracting surplus labor in the agricultural sector. But John Fei and Gustav explained how increase in productivity in agricultural sector would be helpful in promoting industrial sector too. The model explains that the complete shift the focus of progress from the agricultural to industrial economy does not mean that agricultural sector should be negligible rather its output should still be sufficient to support the whole economy with food and raw materials. With the assumption that large proportion Of the high population in these countries is engaged in agriculture and still agriculture is stagnant therefore marginal productivity of labor is zero and negative in agricultural sector while there are certain non agrarian sectorsIn the economy where there is reduced use of capital. This model suggests that if this surplus labor in the agricultural sector is transferred to industrial sector where their productivity will increase, economic development will be taking place.
They argue that an economy goes through three phases of development. In phase 1, marginal product of labor is equal to zero. The first phase is where surplus labor Can be withdrawn from agricultural sector without changing agricultural output. In the second phase of the development, additional output due to an increase in labor begins to rise as transfer takes place from agricultural sector to industrial sector, average Product falls showing an increase in real wages of industrial workers because sThere is shortage of food supply. The real wages in industrial sector is fixed and equal to real income in agricultural sector. These wages are called institutional wages. in the second stage labor surplus exist where Apl>MPL But it is not equal to institutional wages. If the migration to industrial sector continues, there will be a time from workers produce output that is equal to institutional wages.
The third stage is characterized by self sustained growth where farm workers produce more than the institutional which they get because disguised unemployment has been eliminated. Surplus labor ends and the agricultural sector becomes commercialized sector. MPL here is greater than CIW, disguised unemployment is eliminated. As labor is transferred to industrial sector there will be labor shortage in the agricultural sector so industrial sector cannot get the labor at the same prevailing constant wages therefore the wages in the industrial sector will rise.
From my own point of view the Fei-Ranis model did not take into account the very possible case where a constant transfer of labor from the agricultural sector to the industrial sector causes an extreme shortage of labor in the agricultural sector the model holds that the rate of labor transfer must exceed the rate of population growth. If the largest proportion of the workforce in the country goes to the industrial sector outputs will not be anything close to sufficient to support the whole economy with food and raw materials as Nigeria is facing now. This model is prevalent in Nigeria where labor has been shifted to the industrial sector. Disguised unemployment previously faced by the agricultural sector is now the problem of industrial sector. Shortage of labor in agricultural sector has led to shortage of food supply and raw materials in the economy.
The Harris Todaro Model of Migration
The basic assumption of this model is high expected income in the urban areas than the rural areas. Equilibrium according to this model is reached when expected wage in urban areas is equal to the marginal product of an agricultural worker. It also has the assumption that unemployment is nonexistent in the rural agricultural sector and that rural agricultural products and subsequent market is perfectly competitive which means that agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, rural-urban migration rate is zero since expected rural income equals expected urban income, which is leading to positive unemployment in the urban sector. Expected urban wage rate is equal to urbanwageXemployment rate. Rural urban migration will increase if urban wages increase in the urban sector, increasing the expected urban income and agricultural productivity also decreases, decreasing marginal productivity and wages in the agricultural sector therefore decreasing the expected rural income. This is nothing different to the current Nigerian economy. The expected income in urban areas has caused total neglect to the rural agricultural sector. The rural-urban migration is only rational if equilibrium is achieved, (where expected real wage in urban areas equals marginal product of an agricultural worker). But in the real sense, rural-urban migration is as a result of increase in urban wages in the urban sector which has caused a decrease in expected wages in rural sector.
The neglect to rural agricultural sector caused by rural-urban migration has brought about: shortage of food supply and raw materials, overpopulation and unnecessary competition in the urban sector leading to high crime rates, and a large number of people chasing too few jobs.
This brings an economy back to a state of inadequate development as is seen in Nigeria today.
First of all, I think it’s best to not forget to mention that the Lewis Fei Ranis model came into display only after John Fei and Gustav Ranis decided to work together using Williams growth theory and adding their ideals. This theory also known as the surplus labour theory is a dual economic growth model as it takes into consideration the importance of the Agricultural sector in industrial sector of the Economy. That is to say that the agricultural sector of an economy is as important as the industrial sector because both compliments each other and helps to create a balanced growth and development in the nation.
This model have three stages which when the developing economy have attained it, can be said to have reached the stage of self sustained economic growth after it moved from the stagnation stage. Under these stages includes;
The growth surplus generated from both sectors, the agricultural and the industrial sector. The Nature of the industry’s technical progress and it’sassociated bias and the general growth rate of the population because that’s only when you can say that a nation is growing or developing when there is a significant sign in the third mentioned especially.
This model is of the assumptions THAT; Both Agricultural and Industrial growth are important. That both needs to be balanced and finally, that until the rate at which labour is shifted from agricultural to industrial is greater than the rate of the population will the economy be able to lift itself.
In the under developed countries there’s always much labour but less natural resources and there’s higher birthrate thus, the issues of overpopulation and high rate of unemployment in these underdeveloped countries. There agricultural sector is observed to always be stagnant just as in the case of Nigeria since the so called industrialization started and her main export have become oil.
The Harris Todaro of 1970 have their focus on migration and it’s assumptions is on returns and loss because as one migrates from the rural towns to the urban city in search of better paying job he can end up becoming unemployed after he already lost the not good rural job and in the end their will be no equal returns from the marginal rural and the perfect urban job and that the urban formal wages are fixed and higher than the rural agricultural wages with nothing different just the location and formality of job.
Using Nigeria as an example, I would say that the best growth model for us to practice is the Lewis Fei Ranis Model because unlike the Single structured Harrod do mar model which has no consideration for poor nations capital and the Harris Todaro model which is too focused on how the industrial and agricultural sectors are not balanced as he illustrated with their age gaps and have no other solution to solving that problem.
Lewis Fei Ranis did solve the problem, starting from their assumptions to their observations of the situations these under developed countries are into. Okay, looking at Nigeria, a country well vast in the terms of land and which once was very rich and strong because of their own labour and it’surpluses this I say as regards to the past when Nigeria pays huge attention on their agricultural sector, there were less crimes then, more productivity and efficiency in distribution even though agriculture served as her main exports yet she flourished compared to the late 80s when she quickly embraced the industrial revolution and did not pay attention to agricultural sector again. If one should take a look around in Nigeria now, only failures of mismanagement of that agricultural sector can be seen as there’sboth hunger and strife in the nation.
Now if Nigeria should center it’s policies in considering the Lewis Fei Ranis model of economic growth, she will become very self sufficient once again. In the end I will not suggest or recommend the Harod Do mar model for any developing country because it is another form of disguised imperialism, this can be seen from this aspect that when only one sector of the economy is booming and the majority of the population are still living in abject poverty that such a nation still is stagnant now the question is who benefits from this model if the developing worlds do not rather becomes slaves under it’ practice?
NAME: EZEH JUDE OBIOMA
REG. NO. 2017/249504
DEPARTMENT: ECONOMICS
EMAIL: judeobioma07@gmail.com
HARRIS – TODARO MODEL OF MIGRATION
INTRODUCTION
The Harris-Todaro model is an economic model developed in 1970 which is being used in development economics and welfare economics in analysing some of the issues of rural-urban migration and unemployment. The key contribution of this model to the field of development economics is by making the migration process a rational choice based on expected earnings, that is, labour migration is as a result of rural-urban differences in average expected wages. Here, the minimum urban wage is substantially higher than the rural wage. Also, if additional employment opportunities are created in the urban sector at the minimum wage, the expected wage shall rise and rural-urban migration on the other hand shall be induced resulting to increasing levels of urban employment.
BASIC ASSUMPTIONS OF THE MODEL
The Harris-Todaro model is based on the following assumptions;
There are two sectors in the economy; the rural or agricultural sector (A) and the urban or manufacturing sector (M).
Migration is primarily an economic decision: Workers rationally compare the expected income to current income to make decision on migration.
There is no unemployment in the rural sector and it is perfectly competitive such that wage is equal to marginal product
The model operates in the short run
MAIN ARGUMENTS OF THE MODEL
The Harris-Todaro (1970) elaborated the basic two sector model of rural-urban labour migration. It takes most of Lewis model’s assumptions as given, such as the rural sector being characterised by subsistence agriculture, and the urban sector being characterised by modernised industries. However, the Harris-Todaro model takes a standard two-sector model and imposes a higher wage in the urban sector which is higher than equilibrium clearing, while wage in the agriculture is flexible. These developing countries are lack good social safety nets such as welfare benefits, unemployment benefits, and old age security. If the migrants were unable to find a job in the urban formal sector, which is the modern industrial sector, they would be forced to work in the informal sector to sustain their lives. The informal sector is very primitive; work in this sector is labour intensive with little or no capital endowment.
The equilibrium condition of the Harris-Todaro model can be described as the wage in rural (agricultural) sector must be equal to the expected wage in the urban sector. The model in its most basic form ignores disutility from not being at home farm, or cost of mobility, but these omissions do not change the essence of the model, the only implication of this is a downward shift of the urban sector’s expected returns. This equilibrium can be defined as,
Wa = (Lf/Lf+Li)Wf + (Li/Lf+Li)Wi
Where;
Wa denote the wage in rural (agricultural) sector
Wf denote the wage in urban formal (industry) sector
Wi denote the wage in urban informal sector
Lf denote the number of workers in the urban formal sector
Li denote the number of workers in the urban informal sector
The left hand side of the equation is simply the agricultural wage. The right hand side, Lf+Li which is the formal sector labour force plus informal sector labour force. Combining these will give the entire labour force in the urban sector.
(Lf/Lf+Li) then is simply the ratio of urban workers in the formal sector, in the (H-T) model, this is what the potential migrant sees as the probability of finding a job in the formal sector.
Similarly, (Li/Lf+Li) is what the potential migrant sees as the probability of ending up in the informal sector.
The probabilities of each sector is then multiplied by that sector’s respective wage, adding the results together yields the right hand side of Harris-Todaro equilibrium, which is the expected wage from moving to the urban sector.
The Harris-Todaro model in essence is an extension of the Lewis model. It simply endogenizes migration decision along with the introduction of a second urban sector. It does not change from the Lewis model in that the fundamental driving force of growth is technological growth.
CONCLUSION
Despite the aforementioned weaknesses of the Harris-Todaro model, the model is said to be more realistic than the other dual economy models because it tries to tackle the problem of rural-urban migration that actually exists in LDCs. We consider one of the assumptions of the model that workers are risk-neutral when in reality, most people are risk-averse. However, the model can be modified to incorporate this. In a risk-averse version of the Todaro Model, less migration occurs, causing the agricultural sector to increase which invariably increases the productivity of the rural sector and improvement on the economic growth. The level of risk-aversion is reflected in the difference between the informal sector wage and the formal sector wage.
APPLYING THE MODEL TO NIGERIA ECONOMY
For the fact that Nigeria is a developing country and the economy being structured into rural and urban sectors, hence the Harris-Todaro model of migration can be successfully applied to the Nigeria economy. Since the beginning of 1980s, the economic position has worsened seriously. The per-capita income fall considerably and wage employment has declined (NISER report, 1993).
In recent times, due to persistent underdevelopment, there has been a noticeable high level of rural-urban migration in search of better standards of living and bigger opportunities for meaningful economic and social activities. This is dysfunctional not only to rural development but retards the overall national development.
In view of the foregoing, various Nigeria governments in the past have initiated rural development programmes targeted at the rural sector. Some of these programmes include;
National Accelerated Food Production Programme (NAFPP)
Agricultural Credit Guarantee Scheme (ACGS)
National Directorate of Employment (NDE)
National Poverty Eradication Programme (NAPEP)
With the effective implementation of these programmes by government, rural-urban migration can be curtailed, thereby increasing the productivity of the rural (agricultural) sector and the overall development of the economy.
LEWIS-FEI-RANIS MODEL OF SURPLUS LABOUR
INTRODUCTION
Lewis model of surplus labour was developed in 1954 and later modified by Fei-Ranis in 1961, 1964 and 1997 respectively. Lewis argued that an economy transits from the first stage, labour-surplus to the second, labour-scarce stage of development. Ranis and Fei (1961) later expanded the Lewis theory and defined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Therefore, the second labour-scarce stage of the Lewis model becomes the phase three of the Ranis-Fei model. The three phases are illustrated with the turning points below;
The breakout point leads to phase one growth with exceeding agricultural labour.
The shortage point leads to phase two growths with false appearance of agricultural unemployment.
The commercialisation point leads to phase three of self-sustaining economic growth with the commercialisation of the agricultural sector.
BASIC ASSUMPTIONS OF THE LEWIS-FEI-RANIS MODEL
The basic assumptions of the model are as follows;
There is rural (agricultural) and urban (manufacturing) sector in an economy.
A developing economy has a surplus of unproductive labour in the agricultural sector.
The wages in the manufacturing sector are more or less fixed.
Higher wages are being offered in the manufacturing sector which attract workers.
An advanced manufacturing sector means an economy has moved from a traditional to an industrialized one.
THE MAIN ARGUMENTS OF THE MODEL
The Lewis-Fei-Ranis model is based on structural change theory which explains the mechanism of changing structure of underdeveloped economic from subsistence agriculture to more modern and more urbanized. The movement of labour from traditional to modern sector bring expansion in both output and employment based on the following;
A. Rate of industrial investment and capital accumulation which ultimately depends on the level of profit. Lewis assumes that all profits are reinvested.
B. Wage difference between the rural and urban sector.
The model is focused on the following points;
There is an abundance of labour in under developed countries and shortage of natural resources.
The population growth rate is very high which results in mass unemployment in the economy.
There is a dynamic industrial sector in the economy.
There are certain non-agrarian sectors in the economy where there is reduced use of capital.
The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labour is zero and negative in agricultural sector. The situation where MPL-0, labour can be transferred to industrial sector without any loss in agricultural output. The real wages in industrial sector remains fixed and it is equal to the initial level of real income in agricultural sector. Such wages are given the name of institutional wages.
CONCLUSION
The Lewis-Fei-Ranis model maintained that in developing countries, surplus labour in the agricultural sector is sufficiently large to give an unlimited supply of labour for industrial expansion, thus labour migration from the agricultural sector to the industrial sector induces more significant structural change in these countries than in the developed countries. The model therefore focuses on the capital accumulation in the modern industrial sector so as to absorb this excess labour from the subsistence agricultural sector.
RELATING THE MODEL TO NIGERIA ECONOMY
As Nigeria being a developing country with a dual economic structure (the rural and urban sectors), and having a massive labour supply from the rural sector to the urban sector, it is therefore pertinent that the government should implement policies that will aid investment in both sectors so that the economy will maintain a balanced growth pattern. This is also a crucial part of the Lewis-Fei-Ranis model to support economic development.
Izuogu Chioma Sylverline2017/244598
Education Economics
Lewis-Fei-Ranis Model (Surplus labour theory)
The theory of unlimited supplies of labour by Professor W. Arthur Lewis is a systematic classical theory of economic development which is based on the existence of two sectors in the economy of developing countries- the modern and the traditional sectors. The modern sector is small and uses considerable amounts of capital, while the traditional sector is the large labour surplus rural agricultural sector, with little amount of capital.
The argument is that poor countries have two sectors (the rural agricultural or subsistence sector and the modern industrial or capitalist sector) and that the wage level in the sector with unlimited supply of labour (rural sector) is at its subsistence. In addition to that, it is also believed that the marginal productivity of this surplus labour is zero and as such the economy is backward. Lewis argues that if this surplus labour can be transferred to the sector that has few labour supplies (the modern sector), the productivity level in the agricultural sector would not experience any noticeable reduction but rather, economic development would take place because labour would be put to good use bringing about a chain of productive reactions. Arthur in his article on “Economic Development with unlimited supplies of labour” has a model called the dual sector- model enumerated in it and the model was named in Lewis’s honor. To understand the theory better, the underlining assumptions of the model will be discussed in the next section.
The Assumptions of the Model
The following are the assumptions of the model:
(i) Existence of dual Economy: There exist a two sector economy characterised by a traditional, over-populated agricultural rural subsistence sector with zero Marginal Productivity of Labour(MPL), and the ‘capitalist’ sector which is the high productive modern industrial sector represented by the manufacturing, mining activities.
(ii) Elasticity of Labour: According to Arthur, the supply of labour is perfectly elastic. In other words, the supply of labour is greater than demand for labour in the agricultural sector and therefore the capitalist sector can have as much labour as it requires and will continue to absorb this surplus from the agricultural sector until there is no longer surplus labour left.
(iii) Reproducible Capital: The subsistence sector does not make use of ‘Reproducible Capital’, while the modern sector uses the produced means of capital. As a result of the non usage of reproducible capital in the subsistence sector, output per head is lower than in the capitalist sector.
(iv) The model also assumes that the wages in the manufacturing sector are higher than those of the subsistence sector and are also more or less fixed.
(v) Entrepreneurs in the manufacturing sector make profit because they charge a price above the fixed wage rate
(vi) There is the willingness of the capitalist to reinvest the profit in
the business and this is done in the form of fixed capital. The main people/sources from which workers would be coming for employment at the subsistence wage as economic development proceeds are “the farmers, the casual workers, small scale informal sector participants, women in the household, and population growth.
Basic Thesis of the Lewis Model
The Lewis model is a classical type model based on the assumption of a dual sector economy which are the capitalist sector and the subsistence sector. The subsistence sector is that part of economy which does not use reproducible capital and therefore, the output per head is lower than in the capitalist sector. Also there is perfectly elastic supply of labour at the subsistence sector in many underdeveloped countries but not in themodern sector. Lewis is of the opinion that the industrial and advanced modern sector can be developed and made to boost the entire economy, this according to him, can be done by transferring the surplus labour from traditional sector to the modern sector. From this surplus labour now in the modern sector, new industries will spring up and existing ones would grow. However, the capitalist sector requires skilled labour and this stands as a stumbling block to the development process as the surplus labour from the subsistence sector are mostly unskilled. This problem can be eliminated by providing training facilities to unskilled workers. So in essence, the absence of skilled labour in this sector is a temporary problem which can be solved through training.
Lewis says that the wages in industrial sector remain slightly higher than that of the agricultural sector. Consequently, labour will be attracted to the modern sector because of the higher wage incentives and as a result of this, the capitalists will earn surplus from the increase in productivity brought about by the surplus labour transferred. Such surplus will be re-invested in the modern sector leading thereby to further increase in the productivity of this sector. In this way, the surplus labour or the labour which were prey to disguised unemployment will get to be employed into productive activities. Thus both the labour transfer and modern sector employment growth are brought about by output expansion in the modern sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector. Here is a diagrammatical explanation of Lewis Model
QUANTITY OF LABOUR
Diagramatic Representation of Lewis Model
In this diagram, the horizontal axis (x) represents the quantity of labour employed, while the vertical axis (y) represents the wage rate/Marginal Productivity of Labour. Also in the diagram, OS represent average subsistence wage in the agricultural sector, and OA the capitalist wage, the supply of labour is unlimited and this is shown by the horizontal supply curves of labour AW and Sw. The analysis goes thus: The marginal productivity of labour in the industry is M1P1, with OL1 labour employed , OAKL1 wage rate is paid from the total product of OM1KL1, giving the capitalist a profit of AM1K. With the reinvestment of this profit, the marginal productivity of labour of labour increases from M2P2 and then further reinvestment brings it to M3P3 and so on. As the capitalist continues to reinvestment his profit, his surplus continues to grow. Overtime, as the transition continues and the capitalist continues to reinvest surplus derived from the use of surplus labour from the subsistence sector, the capital stock increases, the marginal productivity of workers in the manufacturing sectors will be driven up by capital formation. Capital formation resulting from this increase in investment leads to quicker utilisation of surplus labour. As more labour is supplied, the marginal productivity falls, and in the long run, the wage rates of the agricultural and manufacturing sectors will equalise because as workers leave the agricultural sector for the manufacturing sector, they increase marginal productivity and wages in agricultural sector while reducing them in manufacturing. The process of modern self sustaining growth and employment expansion will continue till all the surplus rural labour is absorbed in the new industrial sector. Thereafter, additional workers can be withdrawn from agricultural sector only at a higher cost of lost of food production because this will decrease the labour to land ratios. In this way, the MPL will no more be zero and the labour supply curve will become positively sloped along with the growth of modern sector.
CRITICISMS OF THE THEORY
Despite the theory’s huge success in identifying the two key sectors in the developing countries and stating how growth can be achieved in these usually over populated countries, most of the theory’s assumptions do not fit into the institutional and economic realities of the Developing countries and as such can be said to be irrelevant to these countries.
Below are some of the flaws of the theory.
(i) The industrial real wage continues to rise and is not constant as Lewis assumes
(ii) There is the likelihood of the capitalist reinvesting in labour saving techniques like investments in machineries and this would reduce the amount of labour needed causing urban unemployment.
(iii) Lewis ignored the balanced growth between agricultural sector and industrial sector. But we know that there, exists a linkage between agricultural growth and industrial expansion in poor countries. If a part of profits made by capitalists is not devoted to agricultural sector, the process of industrialisation would be jeopardised (perhaps, due to reduced supply of raw material).
(iv) Lewis model underestimates the full impact on the poor economy of a rapidly growing population, i.e., its effects on the capitalist profit share, wage rates and overall employment opportunities.
(vi) Lewis has ignored the role which the leakages can play in the economy. As Lewis assumed that all increases in profits are
diverted into savings. It means that the savings of producers is equal to 1. But, this is unrealistic as the increase in profits may accompany an increase in consumption.
(vii) Lewis assumed that the transfer of unskilled labour from the subsistence agricultural sector to the industrial sector is regarded as almost smooth and costless. The model however fails to take account of the cost of educating and training rural workers for urban employment and also, there is also other indirect cost associated with rural-urban migration. Amongst these are: a lack of sufficient housing, leading to the development of squatter townships or shanty towns, pressure on social infrastructure such as schools and hospitals, increases in disease due to a lack of clean water and sanitation.
CONCLUSION
Arthur Lewis theory of economic development is a structural change theory which explains the mechanism of changing structure of underdeveloped economies from the subsistence rural sector to a modern urbanised one. According to the theory, the economies of most developing countries are made up of two key sectors, the subsistence agricultural sector and the modern capitalist sector. Lewis is of the opinion that economic development occurs when the capitalist gets labour from the unlimited supply of labour in the subsistence sector, which it uses to set up new industries and also grow existing ones. The capitalist gets profit from the activities of the surplus labour and according to Lewis, the capitalist reinvests this profits and this sets off a growth process that continues until there is no longer surplus labour to be absorbed. The theory was criticised by some scholars and one major criticism raised is that the transition from rural sector to urban sector does not come without cost like the theory would like us to.
However, despite the criticisms, the theory still helps to point us to the reality of the existence of the overpopulated subsistence agricultural sector and a modern capitalist sector in most underdeveloped countries. The way we go about developing these sectors to achieve a balanced growth in the economy (which the theory was criticised for not doing) was latter addressed by Fei-Ranis.
Harris-Todaro Model of migration.
The Harrod- Domar models attempt to analyse the requirement of a steady growth in the advanced economies. They are interested in discovering the rate of income growth necessary for a smooth working of an economy and as such, believed that investment plays a key role in the process of economic growth. Investment according to the models is divided into two, based on its ability to:
(a) create income, which is the demand effect of investment and
(b) augmenting the productive capacity of the economy by increasing capital stock, this is the supply effect of investment. Expansion of net investment would result in increase in real income and output in the economy and if this expansion is stopped, income and employment will fall, thereby moving the economy off the equilibrium path of steady growth. For net investment to grow however, the real income is required to also grow continuously at a rate sufficient enough to ensure capacity use of growing stock of capital. The real income growth rate required here is called the full capacity growth rate or the warranted rate of growth.
Assumptions of the Model
The following are the assumptions of the models:
1. There is an initial full employment equilibrium level of income
2. There is an absence of government interference and the models operate in a closed economy which has no foreign trade
3. The average propensity to save is equal to the marginal propensity to save and marginal propensity to save remains constant for the period
4. There are no changes in interest rates
5. There is a fixed proportion of capital and labour in the productive
process
6. The general price level is constant i.e. nominal and real incomes are the same
7. There is no separation between fixed and circulating capital. They are both lumped together under capital
8. There is no depreciation of capital goods, which are assumed to possess infinite life
9. The above are the assumptions of the Model. Let us now examine each of the models independently.
The Domar Model
Domar builds his model based on a self asked question which goes thus “since investment generates income on the one hand and increases productive capacity on the other, at what rate should investment increase in order to make the increase in income equal to the increase in productive capacity, so that full employment is maintained?” In answering the question, Domar forged a link between aggregate supply and aggregate demand through investment. On the supply side, starting from the increase in productive capacity, annual investment rate is taken to be (I), and the annual productive capacity per dollar of newly created capital on the average equals to (s) and this represents the ratio of increase in real income or output to an increase in capital or is the reciprocal of the accelerator or the marginal capital-output ratio. So the productive capacity of I dollar invested will be I.s dollars per day. However, some new investment will be at the expense of the old because the new investment will bring about a competition, for available factors of production and competition in the labour market which brings about a reduction in the old plants output and the annual increase in the economy i.e. the productive capacity of the economy will be less than I.s. This can be represented as Iσ, where σ (sigma) stands for the net potential social average productivity of investment (=∆Y/I). Note that Iσ is less than I.s, and it is the total net potential increase in output of the economy known as the sigma effect of the supply side of the economic system. To explain the demand side, the Keynesian multiplier was used. Here, the annual increase in income is denoted by ∆Y, increase in investment as ∆I and the propensity to save α (alpha) is (∆S/∆Y). Increase in income will therefore be 1 which is also the multiplier effect 1/α. 1-MPC
Note that 1-MPC = MPS. Where MPC and MPS (α) are marginal propensity to consume and marginal propensity to save respectively. Increase in income would be equals to the multiplier (1/ α) multiplied by the increase in investment, which is ∆Y =∆I. I/α. …………………………………. (1)
For full employment equilibrium level of income to be maintained aggregate demand should be equal to aggregate supply which will bring the equation to, ∆I.1/α = σ…………………………………………………………… (2)
Equation (2) is the fundamental equation of the model.
To solve the equation, divide the two sides by I and multiply by σ, we would have, ∆I/I= α σ……………………………………………………………..… (3)
Equation (3) shows that to maintain full employment, the growth rate of net autonomous investment (∆I/I) must be equal to the product of MPS and capital productivity (α σ).This is the rate at which investment must grow to ensure the usage of potential capacity in order to maintain a steady growth rate of the economy at full employment.
The Harrod Model
The Harrod model like that of Domar, examines the possibility of steady growth. Harrod made efforts to show how economy can havegrowth path and if by any chance this steady growth is interrupted, the economy falls into disequilibrium and cumulative forces prolong the divergence from the ‘golden path’ which eventually leads to either secular deflation or secular inflation, showing that the process of steady growth is never smooth. Harrod developed his model on three basic concepts of rates of growth, and they are
(1) actual growth, (2) warranted growth and (3) natural growth.
(1) The actual rate of growth which is given as G, is determined by the saving ratio indicated by s and the incremental capital-output ratio indicated by C. It shows a short run cyclical variations in the rate of growth;
(2) Warranted rate of growth represented by Gw is taken to be the full capacity growth rate of income in an economy. It is the rate of growth required for the full utilisation of a growing stock of capital. The warranted growth rate can therefore be said to be the growth rate at which all saving is absorbed into investment. The demand at this growth rate is high enough for businessmen to sell what they have produced. And
(3) the natural growth rate represented by (Gn), is the rate of advancement which the increase in population and technological improvements allow. This growth rate depends on variables like technology, population and natural resources. The natural growth rate is therefore the rate required to maintain full employment. If the labour force grows at 3 percent per year, then to maintain full employment, the economy’s annual growth rate must be 3 percent (assuming no growth in productivity). According to Harrod, Warranted growth rate Gw is a self-sustaining rate of growth and if the economy continues to grow at this rate, it will follow the equilibrium path. He asserted that on a long run basis, the actual growth rate (G) should be equal to warranted growth rate (Gw). For full employment growth realisation, actual capital goods (C) must equal required capital goods C(r) if not, the economy would be in disequilibrium. Equation for full employment growth Gn =Gw= G. The full employment equilibrium is difficult to achieve and any divergent would lead to disequilibrium either in form of secular stagnation or inflationary conditions in an economy. Harrod model presents a situation where savings is a virtue when there is inflationary gap and a vice when there is deflationary gap in the economy. This model therefore would enable policy makers in an advanced country to use savings adjustments to correct inflation or deflation in the economy
Criticisms of the Models
Some of the criticisms of the models are as follows:
Harrod -Domar model was formulated primarily to protect the developed countries from chronic unemployment, and was not meant for developing countries.
Most less developed countries lack sound financial system and therefore, increased saving by households does not necessarily mean there will be greater funds available for firms to borrow for invest.
Improving capital/output ratio is difficult to achieve in developing countries this is often due to a poorl educated work force. New capital is often inefficiently used by labour.
Increasing the savings ratio in developing countries is not always easy.
Majority of these developing countries have low marginal propensities to save and low income.
Research and Development needed to improve the capital/output ratio is often underfunded in developing countries.The model fails to address the nature of unemployment which exists in
different countries.
In developed countries, the unemployment is ‘cyclical unemployment’, which is due to insufficient effective demand; whereas in developing countries, there is high level of ‘disguised unemployment’ in the urban informal sector and rural agricultural sector.
Finally, the model failed to recognise the effect of government programs on economic growth.
CONCLUSION
Harrod-Domar models are models developed independently by Sir Roy Harrod and Evsey Domar. The models explain economy growth rate in terms of level of saving and productivity of capital. The Harrod -Domar growth model is based on the experiences of advanced capitalist countries and is interested in knowing the rate of income growth that would bring about smooth and sustained growth of the economy. The model has it that growth depends on the quantity of labour and capital, noting that more investment leads to capital accumulation which brings about the growth in an economy. The model’s implication for the less developed country is that because labour is in excess supply and physical capital is not, the LDC’s do not have sufficient average incomes to enable high rates of saving which the model believes is necessary for the accumulation of capital stock. Therefore these countries have low rate of investment caused by low savings rate. For economic growth to be achieved in these countries policies geared towards increasing investment through increased savings should be pursued and also the savings can be used by policy makers to correct inflation or deflation as the case may be.
Kalu Emmanuel Chinemerem
2017/249356
Economics philosophy
INTRODUCTION
The surplus model though widely accepted and praised, has been attacked severely after its emergence in 1954. Yet it is hard to conceive development without growth, though there can be growth without development. The model is unclear, and it could not move further, as a result of this. This has prevented its use in empirical research. However, it was important despite it being unclear, as it was the first work ever on economic development, and other works have built on its existence. It was the first time labour in an economy was looked into. It is further accepted generally as ‘the’ contribution for which Lewis was awarded a Noble prize and with this award, he successfully revolutionized the contemporary development thinking (Ranis, 2004).
The Fei–Ranis model of economic growth is a dualism model in developmental economicsor welfare economics that has been develop by Johnc.h.fei and Gaustav Ranis and can be understood as an extension of the Lewis Model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod-Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries, in this model both primary and secondary sector are both driving force of economic development in developing countries.
HISTORY OF SUPLUS LABOUR THEORY
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.Itrecognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector.Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
COMPARISON WITH OTHER MODELS
Fei and Ranis emphasized strongly on the industry-agriculture interdependency and said that a robust connectivity between the two would encourage and speedup development. If agricultural laborers look for industrial employment, and industrialists employ more workers by use of larger capital good stock and labor-intensive technology, this connectivity can work between the industrial and agricultural sector. Also, if the surplus owner invests in that section of industrial sector that is close to soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized. They took the example of Japan’s dualistic economy in the 19th century and said that connectivity between the two sectors of Japan was heightened due to the presence of a decentralized rural industry which was often linked to urban production. According to them, economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision-making powers and use industrial capital and consumer goods for agricultural practices.
THE ASSUMPTIONS
The first assumption of the model was that the modern sector employment creation and labour transfer rate is proportional to the rate of capital accumulation in the modern sector. Marginal productivity of labour, henceforth MPL, is positive in the modern sector. Labour could be transferred from the agricultural sector to the modern sector at zero cost, yielding net profits the industry leading to a higher rate of investment: countries can thus develop rapidly (Todaro and Smith, 2009 ).
The second was the notion that surplus labour exists in the rural areas, while the urban areas were said to have full employment. This, Todaro said, was because there was over-population in the rural area where MPL is zero. Actual output of labour was used to determine their wages (Todaro and Smith, 2009).
ventions.
There was an assumption of diminishing returns in the modern sector, mostly in the industrial areas. But, there is evidence that there is a prevalent increase in returns (Todaro and Smith, 2009 ).
Finally, there was an unreal assumption that if a modern labour sector was competitive, it guaranteed a continuous existence of real urban wages to a point that surplus labour is exhausted in the rural sector (Todaro and Smith, 2009).
CRITICISM
Lewis’ central problem was identifying the major causes of growth and their constraints. According to Lewis, the most important growth constraint in output was the lack of productive capital accumulation. The existing dominant constraint to capital accumulation foe Lewis was the savings rate as, seen by the classical economists (Hunt, 1989). If the savings rate is so small, then enough capital is not saved.
A major criticism of the Lewis model concerns his notion of “surplus labour”. It was interpreted often as zero marginal productivity of agricultural labour. This situation is highly unlikely and was prone to vigorous attack by T. Schultz (1964). He did this by making available; evidence introduced from India which showed that withdrawal of large agricultural population did not result to agricultural output declining (Ranis, 2004).
According to Lewis, surplus labour was thought of in terms of human beings rather than man-hours, thereby defining his surplus labour happening at the given wage rate.
CONCLUSION
The Lewis model, though widely accepted and praised, has been attacked severely after its emergence in 1954. Yet it is hard to conceive development without growth, though there can be growth without development. The model is unclear, and it could not move further, as a result of this. This has prevented its use in empirical research. However, it was important despite it being unclear, as it was the first work ever on economic development, and other works have built on its existence. It was the first time labour in an economy was looked into. It is further accepted generally as ‘the’ contribution for which Lewis was awarded a Noble prize and with this award, he successfully revolutionized the contemporary development thinking (Ranis, 2004).
Onah promise Chidiebere
2017/249408
Oonahpromise1@gmail.com
Economics/philosophy
REVIEW OF THE HARRIS-TODARO MODEL
The Harris-Todaro Model of Labor Migration in the Literature of Development Economics It has long been realized that in order for an economy to develop or grow, a large amount of labor has to be transferred from the traditional (or backward) agricultural sector in rural areas, where the productivity of labor is low (or negligible, or zero, or even negative) to the modern manufacturing sector where the productivity of labor is higher and rising due to capital accumulation in that sector. It should not be surprising, therefore, that, in the literature of development economics, dualistic models gained popularity over the single-commodity or single-sector theories in the 1950’s. A typical dualistic model in development economics contains two sectors, a traditional or agricultural sector in the rural area and a modern or manufacturing sector in the urban area. The most familiar single-sector model is the growth theory of Harrod-Domar (Harrod 1939 and 1948, Domar 1946). The most representative and influential dualistic framework is that of Lewis (1954). The ideas of surplus labor, subsistence wages, and turning points in the development of a dualistic economy in Lewis (1954) were later rigorously and diagrammatically formalized by Ranis and Fei (1961). Ranis and Fei also showed how agricultural surplus could lead to the growth of industries. The production relations of a dual economy, according to Jorgenson (1961), was characterized by asymmetry. More precisely, he assumed that output in the agricultural sector was a function of land and labor alone (there is no capital accumulation in this sector), and was characterized by diminishing return to scale. On the other hand, the output of the urban sector depended on capital and labor alone (no land was required), and the production function displayed constant return to scale. Since the amount of land and capital in the economy was assumed fixed, the only problem was to allocate labor between the two sectors
The common features of the dualistic theories discussed so far and some other models of that nature are that 1). there is no unemployment in the modern sector, and 2). the sectoral wage differential is assumed fixed or proportional to the wage level in the urban sector. These models were later labeled as “orthodox” by Corden and Findlay (1971). The unorthodox thinking was first and independently introduced by several economists, notably among whom were Michael Todaro (1969) and John Harris (Harris and Todaro 1970). The essence of the new thinking, which has to be reminiscent of the Keynesian revolution, is that there can be an equilibrium with the existence of a chronic large amount of urban unemployment. By the end of the 1960s, the world had seen the rapid growth of urban areas in the developing countries. “From Dares Salaam to Karachi to Caracas, from land surplus to labor
surplus to capital surplus countries, one hears of the everincreasing flow of rural migrants into urban area and of the inability of the urban economy to provide permanent jobs for even a majority of these workers” (Todaro 1969). For instance, between 1950 and 1960, urban areas in Africa grew by 69%, in Latin America by 67%, and in Asia by 51%, while rural areas grew by only 20% over the same period (Fields 1975).
The most important factor that causes urban population explosion has been the migration of labor from the rural areas into the cities throughout the less developed world. Population growth also contributes to this phenomenon but in a much less scale, since it rarely exceeds 3%. In the context of a dualistic model, the rural sector is discharging labor too rapidly and the urban sector is hiring labor too slowly because it is too highly capital intensive (Lewis 1965). As a result, the “urban manifestations of the employment problem” becomes the most visible feature of poverty and underdevelopment of the Third World countries (Lubell 1988). It has been pointed out by many that economic considerations, or urban-rural wage differentials, play an important role in determining the extent of labor migration. The higher than competitive urban wage is due to a combination of trade-union pressure, nationalistic government pressure on foreign enterprises, and the new social conscience of big entrepreneurs (Lewis 1965). Citing the case of increasing gap between urban and agricultural earnings in Puerto Rico, Reynolds (1965) argues that minimum urban wages are politically determined, i.e., through legislation. Harberger (1971) distinguishes urban wages into the “protected-sector wages” and the “unprotected urban wages.” The former is above the market-clearing level and is believed to be held high by minimum wage laws, by collective bargaining agreements, or by the policy of the hiring company itself. In parts of China, minimum wages have been set up since 1988 by local governments mainly to prevent joint ventures from exploiting their local employees (China Reform Journal 1994). More recent studies show that the problem of urban unemployment is not unique to the less developed countries (LDCs). In 1985, while urban unemployment rates of Botswana and Lesotho were as high as 31.2% and 22.3%, respectively, Ireland, France, and Italy recorded 17.3%, 10.2%, and 10.3%, respectively, higher than some LDCs like India or Pakistan (6.8 and 5.0, respectively) (Turnham 1993). In China, where the term “unemployment” did not exist in the official government documents 10 years ago, among the 400 million workers in the countryside, 120-150 million are labelled as “potentially unemployed,” which has added enormous pressure to the urban economy and will undoubtedly continue to do so. Regionally, the urban unemployment rates are as high as over 20% (Wang 1993). It was the observation of “a curious economic phenomenon” in tropical Africa that led to the pioneering work of Harris and Todaro (Todaro 1969; Harris and Todaro 1970). The phenomenon was the continual and accelerating rural-urban labor migration despite the existence of positive marginal products in agriculture. Todaro’s main contribution is the introduction of the probability of employment as an element in the decisioin making process of a potential migrant. He proposed what he called “a more realistic picture of labor migration in less developed countries.
Conclusion
Therefore, migration from rural areas to urban areas will increase if Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal product
INTRODUCTION
The surplus model though widely accepted and praised, has been attacked severely after its emergence in 1954. Yet it is hard to conceive development without growth, though there can be growth without development. The model is unclear, and it could not move further, as a result of this. This has prevented its use in empirical research. However, it was important despite it being unclear, as it was the first work ever on economic development, and other works have built on its existence. It was the first time labour in an economy was looked into. It is further accepted generally as ‘the’ contribution for which Lewis was awarded a Noble prize and with this award, he successfully revolutionized the contemporary development thinking (Ranis, 2004).
The Fei–Ranis model of economic growth is a dualism model in developmental economicsor welfare economics that has been develop by Johnc.h.fei and Gaustav Ranis and can be understood as an extension of the Lewis Model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod-Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries, in this model both primary and secondary sector are both driving force of economic development in developing countries.
HISTORY OF SUPLUS LABOUR THEORY
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.Itrecognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector.Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
COMPARISON WITH OTHER MODELS
Fei and Ranis emphasized strongly on the industry-agriculture interdependency and said that a robust connectivity between the two would encourage and speedup development. If agricultural laborers look for industrial employment, and industrialists employ more workers by use of larger capital good stock and labor-intensive technology, this connectivity can work between the industrial and agricultural sector. Also, if the surplus owner invests in that section of industrial sector that is close to soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized. They took the example of Japan’s dualistic economy in the 19th century and said that connectivity between the two sectors of Japan was heightened due to the presence of a decentralized rural industry which was often linked to urban production. According to them, economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision-making powers and use industrial capital and consumer goods for agricultural practices.
THE ASSUMPTIONS
The first assumption of the model was that the modern sector employment creation and labour transfer rate is proportional to the rate of capital accumulation in the modern sector. Marginal productivity of labour, henceforth MPL, is positive in the modern sector. Labour could be transferred from the agricultural sector to the modern sector at zero cost, yielding net profits the industry leading to a higher rate of investment: countries can thus develop rapidly (Todaro and Smith, 2009 ).
The second was the notion that surplus labour exists in the rural areas, while the urban areas were said to have full employment. This, Todaro said, was because there was over-population in the rural area where MPL is zero. Actual output of labour was used to determine their wages (Todaro and Smith, 2009).
ventions.
There was an assumption of diminishing returns in the modern sector, mostly in the industrial areas. But, there is evidence that there is a prevalent increase in returns (Todaro and Smith, 2009 ).
Finally, there was an unreal assumption that if a modern labour sector was competitive, it guaranteed a continuous existence of real urban wages to a point that surplus labour is exhausted in the rural sector (Todaro and Smith, 2009).
CRITICISM
Lewis’ central problem was identifying the major causes of growth and their constraints. According to Lewis, the most important growth constraint in output was the lack of productive capital accumulation. The existing dominant constraint to capital accumulation foe Lewis was the savings rate as, seen by the classical economists (Hunt, 1989). If the savings rate is so small, then enough capital is not saved.
A major criticism of the Lewis model concerns his notion of “surplus labour”. It was interpreted often as zero marginal productivity of agricultural labour. This situation is highly unlikely and was prone to vigorous attack by T. Schultz (1964). He did this by making available; evidence introduced from India which showed that withdrawal of large agricultural population did not result to agricultural output declining (Ranis, 2004).
According to Lewis, surplus labour was thought of in terms of human beings rather than man-hours, thereby defining his surplus labour happening at the given wage rate.
CONCLUSION
The Lewis model, though widely accepted and praised, has been attacked severely after its emergence in 1954. Yet it is hard to conceive development without growth, though there can be growth without development. The model is unclear, and it could not move further, as a result of this. This has prevented its use in empirical research. However, it was important despite it being unclear, as it was the first work ever on economic development, and other works have built on its existence. It was the first time labour in an economy was looked into. It is further accepted generally as ‘the’ contribution for which Lewis was awarded a Noble prize and with this award, he successfully revolutionized the contemporary development thinking (Ranis, 2004).
Obodike Loveth OGADIMMA
2017/249537
obodikeloveth111@gmail.com
AN ESSAY ON THE SUMMARY OF LEWIS AND FEI RANIS MODEL {SURPLUS LABOR THEORY}
INTRODUCTION
William Arthur Lewis, with his most famous published work, Economic Development with Unlimited Supplies of Labour and The Theory of Economic Growth made a great contribution to the theories of economic development. Based on his findings, Ranis and Fei succeeded to extend the initial Lewis model and assessed the changes in the agricultural and industrial labour in more detail. The fei-Ranis model of economic growth is a dualism model in welfare economic that has been developed by JOHN C.H.Fei and Gustav Ranis. It can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. According to this model, the primitive sector consist of the existing agricultural sector in the economy and the modern sector is the rapidly emerging but small industrial sector .This is to say that it recognizes the presence of a dual economy comprising both the modern and the primitive sector and it takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature .both sectors co-exist in the economy ,wherein lies the crux of the development problem .development can be brought about only by a complete shift in the focal point of progress .
HISTORY
Lewis (1954) proposed a seminal theory of dualistic economic development for over-populated and under-developed countries with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus stage to the second, labour-scarce stage of development. Later, Ranis and Fei (1961) formalised the Lewis theory and defined three phases of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model. These three phases, are distinguished by the marginal productivity of agricultural labour. The entry into each phase is marked three turning points: The breakout point leads to phase one growth with redundant agricultural labour. The shortage point leads to phase two growth with disguised agricultural unemployment. The commercialisation point leads to phase three of self-sustaining economic growth with the commercialisation of the agricultural sector. The two economists John Fei and Gustav Ranis presented their dual economy model. There was a flaw in Lewis model that it did not pay enough attention to the importance of agricultural sector in promoting industrial growth. But Fei-Ranis model of dual economy explains how the increased productivity in agricultural sector would become helpful in promoting industrial sector. In this respect, it presents three stages whereby underdeveloped countries moves from stagnation to self-sustained economic growth. Thus, this model is treated as an improvement over Lewis model of unlimited supply of labor.
Like in the Harrod-Domar model, savings and investment become the driving forces when it comes to economic development of underdeveloped countries. It has been asserted that Fei and Ranis did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed.
ARGUMENT
Fei and Ranis say, “It has been argued that money is not a simple substitute for physical capital in an aggregate production function. Directing majority of my arguments on the analysis by Ranis and Fei in A Theory of Economic Development, The central idea behind the Lewis model is fairly simple. Lewis divided labour force into two differentiated groups subsistence sector and capitalist sector where the former is assumed to contain unlimited supply and consequently, a pool of surplus labour that sets labour-supply conditions for the latter.
There are reasons to believe that the relationship between money and physical capital could be complementary to one another at some stage of economic development, to the extent that credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry.” This indicates that in the process of development they neglect the role of money and prices. They fail to differ between wage labor and household labor, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.Thus we find that whereas Lewis had failed to offer a satisfactory explanation of this subsistence sector and ignored the real impact of population growth on the choice of capital intensity on the process of surplus labor absorption. Moreover, Fei-Ranis model emphasized upon the simultaneous growth of agriculture and industrial sectors. Thus Fei-Ranis model believes in ‘Balanced Growth’ in the take-off stage. It means that there should be a simultaneous investment in both agricultural sector and industrial sector. According to Fei-Ranis model in the beginning the surplus rises; such surplus will be available as a capital in the take-off stage. Some part of this surplus will be used in agricultural development, while some part will be reploughed in industrial development. As a result, both agricultural and industrial sectors will grow under ‘Balanced Growth’ pattern.
Fei-Ranis model argued that surplus can be generated by the investment activities of the land lords and by the fiscal measures of the government. However, leakages could exist because of the cost of transferring the labor from agricultural sector to industrial sector in the form of transport cost and building of schools and hospitals, etc. Moreover, the transference may lead to increased per capita consumption of agricultural output, and a gap may also emerge in case of rural wages and urban wages. Again, if the supply curve of- the labor is backward bending, the peasants may reduce their work effort as their incomes rise.
we refer to the two sectors as agricultural and non-agricultural. Lewis (1954) originally named the two sectors as the subsistence and the capitalistic sectors and later on in Lewis (1979) referred to them as the traditional and modern sectors. Jorgenson (1967, p.291) elaborates further on the distinction between the two sectors and narrows this down to the stylised fact that the two sectors do not share the same production technology, particularly when it comes to capital accumulation. For agricultural labour productivity is very low due to the presence of surplus labour relative to other scarce resources. The agricultural wage rate is lower than the non-agricultural sector.
CRITICISM
i) Marginal Productivity of Labor in Phase I: The FR model is of the view that MFL = 0 in the first phase of growth, and the transfer of labor from agriculture would not reduce output in the agricultural sector in phase I. But the economists like Berry and Soligo are of the view that agricultural output in phase I of Fei-Ranis model will not remain constant and may fell under different systems of land tenure, that is the peasant proprietorship and share cropping etc.
(ii) Marginal Productivity of Labor is Not Zero: Prof. Jorgenson who has also presented a model of ‘dual economy’ has object FR model’s contention of zero MP in phase I. He says whether MPL will be zero is an empirical issue. During the seasons of sowing and harvesting the MPL > 0. Jorgenson concluded on the basis of Japanese data even for the pre I world war period the supply of labor was not unlimited. Then how MPL can be zero.
(iii) Ignoring The Role of Capital: The FR model concentrated upon land and labor as the determinants of output, ignoring the role of capital. But Profs. Brown, Byres, Frankel, Griffen, Ghatak and Ingersent are of the view that in the underdeveloped countrie there has occurred what is known as ‘Green Revolution’ in agriculture, which has promoted the greater use of capital and technology on lands. Consequently, there has been a greater increase in the agricultural productivity and agricultural incomes.
(iv) Open Economy: FR model ignored the role of foreign trade as it assumed a closed economy model. In the 2nd phase when agricultural product decreases, the Terms of trade goes against industrial sector. This would occur in the presence of closed economy. But if the model is made open such would not happen as the goods could be imported in the presence of then-scarcity. This was especially observed in case of Japan which imported cheap farm products to improve her terms of trade .
(v) Supply of Land in Long Run: FR model assumed that in the process of economic development the supply of land remained fixed. But it is not true. The supply of land can be increased in case of long run.
(vi) Commercialization Of Agriculture And Inflation: According to FR model when 3rd phase starts the agricultural sector becomes commercialized. But it is criticized by saying that this phase does not start so easily The shifting of labor to industrial sector will create labor shortage in agricutural sector. This will create shortage of food stuff leading to increase in their prices. In this way, inflation will generate which may obstruct the process of development.
ASSUMPTIONS
The assumption was that, in the agricultural sector, Fei and Ranis assume constant returns to scale in the industrial sector. The main factors of production are capital and labor.
-There is an abundance of labor in such underdeveloped countries and shortage of natural resources.
– The population growth rate is very high which results in mass unemployment in the economy.
– The major share of the population is engaged in agriculture. But agricultural sector is stagnant. Hence, the marginal productivity of labor is zero and negative in agricultural sector.
– There are certain non-agrarian sectors in the economy where there is reduced use of capital.
– There is a dynamic industrial sector in the economy.
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the FeiRanis dual economy model of three growth stages. They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development In Phase 1 of the FeiRanis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
COMPARISM WITH THE REAL WORLD
by applying the Labor Reallocation specified by the World Bank (1996). The approach suggest that labor reallocation has a positive impact on Chinas economic growth, accounting for 1 to 2 percent per annum of GDP growth. We find out that the effect of labour reallocation has declined since the mid-1990s because of less absorption of the surplus rural labour in the non-agricultural sector, particularly in industry. Furthermore, we find that the gap of labour productivities between the two sectors is widening, which is at odds with the theoretical expectation. This reflects the effects of market imperfections and government intervention. A critical minimum effort is required for China to release the remaining disguised agricultural unemployment and enter phase three of economic development. Fei and Ranis (1973) analysed the economic development of Taiwan in 1965-1975 and Korea in 1966-1980 by comparing descriptive statistics and their results also supported the Lewis theory. However, Ho (1972) tested the Lewis theory on Taiwan for the period 1951-1965 and found that technological progress played a far more important role on economic growth than sectoral labour migration unlike my country Nigeria where agriculture happen to be the focal point of economic growth, this is to say that Nigeria was not really in support of lewis model of undermining the role of agriculture in boosting the industrial sector even though Nigeria and every other developing countries will still have to pass and benefit from the lewis model.
AN ESSAY ON THE SUMMARY OF HARRIS TODARO MODEL OF MIGRATION
INTRODUCTION
The HarrisTodaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The Harris-Todaro model of the rural-urban migration process is revisited under an agent-based approach. The migration of the workers is interpreted as a process of social learning by imitation, formalized by a computational model. By simulating this model, we observe a transitional dynamics with continuous growth of the urban fraction of overall population toward an equilibrium. Such an equilibrium is characterized by stabilization of rural-urban expected wages differential (generalized Harris-Todaro equilibrium condition), urban concentration and urban unemployment. These classic results obtained originally by Harris and Todaro are emergent properties of our model.incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migraton decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage.From this crucial assumption, as denominated by Harris-Todaro, is deduced that the migratory dynamics leads the economic system toward an equilibrium with urban concentration and high urban unemployment.The model was an academic investigation to throw light on the events following Tripartite Agreement in Kenya. The newly independent Kenya in the 1960s was increasingly facing a serious situation of unemployment in the major urban cities. To cope with the situation of unemployment,TripartiteAgreement was signed between the government public sector and theprivate sector. The agreement increased employment in the industrial jobs in exchange for unions agreeing to hold wages at their current levels.
HISTORY
The received theory of rural-urban migration, first set forth in Todaro (1968), has been revised and augmented by Todaro (1969), Harris and Todaro (1970), again by Todaro (1971), and by Johnson (1971). The Harris-Todaro version is best known and we shall consider it in that form. The model treats rural-urban migration primarily ~.s an economic phenomenon. In essence, the theory postulates that workers compare the expected incomes in the urban sector with agricultural wage rates and migrate if the former exceeds the latter. Rural-urban migration is thus the equilibrating force which equates rural and urban expected incomes and as such is a disequilibrium phenomenon.The three basic characteristics of their model–that migration occurs largely for economic reasons, that the migration decision depends on expected ralher than nominal wage differentials, and that migration takes place in disequilibrium–suggest that rural-urban migration be given a new emphasis. Rather than considering it as a key phenomenon in its own right, migration could better be regarded as the adjustment mechanism by which workers allocate themselvesbetween different labor markets, some of which are located in urban areas and some in rural areas.The larger number of employment was expected to reduce unemployment, but it appeared that the urban unemployment had increased following the governments agreement. Harris and Todaro subsequently formulated amodelto explain rural-urban economic preferences to migrate. The distinctive concept in the model is that the rate of migration flow from rural (agricultural) areas to urban (industrial) areas is determined by the difference between expected urban wages and rural wages.
COMPARING HARRIS TODARO MODEL WITH LEWIS AND FEI RANIS MODEL
By contrast to the Todarian models, the rural surplus labor models — supporting rural to urban migration — seem to be better founded. What really matters in the Lewis, Ranis and Fei models is not whether there is disguised unemployment in rural areas, but whether the rural sector can massively supply migrants to the urban sector to accompany rapid national growth. The fundamental contribution of Harris and Todaros rural-urban two sector migration model was to build a model that fit the stylized facts of the labour market. On the lines of the theory, developing countries adopted program on integrated rural development which encouraged an increase in the rural traditional sector wage. The theory proves that the higher the unemployment rate, the lower is the probability of new migrants from the countryside actively seeking formal sector employment who are unable to find it. The significant findings of the theory are: first, if the expected urban wage equals rural income, there is no incentive to migrate. Second, if the expected urban wage is greater than rural income, there is a great incentive to move from rural to urban area. Third, if the expected urban wage is less than rural incomes, there would be an incentive to move in other direction. Fourth, the expected urban wage depends on what type of job migrant is engaged in. Therefore, the Harris Todaros model helps policy-makers to avoid two mistakes. One is to assume that development efforts should necessarily be channelled to the sectors where the poor are. The other is to assume that efforts should necessarily be focused on getting the poor out of the sectors in which they presently are. Both the Lewis and Ranis and Fei formalizations describe in a very stylized manner a general mechanism occurring at an initial stage of economic development, which justifies the assumed scarcity of capital and the abundance of labor in these models. The assumption of zero marginal productivity and remuneration at the average product in the agricultural sector is more debatable and has been criticized even though it probably should not be taken at face value: what really matters in the model is that the rural sector can massively provide migrants to the urban sector. In this simple framework, internal migration is desirable to the extent that it accompanies growth. The policy implication of this model is that governments in countries experiencing a transition from a labor-intensive agricultural economy to an economy with significant industrial and services sectors should see to it that migration from rural to urban areas is at least not impeded, and ideally is even facilitated. This type of model also suggests that government should ensure that investments are intense enough for the take-off to ever occur. This would tend to argue in favor of policies favoring investments in modern labor-intensive industries in order to exhaust rural disguised unemployment. It is important, nevertheless, to keep in mind that the Lewis framework applies only to a particular phase of the development process and sheds little light on other contexts. It appears to inadequately describe the urbanization process of many Sub-Saharan African countries, even at the beginning of their urban transition.5In particular, the observation in the late 1960s that urban areas experienced high levels of unemployment suggested that these models might not tell the right story about rural urban interactions. The Todaro (1969) and Harris-Todaro (1970) models also consider the role of internal migration in a dual economy in which the urbansector draws labor force from the rural sector. But the change of focus is radical. In the Lewis model, internal migration removed disguised unemployment from rural areas and enabled the transition to a modern economy. In Todarian models, the focus is on explaining the existence of unemployment in urban areas and its link with internal migration.
ASSUMPTIONS OF THE MODEL
Some of the assumptions of the Harris-Todaros model were judged to be too restrictive.The model also assumesthat potential migrants are risk neutral where the poor migrants will likely be risk averse, as in they are indifferent between a certain expected rural income and an uncertain expected urban income of the same magnitude. The assumption that there exists a perfect competition in rural agriculture sector is not realistic.
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function: where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a 0 and g > 0 are a parametric constant. g is the elasticity of p with respect to the ratio Ym/Ya. The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified:
ARGUMENTS
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.Rural to urban migration will take place if, With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.
Therefore, migration from rural areas to urban areas will increase if: Urban wages (wu) increase in the urban sector (le), increasing the expected urban income. Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income. However, even though this migration creates unemployment and induces informal sector growth, this behaviour is economically rational and utility-maximizing in the context of the HarrisTodaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
CONCLUSIONS WITH THE REAL WORLD
the conditions for the Todaro paradox to hold. At best empirical tests have provided microeconomic evidence consistent with the migration incentives present in the HarrisTodaro model, measuring for instance how rural dwellers respond to an increase in the wage differential. But this type of evidence does not provide a real test of the link between urban unemployment and migration. In other words, the validity of the model has not been clearly established even though it certainly influenced policies for decades. Many countries have implemented policies aimed at forbidding migration from rural to urban areas. In South Africa, the Apartheid system (1948-1994) used extreme controls to monitor what was meant to be the temporary migration of rural workers to cities
NAME:OKOYE KINGSLEY CHIGOZIE
Email:okoyekingsley93@gmail.com
REG NO: 2017/249561
Lawis-Fei-Ranis surplus labour theory.
Lawis-Fei-Model is well recognized in development economics.it provides insight into the early stages of development. it defines two types of surplus labour. it considers the pattern of production and of population growth in the traditional agricultural sector to define the subsistence level of consumption.it considers two wage determination mechanisms in the modern sector, which are then applied to the relationships between these mechanisms and labour market restrictions. Fourth, the role of agriculture and food supply is discussed. it considers the dynamics of surplus labour and labour transfer.
the key concepts in the Lewis model is the ‘subsistence wage’, the starting point of the Lewis model is the wage level in the traditional sector(Agriculture).this model tries to study the organisational structure and the distributional principles of the traditional economy. investigates the characteristics of the traditional economy and analyses the wage determination mechanism in the traditional sector.in this case we assume that the economy is closed and in the long run equilibrium.In this traditional agricultural society, population growth is that described by Malthus (1798). Malthus’ basic idea is this: there is a negative relationship between population level (which is itself endogenously determined) and income per capita. It predicts that population will adjust up or down (by births or deaths) until all individuals are at the subsistence level of consumption. In the long run, income per capita is limited by the available technology, so that the population growth rate is proportional to the rate of technological change (Kremer, 1993). Historical evidence supports the Malthusian hypothesis, as up until the last 200 years the population grew very slowly, despite a biological potential for very rapid growth.
SURPLUS LABOR THEORY.
Many neoclassical economist still doubt the existence of surplus labor in the economy.surplus labour implies the existence of a point at which the marginal product of labour becomes zero and labour can be transferred out of the traditional sector without reducing the quantity of output, as noted by Wellisz (1968: 22)
10discussion. This section considers the various definitions of surplus labour and clarifies them. The simple definition of surplus labour implies the existence of a point at which the marginal product of labour becomes zero and labour can be transferred out of the traditional sector without reducing the quantity of output, as noted by Wellisz (1968: 22): The (disguised-unemployment or the Unlimited Supply of Labour) hypothesis claims that in poor, densely populated countries, more people are employed than needed to produce the prevailing output with the existing techniques and the existing supply of non-labour inputs. The ‘surplus’ labour constitutes ‘hidden’ or ‘disguised’ unemployment. Many of the proponents of the hypothesis make the further claim that agricultural output will not decrease, and industrial output will increase, if measures are taken to re-allocate labour from subsistence agriculture (where the surplus is supposed to exist) to industry (where there is no surplus labour). Since labour can be removed from agriculture at no social cost, its supply to industry is, in a sense, ‘unlimited’ as long as disguised unemployment prevails. However, Ranis does not agree with this definition of ‘surplus labour’, preferring to regard those whose marginal product lies below their consumption or income share as ‘surplus labour’, or more specifically, as ‘disguised unemployed’ or ‘underemployed.
According to him;there exist some sectors or sub-sectors in which, in the presence of a large endowment of unskilled labour and the absence of sufficient cooperating land or capital, with a given technology and a wage level bounded from below, labour markets cannot clear. A full employment, neoclassical ‘wage equals marginal product’ solution would drive remuneration below socially acceptable, possibly subsistence, levels of consumption. Consequently, a labour surplus exists in the sense that a substantial portion of the labour force contributes less to output than it requires, i.e., its marginal product falls below its remuneration, set by bargaining. an unlimited supply of labour may be said to exist in those countries where population is so large relatively to capital and natural resources, that there are large sectors of the economy where the marginal productivity of labour is negligible, zero, or even negativ
LEWIS FEI-RANIS MODEL
The Lewis Fei-Ranis model is for overpopulated and under developed economy. It is based on dualistic economic development because The theory explains a way the industrial sector and agricultural sector can grow simultaneously without a lapse in the other or in the improvements rather than at its expense. There is always a unique, sole characteristic of surplus agricultural labor found in this kind of economy. The model is an attempt to balance agricultural and industrial growth in these economies. Lewis previously held that Economic growth in such economy can be achieved by investments in the non-agricultural sector by extracting surplus labor in the agricultural sector. But John Fei and Gustav explained how increase in productivity in agricultural sector would be helpful in promoting industrial sector too. The model explains that the complete shift the focus of progress from the agricultural to industrial economy does not mean that agricultural sector should be negligible rather its output should still be sufficient to support the whole economy with food and raw materials. With the assumption that large proportion Of the high population in these countries is engaged in agriculture and still agriculture is stagnant therefore marginal productivity of labor is zero and negative in agricultural sector while there are certain non agrarian sectorsIn the economy where there is reduced use of capital. This model suggests that if this surplus labor in the agricultural sector is transferred to industrial sector where their productivity will increase, economic development will be taking place.
They argue that an economy goes through three phases of development. In phase 1, marginal product of labor is equal to zero. The first phase is where surplus labor Can be withdrawn from agricultural sector without changing agricultural output. In the second phase of the development, additional output due to an increase in labor begins to rise as transfer takes place from agricultural sector to industrial sector, average Product falls showing an increase in real wages of industrial workers because sThere is shortage of food supply. The real wages in industrial sector is fixed and equal to real income in agricultural sector. These wages are called institutional wages. in the second stage labor surplus exist where Apl>MPL But it is not equal to institutional wages. If the migration to industrial sector continues, there will be a time from workers produce output that is equal to institutional wages.
The third stage is characterized by self sustained growth where farm workers produce more than the institutional which they get because disguised unemployment has been eliminated. Surplus labor ends and the agricultural sector becomes commercialized sector. MPL here is greater than CIW, disguised unemployment is eliminated. As labor is transferred to industrial sector there will be labor shortage in the agricultural sector so industrial sector cannot get the labor at the same prevailing constant wages therefore the wages in the industrial sector will rise.
From my own point of view the Fei-Ranis model did not take into account the very possible case where a constant transfer of labor from the agricultural sector to the industrial sector causes an extreme shortage of labor in the agricultural sector the model holds that the rate of labor transfer must exceed the rate of population growth. If the largest proportion of the workforce in the country goes to the industrial sector outputs will not be anything close to sufficient to support the whole economy with food and raw materials as Nigeria is facing now. This model is prevalent in Nigeria where labor has been shifted to the industrial sector. Disguised unemployment previously faced by the agricultural sector is now the problem of industrial sector. Shortage of labor in agricultural sector has led to shortage of food supply and raw materials in the economy.
The Harris Todaro Model of Migration
The basic assumption of this model is high expected income in the urban areas than the rural areas. Equilibrium according to this model is reached when expected wage in urban areas is equal to the marginal product of an agricultural worker. It also has the assumption that unemployment is nonexistent in the rural agricultural sector and that rural agricultural products and subsequent market is perfectly competitive which means that agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, rural-urban migration rate is zero since expected rural income equals expected urban income, which is leading to positive unemployment in the urban sector. Expected urban wage rate is equal to urbanwageXemployment rate. Rural urban migration will increase if urban wages increase in the urban sector, increasing the expected urban income and agricultural productivity also decreases, decreasing marginal productivity and wages in the agricultural sector therefore decreasing the expected rural income. This is nothing different to the current Nigerian economy. The expected income in urban areas has caused total neglect to the rural agricultural sector. The rural-urban migration is only rational if equilibrium is achieved, (where expected real wage in urban areas equals marginal product of an agricultural worker). But in the real sense, rural-urban migration is as a result of increase in urban wages in the urban sector which has caused a decrease in expected wages in rural sector.
The neglect to rural agricultural sector caused by rural-urban migration has brought about: shortage of food supply and raw materials, overpopulation and unnecessary competition in the urban sector leading to high crime rates, and a large number of people chasing too few jobs.
This brings an economy back to a state of inadequate development as is seen in Nigeria today.
Ani kenechukwu Joseph
2017/242423
INTRODUCTION
LEWISVILL -FEI-RANIS MODEL ( THE SURPLUS LABOUR THEORY)
One of the best-known early theoretical models of development that focused on the structural transformation of a primarily subsistence economy was that formulated by Nobel laureate W. Arthur Lewis in the mid-1950s and later modified, formalized, and extended by John Fei and Gustav Ranis. It is a dualism model in development and welfare economics. It is also known as the Surplus Labour Model. The Lewis two-sector model became the general theory of the development process in surplus-labor developing nations during most of the 1960s and early 1970s, and it is sometimes still applied, particularly to study the recent growth experience in China and labor markets in other developing countries. There was a flaw in Lewis model that it did not pay enough attention to the importance of the agricultural sector in promoting industrial growth. But Fei-Ranis (FR) model of dual economy explains how the increased productivity in agricultural sector would become helpful in promoting industrial sector. In this respect, it presents three stages whereby a underdeveloped country moves from stagnation to self-sustained economic growth. Thus, this model is treated as an improvement over Lewis model of unlimited supply of labor. This is because the assumption of unlimited supply of labour is unrealistic. Since Fei-Ranis model builds on the proponents of Lewis two-sector model, both are generally referred to as Lewis-Fei-Ranis model. Therefore, it is a matter of necessity to first define the Lewis two-sector model.
tries. In the Lewis model, the underdeveloped economy consists of two sectors:a traditional, overpopulated rural subsistence sector characterized by zero marginal labor productivity ( a situation that permits Lewis to classify this as surplus labor in the sense that it can be withdrawn from the traditional agricultural sector without any loss of output) and a high-productivity modern urban industrial sector into which labor from the subsistence sector is gradually transferred.The Lewis two-sector theory of development in which surplus labor from the traditional agricultural sector is transferred to the modern industrial sector, the growth of which absorbs the surplus labor, promotes industrialization, and stimulates sustained development. Here, Surplus Labour means the excess supply of labor over and above the quantity demanded at the going free-market wage rate. In the Lewis two-sector model of economic development, surplus labor refers to the portion of the rural labor force whose marginal productivity is zero or negative
In this line with this mode of thinking, the Lewis-Fei-Ranis model recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Like most economic theories, the Lewis-Fei-Ranis model relies on various assumptions:
(i) There is an abundance of labor in such underdeveloped countries and shortage of natural resources.
(ii) The population growth rate is very high which results in mass unemployment in the economy.
(iii) The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labor is zero and negative in agriculture
sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy.
-Todaro Migration Theory
The migration theory developed by John H. Harris and Michael Todaro is an economic model that assumes that migration decision is based on the expected difference between the income of rural and urban areas rather than just wage difference.
The model assumes that people miagrate to urban areas is because of the believe that they can earn higher in the urban area.
Cobb-Douglas production function.
Impact of the Theory on Nigeria
In the case of Nigeria, the assumption of the Harris-Todaro model are very much significant given that a lot of people have migrated from the rural areas into the urban areas of the country in order to seek for higher paying jobs in manufacturing companies or greener pasture.
Thus, the assumptions of the Harris-Todaro model of migration holds true in developing countries Nigeria inclusive.
Name: Francis Chibuezem David
Reg. No: 2017/241445
E-mail: francischibuezem247@gmail.com
Harris-Todaro model
1. Productive process
The rural sector is specialized in the production of agricultural goods. The productive process of the rural sector can be described by a Cobb-Douglas production function:
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a 0 and g > 0 are a parametric constants. g is the elasticity of p with respect to the ratio Ym/Ya.
4. The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified:
Summary
The haris todaro model is a dualistic economic model which shows the relationship between the rural and urban areas. It also shows the reason for rural-urban migration and explains that rural production is majorly agricultural goods while urban production is known as manufactured goods. According to this model, individuals migrate from rural areas to urban areas in search of better opportunities and standard of living.
Nigeria is and LDC and so it also has the characteristics of this model which is a dual sector economy. Nigeria also has the characteristics of rural-urban migration of people in search of greener pastures. My only critic of this model is the assumption of full employment in rural areas because rural areas in Nigeria is characterized of large unemployment and underemployment.
Lewis-Fei-ranis model
The Fei-ranis was developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. This model recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account.
They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development. In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
Phase 1: AL=M
According to Fei and Ranis, AD amount of labor (see figure) can be shifted from the agricultural sector without any fall in output. Hence, it represents surplus labor.
Phase 2: AP>MP
After AD, MP begins to rise, and industrial labor rises from zero to a value equal to AD. AP of agricultural labor is shown by BYZ and we see that this curve falls downward after AD. This fall in AP can be attributed to the fact that as agricultural laborers shift to the industrial sector, the real wage of industrial laborers decreases due to shortage of food supply, since less laborers are now working in the food sector. The decrease in the real wage level decreases the level of profits, and the size of surplus that could have been re-invested for more industrialization. However, as long as surplus exists, growth rate can still be increased without a fall in the rate of industrialization. This re-investment of surplus can be graphically visualized as the shifting of MP curve outwards. In Phase2 the level of disguised unemployment is given by AK. This allows the agricultural sector to give up a part of its labor-force until
Phase 3 begins from the point of commercialization which is at K in the Figure. This is the point where the economy becomes completely commercialized in the absence of disguised unemployment. The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor.
Phase 3: MP>CIW
The amount of labor that is shifted and the time that this shifting takes depends upon:
The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits;
The nature of the industry’s technical progress and its associated bias;
Growth rate of population.
The major ideas in this model are:
1. Agricultural growth and industrial growth are both equally important;
2. Agricultural growth and industrial growth are balanced;
3. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap
Name: Francis Chibuezem David
Reg. No: 2017/241445
E-mail: francischibuezem247@gmail.com
Harris-Todaro model
1. Productive process
The rural sector is specialized in the production of agricultural goods. The productive process of the rural sector can be described by a Cobb-Douglas production function:
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a 0 and g > 0 are a parametric constants. g is the elasticity of p with respect to the ratio Ym/Ya.
4. The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified:
Summary
The haris todaro model is a dualistic economic model which shows the relationship between the rural and urban areas. It also shows the reason for rural-urban migration and explains that rural production is majorly agricultural goods while urban production is known as manufactured goods. According to this model, individuals migrate from rural areas to urban areas in search of better opportunities and standard of living.
Nigeria is and LDC and so it also has the characteristics of this model which is a dual sector economy. Nigeria also has the characteristics of rural-urban migration of people in search of greener pastures. My only critic of this model is the assumption of full employment in rural areas because rural areas in Nigeria is characterized of large unemployment and underemployment.
Lewis-Fei-ranis model
The Fei-ranis was developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. This model recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account.
They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development[5] In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.[6]
Using the help of the figure on the left, we see that
Phase 1: AL=M
According to Fei and Ranis, AD amount of labor (see figure) can be shifted from the agricultural sector without any fall in output. Hence, it represents surplus labor.
Phase 2: AP>MP
After AD, MP begins to rise, and industrial labor rises from zero to a value equal to AD. AP of agricultural labor is shown by BYZ and we see that this curve falls downward after AD. This fall in AP can be attributed to the fact that as agricultural laborers shift to the industrial sector, the real wage of industrial laborers decreases due to shortage of food supply, since less laborers are now working in the food sector. The decrease in the real wage level decreases the level of profits, and the size of surplus that could have been re-invested for more industrialization. However, as long as surplus exists, growth rate can still be increased without a fall in the rate of industrialization. This re-investment of surplus can be graphically visualized as the shifting of MP curve outwards. In Phase2 the level of disguised unemployment is given by AK.[4] This allows the agricultural sector to give up a part of its labor-force until
Phase 3 begins from the point of commercialization which is at K in the Figure. This is the point where the economy becomes completely commercialized in the absence of disguised unemployment. The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor.
Phase 3: MP>CIW
The amount of labor that is shifted and the time that this shifting takes depends upon:
The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits;
The nature of the industry’s technical progress and its associated bias;
Growth rate of population.
The major ideas in this model are:
1. Agricultural growth and industrial growth are both equally important;
2. Agricultural growth and industrial growth are balanced;
3. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap
Name: UGWOKE, PAUL CHUKWUEBUKA
Red no. 2017/241059
Dept. Edu/eco
INTRODUCTION
Since the wage in cities is higher than one in village people migrate into the cities hoping to get urban job. The probability to get a job depends on the size of unemployment pool in relation to the number employed in industries. Therefore, in many mostly less-developed countries urban unemployment is a big issue. W. Max Corden in his book Trade Policy and Economic Welfare claims that the possible reason for urban unemployment is the wage differential. This coexists with usually high minimum wage in industries and with a marginal product of labor in agriculture less than the urban minimum wage1.
The model presented is derived from Migration, Unemployment and Development: A Two Sector Analysis original article by John R. Harris and Michael P. Todaro (1970)2 and W.M. Corden’s book mentioned above. In our approach we will assume as Harris and Todaro did that the expected urban wage is equal to the average wage of both urban employed and unemployed. Authors’ main claim is that the best policy to improve employment is to protect agricultural sector rather that manufacturing sector of the country. In this paper we will build a Harris-Todaro model of urban unemployment, discuss two cases: 1) subsidizing manufacturing, and 2) subsidizing agriculture, and test Harris and Todaro’s claim. For that purpose, we will run simulations for both cases in MS Excel, and try to analyze outcomes and suggest possible policies. The approach of the project will be comparative static.
GENERAL ASSUMPTIONS OF THE MODEL
• Two sectors: urban (manufacture) and rural (agriculture)
• Rural-urban migration condition: when urban real wage exceeds real agricultural product
• No migration cost
• Perfect competition
• Cobb-Douglas production function
• Static approach
• Low risk aversion
J. R. HARRIS AND M. P. TODARO MODEL OF LABOUR MIGRATION AND REALLOCATION. Employment policy in developing countries like Nigeria cannot be formulated and implemented without answering a basic question, such as, how can underutilised labour be used in a develop¬ment strategy? Ragnar Nurkse and W. A. Lewis asserted that large numbers of people remain engaged in work which adds nothing to national output. Nurkse saw the reallocation of a sur¬plus labour to more productive uses, especially labour-intensive construction projects, as a major source of capital formation and economic growth.
Lewis conceived a similar reallocation process but he focused on the ‘capitalist sector’, essentially industry, as the main employer of surplus labour. Both theories regarded the labour reallocation process as nearly costless but they worried about how to capture from the agricultural sector the food necessary to feed the transferred workers.
While criticising the Lewis model, J. R. Harris and M. P. Todaro have developed a new model of economic development which is relevant for labour surplus countries like Nigeria. It is the best known model of internal migration in the context of present-day developing countries. The model has focused mainly on migration of labour from rural to urban areas caused by certain incentives. J. R. Harris and M. P. Todaro have referred to two types of migration—induced migration and internal mi¬gration.
According to this model migrating workers are essentially participants in a lottery of rela-tively high-paid jobs in the towns. When new urban jobs are created the lottery becomes more attractive to potential migrants. Depending on their responsiveness to this improved opportu¬nity, more than one worker is likely to migrate for each job created.
If so, the output foregone may be that of two or more agricultural workers, not just one. This is because those in the rural areas are primarily farmers. If the migrants bring some of their family members to urban areas more output will be lost. The reason is that the wife and children of migrants find fewer employment opportunities in towns than in the rural areas because they do not have land in the towns on which to grow food. This also leads to food shortage as the farm produce is drastically reduced.
Internal Migration:
According to J. R. Harris and M. P. Todaro, most of the internal labour migration which occurs in the course of economic development is from rural to urban areas. The model try to explain why the observed high rates of small- urban migration found in most developing countries is quite natural from an economic view point.
In this model the expected real wage-differential between urban and rural areas is the main motivating force behind migration or the main determinant of the migration decision. The potential migrant first calculates the real income which he would get in the urban area for a job with his present effort. He next makes a personal judgement of the probability of obtain-ing such a job.
He then compares the expected income with that which he hopes so obtain in the rural area. His migration decision is based on the difference. For example, suppose the ex¬pected rural income is N1000 per Month, and that real income of an urban job which is commensurate with his qualification is N2000.
However, this information alone is not suffi¬cient to make the migration decision. If the subjective probability of getting the urban job was 0.4, than the expected income would be N800 and no migration would take place on this case expected urban wage = actual urban wage x the probability of getting a job
800 = 0.4 x N2000
If the probability were 0.8 the expected income would be Rs 1600 (= 0.8 x N2000) and the worker would migrate. (To this one may, of course, add the cost of transfer.) Thus the model brings into consideration the role of economic incentive in the migration decision.
The Basic Model:
The Harris-Todaro model assumes that migration from rural to urban areas depends majorly on the difference in wages between the rural and urban labour markets.
That is:
Where: Mt is the number of rural to urban migrants in time t, is response function, Wu is the urban wage and W is the rural wage. Since there is unemployment in the town (and it is as-sumed that there is no unemployment in rural areas), and every migrant cannot expect to find a job there, the model postulates that the expected urban wage with the rural wage. The expected urban wage is the actual urban wage times the probability of getting a job, or
Where Weu = expected urban wage and p = probability of getting a job Here p is expressed as
Where Eu is urban employment, Uu is urban unemployment and L is total urban work force. Harris and Todaro assume that all members of the urban labour force have equal chances of obtaining the jobs available. So Weubecomes simply the urban wage times the urban em-ployment rate.
Migration in any given time then depends on these three factors:
(a) The urban-rural wage gap,
(b) The urban employment rate and
(c) The responsiveness of potential migrants to the resulting opportunities.
Thus
Where Mt = migration in period t and h = the response rate of potential migrants
As long as Weu > Wr the rural-urban migration will continue. It will stop only when migra¬tion has forced down the urban wage or forced up urban unemployment so much that expected urban wage (Weu) is covated to existing rural wage (Wr). If Wr > Weu there will be a flow of disappointed urban jobseekers back to the rural areas. This is known as reverse migration.
Theoretical Implication of the Model:
There is no need to deny the fact that any development project can be evaluated using social cost- benefit analysis. An important part of the social cost of any input is opportunity cost, its value in its next best alternative use. Labour hired for an urban formal-sector project might well be drawn from the urban informal sector also.
The worker who moves out of the urban informal sector may, in turn, be replaced by someone from the rural sector. In this case, the output lost is that of the worker who was formerly in the rural sector, i.e., the worker at the end of the em¬ployment chain. For this reason, some analysts believe that the wage paid to casual agricultural labourers provides a good measure of the social cost of unskilled labour.
However, this measure, although a good indicator of output foregone through labour reallo-cation, probably understates the true social cost of employing labour, which has other compo¬nents that are likely to be significant. One such component is induced migration. No doubt there are both pull and push factors behind internal labour migration that occurs in the course of economic development from rural to urban areas.
Such migration can result either from favourable economic developments in the towns or from adverse developments in the rural areas. The Harris-Todaro model integrates these two sets of forces in their analysis of the proc¬ess of labour reallocation that is likely to occur during economic development. This is why the model was sort of innovation in the literature of development economics when it appeared for the first time in 1970′.
The Policy Implications of the Model:
The H-T model has far-reaching implications from the policy point of view. For example, if the government of the country concerned were successful in fostering industrial development in an urban area, employment would increase there.
• The effect would be to increase the subjective productivity of getting urban employment in the minds of rural inhabitants. Migration would increase and the eventual effect of the new industrial development could be that urban unem-ployment becomes higher that the level prevailing before the new development took place.
• There will be some level of urban employment which ensures equilibrium in the sense that no further migration takes place. Potential migrants may take a long-term view in arriving at a decision. They may consider that their desireness of obtaining an urban job will be higher after a waiting period of some months. Thus they will compare the present value of the sum of expected urban earnings with that of expected rural earnings.
• They may be content to accept a low wage in the urban informal sector for some time. This might be a rational decision on a long-term basis. The root of the problem is the large difference between earnings in the modern industrial sector and those in the rural areas.
• The former are well above the market clear¬ing levels for varies reasory. The long-term solution to the problem lies in adopting policies for both urban and rural areas which reduces the real income differences between the two areas.
Comparisons between Harris-Todaro and Lewis models
The Lewis model and Harris-Todaro model have similar outcomes in the sense of labour moving from rural agricultural areas into urban areas in search of modern industrial work as an approach to earn more money and leave poverty. However, the assumptions of the two models are very different and maybe this is why each model has had different impacts in terms of economic development history. The Lewis model is an early traditional model. which in practical situations does not work properly because of the assumptions. Therefore, the extent of the model is rarely realised. Although, this model does provide a good general theory on labour transiting in developing economies. The Harris-Todaro model, on the other hand, even with its problems with the assumptions, has lead to policy implications such as ways to reduce inequalities and bias between rural areas and urban cities as an attempt to reduce this migration problem.
Overall, both models have increased awareness of the growing issues surrounding rural-urban migration. As many countries like India, Singapore and China act as success stories of this type of migration and economic transition as a catalyst towards leaving poverty, there are many developing nations who have not had the same success, but have suffered from a rise in urban poverty, unemployment and fall in living standards
CONCLUSION
Harris Todaro model explains some issues of rural-urban migration. This migration happens in case when expected rural income is higher than rural wages. In this case economy may have high rates of unemployment. The equilibrium condition of this model is when expected rural wage is equal to rural wage.
When government subsidize manufacturing sector Harris Todaro paradox may happen. According to the authors job creation instead of dealing with unemployment problem actually may cause increase of unemployment. This happens when urban-rural wage differential is high enough, so rural workers move to the cities hoping to find a job with high wage. Obviously, not all these workers succeed in finding jobs which leads to unemployment.
Another issue is that inducing minimum wages creates labor market distortions. Therefore, policy makers should not set the minimum wage rates.
In addition, simulations showed that different policies’ outcomes depend on elasticity of labor demand in different sectors and on marginal product of labor.
Reference
Warner Max Corden, Trade Policy and Economic Welfare, 1997.
Migration, Unemployment and Development: A Two Sector Analysis, John R. Harris and Michael P. Todaro, 1970.
ASSIGNMENT TWO
Lewis Ranis and Fei model
Introduction
Current literature on growth and development continues to be influenced by the one-sector Solow-type models or the two-sector Uzawa-type models, both of which have now been complemented by endogenous growth. While these endogenous growth models have recently begun to confront such issues as poverty traps at a theoretical level, they generally share the neoclassical feature of full employment and market clearing. In contrast, the surplus labor models advanced by Lewis (1954), and expanded upon by Ranis and Fei (1961, 1964, 1997), described a two-sector economy depicting an initially large traditional sector and a relatively small commercialized sector, with the key feature that the traditional sector does not adhere to the neoclassical full employment labor market clearing assumption. While various micro foundations can be constructed to detail why this might be so, at the macro level, which was the focus of these early dual economy models, it was sufficient to posit that labor was in excess supply relative to cooperating factors at the prevailing wage and technology, and thus that the commercialized sector faced an essentially infinitely elastic labor supply at any moment in time.
With unskilled rural labor the abundant resource in many developing countries, especially at an early stage of their development, what determines the price of labor has continued to be a controversial issue, although it is clear that, in recent years, the neoclassical model and market clearing approaches have enjoyed increasing popularity in not only the theoretical but also the applied literature. The notion of an institutional or bargaining wage not based on marginal productivity fundamentals has been especially repugnant to orthodox economists. The rejection of the labor surplus model has, in part, been due to some confusion as to which of its assumptions are necessary as opposed to which are sufficient.
The Lewis-Ranis-Fei model
The Lewis (1954) theory of dualistic economic development provides the seminal contribution to theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to followthe sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150). Thenon-agricultural sector accumulates capital by drawing surplus labour out of the agricultural sector. The expansion of the non-agricultural sector takes advantage of the infinitely elastic supply of labour from the agricultural sector due to its labour surplus. When the surplus labour is exhausted, the labour supply curve in the non-agricultural sector becomes upward-sloping.
CONCEPT OF SURPLUS LABOUR
The concept of surplus labour is widely discussed among development economics but its specific meaning needs to be defined, especially in technical terms, as many neoclassical economists still doubt the existence of surplus labour in an economy.
Defining the source and the extent of surplus labour is then a prerequisite for further discussion. This section considers the various definitions of surplus labour and clarifies them.
The simple definition of surplus labour implies the existence of a point at which the marginal product of labour becomes zero and labour can be transferred out of the traditional sector without reducing the quantity of output, as noted by Wellisz (1968: 22): The (disguised-unemployment or the Unlimited Supply of Labour) hypothesis claims that in poor, densely populated countries, more people are employed than needed to produce the prevailing output with the existing techniques and the existing supply of non-labour inputs. The ‘surplus’ labour constitutes ‘hidden’ or ‘disguised’ unemployment. Many of the proponents of the hypothesis make the further claim that agricultural output will not decrease, and industrial output will increase, if measures are taken to re-allocate labour from subsistence agriculture (where the surplus is supposed to exist) to industry (where there is no surplus labour). Since
labour can be removed from agriculture at no social cost, its supply to industry is, in a sense, ‘unlimited’ as long as disguised unemployment prevails. However, Ranis (2004b) does not agree with this definition of ‘surplus labour’, preferring to regard those whose marginal product lies below their consumption or income share as ‘surplus labour’, or more specifically, as ‘disguised unemployed’ or ‘underemployed’. Ranis defines surplus labour as follows: The basic premise is that there exist some sectors or sub-sectors in which, in the presence of a large endowment of unskilled labour and the absence of sufficient cooperating land or capital, with a given technology and a wage level bounded from below, labour markets cannot clear. A full employment, neoclassical ‘wage equals marginal product’ solution would drive remuneration below socially acceptable, possibly subsistence, levels of consumption. Consequently, a labour surplus exists in the sense that a substantial portion of the labour force contributes less to output than it requires, i.e., its marginal product falls below its remuneration, set by bargaining. (Ranis, 2004b: 1) Lewis (1954: 141) provides a general definition that: an unlimited supply of labour may be said to exist in those countries where population is so large relatively to capital and natural resources, that there are large sectors of the economy where the marginal productivity of labour is negligible, zero, or even negative.
This paper agrees with Lewis that both these circumstances exist, but we distinguish these two types of surplus labour: the labourers with positive but ‘negligible’ marginal because they have different implications in the wage determination in the modern sector, which will be discussed later. If w is the real wage of a labourer, we have:
Definition 1: Type I surplus labour (or Absolute Surplus Labour, ASL): Labour is defined as Absolute Surplus Labour if the MPL is equal to or less than zero, that is,
whenMPL ≤ 0 < ws ≤ w. Type II surplus labour (Relative Surplus Labour, RSL): Labour is defined as Relative Surplus Labour if the MPL is greater than zero but lower than the actual wage received, that is, when 0 < MPL < w . ASL is a narrow definition and RSL a more general one. The definition of RSL means that, as long as 0 < MPL < w holds, it does not matter if MPL is lower or higher than the subsistence level (whether s MPL w ), though normally it is assumed to be lower than the subsistence level ( s MPL < w ).
Having defined the concept, let us now examine the micro-foundations of surplus labour to see how it operates in reality. Surplus labour also includes unutilised labour, including those who do not participate in production in the neoclassical way. People can be considered to be ‘surplus labour’ even if they do not work. That is, were they to work, their MPL would be small, zero or even negative. In reality, these people may stay idle, doing nothing, rather than participate in work and contribute non-positively. Of course, as discussed previously, they have to be supported by their families to survive. Their marginal utility of leisure is also zero. They want to work but there is no job for them. In such a situation, these people either do not work or work less than any reasonable conception of full time, and they could readily be put to work at subsistence level wages.
For example, in the traditional agricultural economy, a certain amount of field work (e.g. ploughing a certain piece of land) may need either all family members to work one-fifth of their time, or only one-fifth of the members to work full-time while the rest are idle. Surplus labour exists in this sense.
Conclusion
For economies in the early stages of development, the rural agricultural sector consists of family farming units, with a hiring principle that is different from that of the firm. Family members work together and share the value of their output. They are paid not the marginal product but the average product of labour. Thus, it is possible that there exists surplus labour in many developing countries. The notions of surplus labour and disguised unemployment have been a central part of development economics since Lewis (1954).
With the presence of surplus labour in the traditional sector, the modern sector can expand without increasing labour costs. This process will continue until the surplus labour in the traditional sector is used up. After this point is reached, wages begin to rise consistent with rising marginal productivity, in which the workers in the traditional sector would also be paid in accordance with their marginal product rather than the subsistence wage. At this stage, the dualistic economic structure disappears, replaced by acompetitive one-sector economy that can be explained by the neoclassical model.
This paper contributes to the literature by clarifying some of the ambiguities in the discussions following Lewis’ model. There has long been a debate about the precise definition of surplus labour. This paper first identified the problem and defined two typesof surplus labour, with type I (absolute) surplus labour being defined to be when the marginal product of labour is equal to or even lower than zero, and type II (relative) surplus labour being when the marginal product of labour is higher than zero but lower than the wage level, which is set at the subsistence level in the long run. This seemingly simple distinction resolves much of the misunderstanding. Based on this classification of two types of surplus labour, we define two turning points: the type I turning point, when type I surplus labour is used up; and the type II turning point, when type II surplus labour is used up. The wage is constant before the type I turning point, increases slowly after it,,and the dual economy merges with the neoclassical one-sector economy after the type II turning point is passed.
NAME: EWA PRINCESS
REG NO: 2017/249501
DEPT: ECONOMICS
BLOG ADDRESS: blogwithprincess.wordpress.com
EMAIL ADDRESS: ewaprincess792@gmail.com
ANSWER:
1. THE LEWIS-FEI-RANIS MODEL OF LABOUR SUPPLY.
The Lewis (1954) theory of dualistic economic development provides the seminal contribution to theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance of capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150). The non-agricultural sector accumulates capital by drawing surplus labour out of the agricultural sector. The expansion of the non-agricultural sector takes advantage of the infinitely elastic supply of labour from the agricultural sector due to its labour surplus. When the surplus labour is exhausted, the labour supply curve in the non-agricultural sector becomes upward-sloping. Ranis and Fei (1961) formalised Lewis’s theory by combining it with Rostow’s (1956) three “linear-stages-of-growth” theory. They disassembled Lewis’s two-stage economic development into three phases, defined by the marginal productivity of agricultural labour. They assume the economy to be stagnant in its pre-conditioning stage. The breakout point marks the creation of an infant non-agricultural sector and the entry into phase one. Agricultural labour starts to be reallocated to the non-agricultural sector. Due to the abundance of surplus agricultural labour, its marginal productivity is extremely low and average labour productivity defines the agricultural institutional wage. When the redundant agricultural labour force has been reallocated, the agricultural marginal productivity of labour starts to rise but is still lower
than the institutional wage. This marks the shortage point at which the economy enters phase two of development. During phase two the remaining agricultural unemployment is gradually absorbed. At the end of this process the economy reaches the commercialisation point and enters phase three where the agricultural labour market is fully commercialised.
The Lewis-Fei-Ranis model in relation to the Nigerian economy:
Having tested the Lewis-Ranis-Fei theory for the Nigerian economy, we have found that Nigeria’s economic growth is mainly attributable to the development of the non-agricultural sector. This is driven by rapid capital accumulation as well as employment growth. The reallocation of labour away from agriculture will make a positive net contribution to Nigeria’s rapid economic growth. The rise in the marginal productivity of agricultural labour indicates the absorption of redundant agricultural labour. However, the marginal productivity of agricultural labour is still lower than the initial low average productivity of agricultural labour. This implies the continued existence of disguised agricultural unemployment. This suggests that the Nigerian economy has entered the Lewis-Ranis-Fei phase two of development but has not yet achieved phase three. The continuing widening productivity gap between the two sectors calls for the removal of market restrictions and government interventions so as to allow the continued absorption of surplus labour. Several policy recommendations are tentatively suggested. First and foremost, more effort should be made in promoting employment to effectively absorb the remaining labour surplus and promote Nigeria’s economic development. This can be achieved by further relaxing the restrictions on migration, increasing labour market flexibility and improving the allocative efficiency of labour. It can also be achieved by encouraging the development of private enterprise to create more employment opportunities. Second, Nigeria’s government should continue implementing the it’s policies, designed to provide rudimentary job training, recruitment information and information about conditions in the destination cities to rural migrants. This will not only help facilitate employment of rural migrants but also satisfy the increasing demand for skilled labour in the growing non-agricultural sector. Third, agriculture could be promoted by tax breaks, direct subsidies and most importantly, by removing price controls on agricultural products. Agriculture could thus be commercialised and the economy would enter phase three of economic development.
2. HARRIS – TODARO MODEL OF RURAL – URBAN MIGRATION
The Harris-Todaro model, named after John R. Harris and Michael P. Todaro, is an economic model developed in 1970s and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. John R. Harris and Michael P. Todaro presented the seminal ‘Two Sector Model’ in American Economic Association, 1970. This model is a pioneering study in the field encompassing rural-urban migration. The classical theory is used in development economics and is an economic illustration of migrants’ decision on expected income differentials between rural (agriculture) and urban (manufacturing) sectors. The model of rural-urban migration is typically studied in the context of employment and unemployment situation in developing countries. The purpose of the model is to explain the critical urban unemployment problem in developing countries. The key hypothesis of the Harris and Todaro’s model is that economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migration decision. In other words, this theory puts forward that rural-urban migration will occur when the urban expected wage exceeds the rural actual wage. The main assumption of the model is that the migration decision is based on the expected income differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
In the model, equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agriculture worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It also assumes that rural agricultural production and the subsequent labour market is perfectly competitive. As a result, the agricultural wage is equal to the agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector.
The Harris-Todaro model produced two powerful policy results. The first concerns the policy of the formal-sector job creation to employ the unemployed (who, in the Harris-Todaro model, are all in the urban sector, because that is where the formal-sector jobs are assumed to be located. Such a policy, they concluded, would increase the formal-sector labour force by more than the number of new jobs created, therby raising the number of urban unemployment. Thus, the solution to urban unemployment is not to create urban employment.
The second policy option that Harris and Todaro considered was a policy of rural development. If such a program could increase the rural traditional-sector wage, unemployment would then fall. Thus, in the Harris-Todaro model, the solution to urban unemployment is rural development.
Soon after the model was published, the government of Kenya followed the Harris-Todaro precepts by putting into place an integrated program of rural development. Te result was that unemployment in Kenya fell.
ASSUMPTIONS
1. Two sectors: the urban sector (manufacturing) and the rural sector (agriculture)
2. Rural-urban migration: when urban real wage exceeds real agricultural products
3. No migration cost
4. Perfect competition
5. Cob-Douglas production function
6. Static approach
7. Low risk aversion
Harris-Todaro model explains some issues of rural-urban migration. This migration happens in case when expected urban income is higher than actual rural wages. In this case, an economy may have high rate of unemployment in the urban sector. The equilibrium condition of this model is when expected urban wage is equal to rural wage.
Therefore, migration from the rural sector to the urban sector will increase if:
1. Urban wages increase in the urban sector, increasing the expected urban income
2. Agricultural productivity decreases, lowering marginal productivity and wages in the rural sector, decreasing the expected rural income.
When government subsidizes the manufacturing sector, Harris-Todaro paradox may happen. Accordingly, jobs creation instead of dealing with unemployment problem actually may cause increase of unemployment. This happens when urban-rural wage differential is high enough, so rural workers move to the urban sectors hoping to find a job with high wage. Obviously, not all these workers succeed in finding jobs which leads to unemployment.
The Harris Todaro model in relation to the Nigerian economy:
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris-Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
Another issue is that inducing minimum wages creates labour market distortions. Therefore, policy makers in Nigeria should not set the minimum wage rate.
In addition, simulations showed that different policies’ outcomes depend on elasticity of labour demand in different sectors and on marginal product of labour.
As Harris and Todaro suggested the first-best policy would be subsidizing manufacturing along with restrictions of rural migration, thus, the Nigerian economy will be better off if it implements the first best policy.
UNIVERSITY OF NIGERIA, NSUKKA
FACULTY OF SOCIAL SCIENCE
DEPARTMENT OF ECONOMICS
AN ASSIGNMENT WRITTEN IN THE PARTIAL FUFUILMENT OF THE COURSE: DEVELOPMENT ECONOMICS 1 (ECO 361).
TOPIC:
LEWIS-FEI-RANIS MODEL OF ECONOMIC GROWTH
BY:
ABIAZIA RUFUS CHIDIEBUBE
2017/243371
LECTURER:
DR. OLISAEMEKA ACHIME
MARCH, 2021
LEWIS-FEI-RANIS MODEL
INTRODUCTION
BRIEF HISTORY OF THE LEWIS MODEL:
The Lewis Model of economic development was developed by Sir. W. Arthur Lewis ( 1915-1991) in 1954. He was a political economics tutor in different universities and the 1950’s he worked with the United Nations. He won a Noble Prize for Economics in 1979.
Lewis most famous and influential contribution to Economics is undoubtedly the 1954 paper on ” Economic development with unlimited supply of labour”. He called it a “Dual-sector model” by categorising an economy into two, as a traditional and as a modern sector. The traditional sector provided surplus labour to the modern sector and this process led to development stability. He focused mainly on labour reallocation and an organisational dualism, but less on product dualism.
BRIEF HISTORY OF FEI-RANIS MODEL:
The model is a dualism model in development economics or welfare economics that has been developed by John. C.H. Fei and Gustave Ranis, it is understood as a extension and modification of the Lewis Model, it is also known as the surplus labour model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes into account the economic situation of unemployment and underdevelopment of resources into account.
Both sectors coexist in the economy. Development can be obtained by a complete shift in the focal point of progress from the agricultural to the industrial economy. This is done by transfer of labour from the agricultural to industrial sector. Showing that underdeveloped countries do not suffer from constraints of labour supply.
Surplus labour is the central element in the LEWIS-FEI-RANIS MODEL which based on a “capitalist and a subsistence sector” and it is grouped into three main instruments; labour force, capital accumulation and integration to the world economy.
The main focus in Lewis Model was on the reallocation of labour until a turning point is reached, economy become fully commercialized.
COMPARISON WITH OTHER MODELS
i) Other growth model considers underdeveloped countries to be homogeneous in nature.
ii) Keynesian (1936) model, focusing on advanced economy cyclical issues. He focused on the temporary unemployment of both capital and labor in the advanced economy, not the secular underemployment of labor in the developing world. Clearly, savings-oriented one-sector models were all the vogue, incorporated in both approaches,
iii) Lewis rejected the neoclassical assumptions of full employment, market clearance and perfect competition.
CORE DISCUSSIONS AND THE MAIN ARGUMENT OF THE MODEL:
This theory is concerned with a poor economy which has following properties:
(i) There is an abundance of labor in such underdeveloped country and shortage of natural resources.
(ii) The population growth rate is very high which results in mass unemployment in the economy.
(iii) The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labor is zero and negative in agriculture sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy.
THUS THE MODEL SUGGESTS THAT:
“Economic development would be taking place if agricultural laborers are transferred to industrial sector where their productivity will increase”.
STAGES OF FEI-RANIS MODEL:
Fei and Ranis develop their dual economy model with the help of three stages of economic growth. They are presented as:
Diagram/Figure:
In the (a) part of the Fig., the labor supply curve is perfectly elastic, as between S and T. In phase (I) as shown in (c) part of Fig., the MPL = 0. In other words AL = MPL = 0. But here APL = AB.
Following Lewis the FR model argues that AD units of labor are the surplus amount of labor in agricultural sector which is prey to disguised unemployment.
In phase (II) APL > MPL, but after AD, MPL begins to rise (c part of Fig). The growth of labor force in industrial sector increases from zero to OG (a part of Fig). The APL in agri. sector is shown by BYZ curve (c part of Fig).
The first stage of FR model is very similar to Lewis. Disguised unemployment comes into being because the supply of labor is perfectly elastic and MPL = 0. Therefore, such disguised unemployed are to be transferred to industrial sector at the constant institutional wage.
In the second stage of FR model (phase) agri. workers add to agri. output but they produce less than institutional wage they get. In other words, in the second stage the labor surplus exists where APL > MPL, but it is not equal to subsistence (institutional) wages.
Accordingly, such disguised unemployed also have to be transferred to industrial sector
In the third stage of FR model the take-off situation comes to an end and there begins the era of self-sustained growth where the farm workers produce more than the institutional wage they get. In this stage of economic growth the surplus labor comes to an end and the agri. sector becomes commercialized sector. All such is explained with the Fig.
Accordingly, they have to be shifted to industrial sector. As labor is transferred to industrial sector a shortage of labor will develop in agri. sector. As a result, the wages in the industrial sector will rise as from T to Q in (a) part of Fig.
After point T the turn which occurs in the SZ curve is known as “Lewis Turning Point”. In the 3rd phase the agri. laborers produce more than CIW. (As here MPL > CIW shown in (c) part of Fig). In this phase the take off comes to an end and self-sustained growth starts. This is also known as point of commercialization (of agri.) in FR model.
The Amount And Time To Re-Allocate Labor Will Depend Upon:
(i) The rate of growth of industrial capital which depends upon the growth of profits in industrial sector and growth of surplus generated within the agri. sector.
(ii) The nature and bias of technical progress in industry.
(iii) The rate of growth of population. It means that the rate of labor transfer must be in excess of the rate of growth of population.
The Three Phases Of Labor Transfer Are Summarized As:
In phase I: MPL = 0 and there exists the surplus labor equal to AD.
In phase II: CIW > MPL > 0 and there exists the open and disguised unemployment equal to AK.
In phase III: MPL > CIW and the economy is fully commercialized and disguised unemployment is exhausted.
Criticism:
(i) According to prof.Jorgenson, he says whether MPL will be zero is an empirical issue. During the seasons of sowing and harvesting the MPL > 0. Jorgenson concluded on the basis of Japanese data even for the pre I world war period the supply of labor was not unlimited.
(ii) Ignoring the Role of Capital: The FR model concentrated upon land and labor as the determinants of output, ignoring the role of capital.
(iii) Open Economy: FR model ignored the role of foreign trade as it assumed a closed economy model.
(iv) Supply of Land in Long Run: FR model assumed that in the process of economic development the supply of land remained fixed. But it is not true. The supply of land can be increased in case of long run.
(v) Low Productivity in Agricultural Sector: According to Jorgenson it has been observed that there has been a very slow rise in the productivity of agricultural sector. Consequently, the surplus will hardly be created in agricultural.
Conclusion/Comparison with Real World/Opinion:
Thus we find that whereas Lewis had failed to offer a satisfactory explanation of this subsistence sector and ignored the real impact of population growth on the choice of capital intensity on the process of surplus labor absorption. Moreover, FR model emphasized upon the simultaneous growth of agricultural and industrial sectors. Thus FR model believes in ‘Balanced Growth’ in the take-off stage. It means that there should be a simultaneous investment in both agricultural sector and industrial sector. According to FR model in the beginning the surplus rises; such surpluses will be available as a capital in the take-offstage. Some part of this surplus will be used in agri. development, while some part will be reploughed in industrial development. As a result, both agri. and industrial sectors will grow under ‘Balanced Growth’ pattern.
Apparently, Niegeria as case study, the model has fail because the model focuses only on surplus labour and its reallocation to the industrial sector without considering institution-political factors, and effect cause by migration to industrial, agricultural output will decrease which increase price and lead to inflation at the longrun. As such balance growth or equilibrium will be obtained in the economy.
Thus, three major opinions are highlighted in the FR mode:
(i) Growth of agriculture is as important as the growth of industry.
(ii) There should be a balanced growth of agriculture and industrial sectors.
(iii) Balance growth can be obtain in the economy by equitable distribution of resources ( labour and capital) to both sectors.
HARRIS-TODARO MODEL
INTRODUCTION:
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in
development economics and welfare economics to explain some of the issues concerning rural-urban migration . The main assumption of the model is that the migration.
BASIC ARGUMENTS:
decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
It has long been realized that in order for an economy to develop or grow, a large amount of labor has to be transferred from the traditional (or backward) agricultural sector in rural areas, where the productivity of labor is low (or negligible, or zero, or even negative) to the modern manufacturing sector where the productivity of labor is higher and rising due to capital accumulation in that sector.
The model treats rural-urban migration primarily is an economic phenomenon. In essence, the theory postulates that workers compare the expected incomes in the urban sector with agricultural wage rates and migrate if the former exceeds the latter. Rural-urban migration is thus the equilibrating force which equates rural and urban expected incomes and as such is a disequilibrium phenomenon.o The three basic characteristics of their model–that migration occurs largely for economic reasons, that the migration decision depends on expected ralher than nominal wage differentials, and that migration takes place in dis-equilibrium–suggest that rural-urban migration be given a new emphasis. Rather than considering it as a key phenomenon in its own right, migration could better be regarded as the adjustment mechanism by which workers allocate themselves between different labor markets, some of which are located in urban areas and some in rural areas.
The structure of the HT model is based on the premise that a fixed wage leads to
an outbreak of distortion and urban unemployment. By introducing the concept ofexpected wage in the urban sector.
ASSUMPTIONS OF THE MODEL
I. The model assumes that unemployment is non-existent in the rural agricultural sector
ii. There are two sectors, and the rural prices are wholly flexible, which implies that there is full employment in the rural labour market.
iii. It also assumed that in the urban sector, minimum wage is assumed to be fixed institutionally in a level above equilibrium in it’s lbour market.
iv. It also assumed that rural agricultural production and the subsequent labour market is perfectly competitive.
v. The model also assumes that potential migrants are risk neutral where the poor migrants will likely be risk aversive in that they are indifferent between a certain a certain expected rural income and an uncertain expected urban income.
Conclusion:
Harris-Todaro model postulated rural-urban labour migration, which it also stipulate that employment on the rural sector is at full employment level. Migration been determined by expected wage differential in urban.
In Nigeria, rural-urban labour migration is at high speed, as many graduate leaves there rural agricultural sector and migrate to urban industrial sector in search of white collar Jobs over the years. Thus, it have but negative and positive effect in both sectors.
Negative impact in rural agricultural sector:
It reduces labour (man power) in the rural areas.
It reduces production of agricultural products
It increases cost of agricultural products.
Positive impact in the rural sector:
It helps in the introduction of technology in the agricultural sector
Negative impact in Urban Sector:
It increases the population of the urban area.
It increases cost of living.
It causes job scarcity–many people chasing few job
It lead to the reduction of wages
Positive Impact in Urban Sector
It increases labour supply ( labour force)
It increases production .
NAME: EWA PRINCESS
REG NO: 2017/249501
DEPT: ECONOMICS
BLOG ADDRESS: blogwithprincess.wordpress.com
EMAIL ADDRESS: ewaprincess792@gmail.com
ANSWER:
1. THE LEWIS-FEI-RANIS MODEL OF LABOUR SUPPLY.
The Lewis (1954) theory of dualistic economic development provides the seminal contribution to theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance of capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150). The non-agricultural sector accumulates capital by drawing surplus labour out of the agricultural sector. The expansion of the non-agricultural sector takes advantage of the infinitely elastic supply of labour from the agricultural sector due to its labour surplus. When the surplus labour is exhausted, the labour supply curve in the non-agricultural sector becomes upward-sloping. Ranis and Fei (1961) formalised Lewis’s theory by combining it with Rostow’s (1956) three “linear-stages-of-growth” theory. They disassembled Lewis’s two-stage economic development into three phases, defined by the marginal productivity of agricultural labour. They assume the economy to be stagnant in its pre-conditioning stage. The breakout point marks the creation of an infant non-agricultural sector and the entry into phase one. Agricultural labour starts to be reallocated to the non-agricultural sector. Due to the abundance of surplus agricultural labour, its marginal productivity is extremely low and average labour productivity defines the agricultural institutional wage. When the redundant agricultural labour force has been reallocated, the agricultural marginal productivity of labour starts to rise but is still lower
than the institutional wage. This marks the shortage point at which the economy enters phase two of development. During phase two the remaining agricultural unemployment is gradually absorbed. At the end of this process the economy reaches the commercialisation point and enters phase three where the agricultural labour market is fully commercialised.
The Lewis-Fei-Ranis model in relation to the Nigerian economy:
Having tested the Lewis-Ranis-Fei theory for the Nigerian economy, we have found that Nigeria’s economic growth is mainly attributable to the development of the non-agricultural sector. This is driven by rapid capital accumulation as well as employment growth. The reallocation of labour away from agricultur will make a positive net contribution to Nigeria’s rapid economic growth. The rise in the marginal productivity of agricultural labour indicates the absorption of redundant agricultural labour. However, the marginal productivity of agricultural labour is still lower than the initial low average productivity of agricultural labour. This implies the continued existence of disguised agricultural unemployment. This suggests that the Nigerian economy has entered the Lewis-Ranis-Fei phase two of development but has not yet achieved phase three. The continuing widening productivity gap between the two sectors calls for the removal of market restrictions and government interventions so as to allow the continued absorption of surplus labour. Several policy recommendations are tentatively suggested. First and foremost, more effort should be made in promoting employment to effectively absorb the remaining labour surplus and promote Nigeria’s economic development. This can be achieved by further relaxing the restrictions on migration, increasing labour market flexibility and improving the allocative efficiency of labour. It can also be achieved by encouraging the development of private enterprise to create more employment opportunities. Second, Nigeria’s government should continue implementing the it’s policies, designed to provide rudimentary job training, recruitment information and information about conditions in the destination cities to rural migrants. This will not only help facilitate employment of rural migrants but also satisfy the increasing demand for skilled labour in the growing non-agricultural sector. Third, agriculture could be promoted by tax breaks, direct subsidies and most importantly, by removing price controls on agricultural products. Agriculture could thus be commercialised and the economy would enter phase three of economic development.
2. HARRIS – TODARO MODEL OF RURAL – URBAN MIGRATION
The Harris-Todaro model, named after John R. Harris and Michael P. Todaro, is an economic model developed in 1970s and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. John R. Harris and Michael P. Todaro presented the seminal ‘Two Sector Model’ in American Economic Association, 1970. This model is a pioneering study in the field encompassing rural-urban migration. The classical theory is used in development economics and is an economic illustration of migrants’ decision on expected income differentials between rural (agriculture) and urban (manufacturing) sectors. The model of rural-urban migration is typically studied in the context of employment and unemployment situation in developing countries. The purpose of the model is to explain the critical urban unemployment problem in developing countries. The key hypothesis of the Harris and Todaro’s model is that economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migration decision. In other words, this theory puts forward that rural-urban migration will occur when the urban expected wage exceeds the rural actual wage. The main assumption of the model is that the migration decision is based on the expected income differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
In the model, equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agriculture worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It also assumes that rural agricultural production and the subsequent labour market is perfectly competitive. As a result, the agricultural wage is equal to the agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector.
The Harris-Todaro model produced two powerful policy results. The first concerns the policy of the formal-sector job creation to employ the unemployed (who, in the Harris-Todaro model, are all in the urban sector, because that is where the formal-sector jobs are assumed to be located. Such a policy, they concluded, would increase the formal-sector labour force by more than the number of new jobs created, therby raising the number of urban unemployment. Thus, the solution to urban unemployment is not to create urban employment.
The second policy option that Harris and Todaro considered was a policy of rural development. If such a program could increase the rural traditional-sector wage, unemployment would then fall. Thus, in the Harris-Todaro model, the solution to urban unemployment is rural development.
Soon after the model was published, the government of Kenya followed the Harris-Todaro precepts by putting into place an integrated program of rural development. Te result was that unemployment in Kenya fell.
ASSUMPTIONS
1. Two sectors: the urban sector (manufacturing) and the rural sector (agriculture)
2. Rural-urban migration: when urban real wage exceeds real agricultural products
3. No migration cost
4. Perfect competition
5. Cob-Douglas production function
6. Static approach
7. Low risk aversion
Harris-Todaro model explains some issues of rural-urban migration. This migration happens in case when expected urban income is higher than actual rural wages. In this case, an economy may have high rate of unemployment in the urban sector. The equilibrium condition of this model is when expected urban wage is equal to rural wage.
Therefore, migration from the rural sector to the urban sector will increase if:
1. Urban wages increase in the urban sector, increasing the expected urban income
2. Agricultural productivity decreases, lowering marginal productivity and wages in the rural sector, decreasing the expected rural income.
When government subsidizes the manufacturing sector, Harris-Todaro paradox may happen. Accordingly, jobs creation instead of dealing with unemployment problem actually may cause increase of unemployment. This happens when urban-rural wage differential is high enough, so rural workers move to the urban sectors hoping to find a job with high wage. Obviously, not all these workers succeed in finding jobs which leads to unemployment.
The Harris Todaro model in relation to the Nigerian economy:
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris-Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
Another issue is that inducing minimum wages creates labour market distortions. Therefore, policy makers in Nigeria should not set the minimum wage rate.
In addition, simulations showed that different policies’ outcomes depend on elasticity of labour demand in different sectors and on marginal product of labour.
As Harris and Todaro suggested the first-best policy would be subsidizing manufacturing along with restrictions of rural migration, thus, the Nigerian economy will be better off if it implements the first best policy.
NAME: Likibe Gita Cassandra
REG NO: 2017/241429
DEPARTMENT: ECONOMICS
EMAIL ADDRESS: likibegitacassy@gmail.com
FEI-RANIS MODEL OF ECONOMICS GROWTH
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.[1] It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.[2] According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector.[3] Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
According to Fei and Ranis, AD amount of labor can be shifted from the agricultural sector without any fall in output. Hence, it represents surplus labor.
After AD, MP begins to rise, and industrial labor rises from zero to a value equal to AD. AP of agricultural labor is shown by BYZ and we see that this curve falls downward after AD. This fall in AP can be attributed to the fact that as agricultural laborers shift to the industrial sector.
HARRIS-TODARO MODEL OF MIGRATION
Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income. In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
Therefore, migration from rural areas to urban areas will increase if:
Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
HARRIS-TODARO MODEL OF MIGRATION AND UNEMPLOYMENT
The Harris-Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics used to explain rural-urban migration. The main assumption of the model is that the migration decision is based on expected differential between rural and urban areas rather than just wage differentials. Since the wage in cities is higher than one in village people migrate into the cities hoping to get urban job. The probability to get a job depends on the size of unemployment pool in relation to the number employed in industries. Therefore, in many mostly less-developed countries urban unemployment is a big issue. W. Max Corden in his book Trade Policy and Economic Welfare claims that the possible reason for urban unemployment is the wage differential. This coexists with usually high minimum wage in industries and with a marginal product of labor in agriculture less than the urban minimum wage1 The model presented is derived from Migration, Unemployment and Development: Corden’s book mentioned above. In our approach we will assume as Harris and Todaro did that the expected urban wage is equal to the average wage of both urban employed and unemployed. Authors’ main claim is that the best policy to improve employment is to protect agricultural sector rather that manufacturing sector of the country.
Harris-Todaro model of urban unemployment, discuss two cases:
1) subsidizing manufacturing
2) subsidizing agriculture, and test Harris and Todaro’s claim.
GENERAL ASSUMPTIONS;
1. Two sectors: urban (manufacture) and rural (agriculture)Rural-urban migration condition: when urban real wage exceeds real agricultural product
2. No migration cost
3. Perfect competition
4. Cobb-Douglas production function.
THE EXPECTED URBAN WAGE AND THE UNEMPLOYMENT POOLThere are two sectors: agriculture and manufacturing. Each sector has a specific factor (agriculture – land, manufacturing – capital) and labor which is mobile between these two sectors. In this model we assume that prices of agricultural and manufacturing goods are constant. The horizontal axis shows total labor force. The marginal product curves are LL’ for agriculture and MM’ for manufacturing. O*W is the fixed minimum wage in manufacturing, and corresponding employment is given at NO*. According to Harris and Todaro’s approach in equilibrium the expected urban wage must be equal to the agriculture wage. We draw a rectangular hyperbola through J and let it intersect LL’ at R. This gives agricultural wage OV and rural employment OG. The remained part GN will be an unemployment pool. Manufacturing wage-bill NJWO* rectangular area is spread over the whole urban labor force, and we get the expected urban wage GR, which is the average of the minimum wage O*W received by the employed and the zero wage received by the unemployed. Since two shaded areas are equal.
SUBSIDIZING EMPLOYMENT IN MANUFACTURING
When we subsidize manufacturing as it can be seen by QJ’ per man we expand manufacturing output by N’N. The shaded area N’QJN is the value of extra output in manufacturing. Then we draw a new rectangular hyperbola R’J’, and get the new equilibrium allocation. Labor in agriculture declines by G’G, and the output also declines by the area of the shaded area G’R’RG. So we need to compare the two shaded areas in order to measure effect on total output. This depends on the size of the unemployment pool. The flatter the slope of LL’ and steeper the slope of MM’, the bigger number of the unemployment people and lower real output (image)
Can we restore full employment subsidizing manufacturing? Yes. More and more workers will leave agriculture increasing marginal product in agriculture till it reaches the fixed minimum wage in industry. Here both wages are equalized, so there will be no unemployment. In Figure 2, agricultural output declines by OG’’. Because marginal product of labor in manufacturing will be below that in agriculture, this would not be first-best solution, and not even second-best solution. However, a very low wage subsidy may maximize real output.
Name: Oji Samuel Nkemakolam
Reg no: 2017/249548
Department: Economics
Lewis-Fei-Ranis Model (Surplus labour theory)
Two economists, by name, John Fei and Gustav Ranis presented their dual economy model which is an improvement on Lewis model. Fei-Ranis (FR) model of dual economy explains how the increased productivity in the agricultural sector would become helpful in promoting the industrial sector in the evonomy.Thus, this model is treated as an improvement over Lewis model of unlimited supply of labor. They observed the Lewis model by reading it from left to right and assessed the changes in the output and wage as more people moved from agriculture to the industry. A new concept was added – namely, disguised unemployment, which appears in the traditional subsistence sector (primitive sector). It acknowledges the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account. Some of the basic thesis of the model are:
I. The growth rate of population is high which results in mass unemployment.
II. The industrial sector is dynamic.
IV. Natural resources are scarce and there is an abundance of labour.
V. There are certain non-agrarian sectors in the economy where there is reduced use of capital.
There are three stages in this model which are:
Stage one: The first stage of the FR model is very similar to Lewis. Disguised unemployment comes into being because the supply of labor is perfectly elastic and MPL = 0. Therefore, such disguised unemployment are to be transferred to industrial sector at the constant institutional wage.
Stage two: In the second stage of the FR model, agricultural workers add to agricultural output but they produce less than the institutional wage they get. In other words, the labor surplus exists where APL > MPL, but it is not equal to subsistence (institutional) wages. Accordingly, such disguised unemployed also have to be transferred to industrial sector. If the migration to industrial sector continues a situation is eventually reached where the farm workers produce output equal to institutional wages. This would mean that productivity in agricultural sector has gone up. With this, the third phase starts.
Stage three: In the third stage of the FR model, the take-off situation comes to an end and there begins the era of self-sustained growth where the farm workers produce more than the institutional wage they get. In this stage of economic growth the surplus labor comes to an end and the agricultural sector becomes a commercialized sector.
Some of the criticisms of the Lewis-fei-Ranis model includes:
I. The model ignored the role of foreign trade as it assumed a closed economy model.
II. MPL is zero in the model but Prof. Jorgenson who has also presented a dual economy model says that the MPL is an empirical issue. During good farming seasons, the MPL > 0.
III.The model holds that MPL is zero in the first phase of growth and the transfer of labor from agriculture would not reduce output in the agricultural sector in phase I but some other economists like Berry insists that agricultural output in phase I will not remain constant and can be affected by different land conditions.
IV. The model assumed that in the process of economic development, the supply of land remains fixed but this is not so. Land supply can be increased in the long run.
In conclusion, the Fei-Ranis Model is one of dualism. The model believes in the simultaneous growth of the agricultural and investment sector because it accelerates economic development in the economy. In real life, this model is significant amd realistic, the two sectors of the model, agricultural and industrial sector, exists real life and efforts are normally made to speed up development of the two sectors. Labour also move from the agricultural sector into the industrial sector without the agricultural sector being ignored.
HARRIS-TODARO model of migration
The Harris–Todaro model was named after John R. Harris and Michael Todaro. It is an economic model of migration developed in the year 1970 and used in development economics to explain the concept of rural-urban migration. The main hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migraton decision.
Rural to urban migration does not equate the wage differences between the two labor markets as designated by demand and supply fundamentals. The reason is the lack of full employment in urban areas. The probability of finding a job in an urban area is never 100%. In other words, the urban labor market never fully clears due to institutionally determined urban wages; there will always be unemployment. This provides a technical rational to the reason why there is rural to urban migration amidst unemployment.
The model assumes the following:
I. A two sector economy (urban and rural also seen as manufacturing and agricultural sectors respectively).
II. To move from one sector to another, there is little or no marginal cost.
III. The two sectors are perfectly competitive.
The following are the critiques of the Harris Todaro model
I. The Harris-Todaro model is a static model describing migration, which is a dynamic phenomenon by nature.
II. The assumption that urban workers are either employed in the manufacturing sector or unemployed has been criticized as too simplistic even though, it was implicit that unemployment could also be interpreted as underemployment in the informal sector.
III. The influence on decision making of risk and risk attitudes on the part of the potential immigrants is not included;
IV. Differences in skill levels among the migrants are not accounted for.
In conclusion, the model examines the concept rural-urban migration. This migration occurs as a result of rational decision makers comparing urban expected income with wage in rural areas. The equilibrium condition of this model is when expected rural wage is equal to rural wage. It is also explains the idea of urban unemployment which is referred to as the Todaro Paradox. This model, which seem incomplete at first, has been advanced and improved upon by latter economists increasing its analytic, predictive and prescriptive power.
Name : Okwuchie Amos
Reg. Number: 2017/249562
Email: Okwuchieamos@gmail.com
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR)
The Lewis (1954) Model was the first model to explicitly focus on dualist economic development. The original Lewis model was simple yet genius with the clarity he expressed his ideas, nearly every development model is some way related to the roots of the Lewis Model. The Lewis model understood that in most LDC’s, most workers are in the rural/agricultural sector. Agricultural sector in these nations are not endowed with capital with high productivity like agricultural sectors in the developed nations. Agricultural sector in the LDC’s are mostly family farms characterized by low productivity and uncertain output. This assumption made by Arthur Lewis is valid in most LDC’s; every development model after the Lewis model has used some form of the assumptions made by
Arthur Lewis
ASSUMPTIONS OF LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR)
1. There is traditional and urban sector.
2. Labour are perfectly mobile.
3. Markets are perfectly competitive.
4. Diminishing returns of factors
5. There is downward rigid wage
SUMMARY OF THE MODEL
The Lewis Dual Sector model of development
This is based on structural change theory which explains the mechanism of changing structure of underdeveloped economic from subsistence agriculture to more modern and more urbanized.
This model became the general theory of development process for surplus labour nation during 1960s and early 1970s.
Lewis model consist of two sectors which are traditional sector and modern sector and modern sector.
TRADITIONAL SECTOR: This sector is the overpopulated subsistent sector where marginal marginal productivity of labour is zero. Due to zero marginal productivity, it is possible to withdraw labour from this sector without affecting the level of output. This is why it is classified as the surplus labour sector.
MODERN SECTOR: This sector is urban, industrial sector. Productivity is high in this sector. Labour is gradually transferred into this sector from traditional sector.
The movement of labour from traditional to modern sector bring expansion in both output and employment. The speed of this expansion depends on
1. Rate of industrial investment and capital accumulation which ultimately depends on the level of profit. Lewis assume that all profit are reinvested.
2. Wage difference between the rural and urban sector.
According to Lewis, there should be at least 30 percent higher wage rate in the urban sector than rural sector in order to transfer labour automatically from rural to urban sector.
Lewis assume that there is perfectly competitive labour market in modern sector giving fixed wage rate and horizontal supply of labour. In other hand wage rate in traditional sector is given average productivity of labour (w = APPL = TP/L).
On the other hand, the labour surplus theory is concerned with poor economy that is the under developing countries. The main argument of the model is focused on the following backgrounds.
There is an abundance of labour in under developed countries and shortage of natural resources.
The population growth rate is very high which results in mass unemployment in the economy.
There is a dynamic industrial sector in the economy.
There are certain non-agrarian sectors in the economy where there is reduced use of capital.
The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labour is zero and negative in agricultural sector. The situation where MPL-0, labour can be transferred to industrial sector without any loss in agricultural output. The real wages in industrial sector remains fixed and it is equal to the initial level of real income in agricultural sector. Such wages are given the name of institutional wages.
From the focal point above, the Lewis-Fei-Ranis theory of dualistic economic development provides the primary contribution to theories of economic development particularly for labour-surplus and resource for poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. While the non-agricultural seems to be the obverse of the agricultural sector
HOW THE LEWIS-RANIS-FEI MODEL OF SURPLUS LABOUR RELATE TO NIGERIA ECONOMY.
Mr President, it should interest you to know that Nigeria is operating under the above model, since the model applies to developing countries. Hence Nigeria happens to be one of the developing countries.
In sum, Nigeria has two sector economy, the urban and rural sector. These two sectors have their labour. But there is excess or surplus labour in the rural area. It therefore needs that the surplus labour be transferred to the urban area. The urban area is the industrialized and can absorb the excess labour. Checking the existing scenario in Nigeria economy, we can observe that we are operating on this model. But we need to invest in both sectors so as to speed up development.
To conclude, I have shown the main ideas behind the Lewis-Ranis-Fei model and used the consecutive analysis of the model to explain why it is important to invest in both sectors in order to remain on the balanced growth path and maintain the rate of industrialization. The existence of surplus labour in agriculture allows the industry to continue to pay the institutional wage and therefore enjoy further profits and continued investment. At the same time, as more and more people are moving away from agriculture, there will be some amount of agricultural surplus that can be used up to fuel further development. This process continues until the surplus labour is absorbed. Hence, saving and investment are a crucial part in the Lewis-Ranis-Fei to support economic development.
HARRIS – TODARO MODEL OF MIGRATION
The Harris-Todaro (H-T) model is based on the experiences of Less Developed Countries (LCDs) facing the problems of rural-urban migration and urban unemployment.
The key contribution of this model to the field of development economics is by making the migration process a rational choice based on expected earnings, that is, labour migration is as a result of rural-urban differences in average expected wages. Here, the minimum urban wage is substantially higher than the rural wage. Also, if additional employment opportunities are created in the urban sector at the minimum wage, the expected wage shall rise and rural-urban migration on the other hand shall be induced resulting to increasing levels of urban employment. Harris and Todaro suggest a subsidised minimum wage through a lumpsum tax.
BASIC ASSUMPTIONS OF HARRIS-TODARO MODEL
The Harris-Todaro model is based on the following assumptions;
There are two sectors in the economy; the rural or agricultural sector (A) and the urban or manufacturing sector (M).
The model operates in the short run
Capital is available in fixed quantities (K-) in the two sectors.
There are N workers in the economy with NA and NM numbers employed in the rural and urban sectors respectively.
The urban wage if fixed at WM and the rural wage at WA, such that WM > WA.
The rural wage equals the rural marginal product of labour, and the urban wage is exogenously determined.
Rural-urban migration continues as long as the expected urban real income is more than the real agricultural income (by making rational decision)
There is perfect competition among producers in both sector
The price of the agricultural good is determined directly by the relative quantity of the two goods produced in both the sectors.
SUMMARRY OF THE MODEL
The Harris-Todaro (1970) elaborated the basic two sector model of rural-urban labour migration. It takes most of Lewis model’s assumptions as given, such as the rural sector being characterised by subsistence agriculture, and the urban sector being characterised by modernised industries. However, the Harris-Todaro model takes a standard two-sector model and imposes a higher wage in the urban sector which is higher than equilibrium clearing, while wage in the agriculture is flexible. The equilibrium clearing is simply when wage across both sectors equalize, minus movements costs or natural advantages (such as better living environment) in one of the sectors. By imposing this higher wage in the urban sector, we no longer have market clearing wage which gives the workers in the rural sector an incentive to migrate to the urban sector. These migrant workers are not guaranteed to find a job in the urban sector. There is a probability that they will end being unemployed or in the informal sector.
Less Developed Countries (LDCs) are unlikely to have good social safety nets such as welfare benefits, unemployment benefits, and old age security. If the migrants were unable to find a job in the urban formal sector, which is the modern industrial sector, they would be forced to work in the informal sector to themselves alive. The informal sector is very primitive; work in this sector is labour intensive with little or no capital endowment.
The equilibrium condition of the Harris-Todaro model can be described as the wage in rural (agricultural) sector must be equal to the expected wage in the urban sector. The model in its most basic form ignores disutility from not being at home farm, or cost of mobility, but these omissions do not change the essence of the model, the only implication of this is a downward shift of the urban sector’s expected returns.
HOW THE MODEL RELATE TO NIGERIAN ECONOMY.
Mr president, the Harris-Todaro model of migration is a typical scenario obtained in the Nigerian economy where those in the rural area migrate to the urban area for greener pasture where the wages are higher than as obtained in the rural agricultural sector.
Consequently, there is high unemployment in the urban area in Nigeria today because of the perceived better life in the city (urban area). But the cost of living in the urban area leads to balance in the cost of living in the rural area when the high cost of living in the urban area is accounted for.
NAME: Uwode Joy Ogheneyonle
DEPARTMENT: Economics
REG NO: 2017/241451
EMAIL: yonlejoyuwode@gmail.com
Harris_todaro Model of Migration
The Harris_Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural_urban migration. The main assumption of the model is that the migration decision is based on expected income differentials. This implies that rural_urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
Lewis_Fei_Ranis Model of Economic Growth
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Reg Number: 2017/243818
Department: Economics
Course: Eco 361
The Lewis-Fei-Ranis model of economic growth is a two way model in development economics which has been propounded by John C.H Fei and Gustav Ranis and can be clearly understood as an extension of the Lewis Model. It can also be referred to as a Surplus Labour Model (SLM). Lewis divided labour force into two different categories namely; i) The subsistence sector and ii) The capitalist sector
Some of the assumptions are:
*Constant returns to scale in industrial sector
*Existence of surplus labour in subsistence sectors
The Harris Todaro model of migration was named after John R Harris and Michael Todaro. It is an economic model developed in the year 1970 and used to explain some issues concerning rural-urban migration or agricultural-industrial migration
Some of the assumptions are:
* Unemployment is non-existent in rural agricultural sector causing rural wage to be equal to agricultural marginal productivity
* Rate of migration flow from Rural, that is agricultural areas to urban, that is industrial areas is determined by the difference between urban wage and rural wage.
Name: Okwuchie Amos
Reg. Number: 2017/249562
Email: Okwuchieamos@gmail.com
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR)
The Lewis (1954) Model was the first model to explicitly focus on dualist economic development. The original Lewis model was simple yet genius with the clarity he expressed his ideas, nearly every development model is some way related to the roots of the Lewis Model. The Lewis model understood that in most LDC’s, most workers are in the rural/agricultural sector. Agricultural sector in these nations are not endowed with capital with high productivity like agricultural sectors in the developed nations. Agricultural sector in the LDC’s are mostly family farms characterized by low productivity and uncertain output. This assumption made by Arthur Lewis is valid in most LDC’s; every development model after the Lewis model has used some form of the assumptions made by
Arthur Lewis
ASSUMPTIONS OF LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR)
1. There is traditional and urban sector.
2. Labour are perfectly mobile.
3. Markets are perfectly competitive.
4. Diminishing returns of factors
5. There is downward rigid wage
SUMMARY OF THE MODEL
The Lewis Dual Sector model of development
This is based on structural change theory which explains the mechanism of changing structure of underdeveloped economic from subsistence agriculture to more modern and more urbanized.
This model became the general theory of development process for surplus labour nation during 1960s and early 1970s.
Lewis model consist of two sectors which are traditional sector and modern sector and modern sector.
TRADITIONAL SECTOR: This sector is the overpopulated subsistent sector where marginal marginal productivity of labour is zero. Due to zero marginal productivity, it is possible to withdraw labour from this sector without affecting the level of output. This is why it is classified as the surplus labour sector.
MODERN SECTOR: This sector is urban, industrial sector. Productivity is high in this sector. Labour is gradually transferred into this sector from traditional sector.
The movement of labour from traditional to modern sector bring expansion in both output and employment. The speed of this expansion depends on
1. Rate of industrial investment and capital accumulation which ultimately depends on the level of profit. Lewis assume that all profit are reinvested.
2. Wage difference between the rural and urban sector.
According to Lewis, there should be at least 30 percent higher wage rate in the urban sector than rural sector in order to transfer labour automatically from rural to urban sector.
Lewis assume that there is perfectly competitive labour market in modern sector giving fixed wage rate and horizontal supply of labour. In other hand wage rate in traditional sector is given average productivity of labour (w = APPL = TP/L).
On the other hand, the labour surplus theory is concerned with poor economy that is the under developing countries. The main argument of the model is focused on the following backgrounds.
There is an abundance of labour in under developed countries and shortage of natural resources.
The population growth rate is very high which results in mass unemployment in the economy.
There is a dynamic industrial sector in the economy.
There are certain non-agrarian sectors in the economy where there is reduced use of capital.
The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labour is zero and negative in agricultural sector. The situation where MPL-0, labour can be transferred to industrial sector without any loss in agricultural output. The real wages in industrial sector remains fixed and it is equal to the initial level of real income in agricultural sector. Such wages are given the name of institutional wages.
From the focal point above, the Lewis-Fei-Ranis theory of dualistic economic development provides the primary contribution to theories of economic development particularly for labour-surplus and resource for poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. While the non-agricultural seems to be the obverse of the agricultural sector
HOW THE LEWIS-RANIS-FEI MODEL OF SURPLUS LABOUR RELATE TO NIGERIA ECONOMY.
Mr President, it should interest you to know that Nigeria is operating under the above model, since the model applies to developing countries. Hence Nigeria happens to be one of the developing countries.
In sum, Nigeria has two sector economy, the urban and rural sector. These two sectors have their labour. But there is excess or surplus labour in the rural area. It therefore needs that the surplus labour be transferred to the urban area. The urban area is the industrialized and can absorb the excess labour. Checking the existing scenario in Nigeria economy, we can observe that we are operating on this model. But we need to invest in both sectors so as to speed up development.
To conclude, I have shown the main ideas behind the Lewis-Ranis-Fei model and used the consecutive analysis of the model to explain why it is important to invest in both sectors in order to remain on the balanced growth path and maintain the rate of industrialization. The existence of surplus labour in agriculture allows the industry to continue to pay the institutional wage and therefore enjoy further profits and continued investment. At the same time, as more and more people are moving away from agriculture, there will be some amount of agricultural surplus that can be used up to fuel further development. This process continues until the surplus labour is absorbed. Hence, saving and investment are a crucial part in the Lewis-Ranis-Fei to support economic development.
HARRIS – TODARO MODEL OF MIGRATION
The Harris-Todaro (H-T) model is based on the experiences of Less Developed Countries (LCDs) facing the problems of rural-urban migration and urban unemployment.
The key contribution of this model to the field of development economics is by making the migration process a rational choice based on expected earnings, that is, labour migration is as a result of rural-urban differences in average expected wages. Here, the minimum urban wage is substantially higher than the rural wage. Also, if additional employment opportunities are created in the urban sector at the minimum wage, the expected wage shall rise and rural-urban migration on the other hand shall be induced resulting to increasing levels of urban employment. Harris and Todaro suggest a subsidised minimum wage through a lumpsum tax.
BASIC ASSUMPTIONS OF HARRIS-TODARO MODEL
The Harris-Todaro model is based on the following assumptions;
There are two sectors in the economy; the rural or agricultural sector (A) and the urban or manufacturing sector (M).
The model operates in the short run
Capital is available in fixed quantities (K-) in the two sectors.
There are N workers in the economy with NA and NM numbers employed in the rural and urban sectors respectively.
The urban wage if fixed at WM and the rural wage at WA, such that WM > WA.
The rural wage equals the rural marginal product of labour, and the urban wage is exogenously determined.
Rural-urban migration continues as long as the expected urban real income is more than the real agricultural income (by making rational decision)
There is perfect competition among producers in both sector
The price of the agricultural good is determined directly by the relative quantity of the two goods produced in both the sectors.
SUMMARRY OF THE MODEL
The Harris-Todaro (1970) elaborated the basic two sector model of rural-urban labour migration. It takes most of Lewis model’s assumptions as given, such as the rural sector being characterised by subsistence agriculture, and the urban sector being characterised by modernised industries. However, the Harris-Todaro model takes a standard two-sector model and imposes a higher wage in the urban sector which is higher than equilibrium clearing, while wage in the agriculture is flexible. The equilibrium clearing is simply when wage across both sectors equalize, minus movements costs or natural advantages (such as better living environment) in one of the sectors. By imposing this higher wage in the urban sector, we no longer have market clearing wage which gives the workers in the rural sector an incentive to migrate to the urban sector. These migrant workers are not guaranteed to find a job in the urban sector. There is a probability that they will end being unemployed or in the informal sector.
Less Developed Countries (LDCs) are unlikely to have good social safety nets such as welfare benefits, unemployment benefits, and old age security. If the migrants were unable to find a job in the urban formal sector, which is the modern industrial sector, they would be forced to work in the informal sector to themselves alive. The informal sector is very primitive; work in this sector is labour intensive with little or no capital endowment.
The equilibrium condition of the Harris-Todaro model can be described as the wage in rural (agricultural) sector must be equal to the expected wage in the urban sector. The model in its most basic form ignores disutility from not being at home farm, or cost of mobility, but these omissions do not change the essence of the model, the only implication of this is a downward shift of the urban sector’s expected returns.
HOW THE MODEL RELATE TO NIGERIAN ECONOMY.
Mr president, the Harris-Todaro model of migration is a typical scenario obtained in the Nigerian economy where those in the rural area migrate to the urban area for greener pasture where the wages are higher than as obtained in the rural agricultural sector.
Consequently, there is high unemployment in the urban area in Nigeria today because of the perceived better life in the city (urban area). But the cost of living in the urban area leads to balance in the cost of living in the rural area when the high cost of living in the urban area is accounted for.
A. LEWIS-FEI-RANIS ECONOMIC GROWTH THEORY
Lewis-Fei-Ranis Model is concern with double economic system (agricultural/traditional sector and industrial/modern sector), it emphasis on how excess unproductive labour from the traditional (agricultural) sector is being absolved by the modern (industrial) sector. The theory is called Lewis-Fei-Ranis model because it was originally initiated by W. Arthur Lewis and was brought into modern view by John C. H. Fei and Gustav Ranis. Fei and Ranis work is the extension of Lewis theory.
From the model, the agricultural sectors dominate the developing/underdeveloped countries while the industrial sectors are major feature in the developed country. When excess or surplus labour from agricultural sector is transferred to industrial sector which has less labour it facilitates the development of a country. If the labour four becomes higher in the industrial sectors than the agricultural sectors, then one can say the country has advanced.
Relating the model to the real world (using Nigeria as a case study) and viewing it applicability:
Nigeria economy is majorly characterized by agricultural sectors though the industrial sectors also exist but they are very few. From the above model, the main determinant of a developed nation is the ability of a country to shift its surplus unproductive labour in the agricultural sectors to the industrial sectors. But is this applicable in Nigeria, NO, this is because the government of Nigeria has shown little or zero interest in development of industrial sectors which can only bring about the validity of the model in the country. Even our so called oil sector has the highest impact in the country’s GDP is being neocolonized by the industrialized countries, corruption and nepotism is the order of the day for politicians, everyone collecting his or her own national cake. In summary, the government of Nigeria has not created the enabling environment that will ensure excess labour in the traditional sectors are move to industrialized sectors.
B. HARRIS-TODARO MODEL OF MIGRATION
The theory was named after the two economists John R. Harris and Michael Todaro. It was propounded in 1970. The major position of the theory is that migration decision is based on expected (not actual) differential between the urban sector and the rural sector. From the model, the reason for migration is based on the employment opportunities in the rural and urban sector and the interests of individual to go for the one with greater expected wage.
some major assumption of the model includes:
1. There exist long run equilibrium when the expected urban wage equates the rural wage.
2. Fixed amount of labour and capital.
3. Unemployment (labour unemployment) exist in the urban sector.
4. There exists equal chance of employment for all labour in the urban sector.
5. Reason for rural-urban migration is because the expected higher wage in urban sectors.
Relating this model to Nigeria economy in order to checked its validity in developing countries:
From the model we can deduce that the determinant of rural-urban migration is the expected higher wage in the urban areas. In Nigeria it is well observed that individuals move to the urban sectors because they believe that greater opportunities and employment with high wage exist in the urban areas. Also it is inherent in nature that individuals will always migrate to urban sectors in search of greener pasture.
Name: Nwobodo Christian Chukwuemeka
Reg. No: 2017/241437
Department: Economics
Email Address: justicextiano@gmail.com
ANSWER
Harris-Todaro Migration Theory
The migration theory developed by John H. Harris and Michael Todaro is an economic model that assumes that migration decision is based on the expected difference between the income of rural and urban areas rather than just wage differentials.
The model assumes that the primary reason why people migrate from rural to urban areas is due to the high-income level prevalent in the urban areas.
Assumptions of the Model
The economy has two sectors of urban (manufacture) and rural (agriculture).
Rural-urban migration exists when urban real wage exceeds real agricultural product.
No migration cost.
Perfect competition in the economy.
Cobb-Douglas production function.
Impact of the Theory on Nigeria
In the case of Nigeria, the assumptions of the Harris-Todaro model are very much significant given that a lot of people have migrated from the rural areas into the urban areas of the country in order to seek for higher paying jobs in manufacturing companies or greener pasture.
Thus, the assumptions of the Harris-Todaro model of migration holds true in Nigeria and many developing economies.
Lewis Fei-Ranis Model
The Lewis-Fei-Ranis model of a dual-sector economy tries to explain the relationship that exists between the traditional and modern sector of a nation’s economy. It explains the conditions that results in rural to urban migration of surplus labour between the agricultural to industrial sector of a two-sector economy. The models extensively describe how surplus labour migrates between the traditional and industrial sectors of an economy.
The Fei-Ranis Model was an improvement on the Lewis Model of economic growth as developed by two economists, John Fei and Gustav Ranis. They built upon the Lewis model by evaluating the criticism of the Lewis and making the needed improvements on the model. The flaw of the Lewis model comes from its lack of attention to the role of the agricultural sector in bringing about industrial growth in the developing economy.
The Fei-Ranis (FR) model of a two-sector economy explains how increase in productivity of the agricultural sector would help in promoting the growth of the agricultural sector. The Fei-Ranis model is also known as the Surplus Labor Model.
Application of the Lewis-Fei-Ranis Model in Nigeria
In Nigeria, the rural agricultural sector is very much predominant as family members. Family members work together and share the value of their output. In the case of Nigeria, there exist surplus labour. The presence of surplus labour in the traditional sector will lead to an expansion in the modern sector without increasing labour cost. This will continue till the surplus labour of the traditional sector is used up.
Izuogu Chioma Sylverline
2017/244598
Education Economics
Lewis-Fei-Ranis Model (Surplus labour theory)
The theory of unlimited supplies of labour by Professor W. Arthur Lewis is a systematic classical theory of economic development which is based on the existence of two sectors in the economy of developing countries- the modern and the traditional sectors. The modern sector is small and uses considerable amounts of capital, while the traditional sector is the large labour surplus rural agricultural sector, with little amount of capital.
The argument is that poor countries have two sectors (the rural agricultural or subsistence sector and the modern industrial or capitalist sector) and that the wage level in the sector with unlimited supply of labour (rural sector) is at its subsistence. In addition to that, it is also believed that the marginal productivity of this surplus labour is zero and as such the economy is backward. Lewis argues that if this surplus labour can be transferred to the sector that has few labour supplies (the modern sector), the productivity level in the agricultural sector would not experience any noticeable reduction but rather, economic development would take place because labour would be put to good use bringing about a chain of productive reactions. Arthur in his article on “Economic Development with unlimited supplies of labour” has a model called the dual sector- model enumerated in it and the model was named in Lewis’s honor. To understand the theory better, the underlining assumptions of the model will be discussed in the next section.
The Assumptions of the Model
The following are the assumptions of the model:
(i) Existence of dual Economy: There exist a two sector economy characterised by a traditional, over-populated agricultural rural subsistence sector with zero Marginal Productivity of Labour(MPL), and the ‘capitalist’ sector which is the high productive modern industrial sector represented by the manufacturing, mining activities.
(ii) Elasticity of Labour: According to Arthur, the supply of labour is perfectly elastic. In other words, the supply of labour is greater than demand for labour in the agricultural sector and therefore the capitalist sector can have as much labour as it requires and will continue to absorb this surplus from the agricultural sector until there is no longer surplus labour left.
(iii) Reproducible Capital: The subsistence sector does not make use of ‘Reproducible Capital’, while the modern sector uses the produced means of capital. As a result of the non usage of reproducible capital in the subsistence sector, output per head is lower than in the capitalist sector.
(iv) The model also assumes that the wages in the manufacturing sector are higher than those of the subsistence sector and are also more or less fixed.
(v) Entrepreneurs in the manufacturing sector make profit because they charge a price above the fixed wage rate
(vi) There is the willingness of the capitalist to reinvest the profit in
the business and this is done in the form of fixed capital. The main people/sources from which workers would be coming for employment at the subsistence wage as economic development proceeds are “the farmers, the casual workers, small scale informal sector participants, women in the household, and population growth.
Basic Thesis of the Lewis Model
The Lewis model is a classical type model based on the assumption of a dual sector economy which are the capitalist sector and the subsistence sector. The subsistence sector is that part of economy which does not use reproducible capital and therefore, the output per head is lower than in the capitalist sector. Also there is perfectly elastic supply of labour at the subsistence sector in many underdeveloped countries but not in themodern sector. Lewis is of the opinion that the industrial and advanced modern sector can be developed and made to boost the entire economy, this according to him, can be done by transferring the surplus labour from traditional sector to the modern sector. From this surplus labour now in the modern sector, new industries will spring up and existing ones would grow. However, the capitalist sector requires skilled labour and this stands as a stumbling block to the development process as the surplus labour from the subsistence sector are mostly unskilled. This problem can be eliminated by providing training facilities to unskilled workers. So in essence, the absence of skilled labour in this sector is a temporary problem which can be solved through training.
Lewis says that the wages in industrial sector remain slightly higher than that of the agricultural sector. Consequently, labour will be attracted to the modern sector because of the higher wage incentives and as a result of this, the capitalists will earn surplus from the increase in productivity brought about by the surplus labour transferred. Such surplus will be re-invested in the modern sector leading thereby to further increase in the productivity of this sector. In this way, the surplus labour or the labour which were prey to disguised unemployment will get to be employed into productive activities. Thus both the labour transfer and modern sector employment growth are brought about by output expansion in the modern sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector. Here is a diagrammatical explanation of Lewis Model
QUANTITY OF LABOUR
Diagramatic Representation of Lewis Model
In this diagram, the horizontal axis (x) represents the quantity of labour employed, while the vertical axis (y) represents the wage rate/Marginal Productivity of Labour. Also in the diagram, OS represent average subsistence wage in the agricultural sector, and OA the capitalist wage, the supply of labour is unlimited and this is shown by the horizontal supply curves of labour AW and Sw. The analysis goes thus: The marginal productivity of labour in the industry is M1P1, with OL1 labour employed , OAKL1 wage rate is paid from the total product of OM1KL1, giving the capitalist a profit of AM1K. With the reinvestment of this profit, the marginal productivity of labour of labour increases from M2P2 and then further reinvestment brings it to M3P3 and so on. As the capitalist continues to reinvestment his profit, his surplus continues to grow. Overtime, as the transition continues and the capitalist continues to reinvest surplus derived from the use of surplus labour from the subsistence sector, the capital stock increases, the marginal productivity of workers in the manufacturing sectors will be driven up by capital formation. Capital formation resulting from this increase in investment leads to quicker utilisation of surplus labour. As more labour is supplied, the marginal productivity falls, and in the long run, the wage rates of the agricultural and manufacturing sectors will equalise because as workers leave the agricultural sector for the manufacturing sector, they increase marginal productivity and wages in agricultural sector while reducing them in manufacturing. The process of modern self sustaining growth and employment expansion will continue till all the surplus rural labour is absorbed in the new industrial sector. Thereafter, additional workers can be withdrawn from agricultural sector only at a higher cost of lost of food production because this will decrease the labour to land ratios. In this way, the MPL will no more be zero and the labour supply curve will become positively sloped along with the growth of modern sector.
CRITICISMS OF THE THEORY
Despite the theory’s huge success in identifying the two key sectors in the developing countries and stating how growth can be achieved in these usually over populated countries, most of the theory’s assumptions do not fit into the institutional and economic realities of the Developing countries and as such can be said to be irrelevant to these countries.
Below are some of the flaws of the theory.
(i) The industrial real wage continues to rise and is not constant as Lewis assumes
(ii) There is the likelihood of the capitalist reinvesting in labour saving techniques like investments in machineries and this would reduce the amount of labour needed causing urban unemployment.
(iii) Lewis ignored the balanced growth between agricultural sector and industrial sector. But we know that there, exists a linkage between agricultural growth and industrial expansion in poor countries. If a part of profits made by capitalists is not devoted to agricultural sector, the process of industrialisation would be jeopardised (perhaps, due to reduced supply of raw material).
(iv) Lewis model underestimates the full impact on the poor economy of a rapidly growing population, i.e., its effects on the capitalist profit share, wage rates and overall employment opportunities.
(vi) Lewis has ignored the role which the leakages can play in the economy. As Lewis assumed that all increases in profits are
diverted into savings. It means that the savings of producers is equal to 1. But, this is unrealistic as the increase in profits may accompany an increase in consumption.
(vii) Lewis assumed that the transfer of unskilled labour from the subsistence agricultural sector to the industrial sector is regarded as almost smooth and costless. The model however fails to take account of the cost of educating and training rural workers for urban employment and also, there is also other indirect cost associated with rural-urban migration. Amongst these are: a lack of sufficient housing, leading to the development of squatter townships or shanty towns, pressure on social infrastructure such as schools and hospitals, increases in disease due to a lack of clean water and sanitation.
CONCLUSION
Arthur Lewis theory of economic development is a structural change theory which explains the mechanism of changing structure of underdeveloped economies from the subsistence rural sector to a modern urbanised one. According to the theory, the economies of most developing countries are made up of two key sectors, the subsistence agricultural sector and the modern capitalist sector. Lewis is of the opinion that economic development occurs when the capitalist gets labour from the unlimited supply of labour in the subsistence sector, which it uses to set up new industries and also grow existing ones. The capitalist gets profit from the activities of the surplus labour and according to Lewis, the capitalist reinvests this profits and this sets off a growth process that continues until there is no longer surplus labour to be absorbed. The theory was criticised by some scholars and one major criticism raised is that the transition from rural sector to urban sector does not come without cost like the theory would like us to.
However, despite the criticisms, the theory still helps to point us to the reality of the existence of the overpopulated subsistence agricultural sector and a modern capitalist sector in most underdeveloped countries. The way we go about developing these sectors to achieve a balanced growth in the economy (which the theory was criticised for not doing) was latter addressed by Fei-Ranis.
HARRI-TODARO MODEL OF MIGRATION
Starting from the assumption that migration is based primarily on privately rational economic calculations despite the existence of high urban unemployment, the Todaro model postulates that migration proceeds in response to urban-rural differences in expected rather than actual earnings. The fundamental premise is that as decision-makers migrants consider the various labor-market opportunities available to them as, say, between the rural and urban sectors, choosing the one that maximizes their “expected” gains from migration. Expected gains are measured by the difference in real incomes between rural and urban work opportunities and the probability of a new migrant’s obtaining urban job. A schematic framework describing the multiplicity of factors affecting the migration decision is portrayed in figure 34.4. While the factors illustrated in figure 34.4 include both economic and noneconomic variables, the economic ones are assumed to predominate. The “thought process” of the Todaro model can be explained as follows. Suppose the average unskilled or semiskilled rural worker has a choice between being a farm laborer (or working his own land) for an annual average real income of, say, 50 units per year, and migrating to the city where a worker with his skill or educational background can obtain wage employment yielding an annual real income of, say, 100 units. The more traditional economic models of migration that place exclusive emphasis on the income differential factor as the determinant of the decision to migrate would indicate a clear choice in this situation. The worker should seek the higher-paying urban job. It is important to recognize, however, that these migration models were developed largely in the context of advanced industrial economies and, as such, implicitly assumed the existence of full or near-full employment in urban areas. In a full-employment environment the decision to migrate can in fact be predicated solely on securing the highest-paying job wherever it becomes available, other factors being held constant. Simple economic theory would then indicate that such migration should lead to a reduction in wage differentials through geographic changes in supply and demand, both in areas of out-migration (where incomes rise) and in points of in-migration (where they fall).
Unfortunately, such an analysis is not very realistic in the context of the institutional and economic framework of most Third World nations. First of all, these countries are beset by a chronic and serious problem of urban surplus labor, so that many migrants cannot expect to secure highpaying urban jobs immediately upon arrival. In fact, it is much more likely that upon entering the urban labor market many migrants will either become totally unemployed or will seek casual and part-time employment in the urban traditional sector for some time.
Consequently, in his decision to migrate the individual must in effect balance the probabilities and risks of being unemployed or underemployed for a considerable period of time against the positive urban-rural real-income differential. That it is possible for our hypothetical migrant to earn twice as much annual real income in an urban area as in his rural environment may be of little consequence if his actual probability of securing the higher-paying job within a year is one chance in five. In such a situation the migrant’s actual probability of being successful in securing the higher-paying urban job is 20%, so that his “expected” urban income for the one-year period is in fact 20
units, not the 100 units that a migrant in a full-employment urban environment might expect to receive. Thus, with a one-period time horizon and a probability of success of 20% it would be irrational for this migrant to seek an urban job even though the differential between urban and rural earnings capacity is 100%. On the other hand, if the probability of success were, say, 60%, so that the expected urban income is 60 units, it would be entirely rational for such a migrant with his one-period time horizon to try his luck in the urban job “lottery” even though urban unemployment may be extremely high.
Onoyima Cynthia Oluchi
2017/244902
Library and information science
Cynthia.onoyima.244902@unn.edu.ng
An essay on lewis Fei Ranis model of economic growth and Harris Todaro model of migration
Introduction
Harris and Todaro’s rural-urban two sector migration model was an academic investigation to throw light on the events following ‘Tripartite Agreement’ in Kenya. The newly independent Kenya in the 1960s was increasingly facing a serious situation of unemployment in the major urban cities. To cope with the situation of unemployment, Tripartite Agreement was signed between the government public sector and the private sector. The agreement increased employment in the industrial jobs in exchange for unions agreeing to hold wages at their current levels. The larger number of employment was expected to reduce unemployment, but it appeared that the urban unemployment had increased following the government’s agreement. Harris and Todaro subsequently formulated a model to explain rural-urban economic preferences to migrate. The distinctive concept in the model is that the rate of migration flow from rural (agricultural) areas to urban (industrial) areas is determined by the difference between expected urban wages and rural wages.
The Rural-Urban Two-Sector Model Centrally Holds The Following Futures:
1) Real wages (adjusted for cost-of-living differences) were higher in urban formal sector jobs than in rural traditional sector jobs.
2) Tobe hired for a formal sector job, it was necessary to be physically present in the urban areas where the formal sector jobs were located.
3) Consequently, from the first two features, more workers searched for formal sector jobs than were actually hired. Employers hired some of the searchers but not all of them.
4) To maintain equality between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting would be characterized by urban unemployment.
5) Any temporary difference in the expected wages between one sector and another would be eroded as workers migrate from the low expected wage labour market to the high expected wage one.
Functional Model
There are two regions: rural (agricultural) and urban (industrial) in two sector economic model. The crucial assumption of the Harris and Todaro’s model is that workers base their migration decision on their expected incomes at urban (industrial) areas. As the basic model is static, the expected income is just the weighted average of the urban wage and the unemployment benefit, the weights being the probabilities to find and not to find an urban job. The model assumes that the rate of rural-urban (m= M/LR) is a function of: i)The probability that an urban labour can successfully find a modern sector job, which can be expressed as a positive function of the current urban employment rate EU/LU, or LU-EU/LU, a negative function of urban unemployment rate. ii) The urban-rural real income differential is expressed as- YU/YR= W (W greater than 1), Besides, migration will also be related to, iii) Other factors (Z), such as distance, personal conduct, urban amenities. Where m= Rate of migration from rural to urban areas M= Actual volume of rural-urban migration LR= Rural labour force EU= Level of urban employment
LU= Urban labour force YU= Urban real income YR=Rural real income W= Ratio between rural/urban real income Therefore, the basic rural-migration migration model is expressed as: (rural-urban migration) m = function of (current urban employment rate, urban-rural real income differential, and personal factors). Thus, (rural-urban migration rate) m= f (EU /LU, W,Z) …. 1.1 = f (EU /LU) (holding W and Z constant) = Function of the ratio between the level of urban employment and urban labour force. Where f (EU /LU) is greater than Zero; f (W) is greater than Zero, and f (Z) may have +ve or – ve values; (here fis the time derivative of three elements) That is, migration rate is a function of the ratio between the level of urban employment and urban labour force, or the probability to find a job in an urban industrial sector. Besides, urban labour force growth can be expressed as: lU/LU=r + LR/LU(m)= r + LR/LU f (EU/LU) ..1.2 r= natural growth rate of rural/urban labour force lU= time derivative of LU (urban labour force) That is, time derivative of urban labour force growth rate is a function of urban labour force growth rate and the probability of finding a job in a modern urban sector (as derived from equation 1.1 above) 1.4. Discussion The model, then tried to compare the live path of equation (1.1) or (1.2) with the growth rate of urban employment, and discussed rural-urban migration and urban employment under the different assumption of population and employment growth rates.
Discussion
The fundamental contribution of Harris and Todaro’s rural-urban two sector migration model was to build a model that fit the stylized facts of the labour market. On the lines of the theory, developing countries such as Nigeria, adopted program on integrated rural development which encouraged an increase in the rural traditional sector wage. The theory proves that the higher the unemployment rate, the lower is the probability of new migrants from the countryside actively seeking formal sector employment who are unable to find it. The significant findings of the theory are: first,if the expected urban wage equals rural income, there is no incentive to migrate. Second, if the expected urban wage is greater than rural income, there is a great incentive to move from rural to urban area. Third, if the expected urban wage is less than rural incomes, there would be an incentive to move in other direction. Fourth, the expected urban wage depends on what type of job migrant is engaged in. Therefore,the Haris Todaro’smodel helps policy-makers to avoid two mistakes. One is to assume that development efforts should necessarily be channeled to the sectors where the poor are. The other is to assume that efforts should necessarily be focused on getting the poor out of the sectors in which they presently are.
Limitation
Some of the assumptions of the Harris-Todaro’s model were judged to be too restrictive.The model also assumes that potential migrants are risk neutral where the poor migrants will likely be risk averse, as in they are indifferent between a certain expected rural income and an uncertain expected urban income of the same magnitude. The assumption that there exists a perfect competition in rural agriculture sector is not realistic.
Conclusion
Harris Todaro model explains some issues of rural-urban migration. This migration happens in case when expected rural income is higher than rural wages. In this case economy may have high rates of unemployment. The equilibrium condition of this model is when expected rural wage is equal to rural wage. When government subsidize manufacturing sector Harris Todaro paradox may happen. According to the authors job creation instead of dealing with unemployment problem actually may cause increase of unemployment. This happens when urban-rural wage differential is high enough, so rural workers move to the cities hoping to find a job with high wage. Obviously, not all these workers succeed in finding jobs which leads to unemployment. Another issue is that inducing minimum wages creates labor market distortions. Therefore, policy makers should not set the minimum wage rates. In addition, simulations showed that different policies’ outcomes depend on elasticity of labor demand in different sectors and on marginal product of labor. As Harris and Todaro suggested the first-best policy would be subsidizing manufacturing along with restrictions of rural migration.
Name: odo doris kosisochi
Reg no: 2017/249542
Email: kosisochidoris@gmail.com
HARRIS TODARO MODEL OF RURAL-UBARN MIGRATION.
INTRODUCTION
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials.
Assumptions of the model
1. Harris and Todaro [1] studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function.
2. Where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a 0 and g > 0 are a parametric constants. g is the elasticity of p with respect to the ratio Ym/Ya.
6. The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified.
Conclusion
Therefore, migration from rural areas to urban areas will increase if: Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.From my observations on the I can say that migration occurs only when there is rational economic consideration, and migration is basically taking place on the value of the expected urban wage rate rather than on the actual wage rate. The expected urban wage rate depends on the probability of getting a job in the urban sector is positively related to urban employment.
LEWIS-FEi-RANIS MODEL OF ECONOMIC GROWTH
INTRODUCTION
Lewis based his model in dual economy divided into a capitalist and traditional sector. The distinction of Lewis from other economists is that he regards surplus labour as marginal productivity of labour is negligible, zero, or even negative with respect to human beings rather man-hours (Lewis, 1954). Lewis in his model of “Development with Unlimited Supplies of Labour“ represented a growth model of early industrialization in developing countries over the long run, which is now regarded as canonical to development economics (Fitzgerald, 2004). After Lewis set up his model, it has been criticised theoretically and empirically by many economists. Ted Schultz (1964) is one of those who empirically vigorously attacked Lewis model by introducing evidence from India to show that there was no increase in acreage sown crops observed during 1918-1919 even though there were high death rates because of epidemics. Harris and Todaro (1970) theoretically were object to Lewis`s model. They suggested that rural migrants might flow to cities in excess of a “warranted rate” due to high expected unevenness in living standards between rural and urban areas. Labour surplus was thought by Lewis with respect to human beings rather man-hours. In this essay, I will focus on the weaknesses and limits of Lewis model by grouping his proposition under three main headings. These are labour supply, capital accumulation and integration to the world economy. The first section gives a basic background of the model; the weaknesses of the model will be given in a way of critical viewpoint in the second section, the third section focus on current theoretical and policy relevance in his model and the last section summarises main findings with concluding remarks.
WEAKNESSES AND LIMITATIONS IN LEWIS MODEL
Labour force
Lewis model has challenged theoretical and empirical evidences from South eastern Asia and Latin America by many economists. In particular, Ted Schultz heavily criticized Lewis model by providing empirical results from India in which Lewis based his model on the overpopulated in Indian rural areas. What Schultz (1964) questions if marginal productivity of labour in agricultural sector is negligible, zero. His proofs dates back to 1918-1919 when there were a serious deathly epidemics caused many people`s life in rural areas. Should the doctrine of marginal product is zero that is true; the acreage sown crops should have been increased due to the declining population. But this did not happen and agricultural productivity declined in those years. As far as the distinction between hired and non-hired labour is concerned, the marginal product of family labour can hardly be zero if workers are hired, nor can the marginal product of the hired workers themselves be zero if they are paid (Thirlwall, 1994). Theoretical basis of the Lewis model was challenged by Harris and Todaro (1970) who suggested that rural migrants might flow to cities in excess of a “warranted rate” due to high expected inequalities in living standards between rural and urban areas. There is a clear distinction between the classical and the neo-classical stages for two reasons (Knight, 2007); spatial heterogeneity which mean some regions experience about scarcity before others and imperfect labour mobility that the supply price of rural labour is more likely to rise gently than to jump sharply, so that the supply curve to urban sector will curve upwards gradually. The voluntary of workers between geographical areas is the primary equilibrating force in the labor markets of LDCs (Fields, 1975).The formal sector real wage may be determined by non-market forces at a level that is above the market-clearing wage. The efficiency wage, labour turnover, and profit-sharing theories of wages, as well as institutional or bargained wage determination, are all contenders. But additional migration, by increasing unemployment, reduces the earnings of all migrants already in the urban labour force by a factor (1 -R), where R is the fraction of the total urban labour force supplied by the rural sector.(Harris and Todaro, 1970). Fields (1975) underlined educated workers who might preferred by industry. If highly educated workers are hired preferentially for modern sector jobs, the urban unemployment rate will be lower than if workers were hired randomly without regard to educational attainment. This is because preferential hiring reduces the number of jobs available to the uneducated, thereby lowering the probability of finding an urban job and inducing large numbers of them to remain in or move back to agriculture.It is not possible to equate the agricultural sector with the rural sector or the informal sector nor industry with urban or formal. Rural industry can be an important source of employment and the urban informal sector can be an important store of surplus labour.
CONCLUSIONS
Surplus labour is the central element in Lewis model which is based on a “capitalist and a “subsistence” sector which are called later as a modern and a traditional sector in his revisited work of dual economy in 1979 (Lewis, 1954; 1979). Lewis model can be grouped under three instruments; labour force, capital accumulation and integration to the world economy. The main focus in Lewis`s model was on the reallocation of labour until the turning point is reached, i.e., the time when labour reallocation has outstripped population growth long enough for dualism to atrophy and the economy to become fully commercialized. Lewis implicitly showed that the traditional sector do not produce any capital accumulation as they are very small and poor. Trade between agriculture and industry as the supply or marketed food falls or the demand for it rises, or both causing the value of marginal product of labour in agriculture to rise.
NAME: OKOYECHUKWU CHIOMA AUGUSTINA
REG NO: 2017/244837
DEPT: EDUCATION/ECONOMICS
A SUMMARY OF HARRIS TODARO MODEL OF MIGRATION AND LEWIS-FEI RANIS MODEL OF ECONOMIC GROWTH
1. HARRIS TODARO MODEL OF MIGRATION.
Since the wage in cities is higher than one in village people migrate into the cities hoping to get urban job. The probability to get a job depends on the size of unemployment pool in relation to the number employed in industries. Therefore, in many mostly less-developed countries urban unemployment is a big issue. W. Max Corden in his book Trade Policy and Economic Welfare claims that the possible reason for urban unemployment is the wage differential. This coexists with usually high minimum wage in industries and with a marginal product of labor in agriculture less than the urban minimum wage.
John R. Harris and Michael P. Todaro presented the seminal ‘Two sector model’ in American Economic Association, 1970. This model is a pioneering study in the field encompassing rural-urban migration. The classical theory is used in development economics and is an economic illustration of migrants’ decision on expected income differentials between rural (agriculture) and urban (manufacturing) areas. The model of rural-urban migration is typically studied in the context of employment and unemployment situation in developing countries. The purpose of the model is to explain the critical urban unemployment problem in developing countries.
The key hypothesis of Harris and Todaro’s model is that economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migration decision. In other words, this theory puts forward that rural-urban migration will occur when the urban expected wage exceeds the rural obtain wage.
HARRIS TODARO MODEL OF MIGRATION EXPLAINED (ITS ARGUMENTS)
The rural-urban two-sector model centrally holds the following features:
1) Real wages (adjusted for cost-of-living differences) were higher in urban formal sector jobs than in rural traditional sector jobs.
2) To be hired for a formal sector job, it was necessary to be physically present in the urban areas where the formal sector jobs were located.
3) Consequently, from the first two features, more workers searched for formal sector jobs than were actually hired. Employers hired some of the searchers but not all of them.
4) To maintain equality between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting would be characterized by urban unemployment.
5) Any temporary difference in the expected wages between one sector and another would be eroded as workers migrate from the low expected wage labour market to the high expected wage one.
ASSUMPTIONS OF HARRIS TODARO MODEL OF MIGRATION
There are two regions: rural (agricultural) and urban (industrial) in two sector economic model.
The Assumptions are:
Migration is a primarily economic decision.
There is no unemployment in the rural sector and it is perfectly competitive such that wage is equal to marginal product
Members of the labor force rationally compare the expected value of potential wages to current wages to make the decision to migrate or not.
The crucial assumption of the Harris and Todaro’s model is that workers base their migration decision on their expected incomes at urban (industrial) areas. As the basic model is static, the expected income is just the weighted average of the urban wage and the unemployment benefit, the weights being the probabilities to find and not to find an urban job. The model assumes that the rate of rural-urban (m= M/LR) is a function of:
The probability that an urban labour can successfully find a modern sector job, which can be expressed as a positive function of the current urban employment rate EU/LU, or LU-EU/LU, a negative function of urban unemployment rate.
ii) The urban-rural real income differential is expressed as- YU/YR= W (W greater than 1),
Besides, migration will also be related to, iii) other factors (Z), such as distance, personal conduct, urban amenities. Where m= Rate of migration from rural to urban areas. M= Actual volume of rural-urban migration LR= Rural labour force EU= Level of urban employment.
LU= Urban labour force YU= Urban real income YR=Rural real income W= Ratio between rural/urban real income Therefore, the basic rural-migration migration model is expressed as: (rural-urban migration) m = function of (current urban employment rate, urban-rural real income differential, and personal factors). Thus, (rural-urban migration rate) m= f (EU /LU, W, Z)…. 1.1 = f (EU /LU) (holding W and Z constant) = Function of the ratio between the level of urban employment and urban labour force. Where f (EU /LU) is greater than Zero; f (W) is greater than Zero, and f (Z) may have +ve or – ve values; (here fis the time derivative of three elements). That is, migration rate is a function of the ratio between the level of urban employment and urban labour force, or the probability to find a job in an urban industrial sector.
Besides, urban labour force growth can be expressed as: lU/LU=r + LR/LU(m)= r + LR/LU f (EU/LU) ..1.2 r= natural growth rate of rural/urban labour force lU= time derivative of LU (urban labour force)
That is, time derivative of urban labour force growth rate is a function of urban labour force growth rate and the probability of finding a job in a modern urban sector (as derived from equation 1.1 above)
The model, then tried to compare the live path of equation (1.1) or (1.2) with the growth rate of urban employment, and discussed rural-urban migration and urban employment under the different assumption of population and employment growth rates.
CONTRIBUTIONS OF THE MODEL
The fundamental contribution of Harris and Todaro’s rural-urban two sector migration model was to build a model that fit the stylized facts of the labour market. On the lines of the theory, developing countries adopted program on integrated rural development which encouraged an increase in the rural traditional sector wage. The theory proves that the higher the unemployment rate, the lower is the probability of new migrants from the countryside actively seeking formal sector employment who are unable to find it. The significant findings of the theory are:
First, if the expected urban wage equals rural income, there is no incentive to migrate.
Second, if the expected urban wage is greater than rural income, there is a great incentive to move from rural to urban area.
Third, if the expected urban wage is less than rural incomes, there would be an incentive to move in other direction.
Fourth, the expected urban wage depends on what type of job migrant is engaged in.
Therefore, the Harris Todaro’s model helps policy-makers to avoid two mistakes. One is to assume that development efforts should necessarily be channeled to the sectors where the poor are. The other is to assume that efforts should necessarily be focused on getting the poor out of the sectors in which they presently are.
However, wages in the urban sector are always higher than the market clearing equilibrium level due to factors such as unionization of workers and government policies such as minimum wage, pension plans, and unemployment benefits. Additionally, firms choose to set wages higher than other options in order to attract higher quality workers and fire workers who prove to be inferior. In essence, they buy an incentive for productivity. Because of this, wages in the urban sector are always set higher than market equilibrium and wages in the rural sector are conversely lower than equilibrium due to the surplus of labor this wage premium created.
LIMITATIONS
Some of the assumptions of the Harris-Todaro’s model were judged to be too restrictive.The model also assumesthat potential migrants are risk neutral where the poor migrants will likely be risk averse, as in they are indifferent between a certain expected rural income and an uncertain expected urban income of the same magnitude. The assumption that there exists a perfect competition in rural agriculture sector is not realistic.
The model results in an ex ante equilibrium but not ex post, since those who migrate and are unemployed or employed at a lower wage in the informal sector are not better off.
Assumes subjects are risk-neutral when in reality, most people are risk-averse. However, the model can be easily adjusted to reflect this. In a risk-averse version of the Todaro Model, less migration occurs, causing the agricultural sector to be larger. The level of risk aversion is reflected in the difference between the informal sector wage and the formal sector wage.
CONCLUSION
Harris Todaro model explains some issues of rural-urban migration. This migration happens in case when expected rural income is higher than rural wages. In this case economy may have high rates of unemployment. The equilibrium condition of this model is when expected rural wage is equal to rural wage. When government subsidize manufacturing sector Harris Todaro paradox may happen. According to the authors job creation instead of dealing with unemployment problem actually may cause increase of unemployment. This happens when urban-rural wage differential is high enough, so rural workers move to the cities hoping to find a job with high wage. Obviously, not all these workers succeed in finding jobs which leads to unemployment. Another issue is that inducing minimum wages creates labor market distortions. Therefore, policy makers should not set the minimum wage rates. In addition, simulations showed that different policies’ outcomes depend on elasticity of labor demand in different sectors and on marginal product of labor. As Harris and Todaro suggested the first-best policy would be subsidizing manufacturing along with restrictions of rural migration.
2. LEWIS-FEI RANIS MODEL
The FeiRanis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials.
MAIN ARGUMENTS OF THE MODEL
A . Lewiss Model of Rural-Urban Migration:
Prof. W. Arthur Lewis in his article, Unlimited Supplies of Labour has explained the process of migration from rural to urban areas in an underdeveloped economy.
An underdeveloped economy is a dual economy having two sectors:
(i) a modern sector, and
(ii) an indigenous sector.
Out of these two, the latter is the predominant sector. The capitalist sector is defined as that part of the economy which uses reproducible capital, pays capitalists for the use thereof and employs wage labour for profit making purposes.The distinguishing feature of a capitalist sector is that it hires labour and sells output to earn profit. The subsistence sector is that part of the economy which does not use reproducible capital. Labour is abundant and disguised unemployment is the result. The marginal productivity of labour in the agricultural sector may be zero or even negative. In order to solve the problem of disguised unemployment.
Prof. Lewis would like the capitalist (industrial) sector to be expanded by transferring labour from the subsistence (rural) sector to the capitalist sector. He assumes that the supply of labour is perfectly elastic at the subsistence wage.
Since the supply of labour is unlimited, new industries can be established or existing industries can be expanded without limit at the current wage i.e. subsistence wage by withdrawing labour from the subsistence sector. When people migrate from the subsistence sector to the modern sector, the wages should be higher in the capitalist sector than in the subsistence sector by a small but fixed amount.
SOME ASSUMPTIONS AND CRITICISMS
The Lewis model of migration has been criticised on the following counts:
1. Wage Rate not constant in the Capitalist Sector:
The theory assumes a constant wage rate in the capitalist sector until the supply of labour is exhausted from the subsistence sector. This is unrealistic because the wage rate continues to rise over time in the industrial sector of an underdeveloped economy even when there is open unemployment in its rural sector.
2. Not Applicable if Capital Accumulation is Labour Saving: Lewis assumes that the capitalist surplus is reinvested in productive capital. But according to Reynolds, if the productive capital happens to be labour saving, it would not absorb labour and the theory breaks-down.
3. Skilled Labour not a Temporary Bottleneck: Given an unlimited supply of labour, Lewis assumes the existence of unskilled labour for his theory. Skilled labour is regarded as a temporary bottleneck which can be removed by providing training facilities to unskilled labour. No doubt skilled labour is in short supply in underdeveloped countries but skill formation poses a serious problem, as it takes a very long time to educate and train the multitudes in such countries.
4. One-sided Theory: This is a one-sided theory because Lewis does not consider the possibility of progress in the agricultural sector. As the industrial sector develops with the transfer of surplus labour, the demand for food and raw materials will rise which will, in turn, lead to the growth of the agricultural sector.
5. Mobility of Labour not so Easy: Higher capitalist wage will not lead to the movement of surplus labour from the subsistence sector to the capitalist sector. People are so intensely attached to their family and land that they do not like to leave their kith and kin. Moreover, differences in language and custom, the problems of congestion, housing and high cost of living in the capitalist sector stand in the way of mobility of labour of this sector. This is the weakness of the theory.
B.The Fei-Ranis Model on Rural-Urban Migration:
John Fei and Gustav Ranis have presented in an article entitled, A Theory of Economic Development, the process of rural-urban migration in underdeveloped countries.The model is related to an underdeveloped economy having surplus labour but scarcity of capital. The major part of the population is engaged in agriculture which is stagnant. Non-agricultural occupations use small capital. There also exists an industrial sector.The process of development involves transfer of surplus labour from the agricultural sector to the industrial sector, so as to increase its productivity from zero to a wage level equal to the institutional wage in agriculture.
ASSUMPTIONS
The assumptions of the theory are:
1. Land is fixed in supply.
2. Population growth is taken as an exogenous phenomenon.
3. There is a dual economy consisting of a stagnant agricultural sector and an active industrial sector.
4. Agricultural activity is characterised by constant returns to scale with labour as a variable factor.
5. The output of the agricultural sector is a function of land and labour alone.
6. The output of the industrial sector is a function of capital and labour alone.
7. Workers in both the sectors consume only agricultural products.
8. If population increases above the point where marginal productivity of labour becomes zero, labour can be shifted to the industrial sector without loss in agricultural output.
9. The real wage in the industrial sector remains fixed and is equal to the initial level of real income in the agrarian economy, which they call the institutional wage.
THE MODEL: ARGUMENTS
Based on these assumptions the model analysis the development process in three phases.
In the first phase, disguised unemployed workers, who are not adding to agricultural output are shifted to the industrial sector at the constant institutional wages.
In the second phase, agricultural workers add to the agricultural output but produce less than the institutional wage they get. These workers are also shifted to the industrial sector. If the migration of workers to the industrial sector continues, a point is ultimately reached when farm workers produce output equal to the institutional wage.
In the third phase, farm workers produce more than the institutional wage they get. Thus the surplus labour is exhausted and the agricultural sector becomes commercialised.
CRITICISMS
This model is not free from criticisms which are discussed below:
1. Supply of Land not Fixed:
2. Institutional Wage not above the MPP:
3. Institutional Wage not constant in the Agricultural Sector:
4. Closed Model:
5. Commercialisation of Agriculture Leads to Inflation:
6. MPP not Zero.
CONCLUSION
It should be of some interest to note that the Lewis model and its many offspring continue to be viewed as relevant in the South and considered a valuable guide to policy in places like China, India, Bangladesh, Central America and even some parts of sub-Saharan Africa, i.e., wherever heavy population pressure on scarce cultivable land remains a feature of the landscape. Most Northern development economists, on the other hand, are today focusing either on aggregate cross-section models to determine the sources of economic growth in the Barro (1991) tradition or, at the micro level, on the econometric modeling of household behavior, with very little interaction between the two approaches. In the South, dualism still holds the attention of both theoretical and empirical observers. According to Lewis, productivity changes will accrue to the importing or advanced country, leading to another version of immiserizing growth. This is one area in which Lewis adherence to Prebisch-Singer probably did not sufficiently take into account the difference between labor intensive industrial and agricultural exportsalthough he properly emphasized the growing potential for inter-LDC trade. All in all, Lewis rightly saw technology, not trade, as the more dependable engine of growth.
Surprisingly, the Lewis model of dualism also has some relevance to contemporary mainstream development models at the micro level. Lewis was basically a macro-economist, deeply immersed in economic history and the history of thought, both neglected subjects today. He always chose a general equilibrium approach, not only with respect to working within a domestic two-sector world but also with respect to the relationship of the typical developing country to the world economy, as indicated by his Wick sell and Jane way lectures (1969 and 1977). His notion of dualism, especially that focused on the labor market dimension, rural and urban, continues to offer a theoretically valid, empirically relevant and practically useful framework for dealing with some fundamental real world issues of development.
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LEWIS MODEL OF ECONOMIC GROWTH
The dual-sector model is a model in development economics. It is commonly known as the Lewis model after its inventor W. Arthur Lewis. It explains the growth of a developing economy in terms of a labour transition between two sectors, the capitalist sector and the subsistence sector.
The assumptions of Lewis model…the assumptions are the following
The model assumes that a developing economy has a surplus of unproductive labor in the agricultural sector.
These workers are attracted to the growing manufacturing sector where higher wages are offered.
It also assumes that the wages in the manufacturing sector are more or less fixed.
Entrepreneurs in the manufacturing sector make profit because they charge a price above the fixed wage rate.
The model assumes that these profits will be reinvested in the business in the form of fixed capital.
An advanced manufacturing sector means an economy has moved from a traditional to an industrialized one.
W. A. Lewis divided the economy of an underdeveloped country into 2 sectors, which are the capitalist sector and subsistence sector.
The capitalist sector :Lewis defined this sector as “that part of the economy which uses reproducible capital and pays capitalists thereof”. The use of capital is controlled by the capitalists, who hire the services of labour. It includes manufacturing, plantations, mines etc. The capitalist sector may be private or public. On the other hand the subsistence sector is just like agricultural sector is just like opposite of capitalist sector..
The subsistence sector
This sector was defined by him as “that part of the economy which is not using reproducible capital”. It can also be adjusted as the indigenous traditional sector or the “self employed sector”. The per head output is comparatively lower in this sector and this is because it is not fructified with capital.
The relationship between the Lewis sector
The primary relationship between the two sectors is that when the capitalist sector expands, it extracts or draws labour from the subsistence sector. This causes the output per head of labourers who move from the subsistence sector to the capitalist sector to increase.
HARIS TODARO MODEL
Harris Todaro model ..this model is based on migration..which s being divided into urban _rural migration..there is an assumption that people migrate from the rural areas to the urban for some certain reasons.
The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
In summary ,migration from rural areas to urban areas will increase if:
Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
HARRIS TODARO MODEL OF MIGRATION.
Since the wage in cities is higher than one in village people migrate into the cities hoping to get urban job. The probability to get a job depends on the size of unemployment pool in relation to the number employed in industries. Therefore, in many mostly less-developed countries urban unemployment is a big issue. W. Max Corden in his book Trade Policy and Economic Welfare claims that the possible reason for urban unemployment is the wage differential. This coexists with usually high minimum wage in industries and with a marginal product of labor in agriculture less than the urban minimum wage.
John R. Harris and Michael P. Todaro presented the seminal ‘Two sector model’ in American Economic Association, 1970. This model is a pioneering study in the field encompassing rural-urban migration. The classical theory is used in development economics and is an economic illustration of migrants’ decision on expected income differentials between rural (agriculture) and urban (manufacturing) areas. The model of rural-urban migration is typically studied in the context of employment and unemployment situation in developing countries. The purpose of the model is to explain the critical urban unemployment problem in developing countries.
The key hypothesis of Harris and Todaro’s model is that economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migration decision. In other words, this theory puts forward that rural-urban migration will occur when the urban expected wage exceeds the rural obtain wage.
HARRIS TODARO MODEL OF MIGRATION EXPLAINED (ITS ARGUMENTS)
The rural-urban two-sector model centrally holds the following features:
1) Real wages (adjusted for cost-of-living differences) were higher in urban formal sector jobs than in rural traditional sector jobs.
2) To be hired for a formal sector job, it was necessary to be physically present in the urban areas where the formal sector jobs were located.
3) Consequently, from the first two features, more workers searched for formal sector jobs than were actually hired. Employers hired some of the searchers but not all of them.
4) To maintain equality between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting would be characterized by urban unemployment.
5) Any temporary difference in the expected wages between one sector and another would be eroded as workers migrate from the low expected wage labour market to the high expected wage one.
ASSUMPTIONS OF HARRIS TODARO MODEL OF MIGRATION
There are two regions: rural (agricultural) and urban (industrial) in two sector economic model.
The Assumptions are:
Migration is a primarily economic decision.
There is no unemployment in the rural sector and it is perfectly competitive such that wage is equal to marginal product
Members of the labor force rationally compare the expected value of potential wages to current wages to make the decision to migrate or not.
The crucial assumption of the Harris and Todaro’s model is that workers base their migration decision on their expected incomes at urban (industrial) areas. As the basic model is static, the expected income is just the weighted average of the urban wage and the unemployment benefit, the weights being the probabilities to find and not to find an urban job. The model assumes that the rate of rural-urban (m= M/LR) is a function of:
The probability that an urban labour can successfully find a modern sector job, which can be expressed as a positive function of the current urban employment rate EU/LU, or LU-EU/LU, a negative function of urban unemployment rate.
ii) The urban-rural real income differential is expressed as- YU/YR= W (W greater than 1),
Besides, migration will also be related to, iii) other factors (Z), such as distance, personal conduct, urban amenities. Where m= Rate of migration from rural to urban areas. M= Actual volume of rural-urban migration LR= Rural labour force EU= Level of urban employment.
LU= Urban labour force YU= Urban real income YR=Rural real income W= Ratio between rural/urban real income Therefore, the basic rural-migration migration model is expressed as: (rural-urban migration) m = function of (current urban employment rate, urban-rural real income differential, and personal factors). Thus, (rural-urban migration rate) m= f (EU /LU, W, Z)…. 1.1 = f (EU /LU) (holding W and Z constant) = Function of the ratio between the level of urban employment and urban labour force. Where f (EU /LU) is greater than Zero; f (W) is greater than Zero, and f (Z) may have +ve or – ve values; (here fis the time derivative of three elements). That is, migration rate is a function of the ratio between the level of urban employment and urban labour force, or the probability to find a job in an urban industrial sector.
Besides, urban labour force growth can be expressed as: lU/LU=r + LR/LU(m)= r + LR/LU f (EU/LU) ..1.2 r= natural growth rate of rural/urban labour force lU= time derivative of LU (urban labour force)
That is, time derivative of urban labour force growth rate is a function of urban labour force growth rate and the probability of finding a job in a modern urban sector (as derived from equation 1.1 above)
The model, then tried to compare the live path of equation (1.1) or (1.2) with the growth rate of urban employment, and discussed rural-urban migration and urban employment under the different assumption of population and employment growth rates.
CONTRIBUTIONS OF THE MODEL
The fundamental contribution of Harris and Todaro’s rural-urban two sector migration model was to build a model that fit the stylized facts of the labour market. On the lines of the theory, developing countries adopted program on integrated rural development which encouraged an increase in the rural traditional sector wage. The theory proves that the higher the unemployment rate, the lower is the probability of new migrants from the countryside actively seeking formal sector employment who are unable to find it. The significant findings of the theory are:
First, if the expected urban wage equals rural income, there is no incentive to migrate.
Second, if the expected urban wage is greater than rural income, there is a great incentive to move from rural to urban area.
Third, if the expected urban wage is less than rural incomes, there would be an incentive to move in other direction.
Fourth, the expected urban wage depends on what type of job migrant is engaged in.
Therefore, the Harris Todaro’s model helps policy-makers to avoid two mistakes. One is to assume that development efforts should necessarily be channeled to the sectors where the poor are. The other is to assume that efforts should necessarily be focused on getting the poor out of the sectors in which they presently are.
However, wages in the urban sector are always higher than the market clearing equilibrium level due to factors such as unionization of workers and government policies such as minimum wage, pension plans, and unemployment benefits. Additionally, firms choose to set wages higher than other options in order to attract higher quality workers and fire workers who prove to be inferior. In essence, they buy an incentive for productivity. Because of this, wages in the urban sector are always set higher than market equilibrium and wages in the rural sector are conversely lower than equilibrium due to the surplus of labor this wage premium created.
LIMITATIONS
Some of the assumptions of the Harris-Todaro’s model were judged to be too restrictive.The model also assumesthat potential migrants are risk neutral where the poor migrants will likely be risk averse, as in they are indifferent between a certain expected rural income and an uncertain expected urban income of the same magnitude. The assumption that there exists a perfect competition in rural agriculture sector is not realistic.
The model results in an ex ante equilibrium but not ex post, since those who migrate and are unemployed or employed at a lower wage in the informal sector are not better off.
Assumes subjects are risk-neutral when in reality, most people are risk-averse. However, the model can be easily adjusted to reflect this. In a risk-averse version of the Todaro Model, less migration occurs, causing the agricultural sector to be larger. The level of risk aversion is reflected in the difference between the informal sector wage and the formal sector wage.
CONCLUSION
Harris Todaro model explains some issues of rural-urban migration. This migration happens in case when expected rural income is higher than rural wages. In this case economy may have high rates of unemployment. The equilibrium condition of this model is when expected rural wage is equal to rural wage. When government subsidize manufacturing sector Harris Todaro paradox may happen. According to the authors job creation instead of dealing with unemployment problem actually may cause increase of unemployment. This happens when urban-rural wage differential is high enough, so rural workers move to the cities hoping to find a job with high wage. Obviously, not all these workers succeed in finding jobs which leads to unemployment. Another issue is that inducing minimum wages creates labor market distortions. Therefore, policy makers should not set the minimum wage rates. In addition, simulations showed that different policies’ outcomes depend on elasticity of labor demand in different sectors and on marginal product of labor. As Harris and Todaro suggested the first-best policy would be subsidizing manufacturing along with restrictions of rural migration.
LEWIS-FEI RANIS MODEL
The FeiRanis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials.
MAIN ARGUMENTS OF THE MODEL
A . Lewiss Model of Rural-Urban Migration:
Prof. W. Arthur Lewis in his article, Unlimited Supplies of Labour has explained the process of migration from rural to urban areas in an underdeveloped economy.
An underdeveloped economy is a dual economy having two sectors:
(i) a modern sector, and
(ii) an indigenous sector.
Out of these two, the latter is the predominant sector. The capitalist sector is defined as that part of the economy which uses reproducible capital, pays capitalists for the use thereof and employs wage labour for profit making purposes.The distinguishing feature of a capitalist sector is that it hires labour and sells output to earn profit. The subsistence sector is that part of the economy which does not use reproducible capital. Labour is abundant and disguised unemployment is the result. The marginal productivity of labour in the agricultural sector may be zero or even negative. In order to solve the problem of disguised unemployment.
Prof. Lewis would like the capitalist (industrial) sector to be expanded by transferring labour from the subsistence (rural) sector to the capitalist sector. He assumes that the supply of labour is perfectly elastic at the subsistence wage.
Since the supply of labour is unlimited, new industries can be established or existing industries can be expanded without limit at the current wage i.e. subsistence wage by withdrawing labour from the subsistence sector. When people migrate from the subsistence sector to the modern sector, the wages should be higher in the capitalist sector than in the subsistence sector by a small but fixed amount.
SOME ASSUMPTIONS AND CRITICISMS
The Lewis model of migration has been criticised on the following counts:
1. Wage Rate not constant in the Capitalist Sector:
The theory assumes a constant wage rate in the capitalist sector until the supply of labour is exhausted from the subsistence sector. This is unrealistic because the wage rate continues to rise over time in the industrial sector of an underdeveloped economy even when there is open unemployment in its rural sector.
2. Not Applicable if Capital Accumulation is Labour Saving: Lewis assumes that the capitalist surplus is reinvested in productive capital. But according to Reynolds, if the productive capital happens to be labour saving, it would not absorb labour and the theory breaks-down.
3. Skilled Labour not a Temporary Bottleneck: Given an unlimited supply of labour, Lewis assumes the existence of unskilled labour for his theory. Skilled labour is regarded as a temporary bottleneck which can be removed by providing training facilities to unskilled labour. No doubt skilled labour is in short supply in underdeveloped countries but skill formation poses a serious problem, as it takes a very long time to educate and train the multitudes in such countries.
4. One-sided Theory: This is a one-sided theory because Lewis does not consider the possibility of progress in the agricultural sector. As the industrial sector develops with the transfer of surplus labour, the demand for food and raw materials will rise which will, in turn, lead to the growth of the agricultural sector.
5. Mobility of Labour not so Easy: Higher capitalist wage will not lead to the movement of surplus labour from the subsistence sector to the capitalist sector. People are so intensely attached to their family and land that they do not like to leave their kith and kin. Moreover, differences in language and custom, the problems of congestion, housing and high cost of living in the capitalist sector stand in the way of mobility of labour of this sector. This is the weakness of the theory.
B.The Fei-Ranis Model on Rural-Urban Migration:
John Fei and Gustav Ranis have presented in an article entitled, A Theory of Economic Development, the process of rural-urban migration in underdeveloped countries.The model is related to an underdeveloped economy having surplus labour but scarcity of capital. The major part of the population is engaged in agriculture which is stagnant. Non-agricultural occupations use small capital. There also exists an industrial sector.The process of development involves transfer of surplus labour from the agricultural sector to the industrial sector, so as to increase its productivity from zero to a wage level equal to the institutional wage in agriculture.
ASSUMPTIONS
The assumptions of the theory are:
1. Land is fixed in supply.
2. Population growth is taken as an exogenous phenomenon.
3. There is a dual economy consisting of a stagnant agricultural sector and an active industrial sector.
4. Agricultural activity is characterised by constant returns to scale with labour as a variable factor.
5. The output of the agricultural sector is a function of land and labour alone.
6. The output of the industrial sector is a function of capital and labour alone.
7. Workers in both the sectors consume only agricultural products.
8. If population increases above the point where marginal productivity of labour becomes zero, labour can be shifted to the industrial sector without loss in agricultural output.
9. The real wage in the industrial sector remains fixed and is equal to the initial level of real income in the agrarian economy, which they call the institutional wage.
THE MODEL: ARGUMENTS
Based on these assumptions the model analysis the development process in three phases.
In the first phase, disguised unemployed workers, who are not adding to agricultural output are shifted to the industrial sector at the constant institutional wages.
In the second phase, agricultural workers add to the agricultural output but produce less than the institutional wage they get. These workers are also shifted to the industrial sector. If the migration of workers to the industrial sector continues, a point is ultimately reached when farm workers produce output equal to the institutional wage.
In the third phase, farm workers produce more than the institutional wage they get. Thus the surplus labour is exhausted and the agricultural sector becomes commercialised.
CRITICISMS
This model is not free from criticisms which are discussed below:
1. Supply of Land not Fixed:
2. Institutional Wage not above the MPP:
3. Institutional Wage not constant in the Agricultural Sector:
4. Closed Model:
5. Commercialisation of Agriculture Leads to Inflation:
6. MPP not Zero.
CONCLUSION
It should be of some interest to note that the Lewis model and its many offspring continue to be viewed as relevant in the South and considered a valuable guide to policy in places like China, India, Bangladesh, Central America and even some parts of sub-Saharan Africa, i.e., wherever heavy population pressure on scarce cultivable land remains a feature of the landscape. Most Northern development economists, on the other hand, are today focusing either on aggregate cross-section models to determine the sources of economic growth in the Barro (1991) tradition or, at the micro level, on the econometric modeling of household behavior, with very little interaction between the two approaches. In the South, dualism still holds the attention of both theoretical and empirical observers. According to Lewis, productivity changes will accrue to the importing or advanced country, leading to another version of immiserizing growth. This is one area in which Lewis adherence to Prebisch-Singer probably did not sufficiently take into account the difference between labor intensive industrial and agricultural exportsalthough he properly emphasized the growing potential for inter-LDC trade. All in all, Lewis rightly saw technology, not trade, as the more dependable engine of growth.
Surprisingly, the Lewis model of dualism also has some relevance to contemporary mainstream development models at the micro level. Lewis was basically a macro-economist, deeply immersed in economic history and the history of thought, both neglected subjects today. He always chose a general equilibrium approach, not only with respect to working within a domestic two-sector world but also with respect to the relationship of the typical developing country to the world economy, as indicated by his Wick sell and Jane way lectures (1969 and 1977). His notion of dualism, especially that focused on the labor market dimension, rural and urban, continues to offer a theoretically valid, empirically relevant and practically useful framework for dealing with some fundamental real world issues of development.
NAME: Durumba Simon Ikechukwu
REG.NO. 2017/249322
DEPARTMENT: Combined Social Sciences ( Economics/Political Science)
EMAIL: Sp680616@gmail.com
HARRIS-TODARO’S MIGRATION THEORY
John R. Harris and Michael P. Todaro developed the Theory of migration. This theory is used in development economics and it illustrates a migrants’ decision on his expected income difference between a rural(agriculture) and urban(manufacturing) areas. The model of rural-urban migration is typically studied in the context of employment and unemployment situation in developing countries. The need of the model is to explain the critical urban unemployment problem in developing countries.
ASSUMPTIONS OF THE MODEL
Two sectors: urban (manufacture) and rural (agriculture)
Rural-urban migration condition: when urban real wage exceeds real agricultural product
No migration cost
Perfect competition
Cobb-Douglas production function
THE Model
The fundamental contribution of Harris and Todaro’s rural-urban two sector migration model was to build a model that fit the stylized facts of the labor market. On the lines of the theory, developing countries adopted program on integrated rural development which encouraged an increase in the rural traditional sector wage. The theory proves that the higher the unemployment rate, the lower is the probability of new migrants from the countryside actively seeking formal sector employment who are unable to find it. The findings are as follows:
First, if the expected urban wage equals rural income, there is no incentive to migrate.
Second, if the expected urban wage is greater than rural income, there is a great incentive to move from rural to urban area.
Third, if the expected urban wage is less than rural incomes, there would be an incentive to move in other direction.
Fourth, the expected urban wage depends on what type of job migrant is engaged in.
The Haris Todaro’s model will helps policy-makers in Nigeria to avoid two mistakes:
a). One is to assume that development efforts should necessarily be channeled to the sectors where the poor are.
b.) The other is to assume that efforts should necessarily be focused on getting the poor out of the sectors in which they presently are.
CONCLUSION
Harris Todaro model explains some issues of rural-urban migration. This migration happens in case when expected urban income is higher than rural wages. In this case economy may have high rates of unemployment. The equilibrium condition of this model is when expected urban wage is equal to rural wage. When government subsidize manufacturing sector Harris Todaro paradox may happen.
According to the Harris and Todaro, job creation instead of dealing with unemployment problem actually may cause increase of unemployment. This happens when urban-rural wage differential is high enough, so rural workers move to the cities hoping to find a job with high wage. Obviously, not all these workers succeed in finding jobs which leads to unemployment. Another issue is that inducing minimum wages creates labor market distortions. Therefore, policy makers in Nigeria should not set the minimum wage rates. In addition, simulations showed that different policies’ outcomes depend on elasticity of labor demand in different sectors and on marginal product of labor. As Harris and Todaro suggested the first-best policy would be subsidizing manufacturing along with restrictions of rural migration.
2. LEWIS FEI-RANIS MODEL
INTRODUCTION
The Fei–Ranis model of economic growth is a dualism model developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
SIGNIFICANCE OF AGRICULTURE IN THE MODEL
The Lewis model is criticized on the grounds that it neglects agriculture. Fei– Ranis model goes a step beyond and states that agriculture has a very major role to play in the expansion of the industrial sector. In fact, it says that the rate of growth of the industrial sector … depends on the amount of total agricultural surplus and on the amount of profit that are earned in the industrial sector. So, larger the amount of surplus and the amount of surplus put into productive investment and larger the amount of industrial profits earned, the larger will be the rate of growth of the industrial economy. As the model focuses on the shifting of the focal point of progress from the agricultural to the industrial sector, Fei and Ranis believe that the ideal shifting takes place when the investment funds from surplus and industrial profits are significantly large so as to purchase industrial capital goods like plants and machinery. These capital goods are needed for the creation of employment opportunities. Hence, the condition put by Fei and Ranis for a successful transformation is that Rate of increase of capital stock & rate of opportunities > Rate of population growth
CRITICISMS
The FR model is considered to be an improvement over Lewis. This model presents a balanced growth of both the sectors of the economy, the most notable thing for the growth of UDCs. Despite this fact, this model has following shortcomings:
(i) Marginal Productivity of Labour in Phase I: The FR model is of the view that MFL = 0 in the first phase of growth, and the transfer of labour from agri. would not reduce output in the agri. sector in phase I. But the economists like Berry and Soligo are of the view that agri. output in phase I of FR model will not remain constant and may fell under different systems of land tenure, i.e., the peasant proprietorship and share cropping etc.
(ii) Marginal Productivity of Labour is Not Zero: Prof. Jorgenson who has also presented a model of ‘dual economy’ has object FR model’s contention of zero MP in phase I. He says whether MPL will be zero is an empirical issue. During the seasons of sowing and harvesting the MPL > 0. Jorgenson concluded on the basis of Japanese data even for the pre I world war period the supply of labour was not unlimited. Then how MPL can be zero.
(iii) Ignoring The Role of Capital: The FR model concentrated upon land and labour as the determinants of output, ignoring the role of capital. But Profs. Brown, Byres, Frankel, Griffen, Ghatak and Ingersent are of the view that in the UDCs there has occurred what is known as ‘Green Revolution’ in agri. which has promoted the greater use of capital and technology on lands. Consequently, there has been a greater increase in the agri. productivity and agri. incomes.
(iv) Open Economy: FR model ignored the role of foreign trade as it assumed a closed economy model. In the 2nd phase when agri. product decreases the TOT goes against industrial sector. This would occur in the presence of closed economy. But if the model is made open such would not happen as the goods could be imported in the presence of then-scarcity. This was especially observed in case of Japan which imported cheap farm products to improve her TOT (terms of trade).
(v) Supply of Land in Long Run: FR model assumed that in the process of economic development the supply of land remained fixed. But it is not true. The supply of land can be increased in case of long run.
(vi) Commercialization of Agri. And Inflation: According to FR model when 3rd phase starts the agri. sector becomes commercialized. But it is criticized by saying that this phase does not start so easily The shifting of labour to industrial sector will create labor shortage in agri. sector. This will create shortage of food stuff leading to increase their prices. In this way, the inflation will generate which may obstruct the process of development.
(vii) Low Productivity in Agric Sector: According to Jorgenson it has been observed that there has been a very slow rise in the productivity of agri. sector. Consequently, the surplus will hardly be created in agri. sector. Accordingly, agri. sector will not contribute to development Thus the growth requires that the surplus must be generated and it should persist.
CONCLUSION
For economies in the early stages of development or still developing, such as Nigeria, the rural agricultural sector consists of family farming units, with a hiring principle that is different from that of the firm. Family members work together and share the value of their output. They are paid not the marginal product but the average product of labor. Thus, it is possible that there exists surplus labor in Nigeria and other developing countries. The notions of surplus labor and disguised unemployment have been a central part of development economics since Lewis (1954). With the presence of surplus labor in the traditional sector, the modern sector can expand without increasing labor costs. This process will continue until the surplus labor in the traditional sector is used up. After this point is reached, wages begin to rise consistent with rising marginal productivity, in which the workers in the traditional sector would also be paid in accordance with their marginal product rather than the subsistence wage. At this stage, the dualistic economic structure disappears, replaced by a competitive one-sector economy that can be explained by the neoclassical model.
NAME: MGBADA OGOCHUKWU EMELDA
REG NUM: 2017/245040
DEPARTMENT OF ECONOMICS
CHIDIMMALISA.BLOGSPOT.COM
AN ESSAY ON THE HARRIS TODARO MODEL OF MIGRATION
The HarrisTodaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
Overview
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.[1]
Formalism
The formal statement of the equilibrium condition of the HarrisTodaro model is as follows:
Let wr be the wage rate (marginal productivity of labor) in the rural agricultural sector.
Let le be the total number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
Let lus be the total number of job seekers, employed and unemployed, in the urban sector.
Let wu be the wage rate in the urban sector, which could possibly be set by government with a minimum wage law.
Rural to urban migration will take place if:{\displaystyle \ w_{r}{\frac {l_{e}}{l_{us}}}w_{u}}
At equilibrium,
{\displaystyle \ w_{r}={\frac {l_{e}}{l_{us}}}w_{u}}
With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.
Conclusions
Therefore, migration from rural areas to urban areas will increase if:
Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the HarrisTodaro model.
INTRODUCTION TO THE LEWIS MODEL:
Economic Development with Unlimited Supplies of Labour in 1954. In his model Lewis divides the economy in an underdeveloped country in two sectors namely the Subsistence sector and the capitalist sector. Subsistence is identified with the agricultural sector of the economy while the capitalist sector implies mainly the manufacturing sector of the economy.
Capitalist sector also includes plantations and mining where hired labour is employed for purposes of production. The capitalist sector can either be private or public in nature. Subsistence sector, that the agricultural sector is considered to be labour intensive. It does not use reproducible capital. It uses poor techniques of production and has very low productivity.
Assumptions of the Lewis Model:
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
Lewis calls it as institutional wage because every worker gets this wage because of some institutional arrangements. This wages is equal to an average share of each worker in the total output in the subsistence sector. If market forces were allowed to operate in the subsistence sector labourers with zero margin productivity or those with a very low marginal productivity would not have received this wage.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion.
Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector.
Lewis in fact so much fascinated by the higher propensity to save of the capitalist sector that he even advocates a transfer of income from the subsistence sector to the capitalist sector. He feels that steps have to be taken to raise the rate of savings from 10% to 15% if the development of the economy has to be smooth.
The Working of the Lewis Model:
The explanation of working of the Lewis model is quite simple. He feels that if a wage higher than the institutional wage prevailing in the subsistence sector by a certain proportion of the institutional wage is fixed in the capitalist sector the capitalist sector will be able to attract an unlimited quantity, the labour from subsistence sector. This will enable the capitalist sector to expand. It will, in turn lead to the generation of more savings in the capitalists sector.
The additional saving, will not only help the entrepreneurs to invest more but also to improve the quality of capital invested. This will result in more employment of labour from the subsistence sector. This will lead to generation of more savings in the Capitalist sector which can be further invested leading to employment of more surplus labour and so on.
Explains the Process of Expansion of the Capitalists Sector
We is the wage rate fixed in the capitalist sector. It is higher than W which represents the institutional wage. The wage in the capitalist sector has to be higher than the instructional wage because only such higher wage can attract labour from the subsistence sector. At first; ON-I labour is employed. This will lead to the generation of surplus equal to AMIS, after the wages at the rate W have been paid.
According to Lewis this surplus AMIS will be reinvested either in old type of capital or may even be used to improve the existing techniques. All this will result in marginal productivity curve of labour moving M2 M2. Now more labour at wage. We can employee, ON2 amount of labour will now be employed. More surplus will then be generated. It would be reinvested.
Marginal productivity of labour curve will shift to M3 M3 more labour can now be employed. Still more surpluse will be generated and re-invested and so on. The process of transfer of labour from the subsistence sector to the capitalist sector will continue for some time till some obstacles, hindering this transfer appear.
Role of Bank Credit:
From the above analysis, one might get the impression that it is only through the surplus generated in the capitalist sector that the development of the capitalist sector takes place. This however is not correct.
The process of development can also start if the capitalist sector initially does not invest its savings in the capital but borrows from the banks. According to Lewis the basic problems is to employ the labour from the subsistence sector and this can be initially done through investment of funds borrowed from the banks.
Lewis is conscious of the fact that creation of bank credit will give rise to inflationary increase in prices. However, he is not much perturbed by this prospect. He is of the view that inflationary pressures will not continue forever.
A time will come when the additional savings generated by the investment of borrowed funds become equal to these very funds. At that time, prices will stop rising further. As he says, an equilibrium.is reached when savings generated through the investment of additional bank credit become equal to the amount of bank credit itself.
He is also aware of another fact. Inflation can make the distribution of income unfair. However, he says, it will be good for the manufacturing sector if the distribution of income moves in favour of the capitalists. Of course, if inflation tilts the distribution of income in favour of the traders it will be bad for the economy. It will only lead to more speculative activities.
Slowing of the Pace of expansion of the Capitalist Sector:
According to Lewis, expansion of the capitalist sector will continue unhindered so long as the supply curve for labour from the subsistence sector is perfectly elastic i.e. so long as the labour can be transferred to the capitalist sector at a constant wage. Lewis, of course is conscious of the fact that under certain circumstances, the supply curve for labour can turn upwards.
These circumstances are:
(i) The pace of expansion of the capitalist sector is more rapid when compared with the rate of growth of population in the subsistence sector. The surplus labour in that case will ultimately be fully exhausted.
(ii) Technological development in the subsistence sector raise the productivity of labour with in that case will rise. We too will have to be raised them.
(iii) As population increase due to law of decreasing marginal return, prices of food and raw materials will rise. This will increase both W and W.
(iv) When workers in the capitalist sector start imitating the living pattern of the capitalist themselves, they may ask for higher wages.
If any of the above four factors start operating, then according to Lewis, the expansion of the capitalist sector will be slow down.
Impact of the Open Economy:
The open economy can encourage the immigration of labour. If this happens, it will help in the expansion of the capitalist sector. But immigration may not be so easy. If in that case the pace of expansion of the capitalist sector slows down, capital may move out of the country as the economy is an open one. This may in turn lead to balance of payments problems and the problem of stability of rate of exchange.
Critical Review of the Lewiss Model:
Some of the objections against Lewiss model are as follows:
(1) The assumption that disguised unemployment exists in the agriculture sector has not been accepted by many economists. Schultz, Viner, Heberler and Hopper are a few of such economists. According to them, the production in the subsistence sector will be affected when labour is withdrawn from it.
(2) Lewis ignored the cost involved in training the unskilled worker transferred from the subsistence sector. Even if it is obtained at a constant wage rate, so for as its transfer from the subsistence sector is concerned, the supply curve may slope upwards so far as the capitalist, sector is concerned if the cost of training rises as more and more labour is transferred.
(3) When labour is transferred from the subsistence sector share of agricultural output falling to each one left in the agricultural sector will go a rising. This means the institutional wage will go on rising with every transfer and so will be the wages paid in the capitalist sector.
(4) The model assumes that, besides labour, there is unlimited supply of entrepreneurs in the capitalist sector. This is not true in the case of many of the underdeveloped countries.
(5) It is wrong to assume that a capitalist will always re-invest their profits. They to can indulge in un-productive pursuits. They can use their profits for speculative purposes.
(6) It is also wrong to assume that landlords always squander away their savings. The role of landlords of Japan in industrialisation of the country is well known.
(7) The model assumes that there already exists a market for the industrial products in the country. This is wrong. People of an underdeveloped country may not be able to purchase the products perturbed by the expanding capitalist sector. Foreign markets, too, may not be available to the capitalist sector in the beginning.
(8) Inflation is not liquidating, as has been assumed by Lewis, Experience of various, countries shows that if once prices start rising, it, becomes difficult to control them.
(9) It is not easy to transfer labour from the subsistence Sector to the capitalist sector by offering them an incentive of a little higher wage.
Mobility of labour is very low. Many factors like family affection, difference in language, caste, religion etc. affect it adversely.
(10) Every underdeveloped country does not have surplus labour in the subsistence sector. As such, the model does not apply to countries which are sparsely populated.
NAME:ENEH KENECHUKWU FRANKLIN
REG NO:2017/249496
EMAIL:ENEOWOKENECHUKWU@GMAIL.COM
HARRIS TODARO MIGRATION MODEL
In their seminar papers which over time has become very influential in development economics, Todaro (1969) and Harris and Todaro (1970) developed a model of rural-urban migration.
Most Under developed economies see a massive movement of labor from the rural to urban areas. The urban areas are mostly industrial and manufacturing with the rural areas being saturated with lots agricultural activities.
The Harris-Todaro model is typically studied in the context of developing countries employment and unemployment situations. From the Harris-Todaro model earning differences, economic incentives and the probability of actually getting a job at the place being migrated to plays an active role in the decision to migrate.
Basically, it was used to explain migration within an economy, but we attempt to expand the model to an international level.
To summarize, we see that the Harris-Todaro model is very limited in its scope in both an international and internal setting due to its narrow-mindedness assumption on economic values, which don’t incorporate emotional, social and humanitarian costs/benefits.
Harris was trying to explain dualism in economics which can be seen via the decisions to migrate which can be a function of many factors’ income being a major factor, from recent times it can be observed than in Nigeria people see migration to the urban areas as searching for greener pastures and as such migration is encouraged, an average rural area indigene like Nsukka sees migrating to Lagos as a major boost, Harris Todaro Model was built on migration and its causality.
LEWIS FEI RANIS MODEL OF ECONOMIC GROWTH
Arthur Lewis’ seminal 1954 paper and its emphasis on dualism appeared at a time when neither the work of Keynes or Harrod-Domar nor the later neoclassical production function of Solow seemed relevant for developing countries.
Lewis focused on organizational dualism and much less explicitly on product dualism. Indeed, neither Lewis nor the classical school concerned themselves in detail with the analysis of intersectoral relations or the intersectoral terms of trade. Lewis’ main focus was on the reallocation of labor until the turning point is reached, i.e., the time when labor reallocation has outstripped population growth long enough for dualism to atrophy and the economy to become fully commercialized.
The fact that the terms of trade are a crucial determinant of intersectoral labor, financial, as well as commodity market clearance is not something, he very much concerned himself with.
On the other hand, Lewis really moved beyond the classical school in a number of important dimensions. One, he was interested in transition growth from a dualistic to a one sector, modern economic growth world in the Kuznets (1971) tradition, from organizational dualism to organizational homogeneity, i.e., he saw the development problem as focusing on a change in the basic rules of operation of an economic system. Secondly, he believed in the power of technology operating in both sectors, although he didn’t explicitly model it. Thirdly, he rejected the neo-Malthusian (1815) heritage of the classical school; and finally, although not an explicit part of his basic model, he pointed out that food shortage problems could be overcome by imports in the open economy.
Finally, last but not least, we should note that the Lewis model has also been applied to labor movements across countries, along with movements among two sectors in the closed economy
According to Harris development would be stimulated when excess labor in the rural areas is channeled to the urban sector or industrial sector where they can be optimized.
Taking Nigeria, a case study the economic impact of the rural sector in ratio to urban is relatively poor and they are better and more sophisticated mean of production or production patterns as as such excess labor should be engineered towards industrialization
NAME: NTO SUNDAY EKE REG NO:2017/242943
DEPARTMENT: ECONOMICS
Email: ntosunday9@gmail
Joshbalsam.blogspot. com
THE HARRIS –TODARO MODEL OF MIGRATION
INTRODUCTION
The wage in cities is higher than the one obtainable in rural areas .Given this wage differential, people rationally migrate into the cities hoping to get an urban job. But the probability of getting an urban job is not completely dependent on that rational move ,rather it depends on the rate of employment in urban area. Consequentially, under-developed countries are faced with the problem of urban unemployment which is caused majorly by rural-urban migration. The Todaro Paradox occurs when job creation in urban area further leads to unemployment.
ASSUMPTIONS OF THE HARRIS –TODARO MODEL OF MIGRATION
(1)Urban wage is institutionally and legally fixed .
(2)Small open economy; the economy considered in Harris -Todaro model is a small open economy.
(3)Two sector economy; One an agricultural rural sector and the other , manufacturing urban sector economy..
(4)The equilibrium is reached when the expected wage in urban areas is equal to the marginal product of an agricultural worker.
THE CORE AND BASIC CHARACTERISTICS OF HARRIS-TODARO MODEL OF MIGRATION
( 1)Real wages are higher in urban formal sector jobs than in rural traditional –sector jobs.
(2)To be hired, the worker must be physically present in the urban areas where the formal sector jobs are located.
(3)Any temporal difference in the expected wages between one sector and another is eroded as workers migrate from the low-expected-wage labor market to the high-expected-wage labor market.
(4)Rational economic consideration primarily stimulates migration.
THE HARRIS-TODARO MODEL OF MIGRATION
The Harris-Todaro Model of migration named after John R.Harris and Michael Todaro, is an economic Model developed in 1970 and used in development economics to explain the issues concerning rural –urban Migration. The Harris-Todaro model is a pioneering general equilibrium model describing the process of rural-urban labour migration [due to wage differentials] and the existence of urban unemployment in developing countries.
The most significant feature of this model is that it made it possible for analysts to deal with unemployment, by including the unemployed workers who were waiting for job opportunities in the urban sector.
Given the wage rigidity in the urban area ,flexibility of wage in rural area and the mobility of labour assumptions. It is possible for workers to move freely between sectors. Workers in the rural area can easily migrate to the urban area in search of better wage. Some may succeed while others are pushed to the urban informal sectors .This migration causes a huge pressure on the facilities and infrastructures in urban area with attendant unemployment disequilibrium.
THEORECTICAL IMPLICATIONS OF THE HARRIS –TODARO MODEL
The theoretical implications of this model includes the following; Firstly, the model helps us to analyze the social cost of unskilled labour (which is the wage formerly paid to the casual agricultural labourer before the worker moved out of the agricultural sector).
Secondly, it helps us understand the Pull and push factors behind Migration , say induced Migration. This kind of migration can result either from favourable economic developments in the towns(pull factors) or from adverse developments in the rural areas(push factors).
POLICY IMPLICATIONS OF THE HARRIS-TODARO MODEL
The Harris-Todaro Model has far-reaching implications from the purview of policy .It poses the policy questions of “what is the most effective policy tool to solving the problem of rural-urban migration which is ravaging many developing economies?
The first best policy would be creating new job opportunities in the urban area while simultaneously placing an institutional restriction on rural-urban migration.
Again, The long-term solution to the problem of rural-urban migration lies in adopting policies that aims at biased yet systemic development of the rural area.(Electrification, provision of portable water, building of viable firms in the rural areas etc)
These two policy solutions, without doubt can both in the in the short-run and long-run solve to a reasonable extent the problem of rural-urban migration.
THE NIGERIAN ECONOMY AND THE HARRIS-TODARO MODEL
Let’s attempt a contextualization of the Harris-Todaro model to the Nigerian economy this way. The Harris-Todaro model explains theoretically and practically the ravaging issue of rural-urban migration in Nigeria .Rural dwellers or laborers leave the agrarian sector for the cities majorly because of the perceived income and standard of living differentials. A large number of these migrants are insufficiently skilled in relation to being employable in the urban- manufacturing sector. Consequently, they end up working in the urban informal sectors. Again the number of people leaving for the cities’ white collar jobs are usually greater than the available jobs therein , this further creates an urban unemployment and the undue stressing of the urban facilities and infrastructures.
This undue stress on urban facilities and infrastructures consequent of over population and congestion will lead to a decrease in the standard of living in the cities since many struggle to use this facilities and infrastructures at the same time.
Put differently ,Rural- urban migration if unchecked as in Nigeria leads to reduction in the standard of living of urban dwellers.
One of the positive checks to this problem include creating more urban employment while simultaneously placing an institutionally restriction on migration.
Long term-wise, the problem can be eliminated by simultaneously developing the rural and urban area with a biased attention given to the former. Reason because, any perceived difference in wage /standard of living by the rural dwellers will push them to leave the rural area.
A SUMMARY OF THE LEWIS MODEL OF ECONOMIC GROWTH
In 1954 sir Arthur Lewis published a paper “Economic Development with unlimited supplies of labour”, after its publication many economists have either cited it or made the it the center of their discourse when analyzing economic growth.
The focus of the model is “ dual Economics”- small-urban-industrialized sectors of economic activity surrounded by a large –rural-traditional sector.
The central theme of the model as that, labor in dual economies is available to the urban, industrialized sector at a constant wage determined by minimum levels of existence in traditional family farming because of disguised unemployment in agriculture, there is practically unlimited supply of labor and available of industrialization, at least at the early stages of development. At some later point in the history of dual economics, the supply of labor is exhausted then only a rising wage rate will draw more labor out of agriculture.
“Surplus labour” means the existence of such a huge population in the agricultural sector that the marginal product of labour is zero. So, if few workers are removed from land, the total product remains unchanged.
The essence of the development process in such an economy is “the transfer of labour resources from the agricultural sector, where they add nothing to production, to the more modern industrial sector, where they create a surplus that may be used for further growth and development.”In Lewis model the transformation process or the process of structural change starts by an autonomous expansion in demand in industry as a result of changes in domestic consumer tastes, in government purchases, or in international markets.
The central point is that labour shifts from agriculture into industry. The supply of labour from agriculture to industry is “unlimited” at the given urban wage. Lewis postulates the existence of a subsistence sector with surplus labour and he sees in this the seed for the subsistence sector. One major characteristic of the capitalist sector is that it uses reproducible capital and that it produces profit.
APPLICATION OF LEWIS MODEL OF ECONOMIC GROWTH TO NIGERIA ECONOMY
Despite the lewis’ model having an overarching importance in development Economics. Some of its assumptions are incongruent with contemporary less developed countries, particularly Nigeria. Some of these identified flaws include;
Firstly , the model assumes that ‘surplus’ labor exists in rural areas while there is full employment in the urban areas. There is no surplus labour existing in the LDC, the laborers available in the agricultural in most less developed countries are insufficient to the number of people needed to produce a self sufficient food production for the entire country. The import dependent nation like Nigeria depend on other countries for agricultural produce and not just manufactured goods.Again there is wide urban unemployment existing in Nigeria.
Secondly, the model implicitly assumes that the rate of labor transfer and employment creation is proportional to the rate of capital accumulation. The Harris-Todaro model helps us to understand this better as this rural-urban migration does not always end in employment in the urban manufacturing sector. Some of these migrants are unskilled in relation to basic skills needed in the urban and such remain unemployable.
A SUMMARY OF SURPLUS LABOR THEORY
The Fei–Ranis surplus labour is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. Lewis model did not pay enough attention to the importance of agricultural sector in promoting industrial growth, but Fei-Ranis model of dual economy explains how the increased productivity in agricultural sector would become helpful in promoting industrial sector. In this respect, it presents three stages whereby under developed countries moves from stagnation to self-sustained economic growth. According to this theory, underdeveloped economies consist of agricultural sector and the modern sector which is emerging but has a small industrial sector. The agricultural and modern sectors co-exist in the economy. Development can occur only when there is a shift in the center of attention of progress from the agricultural to the industrial sector, such that there is an enhancement of industrial output. This is achieved by the transfer of labor from the agricultural sector to the industrial sector, this shows that undeveloped countries do not suffer from deficient labor supply. While this is being done, growth in the agricultural sector must not be viewed as unimportant, and its output should be sufficient to support the entire economy.
STAGES OF THE SURPLUS LABOUR THEORY
The first stage of the Fei-Ranis model is very similar to Lewis. Disguised unemployment comes to being because the supply of labor is perfectly elastic and marginal productivity of labor equals zero (MPL = 0).
In the second stage of the Fei-Ranis model, agricultural workers add to agricultural output but they produce less than institutional wage they get
In the third stage of the Fei-Ranis model, the take-off situation comes to an end and there begins the era of self-sustained growth where the farm workers produce more than the institutional wage they get.
THE SURPLUS LABOUR THEORY AND NIGERIAN ECONOMY
1.One of the assumptions of Fei and Ranis is that MPPL is zero during the early phases of economic development. In a such developing such as the Nigeria, there is a constant rural-urban migration which makes the number of people in rural agriculture to be insufficient to producing a food self sufficiency. The marginal product of labour can only be zero with the assumption of fixed supply of Land and full employment. The available supply of land is somewhat unexplored.
2. Fei and Ranis assume a close model and hence there is no presence of foreign trade in the economy. The Nigeria we know and live in is an import independent country, where almost the consumer goods are imported from abroad even amidst worsening foreign exchange rate. The assumption such as this doesn’t hold in Nigeria.
3. Stagnation has not been taken into consideration, and no distinction is made between labor through family and labor through wages. There is also no explanation of the process of self sustained growth, or of the investment function. There is complete negligence of terms of trade between agriculture and industry, foreign exchange, money and price.
Idoko patience UCHENNA
Reg.no.2017/241111
ECONOMICS EDUCATION
TOPIC: LEWIS-FEI-RANIS MODEL(SURPLUS LABOUR THEORY
1. INTRODUCTION
The FeiRanis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials.
COMPARISON WITH OTHER MODEL: Like in the HarrodDomar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
MAIN ARGUMENTS OF THE MODEL
A . Lewiss Model of Rural-Urban Migration:
Prof. W. Arthur Lewis in his article, Unlimited Supplies of Labour has explained the process of migration from rural to urban areas in an underdeveloped economy.
An underdeveloped economy is a dual economy having two sectors:
(i) a modern sector, and
(ii) an indigenous sector.
Out of these two, the latter is the predominant sector. The capitalist sector is defined as that part of the economy which uses reproducible capital, pays capitalists for the use thereof and employs wage labour for profit making purposes.The distinguishing feature of a capitalist sector is that it hires labour and sells output to earn profit. The subsistence sector is that part of the economy which does not use reproducible capital. Labour is abundant and disguised unemployment is the result. The marginal productivity of labour in the agricultural sector may be zero or even negative. In order to solve the problem of disguised unemployment.
Prof. Lewis would like the capitalist (industrial) sector to be expanded by transferring labour from the subsistence (rural) sector to the capitalist sector. He assumes that the supply of labour is perfectly elastic at the subsistence wage.
Since the supply of labour is unlimited, new industries can be established or existing industries can be expanded without limit at the current wage i.e. subsistence wage by withdrawing labour from the subsistence sector. When people migrate from the subsistence sector to the modern sector, the wages should be higher in the capitalist sector than in the subsistence sector by a small but fixed amount.
Transfer of Labour to the Capitalist Sector:
Lewis explains the process of transfer of labour with the help of figure 1.
Quantity of Labour and Wage & Marginal Product
In the figure, the quantity of labour is shown on the X-axis and Y-axis represents wage and marginal product. OA is the wage rate of the subsistence (rural) sector and OW of the capitalist (industrial) sector. WW1 shows that the supply of labour is perfectly elastic at OW wage rate. N1D1 is the curve of marginal productivity of labour, which shows the demand of labour. Since the capitalist sector maximises profits, the wage rate remains equal to the marginal productivity of labour.
At the current wage rate OW, employment is OL and the total product in the capitalist sector is N1PLO. Out of this output, wages are equal to OWPL and the capitalists profits are WPN1, which are reinvested to create new capital. The key to the process is the use which is made of the capitalist surplus.The capitalist employment also increases with the reinvestment of profits and the expansion of the capitalist sector. The amount of fixed capital increases as a result of further investment and the marginal productivity of labour is also raised to N2D2 making the capitalist surplus and employment larger to the level of WP1N2and OL1respectively in the figure.
Further, reinvestments raise the marginal productivity of labour to N3D3 and the level of employment to OL2 and so on. This process will continue till the entire surplus rural labour is absorbed in the industrial sector. Thereafter, if additional workers are withdrawn from the rural (subsistence) sector to the industrial sector, there will be loss in food production in the rural sector because the ratio of workers to land will decline. This means that the marginal productivity of the remaining labour force is no longer zero. Thus the supply curve of labour WW1 will slope from left to right upwards like an ordinary supply curve (not shown in the figure) and wages and employment will continue to rise with the growth of population and labour force in the long run.
In the Lewis model, migration is the result of concerted effort on the part ofthe state to transfer surplus rural labour to the industrial sector by developing the latter for capital formation.
SOME ASSUMPTIONS AND CRITICISMS
The Lewis model of migration has been criticised on the following counts:
1. Wage Rate not constant in the Capitalist Sector:
The theory assumes a constant wage rate in the capitalist sector until the supply of labour is exhausted from the subsistence sector. This is unrealistic because the wage rate continues to rise over time in the industrial sector of an underdeveloped economy even when there is open unemployment in its rural sector.
2. Not Applicable if Capital Accumulation is Labour Saving: Lewis assumes that the capitalist surplus is reinvested in productive capital. But according to Reynolds, if the productive capital happens to be labour saving, it would not absorb labour and the theory breaks-down. This is shown in Fig. 2 where the curve N2D2 has a greater negative slope than the curve N1D1thereby showing labour-saving technique. With the shifting of the marginal productivity curve upwards from N1D1 to N2D2 the total output has risen substantially from ON1Q1L1to ON2Q1L1. But the total wage bill OWQ1L1 and the labour employed OL1 remain unchanged.
3. Skilled Labour not a Temporary Bottleneck: Given an unlimited supply of labour, Lewis assumes the existence of unskilled labour for his theory. Skilled labour is regarded as a temporary bottleneck which can be removed by providing training facilities to unskilled labour. No doubt skilled labour is in short supply in underdeveloped countries but skill formation poses a serious problem, as it takes a very long time to educate and train the multitudes in such countries.
4. One-sided Theory: This is a one-sided theory because Lewis does not consider the possibility of progress in the agricultural sector. As the industrial sector develops with the transfer of surplus labour, the demand for food and raw materials will rise which will, in turn, lead to the growth of the agricultural sector.
5. Mobility of Labour not so Easy: Higher capitalist wage will not lead to the movement of surplus labour from the subsistence sector to the capitalist sector. People are so intensely attached to their family and land that they do not like to leave their kith and kin. Moreover, differences in language and custom, the problems of congestion, housing and high cost of living in the capitalist sector stand in the way of mobility of labour of this sector. This is the weakness of the theory.
B. The Fei-Ranis Model on Rural-Urban Migration:
John Fei and Gustav Ranis have presented in an article entitled, A Theory of Economic Development, the process of rural-urban migration in underdeveloped countries.The model is related to an underdeveloped economy having surplus labour but scarcity of capital. The major part of the population is engaged in agriculture which is stagnant. Non-agricultural occupations use small capital. There also exists an industrial sector.The process of development involves transfer of surplus labour from the agricultural sector to the industrial sector, so as to increase its productivity from zero to a wage level equal to the institutional wage in agriculture.
ASSUMPTIONS
The assumptions of the theory are actically useful framework for dealing with some fundamental real world issues of development.
HAREIS TODARO MODEL.
Since the wage in cities is higher than one in village people migrate into the cities hoping to get urban job. The probability to get a job depends on the size of unemployment pool in relation to the number employed in industries. Therefore, in many mostly less-developed countries urban unemployment is a big issue. W. Max Corden in his book Trade Policy and Economic Welfare claims that the possible reason for urban unemployment is the wage differential. This coexists with usually high minimum wage in industries and with a marginal product of labor in agriculture less than the urban minimum wage.
John R. Harris and Michael P. Todaro presented the seminal ‘Two sector model’ in American Economic Association, 1970. This model is a pioneering study in the field encompassing rural-urban migration. The classical theory is used in development economics and is an economic illustration of migrants’ decision on expected income differentials between rural (agriculture) and urban (manufacturing) areas. The model of rural-urban migration is typically studied in the context of employment and unemployment situation in developing countries. The purpose of the model is to explain the critical urban unemployment problem in developing countries.
The key hypothesis of Harris and Todaro’s model is that economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migration decision. In other words, this theory puts forward that rural-urban migration will occur when the urban expected wage exceeds the rural obtain wage.
HISTORY OF THE HARRIS TODARO MODEL OF MIGRATION
The model was an academic investigation to throw light on the events following ‘Tripartite Agreement’ in Kenya. The newly independent Kenya in the 1960s was increasingly facing a serious situation of unemployment in the major urban cities. To cope with the situation of unemployment, Tripartite Agreement was signed between the government public sector and the private sector. The agreement increased employment in the industrial jobs in exchange for unions agreeing to hold wages at their current levels. The larger number of employment was expected to reduce unemployment, but it appeared that the urban unemployment had increased following the government’s agreement. Harris and Todaro subsequently formulated a model to explain rural-urban economic preferences to migrate. The distinctive concept in the model is that the rate of migration flow from rural (agricultural) areas to urban (industrial) areas is determined by the difference between expected urban wages and rural wages.
HARRIS TODARO MODEL OF MIGRATION EXPLAINED (ITS ARGUMENTS)
The rural-urban two-sector model centrally holds the following features:
1) Real wages (adjusted for cost-of-living differences) were higher in urban formal sector jobs than in rural traditional sector jobs.
2) To be hired for a formal sector job, it was necessary to be physically present in the urban areas where the formal sector jobs were located.
3) Consequently, from the first two features, more workers searched for formal sector jobs than were actually hired. Employers hired some of the searchers but not all of them.
4) To maintain equality between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting would be characterized by urban unemployment.
5) Any temporary difference in the expected wages between one sector and another would be eroded as workers migrate from the low expected wage labour market to the high expected wage one.
ASSUMPTIONS OF HARRIS TODARO MODEL OF MIGRATION
There are two regions: rural (agricultural) and urban (industrial) in two sector economic model.
The Assumptions are:
Migration is a primarily economic decision.
There is no unemployment in the rural sector and it is perfectly competitive such that wage is equal to marginal product
Members of the labor force rationally compare the expected value of potential wages to current wages to make the decision to migrate or not.
The crucial assumption of the Harris and Todaro’s model is that workers base their migration decision on their expected incomes at urban (industrial) areas. As the basic model is static, the expected income is just the weighted average of the urban wage and the unemployment benefit, the weights being the probabilities to find and not to find an urban job. The model assumes that the rate of rural-urban (m= M/LR) is a function of:
The probability that an urban labour can successfully find a modern sector job, which can be expressed as a positive function of the current urban employment rate EU/LU, or LU-EU/LU, a negative function of urban unemployment rate.
ii) The urban-rural real income differential is expressed as- YU/YR= W (W greater than 1),
Besides, migration will also be related to, iii) other factors (Z), such as distance, personal conduct, urban amenities. Where m= Rate of migration from rural to urban areas. M= Actual volume of rural-urban migration LR= Rural labour force EU= Level of urban employment.
LU= Urban labour force YU= Urban real income YR=Rural real income W= Ratio between rural/urban real income Therefore, the basic rural-migration migration model is expressed as: (rural-urban migration) m = function of (current urban employment rate, urban-rural real income differential, and personal factors). Thus, (rural-urban migration rate) m= f (EU /LU, W, Z)…. 1.1 = f (EU /LU) (holding W and Z constant) = Function of the ratio between the level of urban employment and urban labour force. Where f (EU /LU) is greater than Zero; f (W) is greater than Zero, and f (Z) may have +ve or – ve values; (here fis the time derivative of three elements). That is, migration rate is a function of the ratio between the level of urban employment and urban labour force, or the probability to find a job in an urban industrial sector.
Besides, urban labour force growth can be expressed as: lU/LU=r + LR/LU(m)= r + LR/LU f (EU/LU) ..1.2 r= natural growth rate of rural/urban labour force lU= time derivative of LU (urban labour force)
That is, time derivative of urban labour force growth rate is a function of urban labour force growth rate and the probability of finding a job in a modern urban sector (as derived from equation 1.1 above)
The model, then tried to compare the live path of equation (1.1) or (1.2) with the growth rate of urban employment, and discussed rural-urban migration and urban employment under the different assumption of population and employment growth rates.
CONTRIBUTIONS OF THE MODEL
The fundamental contribution of Harris and Todaro’s rural-urban two sector migration model was to build a model that fit the stylized facts of the labour market. On the lines of the theory, developing countries adopted program on integrated rural development which encouraged an increase in the rural traditional sector wage. The theory proves that the higher the unemployment rate, the lower is the probability of new migrants from the countryside actively seeking formal sector employment who are unable to find it. The significant findings of the theory are:
First, if the expected urban wage equals rural income, there is no incentive to migrate.
Second, if the expected urban wage is greater than rural income, there is a great incentive to move from rural to urban area.
Third, if the expected urban wage is less than rural incomes, there would be an incentive to move in other direction.
Fourth, the expected urban wage depends on what type of job migrant is engaged in.
Therefore, the Harris Todaro’s model helps policy-makers to avoid two mistakes. One is to assume that development efforts should necessarily be channeled to the sectors where the poor are. The other is to assume that efforts should necessarily be focused on getting the poor out of the sectors in which they presently are.
FRAME WORK OF THE MODEL
Formal Sector– Modern urban capitalist sector geared towards large scale production.
Informal Sector– An unorganized, unregistered, but most legal sector consisting mainly of small family businesses and self employed individuals.
“The self-employed were engaged in a remarkable array of activities, ranging from hawking, street vending, letter writing, knife sharpening, and junk collecting to selling fireworks, prostitution, drug peddling, and snake charming. Others found jobs as mechanics, carpenters, small artisans, barbers, and personal servants. Still others were highly successful small-scale entrepreneurs with several employees (mostly relatives) and higher incomes.”
(Todaro, Michael P.; Smith, Stephen C. (2011-04-13). Economic Development (11th Edition) (The Pearson Series in Economics) (Page 328). Prentice Hall. Kindle Edition.)
Rural Sector– Traditional subsistence farming with labor-oriented small scale production.
Name: Okonkwo Maureen Onyinye
Reg No: 2017/244674
Department: Library and Information Science
HARISS-TODARO MODEL
INTRODUCTION:
The pioneering work on rural-urban labor migration by John R. Harris and Michael P. Todaro in late 1960s to early 1970s generated such enormous interest and later contributions that they have become an important and unique component of development economics literature. The Harris-Todaro (HT) model admits the existence, in equilibrium, of a chronic large amount of urban unemployment due to the presence of urban minimum wages. The distinguishing feature of this model is that labor migration proceeds in response to urban-rural differences in expected earnings with the urban employment rate acting as an equilibrating force on such migration; This dissertation includes three articles and deals with the topic of international trade policies of an HT-type economy with labor surplus.
HARISS-TODARO MODEL:
The HT model is a specific form of the ‘‘neo-classical two sectors model’’, represented by the ‘‘Heckscher, Ohlin and Samuelson model’’ (hereafter HOS model), and it can be understood as a ‘‘specific factor model’’ (hereafter SF model), proposed by Jones (1971). In the SF model, each sector has its own specific production factor which cannot move between sectors, and the specific factor endowments are also fixed. The HT model is a short-run model with fixed specific capital endowment in each sector. In this paper, however, we examine the effects that the urban capital is exogenously increased by such as economic supports or development aid by advanced foreign countries.
2.1 MODEL AND ASSUMPTION:
The Harris-Todaro model assumes that migration from rural to urban areas depends primarily on the difference in wages between the rural and urban labour markets.
That is: where Mt is the number of rural to urban migrants in time t, is response function, Wu is the urban wage and W is the rural wage. Since there is unemployment in the town (and it is assumed that there is no unemployment in rural areas), and every migrant cannot expect to find a job there, the model postulates that the expected urban wage with the rural wage. The expected urban wage is the actual urban wage times the probability of getting a job, where Weu = expected urban wage and p = probability of getting a job Here p is expressed a where Eu is urban employment, Uu is urban unemployment and L is total urban work force. Harris and Todaro assume that all members of the urban labour force have equal chances of obtaining the jobs available. So Weu becomes simply the urban wage times the urban employment rate.
Migration in any given time then depends on three factors:
(a) The urban-rural wage gap,
(b) The urban employment rate and
(c) The responsiveness of potential migrants to the resulting opportunities
Thus, where Mt = migration in period t and h = the response rate of potential migrants
This section outlines assumptions in the HT model and the equations that describe it. The structure of the HT model is based on the premise that a fixed wage leads to an outbreak of distortion and urban unemployment. By introducing the concept of expected wage in the urban sector, the HT model presupposes that the fixed wage in one sector is added to the assumptions of the SF model.
The economy considered in the HT model is a small open economy. In the HT model, the economy consists of two sectors, one is an agricultural rural sector, sector 1, and the other is a manufacturing urban sector, sector 2. There are three kinds of production factors, specific production factor in sector 1, K1, specific production factor in sector 2, K2, and labor, L, which is employed in both sectors and mobile between sectors. In this paper, the specific production factor in the urban sector, K2, includes not only equipment and facilities for production but also social infrastructure, such as airports, roads, and industrial parks, which are related to production. Therefore, an improvement of the social infrastructure means an increase in K2. Accordingly, those specific production factors are immobile between the sectors.
ARGUMENTS:
The argument is carried out in the context of evaluating outward-oriented vs inward-oriented trade practices. The basic structure is that of Corden and Findlay, i.e., with intersectoral capital mobility and the small and open country assumption, whereupon necessary modifications are added to allow for the discussions on the effect of the presence of a service sector and risk averse workers;The essence of the results is that protectionist practices are welfare reducing for a two sector HT economy with risk neutral workers but maybe beneficial in the presence of a nontraded service sector or risk averse workers. More precisely, with a third sector, the nontraded service sector, that uses only labor as input, production subsidies to the import competing industry or import tariffs can be welfare improving. When workers are risk averse, the optimal police combination is a positive production subsidy and a positive tariff. Thus, large amount of urban unemployment (or, underemployment as characterized in the service sector in this dissertation) and risk attitude of the workers can be used as justification (as the infant industry argument) for some LDCs’ trade restraining practices.
Theoretical Implication of the Model: In comparison to the real world and opinions.
There is no denying the fact that any development project can be evaluated using social cost- benefit analysis. An important part of the social cost of any input is opportunity cost, its value in its next best alternative use. Labour hired for an urban formal-sector project might well be drawn from the urban informal sector also.
The worker who moves out of the urban informal sector may, in turn, be replaced by someone from the rural sector. In this case, the output lost is that of the worker who was formerly in the rural sector, i.e., the worker at the end of the employment chain. For this reason, some analysts believe that the wage paid to casual agricultural labourers provides a good measure of the social cost of unskilled labour.
However, this measure, although a good indicator of output foregone through labour reallocation, probably understates the true social cost of employing labour, which has other components that are likely to be significant. One such component is induced migration. No doubt there are both pull and push factors behind internal labour migration that occurs in the course of economic development from rural to urban areas.
Such migration can result either from favourable economic developments in the towns or from adverse developments in the rural areas. The Harris-Todaro model integrates these two sets of forces in their analysis of the process of labour reallocation that is likely to occur during economic development. This is why the model was sort of innovation in the literature of development economics when it appeared for the first time in 1970′.
Policy Implications of the Model: In comparison to the real world and opinions.
The H-T model has far-reaching implications from the policy point of view. For example, if the government of the country concerned were successful in fostering industrial development in an urban area, employment would increase there.
The effect would be to increase the subjective productivity of getting urban employment in the minds of rural inhabitants. Migration would increase and the eventual effect of the new industrial development could be that urban unemployment becomes higher that the level prevailing before the new development took place.
There will be some level of urban employment which ensures equilibrium in the sense that no further migration takes place. Potential migrants may take a long-term view in arriving at a decision. They may consider that their desireness of obtaining an urban job will be higher after a waiting period of some months. Thus they will compare the present value of the sum of expected urban earnings with that of expected rural earnings.
They may be content to accept a low wage in the urban informal sector for some time. This might be a rational decision on a long-term basis. The root of the problem is the large difference between earnings in the modern industrial sector and those in the rural areas.
Often the former are well above the market clearing levels for varies reasory. The long-term solution to the problem lies in adopting policies for both urban and rural areas which reduces the real income differences between the two areas.
4 Conclusion:
For economic development in LDCs, capital accumulation in the urban sector is a crucial element. The accumulated capital forms many production bases and creates job opportunities in the urban sector. At the same time, the increase in employment raises the wage level in the urban sector. In the Harris–Todaro model, the rising urban wage pushes up the expected wage in the urban sector and consequently encourages workers to migrate from the rural sector to the urban sector. If, in the resulting migration, there are more workers than the number of job opportunities created in the urban sector, some will necessarily be unemployed. Occasionally, the increase in unemployment lowers the per-capita income level before the capital is accumulated. This phenomenon is referred to as Todaro paradox. Previous studies have not, however, determined what effect an increase in capital stock in the urban sector has on urban unemployment.
LEWIS’S MODEL OF DEVELOPMENT WITH SURPLUS LABOUR
INTRODUCTION:
An eminent development economist, Arthur Lewis, put forward his model of “Economic Development with Unlimited Supplies of Labour” which envisages the capital accumulation in the modern industrial sector so as to draw labour from the subsistence agricultural sector. Lewis model has been somewhat modified and extended by Fei and Ranis but the essence of the two models is the same. Both the models (that is, one by Lewis and the other modified one by Fei-Ranis) assume the existence of surplus labour in the economy, the main component of which is the enormous disguised unemployment in agriculture.
On the other hand, agriculture represents the subsistence or traditional sector using non-reproducible land on self-employment basis and producing mainly for self-consumption with inferior techniques of production and containing surplus labour in the form of disguised unemployment. As a result, the productivity or output per head in the modern sector is much higher than that in agriculture. Though the marginal productivity in agriculture over a wide range is taken to be zero, the average productivity is assumed to be positive and equal to the bare subsistence level.
LEWIS’S MODEL OF DEVELOPMENT WITH SURPLUS LABOUR:
In the labour-surplus models of Lewis and Fei-Ranis, the wage rate in the modern industrial sector is determined by the average productivity in the agriculture. To this average productivity is added a margin (Lewis fixes this margin at 30%) which is required for furnishing an incentive for labourers to transfer themselves from the countryside to the urban industries as well as for meeting the higher cost of urban living. In this setting, the model shows how the expansion in the industrial investment and production or, in other words, capital accumulation outside agriculture will generate sufficient employment opportunities so as to absorb all the surplus labour from agriculture and elsewhere.
With a given initial amount of industrial capital, the demand for labour is given by the marginal productivity curve MP1 .On the basis of the principle of profit maximisation, at the wage rate OW, the modern sector will employ OL1 labour at which marginal product of labour equals the given wage rate OW. With this the total share of labour, i.e., wage in the modern sector, will be OWQ1L1 and WQ1D will be the capitalists’ surplus. Now, Lewis assumes that all wages are consumed and all profits saved and invested.
When the capitalists will reinvest their profits for setting up new factories or expanding the old ones, the stock of capital assets in the modern sector will increase. As a result of the increase in the stock of industrial capital, the demand for labour or marginal productivity curve of labour will shift outward, for instance from MP1 to MP2 in our diagram. With MP2 as the new demand curve for labour and the wage rate remaining constant at OW, amount of labour OL2 will be employed in the modern sector.
ASSUMPTIONS:
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion.
Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector.
C, There is a duel economy; economy is characterized by a traditional over-populated rural subsistence sector furnished with zero MPL, and high productivity modern industrial sector.
D, The subsistence sector does not make use of ‘Reproducible capital’
E, The supply of labour is perfectly elastic.
COMPARISON TO REAL WORLD AND OPINIONS:
PROFIT AS THE MAIN SOURCE OF CAPITAL FORMATION:
It is clear from the above analysis of Lewis’s model with unlimited supply of labour that profits constitute the main source of capital formation. The greater the share of profits in national income, the greater the rate of savings and capital accumulation.
Thus with the expansion of the modern or capitalist sector, the rate of saving and investment as percentage of national income will continuously rise. As a result, rate of capital accumulation will also increase relative to national income. It is of course assumed that all profits or a greater part of the profits is saved and automatically invested.
Introducing Technical Progress:
What about the role of technical progress in the type of economic expansion proposed in the Lewis model? Prof. Lewis contends that for the purposes of his analysis, the growth of technical knowledge and the growth of productive capital can be taken to work in the same direction – i.e., to increase profits and wage employment. He argues that to be able to apply new technical knowledge, we ought to have new investments.
If the new technical knowledge is capital-saving, it could be regarded as equivalent to an increment in capital. And if it happens to be labour-saving, it could be regarded as equivalent to an increment in the marginal productivity of labour. In effect, therefore, both cases would produce the same result—an outward shift in the marginal productivity schedule. As such, Prof. Lewis in his model takes the growth of knowledge and the growth of productive capital to be essentially a ‘single phenomenon’.
However, the growth of technical knowledge in the subsistence sector is going to be a different kettle of fish. Its effect would be to raise the level of wages. As such, the capitalists’ surplus would be reduced. It is, thus, that the capitalists have a profound and direct interest in holding down the productivity of labour in the subsistence sector.
CRITICISM:
A,Lewis Model Neglects the Importance of Labour Absorption in Agriculture:
A grave weakness of the models of Lewis and Fei-Ranis is that they have ignored the generation of productive employment in agriculture. No doubt, Lewis in his later writings and Fei-Ranis in their modified and extended version of Lewis model have envisaged an important role for agricultural development so as to sustain industrial growth and capital accumulation. But they visualise such an agricultural development strategy that will release labour force from agriculture rather than absorbing them in agriculture. Thus to quote Fei and Ranis – “In such a dualistic setting the heart of the development problem lies in the gradual shifting of the economy’s centre of gravity from the agricultural to the industrial sector through labour reallocation”.
In this process each sector is called upon to perform a special role – productivity in the agricultural sector must rise sufficiently so that smaller fraction of the total population can support the entire economy with food and raw materials, thus enabling agricultural workers to be released; simultaneously, the industrial sector must expand sufficiently to provide employment opportunities for the released workers labour reallocation must be rapid enough to swamp massive population increases if the economy’s centre of gravity is to be shifted over time.
B,Assumption of Adequate Labour-Absorptive Capacity of the Modern Industrial Sector:
Another related shortcoming of development models of Lewis, Fei and Ranis is their assumption that the growth of industrial employment (in absolute amount) will be greater than the growth in labour force (which in India at present is of the order of about 12 million people per year). Because only then the organised industrial sector can absorb surplus labour from agriculture. The employment potential of industrial sector is so little that far from withdrawing labour currently employed in agriculture, it does not seem to be possible for the organised industries and services, on the basis of existing capital-intensive technologies, even to absorb the new entrants to the labour force.
C, The Assumption of Constant Real Wage Rate in the Modern Sector:
The assumption of constant real wages to be paid by the urban industrial sector until the entire labour surplus in agriculture has been drawn away by the expanding industrial sector is quite unrealistic. The actual experience has revealed a striking feature that in the urban labour markets where trade unions play a crucial role in wage determination, there has been a tendency for the urban wages to rise substantially over time, both in absolute terms and relative to average real wages even in the presence of rising levels of urban open unemployment. The rise in wages, as explained above, seriously impairs the development process of the modern sector.
D, It neglects the Labour-Saving nature of Technological Progress:
A serious lacuna of the Lewis model from the viewpoint of employment creation is its neglect of the labour-saving nature of technological progress. It is assumed in the model, though implicitly, that rate of employment creation and therefore of labour transfer from agriculture to the modern urban sector will not be proportional to the rate of capital accumulation in the industrial sector.
Accordingly, the greater the rate of growth of capital formation in the modern sector, the greater the creation of employment opportunities in it. But if capital accumulation is accomplished by labour-saving technological change, that is , if the profit made by the capitalists are reinvested in more mechanised labour- saving capital equipment rather than in existing types of capital, then employment in the industrial sector may not increase at all.
E, Lewis Model Ignores the Problem of Aggregate Demand:
A serious factor which can slow down or even halt the expansionary process in the Lewis model is the problem of deficiency of aggregate demand. Lewis assumes, though implicitly, that no matter how much is produced by the capitalist or modern sector, it will find a market. Either the whole increment in output will be demanded by the people in the modern sector itself or it will be exported. But to think that entire expansion in output will be disposed of in this manner is not valid. This is because a good part of the demand for industrial products comes from the agricultural sector.
Conclusion:
Despite several limitations and drawbacks, the Lewis model retains a high degree of analytical value. It clearly points out the role of capital accumulation in raising the level of output and employment in labour-surplus developing countries. The model makes a systematic and penetrating analysis of the growth problem of dual economies and brings out some of crucial importance of such factors as profits and wages rates in the modern sector for determination the rate of capital accumulation and economic growth. It underlines the importance of inter-sectoral relationship (i.e., the relationship between agriculture and the modern industrial sector) in the growth process of a dual economy.
Name: Okorie Amarachi Ogonnaya
Reg. No: 2018/249116
Email address: amarachiokorie00 @gmail.com
Department:Library and information science
LEWIS FEI- RANIS MODEL OF ECONOMIC GROWTH
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that was developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.
It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem.
Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output.
This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply.
At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to Fei and Ranis emphasized strongly on the industry-agriculture interdependency and said that a robust connectivity between the two would encourage and speedup development. If agricultural laborers look for industrial employment, and industrialists employ more workers by use of larger capital good stock and labor-intensive technology, this connectivity can work between the industrial and agricultural sector.
Also, if the surplus owner invests in that section of industrial sector that is close to soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized. They took the example of Japan’s dualistic economy in the 19th century and said that connectivity between the two sectors of Japan was heightened due to the presence of a decentralized rural industry which was often linked to urban production.
According to them, economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision-making powers and use industrial capital and consumer goods for agricultural practices.
ASSUMPTIONS OF THE MODEL
(1.)There is a dual economy divided into a traditional and stagnant agricultural sector and an active industrial sector.
(2.) The output of the agricultural sector is a function of land and labor alone.
(3. )There is no accumulation of capital in agriculture except in the form of land reclamation.
(4.) Supply of land is fixed
(5. )Population growth is taken as an exogenous phenomenon.
The real wage in the industrial sector remains fixed and is equal to the initial level of real income in the agricultural sector. It is called an institutional wage.
some reasons, and business place shifting.
THE HARRIS-TODARO MODEL OF MIGRATION
The Harris -Todaro model of migration was named after John R.Harris and Michael Todaro, It is an economic model developed in1970. This model is a pioneering study in the field encompassing rural-urban migration. The classical theory is used in development economics and is an economic illustration of migrants’ decision on expected income differentials between rural agricultural areas and the urban areas.
Also,Todaro migration model is a theory that explains rural-urban migration as an economically rational process despite high urban unemployment. Migrants calculate (present value of) urban expected income (or its equivalent) and move if this exceeds average rural income.
Harris-Todaro model is an equilibrium version of the Todaro migration model that predicts that expected incomes will be equated across rural and urban sectors when taking into account informal sector activities and outright unemployment.
It was used in development economics and welfare economics to explain some of the issues concerning rural-urban migration
In the model an equilibrium is attained when the expected wage in urban areas (actual wage adjusted for the unemployment rate),is equal to the marginal product of an agricultural worker.
ASSUMPTIONS OF HARRIS-TODARO MIGRATION MODEL
The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials.Also the model assumes that unemployment is non-existent in the rural agricultural sector.It assumed that rural agricultural production and the subsequent lab our market is perfectly competitive,as a result ,the agricultural rural wage is equal to agricultural marginal productivity.In equilibrium, the rural to urban migration rate will be zero(0)since the expected rural income equals the expected urban income. However,in this equilibrium there will be positive unemployment in the urban sector. There are two regions: rural (agricultural) and urban (industrial) in two sector economic model. The crucial assumption of the Harris and Todaro’s model is that workers base their migration decision on their expected incomes at urban (industrial) areas. As the basic model is static, the expected income is just the weighted average of the urban wage and the unemployment benefit, the weights being the probabilities to find and not to find an urban job. The model assumes that the rate of rural-urban (m= M/LR) is a function of:
i)The probability that an urban labour can successfully find a modern sector job, which can be expressed as a positive function of the current urban employment rate EU/LU,or LU-EU/LU, a negative function of urban unemployment rate.ii) The urban-rural real income differentialis expressed asYU/YR= W (W greater than 1), Besides, migration will also be related to,
iii) Other factors (Z), such as distance, personal conduct, urban amenities. Where m= Rate of migration from rural to urban areas M= Actual volume of rural-urban migration LR= Rural labour forceLU= Urban labour forceYU= Urban real income YR=Rural real income W= Ratio between rural/urban real incomeTherefore, the basic rural-migration migration model is expressed as:(rural-urban migration) m = function of (current urbanemployment rate, urban-rural real income differential, and personal factors).Thus, (rural-urban migration rate) m= f (EU /LU, W,Z) …. 1.1= f (EU /LU) (holding W and Z constant)= Function of the ratio between the level of urbanemployment and urban labour force.
Where f (EU /LU) is greater than Zero;f (W) is greater than Zero, and f (Z) may have +ve or – ve values;(here fis the time derivative of three elements)That is, migration rate is a function of the ratio between the level of urban employment and urban labour force, or the probability to find a job in anurban industrial sector.Besides, urban labour force growth can be expressed as: lU/LU=r + LR/LU(m)= r + LR/LU f (EU/LU) ..1.2r= natural growth rate of rural/urban labour forcelU= time derivative of LU (urban labour force)That is, time derivative of urban labourforce growth rate is a function of urban growth rate and the probability of finding a job in a modern Urban sector.
CONCLUSION
The fundamental contribution of Harris and Todaro’s rural-urban two sector migration model was to build a model that fit the stylized facts of the labour market. On the lines of the theory, developing countries adopted program on integrated rural development which encouraged anincrease in the rural traditional sector wage. The theory proves that the higher the unemployment rate, the lower is the probability of new migrants from the countryside actively seeking formal sector employment who are unable to find it.
NAME: UGWU EMMANUEL KANAYO
REG NO: 2017/251748
EMAIL: Kanayoemma85@gmail.com
ECONOMICS/POLITICAL SCIENCE
(C .S.S)
A BREIEF SUMMARY OF THE LEWIS- FEI –RANIS MODEL OF ECONOMIC GROWTH AND HARRIS-TODRO MODEL OF MIGRATION AND IT”S APPLICATION TO NIGERIA ECONOMY.
Lewis (1954) proposed a seminal theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development. Later, Ranis and Fei (1961) formalised the Lewis theory and defined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model.
But one of the biggest drawback of the lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. He did not acknowledge that the increase in productivity of labour should take place prior to the labour shift to two sectores. However, these two ideas were taken into account in the FEI- RANIS dual economic growth model.
HARRIS-TODARO MODEL OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro , is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income. John R. Harris and Michael P. Todaro presented the seminal ‘Two sector model’ in American Economic Association, 1970. This model is a pioneering study in the field encompassing rural-urban migration. The classical theory is used in development economics and is an economic illustration of migrants’ decision on expected income differentials between rural (agriculture) and urban (manufacturing) areas. The model of rural-urban migration is typically studied in the context of employment and unemployment situation in developing countries. The purpose of the model is to explain the critical urban unemployment problem in developing countries. The key hypothesis of Harris and Todaro’s model is that economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migration decision. In other words, this theory put forward that rural-urban migration will occur when the urban expected wage exceeds the rural obtain wage.
CONCLUSIONS
below, are distinguished by the marginal productivity of agricultural labour. The entry into each phase is marked three turning points:
• The breakout point leads to phase one growth with redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural unemployment.
• The commercialisation point leads to phase three of self-sustaining economic growth with the commercialisation of the agricultural sector. The Lewis-Ranis-Fei theory of dualistic economic development therefore provides a suitable theoretical framework for studying the growth path of labour-surplus developing economies.
This shifting of labor can take place by the landlords’ investment activities and by the government’s fiscal measures. However, the cost of shifting labor in terms of both private and social cost may be high, for example transportation cost or the cost of carrying out construction of buildings. In addition to that, per capita agricultural consumption can increase, or there can exist a wide gap between the wages of the urban and the rural people. These three occurrences- high cost, high consumption and high gap in wages, are called as leakages , and leakages prevent the creation of agricultural surplus. In fact, surplus generation might be prevented due to a backward-sloping supply curve of labor as well, which happens when high income-levels are not consumed. This would mean that the productivity of laborers with rise in income will not rise. However, the case of backward-sloping curves is mostly unpractical.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
NAME: UGWU EMMANUEL KANAYO
REG NO: 2017/251748
EMAIL: Kanayoemma85&gmail.com
ECONOMICS/POLITICAL SCIENCE
(C .S.S)
A BREIEF SUMMARY OF THE LEWIS- FEI –RANIS MODEL OF ECONOMIC GROWTH AND HARRIS-TODRO MODEL OF MIGRATION AND IT”S APPLICATION TO NIGERIA ECONOMY.
Lewis (1954) proposed a seminal theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development. Later, Ranis and Fei (1961) formalised the Lewis theory and defined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model.
But one of the biggest drawback of the lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. He did not acknowledge that the increase in productivity of labour should take place prior to the labour shift to two sectores. However, these two ideas were taken into account in the FEI- RANIS dual economic growth model.
HARRIS-TODARO MODEL OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro , is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income. John R. Harris and Michael P. Todaro presented the seminal ‘Two sector model’ in American Economic Association, 1970. This model is a pioneering study in the field encompassing rural-urban migration. The classical theory is used in development economics and is an economic illustration of migrants’ decision on expected income differentials between rural (agriculture) and urban (manufacturing) areas. The model of rural-urban migration is typically studied in the context of employment and unemployment situation in developing countries. The purpose of the model is to explain the critical urban unemployment problem in developing countries. The key hypothesis of Harris and Todaro’s model is that economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migration decision. In other words, this theory put forward that rural-urban migration will occur when the urban expected wage exceeds the rural obtain wage.
CONCLUSIONS
below, are distinguished by the marginal productivity of agricultural labour. The entry into each phase is marked three turning points:
• The breakout point leads to phase one growth with redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural unemployment.
• The commercialisation point leads to phase three of self-sustaining economic growth with the commercialisation of the agricultural sector. The Lewis-Ranis-Fei theory of dualistic economic development therefore provides a suitable theoretical framework for studying the growth path of labour-surplus developing economies.
This shifting of labor can take place by the landlords’ investment activities and by the government’s fiscal measures. However, the cost of shifting labor in terms of both private and social cost may be high, for example transportation cost or the cost of carrying out construction of buildings. In addition to that, per capita agricultural consumption can increase, or there can exist a wide gap between the wages of the urban and the rural people. These three occurrences- high cost, high consumption and high gap in wages, are called as leakages , and leakages prevent the creation of agricultural surplus. In fact, surplus generation might be prevented due to a backward-sloping supply curve of labor as well, which happens when high income-levels are not consumed. This would mean that the productivity of laborers with rise in income will not rise. However, the case of backward-sloping curves is mostly unpractical.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
NAME: NTO SUNDAY EKE
REG NO:2017/242943
E-mail:ntosunday9@gmail.com
Blogspot:Joshbalsam.blogspot. com
THE HARRIS –TODARO MODEL OF MIGRATION
INTRODUCTION
The wage in cities is higher than the one obtainable in rural areas .Given this wage differential, people rationally migrate into the cities hoping to get an urban job. But the probability of getting an urban job is not completely dependent on that rational move ,rather it depends on the rate of employment in urban area. Consequentially, under-developed countries are faced with the problem of urban unemployment which is caused majorly by rural-urban migration. The Todaro Paradox occurs when job creation in urban area further leads to unemployment.
ASSUMPTIONS OF THE HARRIS –TODARO MODEL OF MIGRATION
(1)Urban wage is institutionally and legally fixed .
(2)Small open economy; the economy considered in Harris -Todaro model is a small open economy.
(3)Two sector economy; One an agricultural rural sector and the other , manufacturing urban sector economy..
(4)The equilibrium is reached when the expected wage in urban areas is equal to the marginal product of an agricultural worker.
THE CORE AND BASIC CHARACTERISTICS OF HARRIS-TODARO MODEL OF MIGRATION
( 1)Real wages are higher in urban formal sector jobs than in rural traditional –sector jobs.
(2)To be hired, the worker must be physically present in the urban areas where the formal sector jobs are located.
(3)Any temporal difference in the expected wages between one sector and another is eroded as workers migrate from the low-expected-wage labor market to the high-expected-wage labor market.
(4)Rational economic consideration primarily stimulates migration.
THE HARRIS-TODARO MODEL OF MIGRATION
The Harris-Todaro Model of migration named after John R.Harris and Michael Todaro, is an economic Model developed in 1970 and used in development economics to explain the issues concerning rural –urban Migration. The Harris-Todaro model is a pioneering general equilibrium model describing the process of rural-urban labour migration [due to wage differentials] and the existence of urban unemployment in developing countries.
The most significant feature of this model is that it made it possible for analysts to deal with unemployment, by including the unemployed workers who were waiting for job opportunities in the urban sector.
Given the wage rigidity in the urban area ,flexibility of wage in rural area and the mobility of labour assumptions. It is possible for workers to move freely between sectors. Workers in the rural area can easily migrate to the urban area in search of better wage. Some may succeed while others are pushed to the urban informal sectors .This migration causes a huge pressure on the facilities and infrastructures in urban area with attendant unemployment disequilibrium.
THEORECTICAL IMPLICATIONS OF THE HARRIS –TODARO MODEL
The theoretical implications of this model includes the following; Firstly, the model helps us to analyze the social cost of unskilled labour (which is the wage formerly paid to the casual agricultural labourer before the worker moved out of the agricultural sector).
Secondly, it helps us understand the Pull and push factors behind Migration , say induced Migration. This kind of migration can result either from favourable economic developments in the towns(pull factors) or from adverse developments in the rural areas(push factors).
POLICY IMPLICATIONS OF THE HARRIS-TODARO MODEL
The Harris-Todaro Model has far-reaching implications from the purview of policy .It poses the policy questions of “what is the most effective policy tool to solving the problem of rural-urban migration which is ravaging many developing economies?
The first best policy would be creating new job opportunities in the urban area while simultaneously placing an institutional restriction on rural-urban migration.
Again, The long-term solution to the problem of rural-urban migration lies in adopting policies that aims at biased yet systemic development of the rural area.(Electrification, provision of portable water, building of viable firms in the rural areas etc)
These two policy solutions, without doubt can both in the in the short-run and long-run solve to a reasonable extent the problem of rural-urban migration.
THE NIGERIAN ECONOMY AND THE HARRIS-TODARO MODEL
Let’s attempt a contextualization of the Harris-Todaro model to the Nigerian economy this way. The Harris-Todaro model explains theoretically and practically the ravaging issue of rural-urban migration in Nigeria .Rural dwellers or laborers leave the agrarian sector for the cities majorly because of the perceived income and standard of living differentials. A large number of these migrants are insufficiently skilled in relation to being employable in the urban- manufacturing sector. Consequently, they end up working in the urban informal sectors. Again the number of people leaving for the cities’ white collar jobs are usually greater than the available jobs therein , this further creates an urban unemployment and the undue stressing of the urban facilities and infrastructures.
This undue stress on urban facilities and infrastructures consequent of over population and congestion will lead to a decrease in the standard of living in the cities since many struggle to use this facilities and infrastructures at the same time.
Put differently ,Rural- urban migration if unchecked as in Nigeria leads to reduction in the standard of living of urban dwellers.
One of the positive checks to this problem include creating more urban employment while simultaneously placing an institutionally restriction on migration.
Long term-wise, the problem can be eliminated by simultaneously developing the rural and urban area with a biased attention given to the former. Reason because, any perceived difference in wage /standard of living by the rural dwellers will push them to leave the rural area.
A SUMMARY OF THE LEWIS MODEL OF ECONOMIC GROWTH
In 1954 sir Arthur Lewis published a paper “Economic Development with unlimited supplies of labour”, after its publication many economists have either cited it or made the it the center of their discourse when analyzing economic growth.
The focus of the model is “ dual Economics”- small-urban-industrialized sectors of economic activity surrounded by a large –rural-traditional sector.
The central theme of the model as that, labor in dual economies is available to the urban, industrialized sector at a constant wage determined by minimum levels of existence in traditional family farming because of disguised unemployment in agriculture, there is practically unlimited supply of labor and available of industrialization, at least at the early stages of development. At some later point in the history of dual economics, the supply of labor is exhausted then only a rising wage rate will draw more labor out of agriculture.
“Surplus labour” means the existence of such a huge population in the agricultural sector that the marginal product of labour is zero. So, if few workers are removed from land, the total product remains unchanged.
The essence of the development process in such an economy is “the transfer of labour resources from the agricultural sector, where they add nothing to production, to the more modern industrial sector, where they create a surplus that may be used for further growth and development.”In Lewis model the transformation process or the process of structural change starts by an autonomous expansion in demand in industry as a result of changes in domestic consumer tastes, in government purchases, or in international markets.
The central point is that labour shifts from agriculture into industry. The supply of labour from agriculture to industry is “unlimited” at the given urban wage. Lewis postulates the existence of a subsistence sector with surplus labour and he sees in this the seed for the subsistence sector. One major characteristic of the capitalist sector is that it uses reproducible capital and that it produces profit.
APPLICATION OF LEWIS MODEL OF ECONOMIC GROWTH TO NIGERIA ECONOMY
Despite the lewis’ model having an overarching importance in development Economics. Some of its assumptions are incongruent with contemporary less developed countries, particularly Nigeria. Some of these identified flaws include;
Firstly , the model assumes that ‘surplus’ labor exists in rural areas while there is full employment in the urban areas. There is no surplus labour existing in the LDC, the laborers available in the agricultural in most less developed countries are insufficient to the number of people needed to produce a self sufficient food production for the entire country. The import dependent nation like Nigeria depend on other countries for agricultural produce and not just manufactured goods.Again there is wide urban unemployment existing in Nigeria.
Secondly, the model implicitly assumes that the rate of labor transfer and employment creation is proportional to the rate of capital accumulation. The Harris-Todaro model helps us to understand this better as this rural-urban migration does not always end in employment in the urban manufacturing sector. Some of these migrants are unskilled in relation to basic skills needed in the urban and such remain unemployable.
A SUMMARY OF SURPLUS LABOR THEORY
The Fei–Ranis surplus labour is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. Lewis model did not pay enough attention to the importance of agricultural sector in promoting industrial growth, but Fei-Ranis model of dual economy explains how the increased productivity in agricultural sector would become helpful in promoting industrial sector. In this respect, it presents three stages whereby under developed countries moves from stagnation to self-sustained economic growth. According to this theory, underdeveloped economies consist of agricultural sector and the modern sector which is emerging but has a small industrial sector. The agricultural and modern sectors co-exist in the economy. Development can occur only when there is a shift in the center of attention of progress from the agricultural to the industrial sector, such that there is an enhancement of industrial output. This is achieved by the transfer of labor from the agricultural sector to the industrial sector, this shows that undeveloped countries do not suffer from deficient labor supply. While this is being done, growth in the agricultural sector must not be viewed as unimportant, and its output should be sufficient to support the entire economy.
STAGES OF THE SURPLUS LABOUR THEORY
The first stage of the Fei-Ranis model is very similar to Lewis. Disguised unemployment comes to being because the supply of labor is perfectly elastic and marginal productivity of labor equals zero (MPL = 0).
In the second stage of the Fei-Ranis model, agricultural workers add to agricultural output but they produce less than institutional wage they get
In the third stage of the Fei-Ranis model, the take-off situation comes to an end and there begins the era of self-sustained growth where the farm workers produce more than the institutional wage they get.
THE SURPLUS LABOUR THEORY AND NIGERIAN ECONOMY
1.One of the assumptions of Fei and Ranis is that MPPL is zero during the early phases of economic development. In a such developing such as the Nigeria, there is a constant rural-urban migration which makes the number of people in rural agriculture to be insufficient to producing a food self sufficiency. The marginal product of labour can only be zero with the assumption of fixed supply of Land and full employment. The available supply of land is somewhat unexplored.
2. Fei and Ranis assume a close model and hence there is no presence of foreign trade in the economy. The Nigeria we know and live in is an import independent country, where almost the consumer goods are imported from abroad even amidst worsening foreign exchange rate. The assumption such as this doesn’t hold in Nigeria.
3. Stagnation has not been taken into consideration, and no distinction is made between labor through family and labor through wages. There is also no explanation of the process of self sustained growth, or of the investment function. There is complete negligence of terms of trade between agriculture and industry, foreign exchange, money and price.
Name:Ogbu Julieth Chinenye
Reg. Num: 2017/249389
Dept.: Combined Social Sciences (Economics Sociology)
E-mail: julieth.ogbu.249389@unn.edu.ng
THE LEWIS-RANIS-FEI MODEL
In 1954, John C. H. Fei and Gustav Ranis proposed a model in developmental economics that is popularly known as the Fei-Ranis model of economic growth, which is also called the surplus-labor model. This is the most focused area for researchers that regards the dualistic economy. It is also termed as the key area that contributes greatly to the academic discipline of economic development in the 21st century (Kirkpatrick and Barrientos 2004). Fei-Ranis model is grokked as an extension of the Lewis Model. This Lewis model comprises of the modern and primitive sectors that explain the economic condition of the resources of both unemployment and under unemployment.
The modern sector is prominent and is known to be a small industrial sector that exists in the economy while the primitive sectors comprise the agricultural economy. The two sectors are abode by development issues which can be conquered by a shift from the agricultural economy to the industrial economy in such a way that there is a massive win in the output of the industrial economy. To achieve this, labor is moved from the agricultural sector to the industrial sector, thereby ensuring that the underdeveloped countries will not have anything to do with the constraints of labor supply.
Hence, the agricultural sector’s growth is then neglected whilst its output has to be adequate to uphold the entire economy with both food and raw material. So the savings and investments automatically become the impetus for the economic development of underdeveloped countries. The major difference between this Lewis model and other growth models is that it does not regard the underdeveloped countries as having homogenous nature.
The primitive sector as described by Lewis-Fei-Ranis consists of the existing, rural, and subsistence sectors in the economy, while the modern sector is the forthcoming but small urban, capitalist sector. In the Primitive (subsistence) sector, the population is relatively huge to capital and natural resources, constantly having zero, negative, or very low marginal productivity of labor. While in the modern sector, the population has a positive marginal product. In other words, there is disguised unemployment or underemployment, which is an essential reservoir of labor supply to the capitalist sector. This population could be lowered without reducing output.
The supply of labor can be influenced abundantly by the following factors:
a. High population growth as a result of high birth rate and low mortality rate.
b. Females released from domestic works
c. Workers from other causal jobs, etc.
This indicates that the supply of labor surpasses the demand for labor thereby making the Labour market in favor of the capitalist sector and when this happens, the capitalist sector will keep the wage constant.
THREE PHASES OF LEWIS-RANIS-FEI MODEL
In 1961, Ranis and Fei formalized Lewis’s theory. This theory was then combined with Rostow’s in the year 1956, and there they emerged three different linear-stages-of-growth theory. The two well-known stages of economic development were split into three phases, which are defined by the marginal productivity of agricultural labor.
During the pre-condition stage, they assumed the economy to be stagnant. Then the breakout point marks the creation of an infant non-agricultural sector and the entry into the first phase called phase one. The Agricultural labor starts to be reallocated to the non-agricultural sector. Because of the abundance of surplus agricultural labor, its marginal productivity is then extremely low and average labor productivity defines the agricultural institutional wage.
At the allocation of the redundant agricultural labor force, the agricultural marginal productivity of labor starts to increase even though it is still lower than the institutional wage. This point is known as the shortage point, the economy enters phase two of development. Hence, the two remaining agricultural unemployment is then absorbed.
When this process is completed, the economy reaches the commercialization point and switches into the final phase. At this third stage, the agricultural labor market is fully commercialized.
ASSUMPTIONS:
There are eight (8) basic assumptions of Fei-Ranis model:
1. The first assumption on the Fei-Ranis model is that there exists a dual economy in the system. So the capitalist (K) sector is active and progressive in its form while the agricultural (A) sector is passive and fixed.
2. The two sectors (A and K) take advantage of the land. The supply of land is considered to be fixed here.
3. Population is determined by the change that comes from outside the model rather than those present in the model. This simply means that population is termed as an “exogenous factor”.
4. In the industrial sector, the initial level of productivity (wage rate, which is popularly known as “constant institutional wage rate”) is fixed.
5. Since labor acts as a variable factor in the A and K sectors, there are steady and none changing returns to scale with regards to labor.
6. Except in the land reclamation form, there is no accumulation of the A and K sectors. This means that if there is no major progress in the A sector, it becomes none financially rewarding.
7. The output of the A sector depends on land and labor while the output of the K sector depends on land and capital.
8. At some point, the marginal product of labor is zero. So, such labor is transferrable from A sector to K sector, where the capacity of the productivity is more without bearing any loss on the A sector.
HARRIS AND TODARO MODELS
The canonical model of rural-urban migration was developed by Harris (H) and Todaro (T) in 1970. This model is popularly referred to as Harris-Todaro (H-T) model. The H-T model clearly explains the migration of workers in an economic system. This system which comprises of the rural and urban sector are differentiated by the class of goods produced, the technology of production and the process of wage determination. The production of agricultural goods is the focus of the rural sectors. The H-T model is known as the starting point of classic rural-urban migration theory.
In 1969, Todaro built a seminal model that clearly analyzes the rural-urban migration in the developing countries where he extended and formalized ideas from many authors that succeeded Lewis (1954). The main assumption of the H-T model is that for a rural worker to make the decision to move to another country, it will be based on the expected differential wage. This act of migration according to Todaro is seen as an investment decision that is closely connected to the net returns. However, these net returns solely depend on the probability of getting a job in the modern sector against getting a job in the traditional urban sector. H-T model analyzes the probability in such a way that it produces and affects the creation of urban employment and the number of unemployed urban workers. The major aim of the H-T model is to expound how the rate of employment looks under the equilibrium below full employment in both the short and long term.
In 1970, the H-T model showcased their general equilibrium analysis in a way that the artificial upholding of the wage difference in both the rural and urban sectors yields an equilibrium that is not efficient. Even though the informal sector is not included in the model, the idea of the expected wage is retained. So the expected wage is being determined by either employment or unemployment in the urban sector
In calculating the long-term equilibrium (when the net rural-urban migratory flow is not present) there has to be a migratory flow that is emanating from the rural sector to the urban sector.
Hence, the expected urban wage is then higher than the rural wage. In this way, the long-term equilibrium is attained when the urban worker population reaches a level that the expected urban wage is equal to the rural wage. The point that equality occurred is referred to as the H-T condition.
ASSUMPTIONS OF HARRIS AND TODARO MODELS.
The following assumption are valid for H-T models:
1. In the urban sector, the productive process is been described by the Cobb-Douglas production function.
2. Even though goods and labor markets are perfectly competitive. There are different segments in the labor market because of a high minimum urban wage which is usually determined politically. So in the rural sector, the real wage which is perfectly flexible is equal to the marginal productivity of labor.
3. In the urban sector, the minimum wage is assumed to be fixed at a level above the equilibrium in the labor market.
4. The individual price of agricultural goods/manufactured goods varies according to the scarcity of agricultural and manufactured goods.
5. By assumption there are only two sectors and rural prices which are entirely flexible. This means that there are many employment opportunities in the rural areas and people can be employed there at any point in time.
CONCLUSION
The Harris-Todaro model is more realistic when it comes to developing countries, especially Nigeria since the labor is shifted to the urban industrialized sector from the rural agricultural sector to increase the employment opportunities and in-turn increasing production thereby boosting the economy. This is because the H-T model focuses on the migration of the two sectors (rural and urban sectors) of the economic system. Unlike that of the Lewis model that proved to be unrealistic by assuming that there is no unemployment in the urban sector. This statement is not true for developing and underdeveloped countries. However, during the H-T model, migration of rural-urban emerges and the number of employments in the urban sector will be the same as the number of migrants.
The rural wages are lower than the minimal urban wage. So when more job opportunities are created in the urban sector, the minimum expected wage rises, and the rural-urban migration will lead to a high level of urban employment. To get rid of the urban unemployment, H-T employs that we pay a relatively large payment as tax to subsidize the minimum wage.
NAME: ONAH STANLEY CHINONSO
REG NO:2017/249272
DEPARMENT: LIBRARY AND INFORMATION SCIENCE
A SUMMARY OF THE LEWIS-RANIS MODEL OF ECONOMIC GROWTH
In 1954 Sir Arthur Lewis published a paper “Economic Development with unlimited supplies of labour”, after its publication many economists have either cited it or made the it the center of their discourse when discussing economic growth.
The focus of the model is “ dual Economics”- small-urban-industrialized sectors of economic activity surrounded by a large –rural-traditional sector.
The central theme of the model as that, labor in dual economies is available to the urban-industrialized sector at a constant wage determined by minimum levels of existence in traditional family farming because of disguised unemployment in agriculture, there is practically unlimited supply of labor and available of industrialization, at least atthe early stages of development.At some later point in the history of dual economics, the supply of labor is exhausted then only a rising wage rate will draw more labor out of agriculture.With their acute material poverty, it is difficult at first sight to imagine how the overpopulated countries can increase their savings without great hardships. On the contrary, their surplus population on the land seems to offer a major unused potential for growth, waiting only for the ‘missing component’ of outside capital to assist them in the process.Moreover, their rapid rates of population growth lend themselves to calculations of aggregate capital requirements which must be made available if their per capita incomes are to be maintained or raised.
“Surplus labor” (or disguised unemployment) means the existence of such a huge population in the agricultural sector that the marginal product of labor is zero. So, if a few workers are removed from land, the total product remains unchanged.
The essence of the development process in such an economy is “the transfer of labor resources from the agricultural sector, where they add nothing to production, to the more modern industrial sector, where they create a surplus that may be used for further growth and development.”In Lewis model the transformation process or the process of structural change starts by an autonomous expansion in demand in industry as a result of changes in domestic consumer tastes, in government purchases, or in international markets.
The central point is that labor shifts from agriculture into industry. The supply of labor from agriculture to industry is “unlimited” at the given urban wage, owing to the relative sire of the agricultural labor forces at the margin.
When these profits are ploughed back into industrial capital formation, demand for industrial output (both for consumption goods by newly employed workers and investment by capitalists) rises, causing further shifts of labor out of agriculture into industry.
APPLICATION TO NIGERIA ECONOMY
It is to be noted that although the Lewis model of development is both simple and roughly in conformity with the historical experience of economic growth in the West, it has three key assumptions which are sharply in contrast with the realities of underdevelopment particularly in Nigeria.
First, the model assumes that ‘surplus’ labor exists in rural areas while there is full employment in the urban areas. In reality, exactly the reverse is true in Nigeria: there is substantial open unemployment in urban areas but almost no general surplus labor in rural locations
Second, the model implicitly assumes that the rate of labor transfer and employment creation is proportional to the rate of capital accumulation. So, if there occurs labor-saving capital accumulation, the employment implications of the model will be modified.
The third key assumption at variance with reality is the notion of the continued existence of constant real urban wages until the supply of small surplus labor is exhausted. Says M.P. Todaro, “One of the most striking features of the urban wage situation in almost all developing countries, however, has been the tendency for these wages to rise substantially, both in absolute terms and relative to average rural incomes, even in the presence of rising levels of open unemployment.”
A SUMMARY OF SURPLUS LABOR THEORY
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. Lewis model did not pay enough attention to the importance of agricultural sector in promoting industrial growth, but Fei-Ranis model of dual economy explains how the increased productivity in agricultural sector would become helpful in promoting industrial sector. In this respect, it presents three stages whereby under developed countries moves from stagnation to self-sustained economic growth. According to this theory, underdeveloped economies consists of agricultural sector and the modern sector which is emerging but has a small industrial sector. The agricultural and modern sectors co-exist in the economy. Development can occur only when there is a shift in the center of attention of progress from the agricultural to the industrial sector, such that there is an enhancement of industrial output. This is achieved by the transfer of labor from the agricultural sector to the industrial sector, this shows that undeveloped countries do not suffer from deficient labor supply. While this is being done, growth in the agricultural sector must not be viewed as unimportant, and its output should be sufficient to support the entire economy.
STAGES OF THE LEWIS-FEI-RANIS SURPLUS LABOUR MODEL
1. The first stage of the Fei-Ranis model is very similar to Lewis. Disguised unemployment comes to being because the supply of labor is perfectly elastic and marginal productivity of labor equals zero (MPL = 0).
2. In the second stage of the Fei-Ranis model, agricultural workers add to agricultural output but they produce less than institutional wage they get. In other words, in the second stage the labor surplus exists where average product of labor is greater than marginal product of labor, but it is not equal to subsistence institutional wages.
3. In the third stage of the Fei-Ranis model, the take-off situation comes to an end and there begins the era of self-sustained growth where the farm workers produce more than the institutional wage they get. In this stage of economic growth the surplus labor comes to an end and the agricultural sector becomes a commercialized sector.
APPLICATION OF SURPLUS LABOUR TO NIGERIA ECONOMY
Fei–Ranis surplus labour has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development and on the persisting controversialstatements regarding the balanced vs. unbalanced growth debate.
Fei and Ranis assume that MPPL is zero during the early phases of economic development .In Nigeria today due to rural urban migration, the agricultural sector is facing an low supply of labor. Hence the marginal product of labour can’t be zero. In fact, in the rural area it is as if the supply of land is not fixed.
Fei and Ranis assume a close model and hence there is no presence of foreign trade in the economy, which is very unrealistic as food or raw materials can not be imported. In Nigeria, the demand for foreign goods is almost inelastic . despite the increase the exchange rate of Dollar to Naira,many Nigerians keep demanding for dollar. Put differently,this assumption does not hold for Nigeria since we are almost import dependent country.
THEHARRIS –TODARO MODEL OF MIGRATION
The wage in cities is higher than the one obtainable in rural areas .Given this wage differential, people rationally migrate into the cities hoping to get an urban job. But the probability of getting an urban job is not completely dependent on that rational move ,rather it depends on the the rate of employment in urban area. Consequentially, under-developed countries are faced with the problem of urban unemployment which is caused majorly by rural-urban migration. The Todaro Paradox occurs when job creation in urban area further leads to unemployment. Generally, this essay attempted to expound the assumptions, characteristics ,history and the core arguments of Harris –Todaro model of Migration, Initiate a comparison between the Harris-Todaro model with other models and expatiate the theoretical and policy implications of the model and more specifically, compare the model with the real world while drawing opinions.
ASSUMPTIONS OF THE HARRIS –TODARO MODEL OF MIGRATION
The following are the underlying assumptions of the Harris -Todaro migration Model ;
(1)Urban wage is institutionally and legally fixed .
(2)Small open economy; the economy considered in Harris -Todaro model is a small open economy.
(3)Two sector economy; One an agricultural rural sector and the other , manufacturing urban sector economy..
(4)The equilibrium is reached when the expected wage in urban areas is equal to the marginal product of an agricultural worker.
(5)The Harris- Todaro model assumes the existence of perfect competition in the labour market.
THE HARRIS-TODARO MODEL OF MIGRATION
The Harris-Todaro Model of migration named after John R.Harris and Michael Todaro, is an economic Model developed in 1970 and used in development economics to explain the issues concerning rural –urban Migration. The Harris-Todaro model is a pioneering general equilibrium model describing the process of rural-urban labour migration [due to wage differentials] and the existence of urban unemployment in developing countries.
Historically, the Harris- Todaro Model is traceable to the 1960s , when the government of newly independent Kenya faced a difficult situation- unemployment in Nairobi and other major cities was high and obviously rising. In other to tackle this problem, a cross sectional agreements were reached between the private-sector and public-sector which the employers agreed to increase employment in exchange for unions agreeing to hold wages at their present levels. The newly created jobs was expected to reduce unemployment. Nevertheless, urban unemployment appeared to have increased rather than decreased.
The most significant feature of this model is that it made it possible for analysts to deal with unemployment, by including the unemployed workers who were waiting for job opportunities in the urban sector.
Given the wage rigidity in the urban area ,flexibility of wage in rural area and the mobility of labor assumptions. It is possible for workers to move freely between sectors.. Since the rural area is agrarian, there is therefore no unemployment in the rural sector. Given this, the workers in the rural sector can always be employed, so that the probability of finding a job in the rural sector equals unity. The same doesn’t hold for the urban rate of employment. The probability of finding job in the Urban sector is less than unity because of the existence of unemployment. All this conditions in place , workers in the rural can easily migrate to the urban area in search of better wage. Some may succeed while others are pushed to the urban informal sectors .This migration causes a huge pressure on the facilities and infrastructures in urban area with attendant unemployment disequilibrium.
The Harris-Todaro migration Model assumes wage differential as the basis of migration ,hence in equilibrium, migration between the rural and urban sectors will cease since the urban expected wage is equal to the rural-expected wage which is the same as the rural real wage.
The first best policy would be creating new job opportunities in the urban area while simultaneously placing an institutional restriction on rural-urban migration.
THE NIGERIAN ECONOMY AND THE HARRIS-TODARO MODEL
Let’s attempt a contextualization of the Harris-Todaro model to the Nigerian economy this way. The Harris-Todaro model explains theoretically and practically the ravaging issue of rural-urban migration in Nigeria .Rural dwellers or laborers leave the agrarian sector for the cities majorly because of the perceived income and standard of living differentials. A large number of these migrants are insufficiently skilled in relation to being employable in the urban- manufacturing sector. Consequently, they end up working in the urban informal sectors. Again the number of people leaving for the cities’ white collar jobs are usually greater than the available jobs therein , this further creates an urban unemployment and the undue stressing of the urban facilities and infrastructures.
One of the positive checks to this problem include creating more urban employment while simultaneously placing an institutionally restriction on migration.
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DISCUSSION ON LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR) AND HARRIS TODARO’S MODEL OF MIGRATION
STUDENT NAME AND REG NO.
UGWU PERPETUA ODINAKA 2017/244848
everlastinggift9507@gmail.com
ECO 361
LECTURER’S NAME:
DR. OLISAEMEKA ACHIME
MARCH,2021
LEWIS-RANIS FEI MODEL (SURPLUS LABOUR)
INTRODUCTION
The Lewis dual economy model is widely recognised in development economics for providing profound explanatory insights into the early stages of development. Although its general framework is inspiring, its fundamental concepts and micro-mechanisms – especially, the definition of surplus labour, the wage determination mechanisms in both the traditional and modern sectors and the dynamics of labour flows between the two sectors – lack sufficient detail.
The dual-sector model is a model in development economics. It is commonly known as the Lewis model after its inventor W. Arthur Lewis. It explains the growth of a developing economy in terms of a labour transition between two sectors, the capitalist sector and the subsistence sector.
Initially the dual-sector model as given by W. Arthur Lewis was enumerated in his article entitled “Economic Development with Unlimited Supplies of Labor” written in 1954, the model itself was named in Lewis’s honor
ASSUMPTIONS
The model assumes that a developing economy has a surplus of unproductive labor in the agricultural sector.
These workers are attracted to the growing manufacturing sector where higher wages are offered.
It also assumes that the wages in the manufacturing sector are more or less fixed.
Entrepreneurs in the manufacturing sector make profit because they charge a price above the fixed wage rate.
The model assumes that these profits will be reinvested in the business in the form of fixed capital.
An advanced manufacturing sector means an economy has moved from a traditional to an industrialized one.
W. A. Lewis divided the economy of an underdeveloped country into 2 sectors:
The capitalist sector
Lewis defined this sector as “that part of the economy which uses reproducible capital and pays capitalists thereof”. The use of capital is controlled by the capitalists, who hire the services of labour. It includes manufacturing, plantations, mines etc. The capitalist sector may be private or public.
The subsistence sector
This sector was defined by him as “that part of the economy which is not using reproducible capital”. It can also be adjusted as the indigenous traditional sector or the “self employed sector”. The per head output is comparatively lower in this sector and this is because it is not fructified with capital.
The “DUAL SECTOR MODEL” is a theory of development in which surplus labor from traditional agricultural sector is transferred to the modern industrial sector whose growth over time absorbs the surplus labour, promotes industrialization and stimulates sustained development.
In the model, the subsistence agricultural sector is typically characterized by low wages, an abundance of labour, and low productivity through a labour-intensive production process. In contrast, the capitalist manufacturing sector is defined by higher wage rates as compared to the subsistence sector, higher marginal productivity, and a demand for more workers. Also, the capitalist sector is assumed to use a production process that is capital intensive, so investment and capital formation in the manufacturing sector are possible over time as capitalists’ profits are reinvested in the capital stock. Improvement in the marginal productivity of labour in the agricultural sector is assumed to be a low priority as the hypothetical developing nation’s investment is going towards the physical capital stock in the manufacturing sector.
RELATIONSHIP BETWEEN THE TWO SECTORS
The primary relationship between the two sectors is that when the capitalist sector expands, it extracts or draws labour from the subsistence sector. This causes the output per head of labourers who move from the subsistence sector to the capitalist sector to increase. Over time as this transition continues to take place and investment results in increases in the capital stock, the marginal productivity of workers in the manufacturing will be driven up by capital formation and driven down by additional workers entering the manufacturing sector. Eventually, the wage rates of the agricultural and manufacturing sectors will equalize as workers leave the agriculture sector for the manufacturing sector, increasing marginal productivity and wages in agriculture whilst driving down productivity and wages in manufacturing.
The end result of this transition process is that the agricultural wage equals the manufacturing wage, the agricultural marginal product of labour equals the manufacturing marginal product of labour, and no further manufacturing sector enlargement takes place as workers no longer have a monetary incentive to transition.
SURPLUS LABOUR AND THE GROWTH OF THE ECONOMY
Surplus labour can be used instead of capital in the creation of new industrial investment projects, or it can be channeled into nascent industries, which are labour-intensive in their early stages. Such growth does not raise the value of the subsistence wage, because the supply of labor exceeds the demand at that wage, and rising production via improved labour techniques has the effect of lowering the capital coefficient. Although labour is assumed to be in surplus, it is mainly unskilled. This inhibits growth since technical progress necessary for growth requires skilled labor. But should there be a labor surplus and a modest capital, this bottleneck can be broken through the provision of training and education facilities. The utility of unlimited supplies of labour to growth objectives depends upon the amount of capital available at the same time. Should there be surplus labour, agriculture will derive no productive use from it, so a transfer to a non agriculture sector will be of mutual benefit. It provides jobs to the agrarian population and reduces the burden of population from land. Industry now obtains its labour. Labour must be encouraged to move to increase productivity in agriculture.
Since the wages in the capitalist sector depend on the earnings of the subsistence sector, capitalists would like to keep down productivity/wages in the subsistence sector, so that the capitalist sector may expand at a fixed wage. In the capitalist sector labor is employed up to the point where its marginal product equals wage, since a capitalist employer would be reducing his surplus if he paid labor more than he received for what is produced. But this need not be true in subsistence agriculture as wages could be equal to average product or the level of subsistence. The total product labor is divided between the payments to labor in the form of wages, OWPM, and the capitalist surplus,. The growth of the capitalist sector and the rate of labor absorption from the subsistence sector depends on the use made of capitalist surplus. When the surplus is reinvested, the total product of labor will rise. This amount can now be reinvested and the process will be repeated and all the surplus labor would eventually be exhausted. When all the surplus labor in the subsistence sector has been attracted into the capitalist sector, wages in the subsistence sector will begin to rise, shifting the terms of trade in favor of agriculture, and causing wages in the capitalist sector to rise.
CAPITAL ACCUMULATION
The process of economic growth is inextricably linked to the growth of capitalist surplus, that is as long as the capitalist surplus increases, the national income also increases raising the growth of the economy. The increase in capitalist surplus is linked to the use of more and more labor which is assumed to be in surplus in case of this model. This process of capital accumulation does come to an end at some point.
This point is where capital accumulation catches up with population so that there is no longer any surplus labor left. Lewis says that the point where capital accumulation comes to a stop can come before also that is if real wages rise so high so as to reduce capitalists’ profits to the level at which profits are all consumed and there is no net investment.
CRITICISM
Lewis model has attracted attention of underdeveloped countries because it brings out some basic relationships in dualistic development. However it has been criticized on the following grounds:
Economic development takes place via the absorption of labor from the subsistence sector where opportunity costs of labor are very low. However, if there are positive opportunity costs.
Lewis seems to have ignored the role of extractive industries in economic modernization. He explicitly excludes mining sector from his analysis.
Absorption of surplus labor itself may end prematurely because competitors may raise wage rates and lower the share of profit.
The Lewis model underestimates the full impact on the poor economy of a rapidly growing population.
Lewis seems to have ignored the balanced growth between agriculture and industry. Given the linkages between agricultural growth and industrial expansion in poor countries, if a section of the profit made by the capitalists is not devoted to agricultural development, the process of industrialization would be jeopardized.
Possible leakages from the economy seem to have been ignored by Lewis. He assumes boldly that a capitalist’s marginal propensity to save is close to one, but a certain increase in consumption always accompanies an increase in profits, so the total increment of savings will be somewhat less than increments in profit.
The transfer of unskilled workers from agriculture to industry is regarded as almost smooth and costless, but this does not occur in practice because industry requires different types of labor.
EMPIRICAL TESTS AND PRACTICAL APPLICATION OF THE LEWIS MODEL
Empirical evidence does not always provide much support for the Lewis model. Theodore Schultz in an empirical study of a village in India during the influenza epidemic of 1918–19 showed that agricultural output declined, although his study does not prove whether output would have declined had a comparable proportion of the agricultural population left for other occupations in response to economic incentive. Again disguised unemployment may be present in one sector of the economy but not in others. Further, empirically it is important to know not only whether the marginal productivity is equal to zero, but also the amount of surplus labor and the effect of its withdrawal on output.
The Lewis model was applied to the Egyptian economy by Mabro in 1967 and despite the proximity of Lewis’s assumptions to the realities of the Egyptian situation during the period of study, the model failed firstly because Lewis seriously underestimated the rate of population growth and secondly because the choice of capital intensiveness in Egyptian industries did not show much labor using bias and as such, the level of unemployment did not show any tendency to register significant decline.
The validity of the Lewis model was again called into question when it was applied to Taiwan. It was observed that, despite the impressive rate of growth of the economy of Taiwan, unemployment did not fall appreciably and this is explained again in reference to the choice of capital intensity in industries in Taiwan. This raised the important issue whether surplus labor is a necessary condition for growth.
This model has been employed quite successfully in Singapore. Ironically however it has not been employed in Sir Arthur Lewis’ home country of St. Lucia.
Lewis model is not applicable in real life.
HARRIS-TODARO’S MODEL OF MIGRATION
INTRODUCTION
Employment policy in developing countries like India cannot be formulated and implemented without answering a basic question, viz., how can underutilised labour be used in a development strategy? Ragnar Nurkse and W. A. Lewis asserted that large numbers of people remain engaged in work which adds nothing to national output. Nurkse saw the reallocation of a surplus labour to more productive uses, especially labour-intensive construction projects, as a major source of capital formation and economic growth.
Lewis envisaged a similar reallocation process but he pictured the ‘capitalist sector’, essentially industry, as the principal employer of surplus labour. Both theories regarded the labour reallocation process as nearly costless but they worried about how to capture from the agricultural sector the food necessary to feed the transferred workers.
While criticising the Lewis model J. R. Harris and M. P. Todaro have developed a new model of economic development which is relevant for labour surplus countries like India. It is the best known model of internal migration in the context of present-day developing countries. The model has focused on migration of labour from rural to urban areas induced by certain incentives. They have referred to two types of migration—induced migration and internal migration.
According to this model migrating workers are essentially participants in a lottery of relatively high-paid jobs in the towns. When new urban jobs are created the lottery becomes more attractive to potential migrants. Depending on their responsiveness to this improved opportunity, more than one worker are likely to migrate for each job created.
If so, the output foregone may be that of two or more agricultural workers, not just one. If the migrants bring some of their family members to urban areas more output will be lost. The reason is that the wife and children of migrants find fewer employment opportunities in towns than in the rural areas because they do not have land in the towns on which to grow food.
Internal Migration:
Most of the internal labour migration which occurs in the course of economic development is from rural to urban areas. The model sets out to explain why the observed high rates of small- urban migration found in most developing countries is quite natural from an economic view point.
In this model the expected real wage-differential between urban and rural areas is the main motivating force behind migration or the main determinant of the migration decision. The potential migrant first calculates the real income which he would get in the urban area for a job with his present effort. He next makes a personal judgement of the probability of obtaining such a job.
He then compares the expected income with that which he hopes so obtain in the rural area. His migration decision is based on the difference. For example, suppose the expected rural income is Rs 1000 per month, and that real income of an urban job which is commensurate with his qualification is Rs 2000.
However, this information alone is not sufficient to make the migration decision. If the subjective probability of getting the urban job was 0.4, than the expected income would be Rs 800 and no migration would take place on this case expected urban wage = actual urban wage x the probability of getting a job
800 = 0.4 x Rs 2000
If the probability were 0.8 the expected income would be Rs 1600 (= 0.8 x Rs 2000) and the worker would migrate. (To this one may, of course, add the cost of transfer.) Thus the model brings into focus the role of economic incentive in the migration decision.
The Basic Model:
The Harris-Todaro model assumes that migration from rural to urban areas depends primarily on the difference in wages between the rural and urban labour markets.
Since there is unemployment in the town (and it is assumed that there is no unemployment in rural areas), and every migrant cannot expect to find a job there, the model postulates that the expected urban wage with the rural wage. The expected urban wage is the actual urban wage times the probability of getting a job.
Harris and Todaro assume that all members of the urban labour force have equal chances of obtaining the jobs available.
Migration in any given time then depends on three factors:
(a) The urban-rural wage gap,
(b) The urban employment rate and
(c) The responsiveness of potential migrants to the resulting opportunities.
Theoretical Implication of the Model:
There is no denying the fact that any development project can be evaluated using social cost- benefit analysis. An important part of the social cost of any input is opportunity cost, its value in its next best alternative use. Labour hired for an urban formal-sector project might well be drawn from the urban informal sector also.
The worker who moves out of the urban informal sector may, in turn, be replaced by someone from the rural sector. In this case, the output lost is that of the worker who was formerly in the rural sector, i.e., the worker at the end of the employment chain. For this reason, some analysts believe that the wage paid to casual agricultural labourers provides a good measure of the social cost of unskilled labour.
However, this measure, although a good indicator of output foregone through labour reallocation, probably understates the true social cost of employing labour, which has other components that are likely to be significant. One such component is induced migration. No doubt there are both pull and push factors behind internal labour migration that occurs in the course of economic development from rural to urban areas.
Such migration can result either from favourable economic developments in the towns or from adverse developments in the rural areas. The Harris-Todaro model integrates these two sets of forces in their analysis of the process of labour reallocation that is likely to occur during economic development. This is why the model was sort of innovation in the literature of development economics when it appeared for the first time in 1970′.
The Policy Implications of the Model:
The H-T model has far-reaching implications from the policy point of view. For example, if the government of the country concerned were successful in fostering industrial development in an urban area, employment would increase there.
The effect would be to increase the subjective productivity of getting urban employment in the minds of rural inhabitants. Migration would increase and the eventual effect of the new industrial development could be that urban unemployment becomes higher that the level prevailing before the new development took place.
There will be some level of urban employment which ensures equilibrium in the sense that no further migration takes place. Potential migrants may take a long-term view in arriving at a decision. They may consider that their desireness of obtaining an urban job will be higher after a waiting period of some months. Thus they will compare the present value of the sum of expected urban earnings with that of expected rural earnings.
They may be content to accept a low wage in the urban informal sector for some time. This might be a rational decision on a long-term basis. The root of the problem is the large difference between earnings in the modern industrial sector and those in the rural areas.
Often the former are well above the market clearing levels for varies reasory. The long-term solution to the problem lies in adopting policies for both urban and rural areas which reduces the real income differences between the two areas.
NAME: OKOLI MARYANN AMAUCHE
DEPARTMENT: ECONOMICS EDUCATION
REG NO: 2017/243272
EMAIL: maryannokoli14@gmail.com
BLOG: https://maryannokoli.blogspot.com.ng
HARRIS TODARO MODEL
INTRODUCTION
The HarrisTodaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage
HISTORY OF HARRIS TODARO MODEL OF MIGRATION
In the 1960s the government of newly independent Kenya faced a difficult situation: Unemployment in Nairobi and other major cities was high and apparently rising. To cope with this problem, Tripartite Agreements were reached in which private-sector and public-sector employers agreed to increase employment in exchange for unions agreeing to hold wages at their current levels. The larger number of jobs was expected to reduce unemployment. However, in the event, urban unemployment appeared to have increased following the Tripartite Agreements rather than decreased, as far as anyone could tell.
In light of these events, John Harris and Michael Todaro formulated the Harris-Todaro model to explain the puzzle. At the core of the Harris-Todaro model were the following features. First, real wages (adjusted for cost-of-living differences) are higher in urban formal-sector jobs than in rural traditional-sector jobs. Second, to be hired for a formal-sector job, one has to be physically present in the urban areas where the formal-sector jobs are located. Third, and as a consequence of the first two features, more workers search for formal-sector jobs than are hired, employers hire some of the job seekers but not all of them, and those not hired end up unemployed. Fourth, for equality to be maintained between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting is characterized by urban unemployment. And fifth, any temporary difference in the expected wages between one sector and another is eroded as workers migrate from the low-expected-wage labor market to the high-expected-wage labor market.
The Harris-Todaro model produced two powerful policy results. The first concerns the policy of formal-sector job creation to employ the unemployed (who, in the Harris-Todaro model, are all in urban areas, because that is where the formal-sector jobs are assumed to be located). Such a policy, they concluded, would increase the formalsector labor force by more than the number of new jobs created, thereby raising the number of urban unemployed. Thus, the solution to urban unemployment is not to create urban employment.
The second policy option that Harris and Todaro considered was a policy of rural development. If such a program could increase the rural traditional-sector wage, unemployment would then fall. Thus, in the Harris-Todaro model, the solution to urban unemployment is rural development. Soon after the model was published, the government of Kenya followed the Harris-Todaro precepts by putting into place an integrated program of rural development. The result was that unemployment in Kenya fell.
Harris and Todaros fundamental contribution was building a model that fit the stylized facts of the labor market they were analyzing and that was based on sound micro foundations. The fact that the model remains part of the economists intellectual toolkit today is a tribute to its basic insight and enduring analytic power.
The original model has been both simplified for some purposes and expanded for others by later contributors, including Stiglitz, Bell, Khan, Anand and Joshi, Bourguignon, Corden and Findlay, and others (Fields 2005). Harris and Todaro formulated general processes for determining prices of the products produced by the two sectors and also for determining a rural-sector wage that varies inversely with the number of people in the rural sector. A simplified version of the Harris-Todaro model was developed in which product prices and rural-sector wages are taken as constant. Numerous additional analytic and policy results were derived in the simplified Harris-Todaro model. At the same time, some of the assumptions of the Harris-Todaro model were judged to be too restrictive, and so the model was generalized in the years that followed to nest their specific formulation within a broader framework. The initial Harris-Todaro model has been extended to allow for on-the-job search from a rural agriculture setting, the existence of an urban informal sector, preferential hiring of the better-educated, employment fixity, duality of production conditions and earnings levels within the rural sector, capital mobility, endogenous urban wage setting, risk aversion, and a system of demand for goods, among other factors.
As an early multisector labor-market model, the Harris-Todaro model set forth a principal alternative framework for policy analysis. It showed how employment and wage levels in one labor market reflect supply, demand, and institutional conditions not only in that labor market but also in other labor markets.
In terms of pro-poor economic growth, the Harris-Todaro model and other multisector-labor-market models can help policy makers avoid two mistakes. One is to assume that development efforts should be channeled to the sectors where the poor are. The other is to assume that efforts should always be focused on getting the poor out of the sectors in which they now are. Careful cost-benefit analysis based on well-specified labor-market models is required to decide among such alternatives.
differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migraton decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage. From this crucial assumption, as denominated by Harris-Todaro is deduced that the migratory dynamics leads the economic system toward an equilibrium with urban concentration and high urban unemployment.
GENERAL ASSUMPTIONS
Two sectors: urban (manufacture) and rural (agriculture)
Rural-urban migration condition: when urban real wage exceeds real agricultural product
● No migration cost
● Perfect competition
● Cobb-Douglas production function
● Static approach
● Low risk aversion
LIMITATIONS
Some of the assumptions of the Harris-Todaro’s model were judged to be too restrictive.The model also assumesthat potential migrants are risk neutral where the poor migrants will likely be risk averse, as in they are indifferent between a certain expected rural income and an uncertain expected urban income of the same magnitude. The assumption that there exists a perfect competition in rural agriculture sector is not realistic.
The model results in an ex ante equilibrium but not ex post, since those who migrate and are unemployed or employed at a lower wage in the informal sector are not better off.
Assumes subjects are risk-neutral when in reality, most people are risk-averse. However, the model can be easily adjusted to reflect this. In a risk-averse version of the Todaro Model, less migration occurs, causing the agricultural sector to be larger. The level of risk aversion is reflected in the difference between the informal sector wage and the formal sector wage.
CONTRIBUTIONS OF THE MODEL
The fundamental contribution of Harris and Todaro’s rural-urban two sector migration model was to build a model that fit the stylized facts of the labour market. On the lines of the theory, developing countries adopted program on integrated rural development which encouraged an increase in the rural traditional sector wage. The theory proves that the higher the unemployment rate, the lower is the probability of new migrants from the countryside actively seeking formal sector employment who are unable to find it. The significant findings of the theory are:
First, if the expected urban wage equals rural income, there is no incentive to migrate.
Second, if the expected urban wage is greater than rural income, there is a great incentive to move from rural to urban area.
Third, if the expected urban wage is less than rural incomes, there would be an incentive to move in other direction.
Fourth, the expected urban wage depends on what type of job migrant is engaged in.
Therefore, the Harris Todaro’s model helps policy-makers to avoid two mistakes. One is to assume that development efforts should necessarily be channeled to the sectors where the poor are. The other is to assume that efforts should necessarily be focused on getting the poor out of the sectors in which they presently are.
CONCLUSION
For economic development in LDCs, capital accumulation in the urban sector is a crucial element. The accumulated capital forms many production bases and creates job opportunities in the urban sector. In principle, the Todarian models can be used for policy analysis in situations where urban unemployment arising from rapid rural to urban migration is a concern. However, the empirical literature has not been convincing in assessing whether the conditions for the Todaro paradox were met in the real world. Empirically testing the Harris-Todaro model has also been complex so that these tests are no more convincing than the tests For discussions At best empirical tests have provided microeconomic evidence consistent with the migration incentives present in the HarrisTodaro model, measuring for instance how rural dwellers respond to an increase in the raises the wage level in the urban sector. In the HarrisTodaro model, the rising urban wage pushes up the expected wage in the urban sector and consequently encourages workers to migrate from the rural sector to the urban sector. If, in the resulting migration, there are more workers than the number of job opportunities created in the urban sector, some will necessarily be unemployed. Occasionally, the increase in unemployment lowers the per-capita income level before the capital is accumulated. This phenomenon is referred to as Todaro paradox. Previous studies have not, however, determined what effect an increase in capital stock in the urbansector has on urban unemployment.
LEWIS FEI RANIS MODEL
INTRODUCTION
The FeiRanis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials.
COMPARISON WITH OTHER MODEL: Like in the HarrodDomar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
MAIN ARGUMENTS OF THE MODEL
A . Lewiss Model of Rural-Urban Migration:
Prof. W. Arthur Lewis in his article, Unlimited Supplies of Labour has explained the process of migration from rural to urban areas in an underdeveloped economy.
An underdeveloped economy is a dual economy having two sectors:
(i) a modern sector, and
(ii) an indigenous sector.
Out of these two, the latter is the predominant sector. The capitalist sector is defined as that part of the economy which uses reproducible capital, pays capitalists for the use thereof and employs wage labour for profit making purposes.The distinguishing feature of a capitalist sector is that it hires labour and sells output to earn profit. The subsistence sector is that part of the economy which does not use reproducible capital. Labour is abundant and disguised unemployment is the result. The marginal productivity of labour in the agricultural sector may be zero or even negative. In order to solve the problem of disguised unemployment.
Prof. Lewis would like the capitalist (industrial) sector to be expanded by transferring labour from the subsistence (rural) sector to the capitalist sector. He assumes that the supply of labour is perfectly elastic at the subsistence wage.
Since the supply of labour is unlimited, new industries can be established or existing industries can be expanded without limit at the current wage i.e. subsistence wage by withdrawing labour from the subsistence sector. When people migrate from the subsistence sector to the modern sector, the wages should be higher in the capitalist sector than in the subsistence sector by a small but fixed amount.
ASSUMPTIONS
The assumptions of the theory are:
1. Land is fixed in supply.
2. Population growth is taken as an exogenous phenomenon.
3. There is a dual economy consisting of a stagnant agricultural sector and an active industrial sector.
4. Agricultural activity is characterised by constant returns to scale with labour as a variable factor.
5. The output of the agricultural sector is a function of land and labour alone.
6. The output of the industrial sector is a function of capital and labour alone.
7. Workers in both the sectors consume only agricultural products.
8. If population increases above the point where marginal productivity of labour becomes zero, labour can be shifted to the industrial sector without loss in agricultural output.
9. The real wage in the industrial sector remains fixed and is equal to the initial level of real income in the agrarian economy, which they call the institutional wage.
CRITICISMS
This model is not free from criticisms which are discussed below:
1. Supply of Land not Fixed:
2. Institutional Wage not above the MPP:
3. Institutional Wage not constant in the Agricultural Sector:
4. Closed Model:
5. Commercialisation of Agriculture Leads to Inflation:
6. MPP not Zero.
CONCLUSION
It should be of some interest to note that the Lewis model and its many offspring continue to be viewed as relevant in the South and considered a valuable guide to policy in places like China, India, Bangladesh, Central America and even some parts of sub-Saharan Africa, i.e., wherever heavy population pressure on scarce cultivable land remains a feature of the landscape. Most Northern development economists, on the other hand, are today focusing either on aggregate cross-section models to determine the sources of economic growth in the Barro (1991) tradition or, at the micro level, on the econometric modeling of household behavior, with very little interaction between the two approaches. In the South, dualism still holds the attention of both theoretical and empirical observers. According to Lewis, productivity changes will accrue to the importing or advanced country, leading to another version of immiserizing growth. This is one area in which Lewis adherence to Prebisch-Singer probably did not sufficiently take into account the difference between labor intensive industrial and agricultural exportsalthough he properly emphasized the growing potential for inter-LDC trade. All in all, Lewis rightly saw technology, not trade, as the more dependable engine of growth.
Surprisingly, the Lewis model of dualism also has some relevance to contemporary mainstream development models at the micro level. Lewis was basically a macro-economist, deeply immersed in economic history and the history of thought, both neglected subjects today. He always chose a general equilibrium approach, not only with respect to working within a domestic two-sector world but also with respect to the relationship of the typical developing country to the world economy, as indicated by his Wick sell and Jane way lectures (1969 and 1977). His notion of dualism, especially that focused on the labor market dimension, rural and urban, continues to offer a theoretically valid, empirically relevant and practically useful framework for dealing with some fundamental real world issues of development.
NAME: ANI CHUKWUWEBUKA CHINONSO
REG NO:2017/244842
DEPARMENT: LIBRARY AND INFORMATION SCIENCE
A SUMMARY OF SURPLUS LABOR THEORY
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. Lewis model did not pay much attention to the importance of agricultural sector in promoting industrial growth, but Fei-Ranis model of dual economy explains how the increased productivity in agricultural sector would become helpful in promoting industrial sector. In this respect, it presents three stages whereby under developed countries moves from stagnation to self-sustained economic growth. According to this theory, underdeveloped economies consists of agricultural sector and the modern sector which is emerging but has a small industrial sector. The agricultural and modern sectors co-exist in the economy. Development can occur only when there is a shift in the center of attention of progress from the agricultural to the industrial sector, such that there is an enhancement of industrial output. This is achieved by the transfer of labor from the agricultural sector to the industrial sector, this shows that undeveloped countries do not suffer from deficient labor supply. While this is being done, growth in the agricultural sector must not be viewed as unimportant, and its output should be sufficient to support the entire economy.
STAGES OF THE LEWIS-FEI-RANIS SURPLUS LABOUR MODEL
The first stage of the Fei-Ranis model is very similar to Lewis. Disguised unemployment comes to being because the supply of labor is perfectly elastic and marginal productivity of labor equals zero (MPL = 0).
In the second stage of the Fei-Ranis model, agricultural workers add to agricultural output but they produce less than institutional wage they get. In other words, in the second stage the labor surplus exists where average product of labor is greater than marginal product of labor, but it is not equal to subsistence institutional wages.
In the third stage of the Fei-Ranis model, the take-off situation comes to an end and there begins the era of self-sustained growth where the farm workers produce more than the institutional wage they get. In this stage of economic growth the surplus labor comes to an end and the agricultural sector becomes a commercialized sector.
THE NIGERIAN ECONOMY AND SURPLUS LABOUR TO NIGERIA ECONOMY
Fei–Ranis surplus labour has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development and on the persisting controversialstatements regarding the balanced vs. unbalanced growth debate.
Fei and Ranis assume that MPPL is zero during the early phases of economic development .In Nigeria today due to rural urban migration, the agricultural sector is facing an low supply of labor. Hence the marginal product of labour can’t be zero. In fact, in the rural area it is as if the supply of land is not fixed.
Fei and Ranis assume a close model and hence there is no presence of foreign trade in the economy, which is very unrealistic as food or raw materials can not be imported. In Nigeria, the demand for foreign goods is almost inelastic . despite the increase the exchange rate of Dollar to Naira,many Nigerians keep demanding for dollar. Put differently,this assumption does not hold for Nigeria since we are almost import dependent country.
A SUMMARY OF THE LEWIS-RANIS MODEL OF ECONOMIC GROWTH
In 1954 Sir Arthur Lewis published a paper “Economic Development with unlimited supplies of labour”, after its publication many economists have either cited it or made the it the center of their discourse when discussing economic growth.
The focus of the model is “ dual Economics”- small -urban-industrialized sectors of economic activity surrounded by a large –rural-traditional sector.
The central theme of the model as that, labor in dual economies is available to the urban-industrialized sector at a constant wage determined by minimum levels of existence in traditional family farming because of disguised unemployment in agriculture, there is practically unlimited supply of labor and available of industrialization, at least at the early stages of development. At some later point in the history of dual economics, the supply of labor is exhausted then only a rising wage rate will draw more labor out of agriculture. With their acute material poverty, it is difficult at first sight to imagine how the overpopulated countries can increase their savings without great hardships. On the contrary, their surplus population on the land seems to offer a major unused potential for growth, waiting only for the ‘missing component’ of outside capital to assist them in the process. Moreover, their rapid rates of population growth lend themselves to calculations of aggregate capital requirements which must be made available if their per capita incomes are to be maintained or raised.
“Surplus labor” (or disguised unemployment) means the existence of such a huge population in the agricultural sector that the marginal product of labor is zero. So, if a few workers are removed from land, the total product remains unchanged.
The essence of the development process in such an economy is “the transfer of labor resources from the agricultural sector, where they add nothing to production, to the more modern industrial sector, where they create a surplus that may be used for further growth and development.”In Lewis model the transformation process or the process of structural change starts by an autonomous expansion in demand in industry as a result of changes in domestic consumer tastes, in government purchases, or in international markets.
The central point is that labor shifts from agriculture into industry. The supply of labor from agriculture to industry is “unlimited” at the given urban wage, owing to the relative sire of the agricultural labor forces at the margin.
THE MODEL AND NIGERIAN ECONOMY
It is important to note that although the Lewis model of development is both simple and conforms with the historical experience of economic growth experienced in the West, it still has some flaws as it relates to less developed countries,particularly Nigeria..
The model has the assumption that ‘surplus’ labor exists in rural areas while there is full employment in the urban areas. This assumption has not go well at all with the Nigerian Economy. Yhere exist unemployment both in the rural and urban area of the Nigerian economy.
Rural –urban migration majorly accounts for the unemployment existing in the urban area. Despite attempts at policy proposals to deal with the problem ,it has still persisted .
Harris-odaro policy advice seems to be the best policy advice to solving the problem of urban unemployment as caused by rural –urban migration.
Second, the model implicitly assumes that the rate of labor transfer and employment creation is proportional to the rate of capital accumulation. So, if there occurs labor-saving capital accumulation, the employment implications of the model will be modified.
THEHARRIS –TODARO MODEL OF MIGRATION
The wage in cities is higher than the one obtainable in rural areas .Given this wage differential, people rationally migrate into the cities hoping to get an urban job. But the probability of getting an urban job is not completely dependent on that rational move ,rather it depends on the the rate of employment in urban area. Consequentially, under-developed countries are faced with the problem of urban unemployment which is caused majorly by rural-urban migration. The Todaro Paradox occurs when job creation in urban area further leads to unemployment. Generally, this essay attempted to expound the assumptions, characteristics ,history and the core arguments of Harris –Todaro model of Migration, Initiate a comparison between the Harris-Todaro model with other models and expatiate the theoretical and policy implications of the model and more specifically, compare the model with the real world while drawing opinions.
ASSUMPTIONS OF THE HARRIS –TODARO MODEL OF MIGRATION
The following are the underlying assumptions of the Harris -Todaro migration Model ;
(1)Urban wage is institutionally and legally fixed .
(2)Small open economy; the economy considered in Harris -Todaro model is a small open economy.
(3)Two sector economy; One an agricultural rural sector and the other , manufacturing urban sector economy..
(4)The equilibrium is reached when the expected wage in urban areas is equal to the marginal product of an agricultural worker.
(5)The Harris- Todaro model assumes the existence of perfect competition in the labour market.
THE HARRIS-TODARO MODEL OF MIGRATION
The Harris-Todaro Model of migration named after John R.Harris and Michael Todaro, is an economic Model developed in 1970 and used in development economics to explain the issues concerning rural –urban Migration. The Harris-Todaro model is a pioneering general equilibrium model describing the process of rural-urban labour migration [due to wage differentials] and the existence of urban unemployment in developing countries.
Historically, the Harris- Todaro Model is traceable to the 1960s , when the government of newly independent Kenya faced a difficult situation- unemployment in Nairobi and other major cities was high and obviously rising. In other to tackle this problem, a cross sectional agreements were reached between the private-sector and public-sector which the employers agreed to increase employment in exchange for unions agreeing to hold wages at their present levels. The newly created jobs was expected to reduce unemployment. Nevertheless, urban unemployment appeared to have increased rather than decreased.
The most significant feature of this model is that it made it possible for analysts to deal with unemployment, by including the unemployed workers who were waiting for job opportunities in the urban sector.
Given the wage rigidity in the urban area ,flexibility of wage in rural area and the mobility of labor assumptions. It is possible for workers to move freely between sectors.. Since the rural area is agrarian, there is therefore no unemployment in the rural sector. Given this, the workers in the rural sector can always be employed, so that the probability of finding a job in the rural sector equals unity. The same doesn’t hold for the urban rate of employment. The probability of finding job in the Urban sector is less than unity because of the existence of unemployment. All this conditions in place , workers in the rural can easily migrate to the urban area in search of better wage. Some may succeed while others are pushed to the urban informal sectors .This migration causes a huge pressure on the facilities and infrastructures in urban area with attendant unemployment disequilibrium.
THE NIGERIAN ECONOMY AND THE HARRIS-TODARO MODEL
The Harris-Todaro model explains practically the issue of rural-urban migration in Nigeria .Rural dwellers or laborers leave the agrarian sector for the cities majorly because of the perceived income and standard of living differentials. A large number of these migrants are insufficiently skilled in relation to being employable in the urban- manufacturing sector. Consequently, they end up working in the urban informal sectors. Again the number of people leaving for the cities’ white collar jobs are usually greater than the available jobs therein , this further creates an urban unemployment and the undue stressing of the urban facilities and infrastructures.
One of the positive checks to this problem include creating more urban employment while simultaneously placing an institutionally restriction on migration.
.
Izuchukwu Dominic Chinedu
2017/249522
Chinedu.dominic.249522@unn.edu.ng
HARRIS-TODARO MODEL OF MIGRATION
The Harris–Todaro model of migration is a model named after John R. Harris and Michael Todaro. It is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration.
In an attempt to answer the question ‘how can under utilised labour be used strategically in development of the nation?’, Ragnar Nurkse and W. A. Lewis asserted that large numbers of people remain engaged in work which adds nothing to national output. Nurkse saw the reallocation of a surplus labour to more productive uses, especially labour-intensive construction projects, as a major source of capital formation and economic growth.
While criticizing the Lewis model, J. R. Harris and M. P. Todaro have developed a new model of economic development which is relevant for labour surplus countries like India, China and Nigeria. It is the best known model of internal migration in the context of present-day developing countries. The model has focused on migration of labour from rural to urban areas induced by certain incentives.
The Assumptions of Harris-Todaro’s Model
1)There are two sectors: urban (manufacture) and rural(agriculture).
2)Rural-urban migration condition: when urban real wage exceeds real agricultural product.
3)Zero migration cost.
4)Labor market and commodity are perfectly competitive.
5)Production function follows that of Cobb-Douglas.
Harris and Todaro did a great deal of job in explaining some issues of rural-urban migration in underdeveloped nations like Nigeria. This migration happens in a case where expected urban wage is higher than the rural wages. In this case, the economy may have high rates of unemployment in the urban areas(i.e the manufacturing sector). The equilibrium condition of this model is when expected urban wage is equal to rural wage. When government subsidize manufacturing sector Harris-Todaro paradox may happen. According to the authors job creation instead of dealing with unemployment problem actually may cause increase in unemployment rate. This happens when urban-rural wage differential is high enough, so rural workers move to the cities hoping to find a job with high wage. Obviously, not all these workers succeed in finding jobs which leads to unemployment.
In addition, simulations showed that different policies’ outcomes depend on elasticity of labor demand in different sectors and on marginal product of labor.
As Harris and Todaro suggested, the first-best policy would be to subsidize the manufacturing sector and at the same time restrict rural-urban migration.
FEI-RANIS MODEL
Fei-Rains model was designed by two economists John Fei and Gustav Ranis, sometimes referred to as surplus labour theory. The model presents a dual economy where we have the agricultural sector and the industrial sector. The inability of Lewis’s model of migration to explain the important role agricultural sector play in promoting industrial sector is what prompted the design of this model.
While explaining how the increase in the productivity of the agricultural sector would become a helpful tool in promoting the industrial sector, Fei and Ranis introduced three stages through which underdeveloped nations(African nations and Nigeria in particular) moves from stagnation to self-sustained economic growth.
These stages are:
1)The first stage is characterized by perfectly elastic labour supply curve and zero marginal productivity of labour. At this stage, there exist unemployed labour which are transferred to the industrial sector at constant institutional wage.
2)The second stage is where Average product of labour is greater than the marginal product of labour and not equal to the subsistence wage rate. At this stage, there is still need to move labourers into the industrial sector because they produce at rate less than the institutional wage they receive. When this shift of labour continues, at a point, agricultural labour output will equal the institutional wage which means that agricultural productivity has increased.
3)The third stage is characterized by self-sustained growth. There is no need for shift in labour from agriculture to the industry. In other words, surplus labour no longer exist and agricultural sector becomes commercialized.
According to Fei and Ranis, “Economic development would be taking place if agricultural laborers are transferred to industrial sector where their productivity will increase”.
Criticisms of the Model
1) According to the model, marginal product of labour is equal to zero and that the shift of labour from agriculture to industry does not produce the desired end in the first stage but economists Berry and Soligo are of the view that agricultural output in the first stage will not remain consistent but will vary wit the land tenure system in practice.
2)The model did not take into account the role that capital play in the economy.
3)The model only explained what is obtainable in a closed economy thereby ignoring the role of foreign trade.
Name: Ezema ogochukwu loveth
Reg no:2017/248906
Department: Education/Economics
THE HARRIS-TODARO MODEL
The Harris–Todaro model was named after John R. Harris and Michael Todaro. It is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
Assumptions
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
Ya=AaNa
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a 0 and g > 0 are a parametric constants. g is the elasticity of p with respect to the ratio Ym/Ya.The overall population of workers in the economy is N, which is kept constant during the whole period of analysis.
By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified:
The Long Run Equilibrium
Harris and Todaro, in determining the long run equilibrium, i.e., the absence of a net rural-urban migratory flow, argue that the rural workers, in their decision on migrating to the urban area, estimate the expected urban wage
As mentioned before, the key assumption of the model of Harris and Todaro is that there will be a migratory flow from the rural to the urban sector while the expected urban wage is higher than the rural wage. Thus, the long run equilibrium is attained when the urban worker population reaches a level such that the expected urban wage equates the rural wage:This equality is known in the economic literature as the Harris-Todaro condition. Harris and Todaro argue that the differential of expected wagescan be a constant value d ¹ 0. When this differential reaches d, the net migration ceases. This generalized Harris-Todaro condition can be expressed as follows:
Harris and Todaro in order to evaluate the stability of the long run equilibrium, postulate a mechanism of adjustment that is based on the following function of sign preservation.
LEWIS-FEI-RANIS MODEL
ASSUMPTIONS:
Lewis believed that labour in the agriculture sector whose marginal productivity was either zero or was less than the institutional wage was available to the industrial sector at the institutional wage .Fei never pointed out that as soon as the zero value labour was transferred to the industrial sector the supply curve for labour will start turning upwards. For him some other labour too (whose marginal productivity was less than the institutional wage, was also available at a constant wage rate.
Therefore, the model suggests that “Economic development would be taking place if agricultural laborers are transferred to industrial sector where their productivity will increase”.There is a stagnant agriculture sector and dynamic industrial sector. The situation where MPL =0, labor can be transferred to industrial sector without any loss in agricultural output. The real wages in industrial sector remains fixed and it is equal to the initial level of real income in agriculture sector.
Stages of Lewis-Fei-Ranis model
The first stage of FR model is very similar to Lewis. Disguised unemployment comes into being because the supply of labor is perfectly elastic and MPL = 0. Therefore, such disguised unemployed are to be transferred to industrial sector at the constant institutional wage.
In the second stage of FR model agriculture workers add to agricultural output but they produce less than institutional wage they get. In other words, in the second stage the labor surplus exists where APL > MPL, but it is not equal to subsistence (institutional) wages.
In the third stage of FR model the take-off situation comes to an end and there begins the era of self-sustained growth where the farm workers produce more than the institutional wage they get. In this stage of economic growth the surplus labor comes to an end and the agricultural sector becomes commercialized sector.
As labor are transferred to industrial sector a shortage of labor will develop in agri. sector. In other words, it will be difficult for the industrial sector to get the labor at same prevailing constant wages. The amount and time to re-allocate labor will depend upon.
(i) The rate of growth of industrial capital which depends upon the growth of profits in industrial sector and growth of surplus generated within the agri. sector.
(ii) The nature and bias of technical progress in industry.
(iii) The rate of growth of population. It means that the rate of labor transfer must be in excess of the rate of growth of population.
Criticism of Lewis Fei Ranis Model
The model is considered to be an improvement over Lewis. This model presents a balanced growth of both the sectors of the economy, the most notable thing for the growth of UDCs. Despite this fact, this model has the following shortcomings:
(i) Marginal Productivity of Labor in Phase I: The FR model is of the view that MFL = 0 in the first phase of growth, and the transfer of labor from agri. would not reduce output in the agri. sector in phase I. But the economists like Berry and Soligo are of the view that agri. output in phase I of FR model will not remain constant and may fell under different systems of land tenure, i.e., the peasant proprietorship and share cropping etc.
(ii) Marginal Productivity of Labor is Not Zero: Prof. Jorgenson who has also presented a model of ‘dual economy’ has object FR model’s contention of zero MP in phase I. He says whether MPL will be zero is an empirical issue. During the seasons of sowing and harvesting the MPL > 0. Jorgenson concluded on the basis of Japanese data even for the pre I world war period the supply of labor was not unlimited. Then how MPL can be zero.
(iii) Ignoring The Role of Capital: The FR model concentrated upon land and labor as the determinants of output, ignoring the role of capital. But Profs. Brown, Byres, Frankel, Griffen, Ghatak and Ingersent are of the view that in the UDCs there has occurred what is known as ‘Green Revolution’ in agri. which has promoted the greater use of capital and technology on lands. Consequently, there has been a greater increase in the agri. productivity and agri. incomes.
(iv) Open Economy: FR model ignored the role of foreign trade as it assumed a closed economy model. In the 2nd phase when agri. product decreases the TOT goes against industrial sector. This would occur in the presence of closed economy. But if the model is made open such would not happen as the goods could be imported in the presence of then-scarcity. This was especially observed in case of Japan which imported cheap farm products to improve her TOT (terms of trade).
(v) Supply of Land in Long Run: FR model assumed that in the process of economic development the supply of land remained fixed. But it is not true. The supply of land can be increased in case of long run.
(vi) Commercialization Of Agriculture And Inflation: According to FR model when 3rd phase starts the agri. sector becomes commercialized. But it is criticized by saying that this phase does not start so easily The shifting of labor to industrial sector will create labor shortage in agri. sector. This will create shortage of food stuff leading to increase their prices. In this way, the inflation will generate which may obstruct the process of development.
(vii) Low Productivity in Agricultural Sector: According to Jorgenson it has been observed that there has been a very slow rise in the productivity of agri. sector. Consequently, the surplus will hardly be created in agri. sector. Accordingly, agri. sector will not contribute to development Thus the growth requires that the surplus must be generated and it should persist.
NAME: UFOMADU OSCAR ONYEKACHI
REG NO: 2017/249579
DEPARTMENT: ECONOMICS
COURSE: ECO 361(DEVELOPMENT ECONOMICS)
THE HARRIS-TODARO MODEL
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
OVERVIEW
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.[1]
FORMALISM
The formal statementof the equilibrium condition of the Harris–Todaro model is as follows:
Let wr be the wage rate (marginal productivity of labor) in the rural agricultural sector.
Let le be the total number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
Let lus be the total number of job seekers, employed and unemployed, in the urban sector.
Let wu be the wage rate in the urban sector, which could possibly be set by government with a minimum wage law.
With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.
A. ASSUMPTIONS
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a 0 and g > 0 are a parametric constants. g is the elasticity of p with respect to the ratio Ym/Ya.
The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified:
B. TEMPORARY EQUILIBRIUM
Given a parametric constant vector (Aa,Am,f,a,r,g), an initial urban population Nu, and a minimum wage wm one can calculate the temporary equilibrium of the economic system by using eqs. (1 – 6).
From eq. (4) one can find the employment level at the manufacturing sector
Replacing eq. (7) in eq. (2) we get the production level of the manufacturing sector
From eq. (6) one can obtain the relation
which is used with eq. (1) to obtain the agricultural production
By using eqs. (5), (8) and (10) the terms of trade are determined
Finally, by using eqs. (3), (9) and (11), the rural wage in units of manufacturated good is obtained
In sum, the vector (Nm,Ym,Na,Ya,p,wa) configures a temporary equilibrium that might be altered whether occurs a migration of workers, induced by the differential of sectorial wages, which changes the sectorial distribution of overall population.
C. THE LONG RUN EQUILIBRIUM
Harris and Todaro, in determining the long run equilibrium, i.e., the absence of a net rural-urban migratory flow, argue that the rural workers, in their decision on migrating to the urban area, estimate the expected urban wage, , defined as:
The ratio Nm/Nu, which is the employment rate, is an estimative of the probability that a worker living at urban sector gets a job in this sector.
As mentioned before, the key assumption of the model of Harris and Todaro is that there will be a migratory flow from the rural to the urban sector while the expected urban wage is higher than the rural wage. Thus, the long run equilibrium is attained when the urban worker population reaches a level such that the expected urban wage equates the rural wage:
This equality is known in the economic literature as the Harris-Todaro condition. Harris and Todaro argue that the differential of expected wages in eq. (14) can be a constant value d ¹ 0. When this differential reaches d, the net migration ceases. This generalized Harris-Todaro condition can be expressed as follows:
The level of the urban population that satisfies the eq. (15), i.e., the equilibrium urban share = /N, is determined from the solution of the equation resulting from substitution of equations (12), (13) in eq. (15):
The solution of eq. (16) is parametrized by the vector (Aa,Am,r,g,a,f,wm).
Harris and Todaro, in order to evaluate the stabilty of the long run equilibrium, postulate a mechanism of adjustment that is based on the following function of sign preservation:
The differential equation that governs the state transition in the model of Harris and Todaro is obtained by replacing equations (12), (13) in eq. (17). Based on this postulated adjustment process, Harris and Todaro [1] show that the long run equilibrium is globally asymptotically stable. This means that the economy would tend to long run equilibrium with unemployment in the urban sector generated by the presence of a relatively high minimum wage for all possible initial conditions. From now on we will refer to the long run equilibrium simply as equilibrium.
Based on the numerical solutions of eq. (16) one can evaluate the impact that the variation of the minimum wage and the elasticity of the terms of trade on the equilibrium. In Fig. 1 we see that under the hypothesis of a Cobb-Douglas technology, the equilibrium urban share, , does not depend on the minimum wage wm. However, changes in the value of wm reduces the labor demand on the manufacturing sector what results in higher unemployment rates in the equilibrium.
INTRODUCTION TO THE LEWIS MODEL:
Lewis published his model entitled:
“Economic Development with Unlimited Supplies of Labour” in 1954. In his model Lewis divides the economy in an underdeveloped country in two sectors namely the Subsistence sector and the capitalist sector. Subsistence is identified with the agricultural sector of the economy while the capitalist sector implies mainly the manufacturing sector of the economy.
Capitalist sector also includes plantations and mining where hired labour is employed for purposes of production. The capitalist sector can either be private or public in nature. Subsistence sector, that the agricultural sector is considered to be labour intensive. It does not use reproducible capital. It uses poor techniques of production and has very low productivity.
ASSUMPTIONS OF THE LEWIS MODEL:
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
Lewis calls it as institutional wage because every worker gets this wage because of some institutional arrangements. This wages is equal to an average share of each worker in the total output in the subsistence sector. If market forces were allowed to operate in the subsistence sector labourers with zero margin productivity or those with a very low marginal productivity would not have received this wage.
(B) IMPORTANCE OF SAVING:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion.
Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector.
Lewis in fact so much fascinated by the higher propensity to save of the capitalist sector that he even advocates a transfer of income from the subsistence sector to the capitalist sector. He feels that steps have to be taken to raise the rate of savings from 10% to 15% if the development of the economy has to be smooth.
THE WORKING OF THE LEWIS MODEL:
The explanation of working of the Lewis model is quite simple. He feels that if a wage higher than the institutional wage prevailing in the subsistence sector by a certain proportion of the institutional wage is fixed in the capitalist sector the capitalist sector will be able to attract an unlimited quantity, the labour from subsistence sector. This will enable the capitalist sector to expand. It will, in turn lead to the generation of more savings in the capitalists sector.
The additional saving, will not only help the entrepreneurs to invest more but also to improve the quality of capital invested. This will result in more employment of labour from the subsistence sector. This will lead to generation of more savings in the Capitalist sector which can be further invested leading to employment of more surplus labour and so on.
Explains the Process of Expansion of the Capitalists Sector.
We is the wage rate fixed in the capitalist sector. It is higher than W which represents the institutional wage. The wage in the capitalist sector has to be higher than the instructional wage because only such higher wage can attract labour from the subsistence sector. At first; ON-I labour is employed. This will lead to the generation of surplus equal to AMIS, after the wages at the rate W have been paid.
According to Lewis this surplus AMIS will be reinvested either in old type of capital or may even be used to improve the existing techniques. All this will result in marginal productivity curve of labour moving M2 M2. Now more labour at wage. We can employee, ON2 amount of labour will now be employed. More surplus will then be generated. It would be reinvested.
Marginal productivity of labour curve will shift to M3 M3 more labour can now be employed. Still more surpluse will be generated and re-invested and so on. The process of transfer of labour from the subsistence sector to the capitalist sector will continue for some time till some obstacles, hindering this transfer appear.
ROLE OF BANK CREDIT:
From the above analysis, one might get the impression that it is only through the surplus generated in the capitalist sector that the development of the capitalist sector takes place. This however is not correct.
The process of development can also start if the capitalist sector initially does not invest its savings in the capital but borrows from the banks. According to Lewis the basic problems is to employ the labour from the subsistence sector and this can be initially done through investment of funds borrowed from the banks.
Lewis is conscious of the fact that creation of bank credit will give rise to inflationary increase in prices. However, he is not much perturbed by this prospect. He is of the view that inflationary pressures will not continue forever.
A time will come when the additional savings generated by the investment of borrowed funds become equal to these very funds. At that time, prices will stop rising further. As he says, an equilibrium.is reached when savings generated through the investment of additional bank credit become equal to the amount of bank credit itself.
He is also aware of another fact. Inflation can make the distribution of income unfair. However, he says, it will be good for the manufacturing sector if the distribution of income moves in favour of the capitalists. Of course, if inflation tilts the distribution of income in favour of the traders it will be bad for the economy. It will only lead to more speculative activities.
Slowing of the Pace of expansion of the Capitalist Sector.
According to Lewis, expansion of the capitalist sector will continue unhindered so long as the supply curve for labour from the subsistence sector is perfectly elastic i.e. so long as the labour can be transferred to the capitalist sector at a constant wage. Lewis, of course is conscious of the fact that under certain circumstances, the supply curve for labour can turn upwards.
These circumstances are:
(i) The pace of expansion of the capitalist sector is more rapid when compared with the rate of growth of population in the subsistence sector. The surplus labour in that case will ultimately be fully exhausted.
(ii) Technological development in the subsistence sector raise the productivity of labour with in that case will rise. We too will have to be raised them.
(iii) As population increase due to law of decreasing marginal return, prices of food and raw materials will rise. This will increase both W and W.
(iv) When workers in the capitalist sector start imitating the living pattern of the capitalist themselves, they may ask for higher wages.
If any of the above four factors start operating, then according to Lewis, the expansion of the capitalist sector will be slow down.
IMPACT OF THE OPEN ECONOMY:
The open economy can encourage the immigration of labour. If this happens, it will help in the expansion of the capitalist sector. But immigration may not be so easy. If in that case the pace of expansion of the capitalist sector slows down, capital may move out of the country as the economy is an open one. This may in turn lead to balance of payments problems and the problem of stability of rate of exchange.
Critical Review of the Lewis’s Model:
Some of the objections against Lewis’s model are as follows:
(1) The assumption that disguised unemployment exists in the agriculture sector has not been accepted by many economists. Schultz, Viner, Heberler and Hopper are a few of such economists. According to them, the production in the subsistence sector will be affected when labour is withdrawn from it.
(2) Lewis ignored the cost involved in training the unskilled worker transferred from the subsistence sector. Even if it is obtained at a constant wage rate, so for as its transfer from the subsistence sector is concerned, the supply curve may slope upwards so far as the capitalist, sector is concerned if the cost of training rises as more and more labour is transferred.
(3) When labour is transferred from the subsistence sector share of agricultural output falling to each one left in the agricultural sector will go a rising. This means the institutional wage will go on rising with every transfer and so will be the wages paid in the capitalist sector.
(4) The model assumes that, besides labour, there is unlimited supply of entrepreneurs in the capitalist sector. This is not true in the case of many of the underdeveloped countries.
(5) It is wrong to assume that a capitalist will always re-invest their profits. They to can indulge in un-productive pursuits. They can use their profits for speculative purposes.
(6) It is also wrong to assume that landlords always squander away their savings. The role of landlords of Japan in industrialisation of the country is well known.
(7) The model assumes that there already exists a market for the industrial products in the country. This is wrong. People of an underdeveloped country may not be able to purchase the products perturbed by the expanding capitalist sector. Foreign markets, too, may not be available to the capitalist sector in the beginning.
(8) Inflation is not liquidating, as has been assumed by Lewis, Experience of various, countries shows that if once prices start rising, it, becomes difficult to control them.
(9) It is not easy to transfer labour from the subsistence Sector to the capitalist sector by offering them an incentive of a little higher wage.
Mobility of labour is very low. Many factors like family affection, difference in language, caste, religion etc. affect it adversely.
(10) Every underdeveloped country does not have surplus labour in the subsistence sector. As such, the model does not apply to countries which are sparsely populated.
The only positive point in the model is its ‘general’ emphasis on the role of saving in economic development and on the potential that overpopulated countries have in developing themselves with the help of surplus labour.
A. LEWIS-FEI-RANIS ECONOMIC GROWTH THEORY
Lewis-Fei-Ranis Model is concern with double economic system (agricultural/traditional sector and industrial/modern sector), it emphasis on how excess unproductive labour from the traditional (agricultural) sector is being absolved by the modern (industrial) sector. The theory is called Lewis-Fei-Ranis model because it was originally initiated by W. Arthur Lewis and was brought into modern view by John C. H. Fei and Gustav Ranis. Fei and Ranis work is the extension of Lewis theory.
From the model, the agricultural sectors dominate the developing/underdeveloped countries while the industrial sectors are major feature in the developed country. When excess or surplus labour from agricultural sector is transferred to industrial sector which has less labour it facilitates the development of a country. If the labour four becomes higher in the industrial sectors than the agricultural sectors, then one can say the country has advanced.
Relating the model to the real world (using Nigeria as a case study) and viewing it applicability:
Nigeria economy is majorly characterized by agricultural sectors though the industrial sectors also exist but they are very few. From the above model, the main determinant of a developed nation is the ability of a country to shift its surplus unproductive labour in the agricultural sectors to the industrial sectors. But is this applicable in Nigeria, NO, this is because the government of Nigeria has shown little or zero interest in development of industrial sectors which can only bring about the validity of the model in the country. Even our so called oil sector has the highest impact in the country’s GDP is being neocolonized by the industrialized countries, corruption and nepotism is the order of the day for politicians, everyone collecting his or her own national cake. In summary, the government of Nigeria has not created the enabling environment that will ensure excess labour in the traditional sectors are move to industrialized sectors.
B. HARRIS-TODARO MODEL OF MIGRATION
The theory was named after the two economists John R. Harris and Michael Todaro. It was propounded in 1970. The major position of the theory is that migration decision is based on expected (not actual) differential between the urban sector and the rural sector. From the model, the reason for migration is based on the employment opportunities in the rural and urban sector and the interests of individual to go for the one with greater expected wage.
some major assumption of the model includes:
1. There exist long run equilibrium when the expected urban wage equates the rural wage.
2. Fixed amount of labour and capital.
3. Unemployment (labour unemployment) exist in the urban sector.
4. There exists equal chance of employment for all labour in the urban sector.
5. Reason for rural-urban migration is because the expected higher wage in urban sectors.
Relating this model to Nigeria economy in order to checked its validity in developing countries:
From the model we can deduce that the determinant of rural-urban migration is the expected higher wage in the urban areas. In Nigeria it is well observed that individuals move to the urban sectors because they believe that greater opportunities and employment with high wage exist in the urban areas. Also it is inherent in nature that individuals will always migrate to urban sectors in search of greener pasture.
NAME: OBUTE CHISOM HELLEN
DEPT: ECONOMICS
REG NO: 2017/249539
EMAIL ADDRESS: hellytec4@gmail.com
BLOGGERS ADDRESS; obutechisomhellen.blogspot.com
SUMMARY OF LEWIS – FEI – RANIS MODEL OF ECONOMIC GROWTH
BRIEF HISTORY OF LEWIS -FEI- RANIS MODEL OF ECONOMIC GROWTH
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics. This model of economic growth was developed by John C. H. Fei and Gustav Ranis.The Fei- Ranis model of economic growth is understood as an extension of the Lewis model . It is also known as the Surplus Labor model.
INTRODUCTION
We employ the Lewis-Ranis-Fei theory of dualistic economic development as a framework to investigate China’s rapid growth over 1965-2002. We find that China’s economic growth is mainly attributable to the development of the non-agricultural(industrial ands service)sector, driven by rapid labour migration and capital accumulation. Our estimates of the sectoral marginal productivity of labour indicate that China’s 1978 Economic Reform coincided with moving from phase one to phase two growth,
defined in the Lewis-Ranis-Fei model. This implies that phase three growth could be achieved by the commercialization of the Chinese agricultural labour market.
ASSUMPTIONS OF LEWIS MODEL
Surplus Labour in the Subsistence Sectors: The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion. Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector.
BASIC ASSUMPTIONS OF FEI – RANIS MODEL
This theory is concerned with a poor economy which has following properties
(i) There is an abundance of labor in such UDC and shortage of natural resources.
(ii) The population growth rate is very high which results in mass unemployment in the economy.
(iii) The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labor is zero and negative in agriculture sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy.
Thus the model suggests that “Economic development would be taking place if agricultural laborers are transferred to industrial sector where their productivity will increase”. This theory is concerned with a poor economy which has following properties:
RELATING THIS MODEL WITH NIGERIA ECONOMY
Originally an agriculture dependent country, Nigeria shifted focus to oil exports in the 1970s and decades of slow economic growth later; there is a need to refocus on agriculture. With the pressure to attain the MGDs,it is important to investigate the contribution of the sector to Nigeria’s economic growth. Agriculture contributes 40% of the Gross Domestic Product(GDP)and employs about 70% of the working population in Nigeria(CIA,2012). Agriculture is also the largest economic activity in the rural area where almost 50% of the population lives. Nigeria suffers from the resource curse4(Aluko,2004;Otaha,2012). Given the enormous resource endowment both in human capital and natural resources, the performance of the economy has been far below expectation. The most populous nation in Africa, with a population of over 150million and a labourforce of 53.83million(2012estimates;CIA,2012).
HARRIS -TODARO MODEL OF MIGRATION
BRIEF HISTORY OF HARRIS – TODARO MODEL OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. In this paper we turn upon the seminal Harris and Todaro work, which together with Todaro is considered one of the starting points of the classic rural-urban migration theory. The hypothesis and predictions of Harris-Todaro model have been subjected to econometric evaluation and have been corroborated by several studies
INTRODUCTION
John R. Harris and Michael P. Todaro presented the seminal ‘Two sector model’ in American Economic Association, 1970. Thismodel is a pioneering study in the field encompassing rural-urban migration. The classical theory is USSR in development economics and is an economic illustration of migrants’ decision on expected income differentials between rural (agriculture) and urban (manufacturing) areas. The model of rural-urban migration is typically studied in the context of employment and unemployment situation in developing countries. The purpose of the model is to explain the critical urban unemployment problem in developing countries
ASSUMPTION OF HARRIS- TODARO MODEL OF MIGRATION
There are two regions: rural (agricultural) and urban (industrial) in two sector economic model. The crucial assumption of the Harris and Todaro’s model is that workers base their migration decision on their expected incomes at urban (industrial) areas. As the basic model is static, the expected income is just the weighted average of the urban wage and the unemployment benefit, the weights being the probabilities to find and not to find an urban job.
The model assumes that the rate of rural-urban (m= M/LR) is a function of:
i)The probability that an urban labour can successfully find a modern sector job, which can be expressed as a positive function of the current urban employment rate EU/LU,or LU-EU/LU, a negative function of urban unemployment rate.
ii) The urban-rural real income differentialis expressed asYU/YR= W (W greater than 1),
Besides, migration will also be related to,
iii) Other factors (Z), such as distance, personal conduct, urban amenities.
Where
m= Rate of migration from rural to urban areas
M= Actual volume of rural-urban migration
LR= Rural labour force
EU= Level of urban employment
LU= Urban labour force
YU= Urban real income
YR=Rural real income
W= Ratio between rural/urban real income
Therefore, the basic rural-migration migration model is expressed as:
(rural-urban migration) m = function of (current urban employment rate, urban-rural real income differential, and personal factors.
RELATIONSHIP OF THIS MODEL WITH NIGERIA ECONOMY
Throughout many less developed economies of the world,especially these of tropical Africa , a curious economic phenomenon is presently taking place. Despite the existence of positive marginal products in agriculture and significant levels of urban employment , rural-urban labour migration not only continue to exist, but indeed appears to he accelerating conventional economic, models with their singular dependence on the achievement of a full employment equilibrium through appropriate wage and price adjustments are hard put to provide rational behavioural explanation for these sizeable and growing levels of urban unemployment in the absence of absolute labour redundancy in an economy as a whole.
NAME: OBUTE CHISOM HELLEN
DEPT: ECONOMICS
REG NO: 2017/249539
EMAIL ADDRESS: hellytec4@gmail.com
BLOGGERS ADDRESS; obutechisomhellen.blogspot.com
SUMMARY OF LEWIS – FEI – RANIS MODEL OF ECONOMIC GROWTH
BRIEF HISTORY OF LEWIS -FEI- RANIS MODEL OF ECONOMIC GROWTH
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics. This model of economic growth was developed by John C. H. Fei and Gustav Ranis.The Fei- Ranis model of economic growth is understood as an extension of the Lewis model . It is also known as the Surplus Labor model.
INTRODUCTION
We employ the Lewis-Ranis-Fei theory of dualistic economic development as a framework to investigate China’s rapid growth over 1965-2002. We find that China’s economic growth is mainly attributable to the development of the non-agricultural(industrial ands service)sector, driven by rapid labour migration and capital accumulation. Our estimates of the sectoral marginal productivity of labour indicate that China’s 1978 Economic Reform coincided with moving from phase one to phase two growth,
defined in the Lewis-Ranis-Fei model. This implies that phase three growth could be achieved by the commercialization of the Chinese agricultural labour market.
ASSUMPTIONS OF LEWIS MODEL
Surplus Labour in the Subsistence Sectors: The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion. Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector.
BASIC ASSUMPTIONS OF FEI – RANIS MODEL
This theory is concerned with a poor economy which has following properties
(i) There is an abundance of labor in such UDC and shortage of natural resources.
(ii) The population growth rate is very high which results in mass unemployment in the economy.
(iii) The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labor is zero and negative in agriculture sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy.
Thus the model suggests that “Economic development would be taking place if agricultural laborers are transferred to industrial sector where their productivity will increase”. This theory is concerned with a poor economy which has following properties:
RELATING THIS MODEL WITH NIGERIA ECONOMY
Originally an agriculture dependent country, Nigeria shifted focus to oil exports in the 1970s and decades of slow economic growth later; there is a need to refocus on agriculture. With the pressure to attain the MGDs,it is important to investigate the contribution of the sector to Nigeria’s economic growth. Agriculture contributes 40% of the Gross Domestic Product(GDP)and employs about 70% of the working population in Nigeria(CIA,2012). Agriculture is also the largest economic activity in the rural area where almost 50% of the population lives. Nigeria suffers from the resource curse4(Aluko,2004;Otaha,2012). Given the enormous resource endowment both in human capital and natural resources, the performance of the economy has been far below expectation. The most populous nation in Africa, with a population of over 150million and a labourforce of 53.83million(2012estimates;CIA,2012).
HARRIS -TODARO MODEL OF MIGRATION
BRIEF HISTORY OF HARRIS – TODARO MODEL OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. In this paper we turn upon the seminal Harris and Todaro work, which together with Todaro is considered one of the starting points of the classic rural-urban migration theory. The hypothesis and predictions of Harris-Todaro model have been subjected to econometric evaluation and have been corroborated by several studies
INTRODUCTION
John R. Harris and Michael P. Todaro presented the seminal ‘Two sector model’ in American Economic Association, 1970. Thismodel is a pioneering study in the field encompassing rural-urban migration. The classical theory is USSR in development economics and is an economic illustration of migrants’ decision on expected income differentials between rural (agriculture) and urban (manufacturing) areas. The model of rural-urban migration is typically studied in the context of employment and unemployment situation in developing countries. The purpose of the model is to explain the critical urban unemployment problem in developing countries
ASSUMPTION OF HARRIS- TODARO MODEL OF MIGRATION
There are two regions: rural (agricultural) and urban (industrial) in two sector economic model. The crucial assumption of the Harris and Todaro’s model is that workers base their migration decision on their expected incomes at urban (industrial) areas. As the basic model is static, the expected income is just the weighted average of the urban wage and the unemployment benefit, the weights being the probabilities to find and not to find an urban job.
The model assumes that the rate of rural-urban (m= M/LR) is a function of:
i)The probability that an urban labour can successfully find a modern sector job, which can be expressed as a positive function of the current urban employment rate EU/LU,or LU-EU/LU, a negative function of urban unemployment rate.
ii) The urban-rural real income differentialis expressed asYU/YR= W (W greater than 1),
Besides, migration will also be related to,
iii) Other factors (Z), such as distance, personal conduct, urban amenities.
Where
m= Rate of migration from rural to urban areas
M= Actual volume of rural-urban migration
LR= Rural labour force
EU= Level of urban employment
LU= Urban labour force
YU= Urban real income
YR=Rural real income
W= Ratio between rural/urban real income
Therefore, the basic rural-migration migration model is expressed as:
(rural-urban migration) m = function of (current urban employment rate, urban-rural real income differential, and personal factors.
RELATIONSHIP OF THIS MODEL WITH NIGERIA ECONOMY
Throughout many less developed economies of the world,especially these of tropical Africa , a curious economic phenomenon is presently taking place. Despite the existence of positive marginal products in agriculture and significant levels of urban employment , rural-urban labour migration not only continue to exist, but indeed appears to he accelerating conventional economic, models with their singular dependence on the achievement of a full employment equilibrium through appropriate wage and price adjustments are hard put to provide rational behavioural explanation for these sizeable and growing levels of urban unemployment in the absence of absolute labour redundancy in an economy as a whole.
HARIS TODARO MODEL OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The Haris-Todaro model is a pioneering general equilibrium model describing the labor migration mechanism from rural to urban areas due to a wage gap and the existence of urban unemployment and underemployment in developing countries. The Harris-Todaro model takes a standard two sector model and imposes a higher wage in the urban sector which is higher than equilibrium clearing, while wage in agriculture is flexible. Equilibrium clearing is simply when wage across both sectors equalize, minus movement costs or natural advantages (such as better living environment) in one or the other sector. equilibrium condition of the Harris-Todaro model can be described as th upe wage in agriculture must be equal to the expected wage in the urban sector.
The model was an academic investigation to throw light on the events following ‘Tripartite Agreement’ in Kenya. The newly independent Kenya in the 1960s was increasingly facing aserious situation of unemployment in the major urban cities. To cope with the situation of unemployment,TripartiteAgreement was signed between the government public sector and theprivate sector. The larger number of employment was expected to reduce unemployment, but it appeared that the urban unemployment had increased following the government’s agreement. The distinctive concept in the model is that the rate of migration flow from rural (agricultural) areas to urban (industrial) areas is determined by the difference between expected urban wages and rural wages. The rural-urban two-sector model centrally holds the following features:
Real wages (adjusted for cost-of-living differences) were higher in urban formal sectorjobs than in rural traditional sectorjobs
To be hired for a formal sectorjob, it was necessary to be physically present in the urban areas where the formal sectorjobs were located.
Also, more workers searched for formal sectorjobs than were actually hired. Employers hired some of the searchers but not all of them.
To maintain equality between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting would be characterized by urban unemployment.
Any temporary difference in the expected wages between one sector and another would be eroded as workers migrate from the low expected wage labour market to the high expected wage one.
The major contribution of Harris and Todaro’s rural-urban two sector migration model was to build a model that fit the stylized facts of the labour market. In the first lines of the theory, developing countries adopted program on integrated rural development which encouraged an increase in the rural traditional sector wage. The theory proves that the higher the unemployment rate, the lower the probability of new migrants from the countryside actively seeking formal sector employment and are unable to find. The findings of the theory are: first,if the expected urban wage equals rural income, there is no incentive to migrate. Second, if the expected urban wage is greater than rural income, there is a great incentive to move from rural to urban area. Third, if the expected urban wage is less than rural incomes, there would be an incentive to move in other direction. Fourth, the expected urban wage depends on what type of job migrant is engaged in. Therefore,the Haris Todaro’s model helps policy-makers to avoid two mistakes. One is to assume that development efforts should necessarily be channeled to the sectors where the poor are. The other is to assume that efforts should necessarily be focused on getting the poor out of the sectors in which they are presently.
The Harris-Todaro in essence is an extension of the Lewis model. It simply develops migration decision along with the introduction of a second urban sector. It does not change from the Lewis model in that the fundamental driving force of growth is still technological growth.
ASSUMPTION
The main assumption of the model of Harris and Todaro is that there is a migratory flow from the rural to the urban sector while the expected urban wage is higher than the rural wage. Haris Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector with differences in the type of goods produced, the technology of production and the process of wage determination. The productive process of this sectors can be described by a Cobb-Douglas production function: Ya = AaNa^φ
Where, Ya is the production level of the agricultural good, Na is the amount of workers used in the
So In Haris Todaro model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate. For example, if average rural wages are 60 units and urban wages are institutionally set at a level of 120 units, then in a one-period model a 50% urban unemployment rate would be necessary to vitiate the private profitability of further migration. Since expected incomes are defined in terms of both wages and employment probabilities, argument is that it is not only possible but likely to have continued migration in spite of the existence of sizable rates of urban unemployment. In the above numerical example, migration would continue even if the urban unemployment rate were 30 or 40% .
LIMITATIONS
Some of the assumptions of the Harris-Todaro’s model were judged to be too restrictive.The model also assumes that potential migrants are risk neutral where the poor migrants will likely be risk averse, as in they are indifferent between a certain expected rural income and an uncertain expected urban income of the same magnitude. The assumption that there exists a perfect competition in rural agriculture sector is not realistic.
CONCLUSION
Migration from rural to urban areas will increase if Urban wages increase in the urban sector ie, increasing the expected urban income. Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector, decreasing the expected rural income. Even though migration creates unemployment and induces informal sector growth, as long as the migrating economic agents have accurate information concerning rural and urban wage rates and ways of obtaining employment, they will make an expected income-maximizing decision. In Nigeria, most people leave their hometowns or villages to cities due to the belief that things are better in the city. That there are more jobs and social amenities present. This makes them migrate from their location to another place which is believed to be better than their previous locations. And the jobs in this developed areas is mostly in manufacturing industries. As people move in looking for these white collar jobs and manufacturing works the agricultural sector is being neglected because agricultural produce is more rampant in these rural areas. So in order to stabilize the economy and reduce the rate of migration, more attention should be given to these rural areas. They should be provided with enough social amenities and technological tools for carrying out their agricultural productions. If this happens their would be more job opportunity for the citizens in both the rural and urban areas.
LEWIS-FEI-RANIS MODEL OF SURPLUS LABOUR
Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. This growth model further explains that the traditional sector comprises of the agricultural sector which is existent, and the modern sector comprises of the fast-growing but small industrial or manufacturing sector. It is also said that the two sectors (traditional and modern) both exist in the dual economy which lays the basis for the problem of development. How these two sectors would interact in order to yield economic development is the major issue here. This therefore forms the foundation for development too be that economic development can only occur or happen or evolve if and only if the resources in the traditional agricultural sector can be shifted to the modern industrial sector such that the industrial sector is advanced or increased or even taken to another level (higher) in the economy. This then can only be achieved when the labour factor resource is transferred from the traditional agricultural sector to the modern industrial sector. However, this does not imply that the traditional agricultural sector should be neglected because it is this sector that supplies the raw materials needed by the modern industrial sector as well as food.
ASSUMPTIONS OF THE FEI – RANIS GROWTH MODEL
Like in the Harrod – Domar Growth Model, we have that savings and investment are the key instrumentsthat are used to drive economic development when it comes to the less-developed countries. Lewis argued that, economic growth in a less-developed or under-developed economy could only be achieved by capital accumulation in the modern industrial sector, which is done by taking or shifting excess or surplus labour from the traditional agricultural sector to the modern industrial sector. So, Lewis advocated that an economy like that transits or moves from the first stage (excess labour) to the second stage (scarce labour) of economic development. Later on, Fei and Ranis formalized the three stages of dualistic economic development by dividing the first two stages of Lewis Model into the first two stages of the Fei – Ranis Growth Model and the second stage of Lewis Model forming the third stage of the Fei – Ranis Growth Model.
CRITICISM OF THE MODEL
1. The assumption that disguised unemployment exists in the agriculture sector has not been accepted by many economists. Schultz, Viner, Heberler and Hopper are few of such economists. According to them, the production in the subsistence sector will be affected when labour is withdrawn from it.
2. Lewis ignored the cost involved in training the unskilled worker transferred from the subsistence sector. Even if it is obtained at a constant wage rate, so for as its transfer from the subsistence sector is concerned, the supply curve may slope upwards so far as the capitalist, sector is concerned if the cost of training rises as more and more labour is transferred.
3. When labour is transferred from the subsistence sector share of agricultural output falling to each one left in the agricultural sector will go a rising. This means the institutional wage will go on rising with every transfer and so will be the wages paid in the capitalist sector.
4. The model assumes that, besides labour, there is unlimited supply of entrepreneurs in the capitalist sector. This is not true in the case of many of the underdeveloped countries.
5. It is wrong to assume that a capitalist will always re-invest their profits. They too can indulge in un-productive pursuits. They can use their profits for speculative purposes.
6. It is also wrong to assume that landlords always squander away their savings. The role of landlords of Japan in industrialization of the country is well known.
7. The model assumes that there already exists a market for the industrial products in the country. This is wrong. People of an underdeveloped country may not be able to purchase the products perturbed by the expanding capitalist sector. Foreign markets, too, may not be available to the capitalist sector in the beginning.
8. Inflation is not liquidating, as has been assumed by Lewis, Experience of various, countries shows that if once prices start rising, it becomes difficult to control them.
9. It is not easy to transfer labour from the subsistence Sector to the capitalist sector by offering them an incentive of a little higher wage. Mobility of labour is very low. Many factors like family affection, difference in language, caste, religion etc. affect it adversely.
10. Every underdeveloped country does not have surplus labour in the subsistence sector. As such, the model does not apply to countries which are sparsely populated.
The only positive point in the model is its ‘general’ emphasis on the role of saving in economic development and on the potential that overpopulated countries have in developing themselves with the help of surplus labour.
CONCLUSION
The Lewis theory of development to the Nigerian economy. Nigeria has both rural and urban sectors that provide for each forward and backward linkages and the two sectors are not mutually exclusive in promoting the economic growth of the country and improving the standard of living of the citizens. However, the Federal Government of Nigeria does not necessarily have to move surplus labour that exists in the rural areas to the urban areas but instead infrastructural facilities should be provided equally to both the rural and urban areas of the country.
The lewis model
The dual-sector model is a model in development economics. It is commonly known as the Lewis model after its inventor W. Arthur Lewis. It explains the growth of a developing economy in terms of a labor transition between two sectors, the capitalist sector and the subsistence sector.[1]
HistoryInitially the dual-sector model as given by W. Arthur Lewis was enumerated in his article entitled “Economic Development with Unlimited Supplies of Labor” written in 1954, the model itself was named in Lewis’s honor. First published in The Manchester School in May 1954, the article and the subsequent model were instrumental in laying the foundation for the field of development economics. The article itself has been characterized by some as the most influential contribution to the establishment of the discipline.
Assumptions
1. The model assumes that a developing economy has a surplus of unproductive labor in the agricultural sector.
2. These workers are attracted to the growing manufacturing sector where higher wages are offered.
3. It also assumes that the wages in the manufacturing sector are more or less fixed.
4. Entrepreneurs in the manufacturing sector make profit because they charge a price above the fixed wage rate.
5. The model assumes that these profits will be reinvested in the business in the form of fixed capital.
6. An advanced manufacturing sector means an economy has moved from a traditional to an industrialized one.
W. A. Lewis divided the economy of an underdeveloped country into 2 sectors:
The capitalist sector
Lewis defined this sector as “that part of the economy which uses reproducible capital and pays capitalists thereof”. The use of capital is controlled by the capitalists, who hire the services of labor. It includes manufacturing, plantations, mines etc. The capitalist sector may be private or public.
The subsistence sector
This sector was defined by him as “that part of the economy which is not using reproducible capital”. It can also be adjusted as the indigenous traditional sector or the “self employed sector”. The per head output is comparatively lower in this sector and this is because it is not fructified with capital. The “Dual Sector Model” is a theory of development in which surplus labor from traditional agricultural sector is transferred to the modern industrial sector whose growth over time absorbs the surplus labor, promotes industrialization and stimulates sustained development.
In the model, the subsistence agricultural sector is typically characterized by low wages, an abundance of labor, and low productivity through a labor-intensive production process. In contrast, the capitalist manufacturing sector is defined by higher wage rates as compared to the subsistence sector, higher marginal productivity, and a demand for more workers. Also, the capitalist sector is assumed to use a production process that is capital intensive, so investment and capital formation in the manufacturing sector are possible over time as capitalists’ profits are reinvested in the capital stock. Improvement in the marginal productivity of labor in the agricultural sector is assumed to be a low priority as the hypothetical developing nation’s investment is going towards the physical capital stock in the manufacturing sector.
Relationship between the two sectors
The primary relationship between the two sectors is that when the capitalist sector expands, it extracts or draws labor from the subsistence sector. This causes the output per head of laborers who move from the subsistence sector to the capitalist sector to increase. Since Lewis in his model considers overpopulated labor surplus economies he assumes that the supply of unskilled labor to the capitalist sector is unlimited. This gives rise to the possibility of creating new industries and expanding existing ones at the existing wage rate. A large portion of the unlimited supply of labor consists of those who are in disguised unemployment in agriculture and in other over-manned occupations such as domestic services casual jobs, petty retail trading. Lewis also accounts for two other factors that cause an increase in the supply of unskilled labor, they are women in the household and population growth.
The agricultural sector has a limited amount of land to cultivate, the marginal product of an additional farmer is assumed to be zero as the law of diminishing marginal returns has run its course due to the fixed input, land. As a result, the agricultural sector has a quantity of farm workers that are not contributing to agricultural output since their marginal productivities are zero. This group of farmers that is not producing any output is termed surplus labor since this cohort could be moved to another sector with no effect on agricultural output. (The term surplus labor here is not being used in a Marxist context and only refers to the unproductive workers in the agricultural sector.) Therefore, due to the wage differential between the capitalist and subsistence sector, workers will tend to transition from the agricultural to the manufacturing sector over time to reap the reward of higher wages. However even though the marginal product of labor is zero, it still shares a part in the total product and receives approximately the average product.
If a quantity of workers moves from the subsistence to the capitalist sector equal to the quantity of surplus labor in the subsistence sector, regardless of who actually transfers, general welfare and productivity will improve. Total agricultural product will remain unchanged while total industrial product increases due to the addition of labor, but the additional labor also drives down marginal productivity and wages in the manufacturing sector. Over time as this transition continues to take place and investment results in increases in the capital stock, the marginal productivity of workers in the manufacturing will be driven up by capital formation and driven down by additional workers entering the manufacturing sector. Eventually, the wage rates of the agricultural and manufacturing sectors will equalize as workers leave the agriculture sector for the manufacturing sector, increasing marginal productivity and wages in agriculture whilst driving down productivity and wages in manufacturing.
The end result of this transition process is that the agricultural wage equals the manufacturing wage, the agricultural marginal product of labor equals the manufacturing marginal product of labor, and no further manufacturing sector enlargement takes place as workers no longer have a monetary incentive to transition.
Surplus labor and the growth of the economy
Capital accumulation
Criticism
The Lewis model has attracted attention of underdeveloped countries because it brings out some basic relationships in dualistic development. However it has been criticized on the following grounds:
1. Economic development takes place via the absorption of labor from the subsistence sector where opportunity costs of labor are very low. However, if there are positive opportunity costs, e.g. loss of crops in times of peak harvesting season, labor transfer will reduce agricultural output.
2. Lewis seems to have ignored the role of extractive industries in economic modernization. He explicitly excludes mining sector from his analysis.[7]
3. Absorption of surplus labor itself may end prematurely because competitors may raise wage rates and lower the share of profit. It has been shown that rural-urban migration in the Egyptian economy was accompanied by an increase in wage rates of 15 per cent and a fall in profits of 12 per cent. Wages in the industrial sector were forced up directly by unions and indirectly through demands for increased wages in the subsistence sector, as payment for increased productivity. In fact, given the urban-rural wage differential in most poor countries, large scale unemployment is now seen in both the urban and rural sectors.
4. The Lewis model underestimates the full impact on the poor economy of a rapidly growing population, i.e. its effects on agriculture surplus, the capitalist profit share, wage rates and overall employment opportunities. Similarly, Lewis assumed that the rate of growth in manufacturing would be identical to that in agriculture, but if industrial development involves more intensive use of capital than labor, then the flow of labor from agriculture to industry will simply create more unemployment.
5. Lewis seems to have ignored the balanced growth between agriculture and industry. Given the linkages between agricultural growth and industrial expansion in poor countries, if a section of the profit made by the capitalists is not devoted to agricultural development, the process of industrialization would be jeopardized.
6. Possible leakages from the economy seem to have been ignored by Lewis. He assumes boldly that a capitalist’s marginal propensity to save is close to one, but a certain increase in consumption always accompanies an increase in profits, so the total increment of savings will be somewhat less than increments in profit. Whether or not capitalist surplus will be used constructively will depend on the consumption- saving patterns of the top 10 percent of the population. But capitalists alone are not the only productive agents of society. Small farmers producing cash crops in Egypt have shown themselves to be quite capable of saving the required capital. The world’s largest cocoa industry in Ghana is entirely the creation of small enterprise capital formation.
7. The transfer of unskilled workers from agriculture to industry is regarded as almost smooth and costless, but this does not occur in practice because industry requires different types of labor. The problem can be solved by investment in education and skill formation, but the process is neither smooth nor inexpensive.
The model assumes rationality, perfect information and unlimited capital formation in industry. These do not exist in practical situations and so the full extent of the model is rarely realized. However, the model does provide a good general theory on labor transitioning in developing economies
Fei–Ranis model of economic growth
The Fei–Ranis model of economic growth is a dualism model in developmental economicsor welfare economics that has been developed by John C. H. Fei and Gustav Ranisand can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Basics of the model
Depiction of Phase1, Phase2 and Phase3 of the dual economy model using average output.
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages
Using the help of the figure on the left, we see that
According to Fei and Ranis, AD amount of labor (see figure) can be shifted from the agricultural sector without any fall in output. Hence, it represents surplus labor.
After AD, MP begins to rise, and industrial labor rises from zero to a value equal to AD. AP of agricultural labor is shown by BYZ and we see that this curve falls downward after AD. This fall in AP can be attributed to the fact that as agricultural laborers shift to the industrial sector, the real wage of industrial laborers decreases due to shortage of food supply, since less laborers are now working in the food sector. The decrease in the real wagelevel decreases the level of profits, and the size of surplus that could have been re-invested for more industrialization. However, as long as surplus exists, growth rate can still be increased without a fall in the rate of industrialization. This re-investment of surplus can be graphically visualized as the shifting of MP curve outwards. In Phase2 the level of disguised unemployment is given by AK.This allows the agricultural sector to give up a part of its labor-force until
Phase 3 begins from the point of commercialization which is at K in the Figure. This is the point where the economy becomes completely commercialized in the absence of disguised unemployment. The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor.
The amount of labor that is shifted and the time that this shifting takes depends upon:
1. The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits;
2. The nature of the industry’s technical progress and its associated bias;
3. Growth rate of population.
So, the three fundamental ideas used in this model are:
1. Agricultural growth and industrial growth are both equally important;
2. Agricultural growth and industrial growth are balanced;
3. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap.
This shifting of labor can take place by the landlords’ investment activities and by the government’s fiscal measures. However, the cost of shifting labor in terms of both private and social cost may be high, for example transportation cost or the cost of carrying out construction of buildings. In addition to that, per capita agricultural consumption can increase, or there can exist a wide gap between the wages of the urban and the rural people. These three occurrences- high cost, high consumption and high gap in wages, are called as leakages, and leakages prevent the creation of agricultural surplus. In fact, surplus generation might be prevented due to a backward-sloping supply curve of labor as well, which happens when high income-levels are not consumed. This would mean that the productivity of laborers with rise in income will not rise. However, the case of backward-sloping curves is mostly unpractical.
Connectivity between sectors
Agricultural surplus
The indispensability of labor reallocation
Growth without development
Graph showing growth without development
In the Fei-Ranis model, it is possible that as technological progress takes place and there is a shift to labor-saving production techniques, growth of the economy takes place with increase in profits but no economic development takes place. This can be explained well with the help of graph in this section.
The graph displays two MPL lines plotted with real wage and MPL on the vertical axis and employment of labor on the horizontal axis. OW denotes the subsistence wage level, which is the minimum wage level at which a worker (and his family) would survive. The line WW’ running parallel to the X-axis is considered to be infinitely elastics since supply of labor is assumed to be unlimited at the subsistence-wage level. The square area OWEN represents the wage bill and DWE represents the surplus or the profits collected. This surplus or profit can increase if the MPL curve changes.
If the MPL curve changes from MPL1 to MPL2due to a change in production technique, such that it becomes labor-saving or capital-intensive, then the surplus or profit collected would increase. This increase can be seen by comparing DWE with D1WE since D1WE since is greater in area compared to DWE. However, there is no new point of equilibrium and as E continues to be the point of equilibrium, there is no increase in the level of labor employment, or in wages for that matter. Hence, labor employment continues as ON and wages as OW. The only change that accompanies the change in production technique is the one in surplus or profits.
This makes for a good example of a process of growth without development, since growth takes place with increase in profits but development is at a standstill since employment and wages of laborers remain the same.
Reactions to the model
Food-Leisure Graph
Fei–Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.
• It has been asserted that Fei and Ranis did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed.
• Fei and Ranis say, “It has been argued that money is not a simple substitute for physical capital in an aggregate production function. There are reasons to believe that the relationship between money and physical capital could be complementary to one another at some stage of economic development, to the extent that credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry.” This indicates that in the process of development they neglect the role of money and prices. They fail to differ between wage labor and household labor, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
• Fei and Ranis assume that MPPL is zero during the early phases of economic development, which has been criticized by Harry T.Oshima and some others on the grounds that MPPL of labor is zero only if the agricultural population is very large, and if it is very large, some of that labor will shift to cities in search of jobs. In the short run, this section of labor that has shifted to the cities remains unemployed, but over the long run it is either absorbed by the informal sector, or it returns to the villages and attempts to bring more marginal land into cultivation. They have also neglected seasonal unemployment, which occurs due to seasonal change in labor demand and is not permanent.
To understand this better, we refer to the graph in this section, which shows Food on the vertical axis and Leisure on the horizontal axis. OS represents the subsistence level of food consumption, or the minimum level of food consumed by agricultural labor that is necessary for their survival. I0 and I1 between the two commodities of food and leisure (of the agriculturists). The origin falls on G, such that OG represents maximum labor and labor input would be measured from the right to the left. The transformation curve SAG falls from A, which indicates that more leisure is being used to same units of land. At A, the marginal transformation between food and leisure and MPL = 0 and the indifference curve I0 is also tangent to the transformation curve at this point. This is the point of leisure satiation.
Consider a case where a laborer shifts from the agricultural to the industrial sector. In that case, the land left behind would be divided between the remaining laborers and as a result, the transformation curve would shift from SAG to RTG. Like at point A, MPL at point T would be 0 and APL would continue to be the same as that at A (assuming constant returns to scale). If we consider MPL = 0 as the point where agriculturalists live on the subsistence level, then the curve RTG must be flat at point T in order to maintain the same level of output. However, that would imply leisure satiation or leisure as an inferior good, which are two extreme cases. It can be surmised then that under normal cases, the output would decline with shift of labor to industrial sector, although the per capita output would remain the same. This is because, a fall in the per capita output would mean fall in consumption in a way that it would be lesser than the subsistence level, and the level of labor input per head would either rise or fall.
Berry and Soligo in their 1968 paper have criticized this model for its MPL=0 assumption, and for the assumption that the transfer of labor from the agricultural sector leaves the output in that sector unchanged in Phase 1. They show that the output changes, and may fall under various land tenuresystems, unless the following situations arise:
1. Leisure falls under the good category 2. Leisure satiation is present. 3. There is perfect substitutability between food and leisure, and the marginal rate of substitution is constant for all real income levels.
Now if MPL>0 then leisure satiation option becomes invalid, and if MPL=0 then the option of food and leisure as perfect substitutes becomes invalid. Therefore, the only remaining viable option is leisure as an inferior good.
• While mentioning the important role of high agricultural productivity and the creation of surplus for economic development, they have failed to mention the need for capital as well. Although it is important to create surplus, it is equally important to maintain it through technical progress, which is possible through capital accumulation, but the Fei-Ranis model considers only labor and output as factors of production.
• The question of whether MPL = 0 is that of an empirical one. The underdeveloped countries mostly exhibit seasonality in food production, which suggests that especially during favorable climatic conditions, say that of harvesting or sowing, MPL would definitely be greater than zero.
• Fei and Ranis assume a close model and hence there is no presence of foreign trade in the economy, which is very unrealistic as food or raw materials can not be imported. If we take the example of Japan again, the country imported cheap farm products from other countries and this made better the country’s terms of trade.Later they relaxed the assumption and said that the presence of a foreign sector was allowed as long as it was a “facilitator” and not the main driving force.
• The reluctant expansionary growth in the industrial sector of underdeveloped countries can be attributed to the lagging growth in the productivity of subsistence agriculture. This suggests that increase in surplus becomes more important a determinant as compared to re-investment of surplus, an idea that was utilized by Jorgenson in his 1961 model that centered around the necessity of surplus generation and surplus persistence.
• Stagnation has not been taken into consideration, and no distinction is made between labor through family and labor through wages. There is also no explanation of the process of self-sustained growth, or of the investment function. There is complete negligence of terms of trade between agriculture and industry, foreign exchange, money and price.
The Harris Todaro Model
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.[1]
Formalism
The formal statement of the equilibrium condition of the Harris–Todaro model is as follows:
• Let wr be the wage rate (marginal productivity of labor) in the rural agricultural sector.
• Let le be the total number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
• Let lus be the total number of job seekers, employed and unemployed, in the urban sector.
• Let wu be the wage rate in the urban sector, which could possibly be set by government with a minimum wage law.
With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.
Conclusions
Therefore, migration from rural areas to urban areas will increase if:
• Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
• Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
References
https://en.m.wikipedia.org/wiki/Dual-sector_model
Retrieved on 28/3/2021.
https://en.m.wikipedia.org/wiki/Fei–Ranis_model_of_economic_growth
Retrieved on28/3/2021.
https://en.m.wikipedia.org/wiki/Harris–Todaro_model
Retrieved on 28/3/2021.
The lewis model
The dual-sector model is a model in development economics. It is commonly known as the Lewis model after its inventor W. Arthur Lewis. It explains the growth of a developing economy in terms of a labor transition between two sectors, the capitalist sector and the subsistence sector.[1]
HistoryInitially the dual-sector model as given by W. Arthur Lewis was enumerated in his article entitled “Economic Development with Unlimited Supplies of Labor” written in 1954, the model itself was named in Lewis’s honor. First published in The Manchester School in May 1954, the article and the subsequent model were instrumental in laying the foundation for the field of development economics. The article itself has been characterized by some as the most influential contribution to the establishment of the discipline.
Assumptions
1. The model assumes that a developing economy has a surplus of unproductive labor in the agricultural sector.
2. These workers are attracted to the growing manufacturing sector where higher wages are offered.
3. It also assumes that the wages in the manufacturing sector are more or less fixed.
4. Entrepreneurs in the manufacturing sector make profit because they charge a price above the fixed wage rate.
5. The model assumes that these profits will be reinvested in the business in the form of fixed capital.
6. An advanced manufacturing sector means an economy has moved from a traditional to an industrialized one.
W. A. Lewis divided the economy of an underdeveloped country into 2 sectors:
The capitalist sector
Lewis defined this sector as “that part of the economy which uses reproducible capital and pays capitalists thereof”. The use of capital is controlled by the capitalists, who hire the services of labor. It includes manufacturing, plantations, mines etc. The capitalist sector may be private or public.
The subsistence sector
This sector was defined by him as “that part of the economy which is not using reproducible capital”. It can also be adjusted as the indigenous traditional sector or the “self employed sector”. The per head output is comparatively lower in this sector and this is because it is not fructified with capital. The “Dual Sector Model” is a theory of development in which surplus labor from traditional agricultural sector is transferred to the modern industrial sector whose growth over time absorbs the surplus labor, promotes industrialization and stimulates sustained development.
In the model, the subsistence agricultural sector is typically characterized by low wages, an abundance of labor, and low productivity through a labor-intensive production process. In contrast, the capitalist manufacturing sector is defined by higher wage rates as compared to the subsistence sector, higher marginal productivity, and a demand for more workers. Also, the capitalist sector is assumed to use a production process that is capital intensive, so investment and capital formation in the manufacturing sector are possible over time as capitalists’ profits are reinvested in the capital stock. Improvement in the marginal productivity of labor in the agricultural sector is assumed to be a low priority as the hypothetical developing nation’s investment is going towards the physical capital stock in the manufacturing sector.
Relationship between the two sectors
The primary relationship between the two sectors is that when the capitalist sector expands, it extracts or draws labor from the subsistence sector. This causes the output per head of laborers who move from the subsistence sector to the capitalist sector to increase. Since Lewis in his model considers overpopulated labor surplus economies he assumes that the supply of unskilled labor to the capitalist sector is unlimited. This gives rise to the possibility of creating new industries and expanding existing ones at the existing wage rate. A large portion of the unlimited supply of labor consists of those who are in disguised unemployment in agriculture and in other over-manned occupations such as domestic services casual jobs, petty retail trading. Lewis also accounts for two other factors that cause an increase in the supply of unskilled labor, they are women in the household and population growth.
The agricultural sector has a limited amount of land to cultivate, the marginal product of an additional farmer is assumed to be zero as the law of diminishing marginal returns has run its course due to the fixed input, land. As a result, the agricultural sector has a quantity of farm workers that are not contributing to agricultural output since their marginal productivities are zero. This group of farmers that is not producing any output is termed surplus labor since this cohort could be moved to another sector with no effect on agricultural output. (The term surplus labor here is not being used in a Marxist context and only refers to the unproductive workers in the agricultural sector.) Therefore, due to the wage differential between the capitalist and subsistence sector, workers will tend to transition from the agricultural to the manufacturing sector over time to reap the reward of higher wages. However even though the marginal product of labor is zero, it still shares a part in the total product and receives approximately the average product.
If a quantity of workers moves from the subsistence to the capitalist sector equal to the quantity of surplus labor in the subsistence sector, regardless of who actually transfers, general welfare and productivity will improve. Total agricultural product will remain unchanged while total industrial product increases due to the addition of labor, but the additional labor also drives down marginal productivity and wages in the manufacturing sector. Over time as this transition continues to take place and investment results in increases in the capital stock, the marginal productivity of workers in the manufacturing will be driven up by capital formation and driven down by additional workers entering the manufacturing sector. Eventually, the wage rates of the agricultural and manufacturing sectors will equalize as workers leave the agriculture sector for the manufacturing sector, increasing marginal productivity and wages in agriculture whilst driving down productivity and wages in manufacturing.
The end result of this transition process is that the agricultural wage equals the manufacturing wage, the agricultural marginal product of labor equals the manufacturing marginal product of labor, and no further manufacturing sector enlargement takes place as workers no longer have a monetary incentive to transition.
Surplus labor and the growth of the economy
Capital accumulation
Criticism
The Lewis model has attracted attention of underdeveloped countries because it brings out some basic relationships in dualistic development. However it has been criticized on the following grounds:
1. Economic development takes place via the absorption of labor from the subsistence sector where opportunity costs of labor are very low. However, if there are positive opportunity costs, e.g. loss of crops in times of peak harvesting season, labor transfer will reduce agricultural output.
2. Lewis seems to have ignored the role of extractive industries in economic modernization. He explicitly excludes mining sector from his analysis.[7]
3. Absorption of surplus labor itself may end prematurely because competitors may raise wage rates and lower the share of profit. It has been shown that rural-urban migration in the Egyptian economy was accompanied by an increase in wage rates of 15 per cent and a fall in profits of 12 per cent. Wages in the industrial sector were forced up directly by unions and indirectly through demands for increased wages in the subsistence sector, as payment for increased productivity. In fact, given the urban-rural wage differential in most poor countries, large scale unemployment is now seen in both the urban and rural sectors.
4. The Lewis model underestimates the full impact on the poor economy of a rapidly growing population, i.e. its effects on agriculture surplus, the capitalist profit share, wage rates and overall employment opportunities. Similarly, Lewis assumed that the rate of growth in manufacturing would be identical to that in agriculture, but if industrial development involves more intensive use of capital than labor, then the flow of labor from agriculture to industry will simply create more unemployment.
5. Lewis seems to have ignored the balanced growth between agriculture and industry. Given the linkages between agricultural growth and industrial expansion in poor countries, if a section of the profit made by the capitalists is not devoted to agricultural development, the process of industrialization would be jeopardized.
6. Possible leakages from the economy seem to have been ignored by Lewis. He assumes boldly that a capitalist’s marginal propensity to save is close to one, but a certain increase in consumption always accompanies an increase in profits, so the total increment of savings will be somewhat less than increments in profit. Whether or not capitalist surplus will be used constructively will depend on the consumption- saving patterns of the top 10 percent of the population. But capitalists alone are not the only productive agents of society. Small farmers producing cash crops in Egypt have shown themselves to be quite capable of saving the required capital. The world’s largest cocoa industry in Ghana is entirely the creation of small enterprise capital formation.
7. The transfer of unskilled workers from agriculture to industry is regarded as almost smooth and costless, but this does not occur in practice because industry requires different types of labor. The problem can be solved by investment in education and skill formation, but the process is neither smooth nor inexpensive.
The model assumes rationality, perfect information and unlimited capital formation in industry. These do not exist in practical situations and so the full extent of the model is rarely realized. However, the model does provide a good general theory on labor transitioning in developing economies
Fei–Ranis model of economic growth
The Fei–Ranis model of economic growth is a dualism model in developmental economicsor welfare economics that has been developed by John C. H. Fei and Gustav Ranisand can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Basics of the model
Depiction of Phase1, Phase2 and Phase3 of the dual economy model using average output.
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages
Using the help of the figure on the left, we see that
According to Fei and Ranis, AD amount of labor (see figure) can be shifted from the agricultural sector without any fall in output. Hence, it represents surplus labor.
After AD, MP begins to rise, and industrial labor rises from zero to a value equal to AD. AP of agricultural labor is shown by BYZ and we see that this curve falls downward after AD. This fall in AP can be attributed to the fact that as agricultural laborers shift to the industrial sector, the real wage of industrial laborers decreases due to shortage of food supply, since less laborers are now working in the food sector. The decrease in the real wagelevel decreases the level of profits, and the size of surplus that could have been re-invested for more industrialization. However, as long as surplus exists, growth rate can still be increased without a fall in the rate of industrialization. This re-investment of surplus can be graphically visualized as the shifting of MP curve outwards. In Phase2 the level of disguised unemployment is given by AK.This allows the agricultural sector to give up a part of its labor-force until
Phase 3 begins from the point of commercialization which is at K in the Figure. This is the point where the economy becomes completely commercialized in the absence of disguised unemployment. The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor.
The amount of labor that is shifted and the time that this shifting takes depends upon:
1. The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits;
2. The nature of the industry’s technical progress and its associated bias;
3. Growth rate of population.
So, the three fundamental ideas used in this model are:
1. Agricultural growth and industrial growth are both equally important;
2. Agricultural growth and industrial growth are balanced;
3. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap.
This shifting of labor can take place by the landlords’ investment activities and by the government’s fiscal measures. However, the cost of shifting labor in terms of both private and social cost may be high, for example transportation cost or the cost of carrying out construction of buildings. In addition to that, per capita agricultural consumption can increase, or there can exist a wide gap between the wages of the urban and the rural people. These three occurrences- high cost, high consumption and high gap in wages, are called as leakages, and leakages prevent the creation of agricultural surplus. In fact, surplus generation might be prevented due to a backward-sloping supply curve of labor as well, which happens when high income-levels are not consumed. This would mean that the productivity of laborers with rise in income will not rise. However, the case of backward-sloping curves is mostly unpractical.
Connectivity between sectors
Agricultural surplus
The indispensability of labor reallocation
Growth without development
Graph showing growth without development
In the Fei-Ranis model, it is possible that as technological progress takes place and there is a shift to labor-saving production techniques, growth of the economy takes place with increase in profits but no economic development takes place. This can be explained well with the help of graph in this section.
The graph displays two MPL lines plotted with real wage and MPL on the vertical axis and employment of labor on the horizontal axis. OW denotes the subsistence wage level, which is the minimum wage level at which a worker (and his family) would survive. The line WW’ running parallel to the X-axis is considered to be infinitely elastics since supply of labor is assumed to be unlimited at the subsistence-wage level. The square area OWEN represents the wage bill and DWE represents the surplus or the profits collected. This surplus or profit can increase if the MPL curve changes.
If the MPL curve changes from MPL1 to MPL2due to a change in production technique, such that it becomes labor-saving or capital-intensive, then the surplus or profit collected would increase. This increase can be seen by comparing DWE with D1WE since D1WE since is greater in area compared to DWE. However, there is no new point of equilibrium and as E continues to be the point of equilibrium, there is no increase in the level of labor employment, or in wages for that matter. Hence, labor employment continues as ON and wages as OW. The only change that accompanies the change in production technique is the one in surplus or profits.
This makes for a good example of a process of growth without development, since growth takes place with increase in profits but development is at a standstill since employment and wages of laborers remain the same.
Reactions to the model
Food-Leisure Graph
Fei–Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.
• It has been asserted that Fei and Ranis did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed.
• Fei and Ranis say, “It has been argued that money is not a simple substitute for physical capital in an aggregate production function. There are reasons to believe that the relationship between money and physical capital could be complementary to one another at some stage of economic development, to the extent that credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry.” This indicates that in the process of development they neglect the role of money and prices. They fail to differ between wage labor and household labor, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
• Fei and Ranis assume that MPPL is zero during the early phases of economic development, which has been criticized by Harry T.Oshima and some others on the grounds that MPPL of labor is zero only if the agricultural population is very large, and if it is very large, some of that labor will shift to cities in search of jobs. In the short run, this section of labor that has shifted to the cities remains unemployed, but over the long run it is either absorbed by the informal sector, or it returns to the villages and attempts to bring more marginal land into cultivation. They have also neglected seasonal unemployment, which occurs due to seasonal change in labor demand and is not permanent.
To understand this better, we refer to the graph in this section, which shows Food on the vertical axis and Leisure on the horizontal axis. OS represents the subsistence level of food consumption, or the minimum level of food consumed by agricultural labor that is necessary for their survival. I0 and I1 between the two commodities of food and leisure (of the agriculturists). The origin falls on G, such that OG represents maximum labor and labor input would be measured from the right to the left. The transformation curve SAG falls from A, which indicates that more leisure is being used to same units of land. At A, the marginal transformation between food and leisure and MPL = 0 and the indifference curve I0 is also tangent to the transformation curve at this point. This is the point of leisure satiation.
Consider a case where a laborer shifts from the agricultural to the industrial sector. In that case, the land left behind would be divided between the remaining laborers and as a result, the transformation curve would shift from SAG to RTG. Like at point A, MPL at point T would be 0 and APL would continue to be the same as that at A (assuming constant returns to scale). If we consider MPL = 0 as the point where agriculturalists live on the subsistence level, then the curve RTG must be flat at point T in order to maintain the same level of output. However, that would imply leisure satiation or leisure as an inferior good, which are two extreme cases. It can be surmised then that under normal cases, the output would decline with shift of labor to industrial sector, although the per capita output would remain the same. This is because, a fall in the per capita output would mean fall in consumption in a way that it would be lesser than the subsistence level, and the level of labor input per head would either rise or fall.
Berry and Soligo in their 1968 paper have criticized this model for its MPL=0 assumption, and for the assumption that the transfer of labor from the agricultural sector leaves the output in that sector unchanged in Phase 1. They show that the output changes, and may fall under various land tenuresystems, unless the following situations arise:
1. Leisure falls under the good category 2. Leisure satiation is present. 3. There is perfect substitutability between food and leisure, and the marginal rate of substitution is constant for all real income levels.
Now if MPL>0 then leisure satiation option becomes invalid, and if MPL=0 then the option of food and leisure as perfect substitutes becomes invalid. Therefore, the only remaining viable option is leisure as an inferior good.
• While mentioning the important role of high agricultural productivity and the creation of surplus for economic development, they have failed to mention the need for capital as well. Although it is important to create surplus, it is equally important to maintain it through technical progress, which is possible through capital accumulation, but the Fei-Ranis model considers only labor and output as factors of production.
• The question of whether MPL = 0 is that of an empirical one. The underdeveloped countries mostly exhibit seasonality in food production, which suggests that especially during favorable climatic conditions, say that of harvesting or sowing, MPL would definitely be greater than zero.
• Fei and Ranis assume a close model and hence there is no presence of foreign trade in the economy, which is very unrealistic as food or raw materials can not be imported. If we take the example of Japan again, the country imported cheap farm products from other countries and this made better the country’s terms of trade.Later they relaxed the assumption and said that the presence of a foreign sector was allowed as long as it was a “facilitator” and not the main driving force.
• The reluctant expansionary growth in the industrial sector of underdeveloped countries can be attributed to the lagging growth in the productivity of subsistence agriculture. This suggests that increase in surplus becomes more important a determinant as compared to re-investment of surplus, an idea that was utilized by Jorgenson in his 1961 model that centered around the necessity of surplus generation and surplus persistence.
• Stagnation has not been taken into consideration, and no distinction is made between labor through family and labor through wages. There is also no explanation of the process of self-sustained growth, or of the investment function. There is complete negligence of terms of trade between agriculture and industry, foreign exchange, money and price.
The Harris Todaro Model
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.[1]
Formalism
The formal statement of the equilibrium condition of the Harris–Todaro model is as follows:
• Let wr be the wage rate (marginal productivity of labor) in the rural agricultural sector.
• Let le be the total number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
• Let lus be the total number of job seekers, employed and unemployed, in the urban sector.
• Let wu be the wage rate in the urban sector, which could possibly be set by government with a minimum wage law.
With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.
Conclusions
Therefore, migration from rural areas to urban areas will increase if:
• Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
• Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
References
https://en.m.wikipedia.org/wiki/Dual-sector_model
Retrieved on 28/3/2021.
https://en.m.wikipedia.org/wiki/Fei–Ranis_model_of_economic_growth
Retrieved on28/3/2021.
https://en.m.wikipedia.org/wiki/Harris–Todaro_model
Retrieved on 28/3/2021.
HARIS TODARO MODEL OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The Haris-Todaro model is a pioneering general equilibrium model describing the labor migration mechanism from rural to urban areas due to a wage gap and the existence of urban unemployment and underemployment in developing countries. The Harris-Todaro model takes a standard two sector model and imposes a higher wage in the urban sector which is higher than equilibrium clearing, while wage in agriculture is flexible. Equilibrium clearing is simply when wage across both sectors equalize, minus movement costs or natural advantages (such as better living environment) in one or the other sector. equilibrium condition of the Harris-Todaro model can be described as th upe wage in agriculture must be equal to the expected wage in the urban sector.
The model was an academic investigation to throw light on the events following ‘Tripartite Agreement’ in Kenya. The newly independent Kenya in the 1960s was increasingly facing aserious situation of unemployment in the major urban cities. To cope with the situation of unemployment,TripartiteAgreement was signed between the government public sector and theprivate sector. The larger number of employment was expected to reduce unemployment, but it appeared that the urban unemployment had increased following the government’s agreement. The distinctive concept in the model is that the rate of migration flow from rural (agricultural) areas to urban (industrial) areas is determined by the difference between expected urban wages and rural wages. The rural-urban two-sector model centrally holds the following features:
Real wages (adjusted for cost-of-living differences) were higher in urban formal sectorjobs than in rural traditional sectorjobs
To be hired for a formal sectorjob, it was necessary to be physically present in the urban areas where the formal sectorjobs were located.
Also, more workers searched for formal sectorjobs than were actually hired. Employers hired some of the searchers but not all of them.
To maintain equality between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting would be characterized by urban unemployment.
Any temporary difference in the expected wages between one sector and another would be eroded as workers migrate from the low expected wage labour market to the high expected wage one.
The major contribution of Harris and Todaro’s rural-urban two sector migration model was to build a model that fit the stylized facts of the labour market. In the first lines of the theory, developing countries adopted program on integrated rural development which encouraged an increase in the rural traditional sector wage. The theory proves that the higher the unemployment rate, the lower the probability of new migrants from the countryside actively seeking formal sector employment and are unable to find. The findings of the theory are: first,if the expected urban wage equals rural income, there is no incentive to migrate. Second, if the expected urban wage is greater than rural income, there is a great incentive to move from rural to urban area. Third, if the expected urban wage is less than rural incomes, there would be an incentive to move in other direction. Fourth, the expected urban wage depends on what type of job migrant is engaged in. Therefore,the Haris Todaro’s model helps policy-makers to avoid two mistakes. One is to assume that development efforts should necessarily be channeled to the sectors where the poor are. The other is to assume that efforts should necessarily be focused on getting the poor out of the sectors in which they are presently.
The Harris-Todaro in essence is an extension of the Lewis model. It simply develops migration decision along with the introduction of a second urban sector. It does not change from the Lewis model in that the fundamental driving force of growth is still technological growth.
ASSUMPTION
The main assumption of the model of Harris and Todaro is that there is a migratory flow from the rural to the urban sector while the expected urban wage is higher than the rural wage. Haris Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector with differences in the type of goods produced, the technology of production and the process of wage determination. The productive process of this sectors can be described by a Cobb-Douglas production function: Ya = AaNa^φ
Where, Ya is the production level of the agricultural good, Na is the amount of workers used in the
So In Haris Todaro model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate. For example, if average rural wages are 60 units and urban wages are institutionally set at a level of 120 units, then in a one-period model a 50% urban unemployment rate would be necessary to vitiate the private profitability of further migration. Since expected incomes are defined in terms of both wages and employment probabilities, argument is that it is not only possible but likely to have continued migration in spite of the existence of sizable rates of urban unemployment. In the above numerical example, migration would continue even if the urban unemployment rate were 30 or 40% .
LIMITATIONS
Some of the assumptions of the Harris-Todaro’s model were judged to be too restrictive.The model also assumes that potential migrants are risk neutral where the poor migrants will likely be risk averse, as in they are indifferent between a certain expected rural income and an uncertain expected urban income of the same magnitude. The assumption that there exists a perfect competition in rural agriculture sector is not realistic.
CONCLUSION
Migration from rural to urban areas will increase if Urban wages increase in the urban sector ie, increasing the expected urban income. Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector, decreasing the expected rural income. Even though migration creates unemployment and induces informal sector growth, as long as the migrating economic agents have accurate information concerning rural and urban wage rates and ways of obtaining employment, they will make an expected income-maximizing decision. In Nigeria, most people leave their hometowns or villages to cities due to the belief that things are better in the city. That there are more jobs and social amenities present. This makes them migrate from their location to another place which is believed to be better than their previous locations. And the jobs in this developed areas is mostly in manufacturing industries. As people move in looking for these white collar jobs and manufacturing works the agricultural sector is being neglected because agricultural produce is more rampant in these rural areas. So in order to stabilize the economy and reduce the rate of migration, more attention should be given to these rural areas. They should be provided with enough social amenities and technological tools for carrying out their agricultural productions. If this happens their would be more job opportunity for the citizens in both the rural and urban areas.
LEWIS-FEI-RANIS MODEL OF SURPLUS LABOUR
Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. This growth model further explains that the traditional sector comprises of the agricultural sector which is existent, and the modern sector comprises of the fast-growing but small industrial or manufacturing sector. It is also said that the two sectors (traditional and modern) both exist in the dual economy which lays the basis for the problem of development. How these two sectors would interact in order to yield economic development is the major issue here. This therefore forms the foundation for development too be that economic development can only occur or happen or evolve if and only if the resources in the traditional agricultural sector can be shifted to the modern industrial sector such that the industrial sector is advanced or increased or even taken to another level (higher) in the economy. This then can only be achieved when the labour factor resource is transferred from the traditional agricultural sector to the modern industrial sector. However, this does not imply that the traditional agricultural sector should be neglected because it is this sector that supplies the raw materials needed by the modern industrial sector as well as food.
ASSUMPTIONS OF THE FEI – RANIS GROWTH MODEL
Like in the Harrod – Domar Growth Model, we have that savings and investment are the key instrumentsthat are used to drive economic development when it comes to the less-developed countries. Lewis argued that, economic growth in a less-developed or under-developed economy could only be achieved by capital accumulation in the modern industrial sector, which is done by taking or shifting excess or surplus labour from the traditional agricultural sector to the modern industrial sector. So, Lewis advocated that an economy like that transits or moves from the first stage (excess labour) to the second stage (scarce labour) of economic development. Later on, Fei and Ranis formalized the three stages of dualistic economic development by dividing the first two stages of Lewis Model into the first two stages of the Fei – Ranis Growth Model and the second stage of Lewis Model forming the third stage of the Fei – Ranis Growth Model.
CRITICISM OF THE MODEL
1. The assumption that disguised unemployment exists in the agriculture sector has not been accepted by many economists. Schultz, Viner, Heberler and Hopper are few of such economists. According to them, the production in the subsistence sector will be affected when labour is withdrawn from it.
2. Lewis ignored the cost involved in training the unskilled worker transferred from the subsistence sector. Even if it is obtained at a constant wage rate, so for as its transfer from the subsistence sector is concerned, the supply curve may slope upwards so far as the capitalist, sector is concerned if the cost of training rises as more and more labour is transferred.
3. When labour is transferred from the subsistence sector share of agricultural output falling to each one left in the agricultural sector will go a rising. This means the institutional wage will go on rising with every transfer and so will be the wages paid in the capitalist sector.
4. The model assumes that, besides labour, there is unlimited supply of entrepreneurs in the capitalist sector. This is not true in the case of many of the underdeveloped countries.
5. It is wrong to assume that a capitalist will always re-invest their profits. They too can indulge in un-productive pursuits. They can use their profits for speculative purposes.
6. It is also wrong to assume that landlords always squander away their savings. The role of landlords of Japan in industrialization of the country is well known.
7. The model assumes that there already exists a market for the industrial products in the country. This is wrong. People of an underdeveloped country may not be able to purchase the products perturbed by the expanding capitalist sector. Foreign markets, too, may not be available to the capitalist sector in the beginning.
8. Inflation is not liquidating, as has been assumed by Lewis, Experience of various, countries shows that if once prices start rising, it becomes difficult to control them.
9. It is not easy to transfer labour from the subsistence Sector to the capitalist sector by offering them an incentive of a little higher wage. Mobility of labour is very low. Many factors like family affection, difference in language, caste, religion etc. affect it adversely.
10. Every underdeveloped country does not have surplus labour in the subsistence sector. As such, the model does not apply to countries which are sparsely populated.
The only positive point in the model is its ‘general’ emphasis on the role of saving in economic development and on the potential that overpopulated countries have in developing themselves with the help of surplus labour.
CONCLUSION
The Lewis theory of development to the Nigerian economy. Nigeria has both rural and urban sectors that provide for each forward and backward linkages and the two sectors are not mutually exclusive in promoting the economic growth of the country and improving the standard of living of the citizens. However, the Federal Government of Nigeria does not necessarily have to move surplus labour that exists in the rural areas to the urban areas but instead infrastructural facilities should be provided equally to both the rural and urban areas of the country.
Name: Mamah Lynda Uchenna
Reg 2017/249359
Email: lyndauchenna1016@gmail.com
LEWIS-FEI-RANIS MODEL OF SURPLUS LABOUR
The fei-Ranis model of economic growth is a dualism model in the developmental economics that has been developed by John C.H Fei and Gustav Ranis and can be see as an extension of the Lewis model. Lewis model had flaws because it undermined the role of agriculture in boosting the growth of industrial sector. He did not even acknowledged that increase in productivity of labor should take place before the shift between the two sectors, and these is why the model was modified by John C.H and Gustav Ranis. It is also be referred to as surplus labor model. it acknowledged the existence of dual economy comprising the primitive sector known as the agricultural sector and the modern sector known as the industrial sector. According to the model the both sectors co-exist in the economy. The model takes economic conditions of unemployment and underemployment of resources into account unlike other growth model that considered underdeveloped countries to be similar in nature. Fei-Ranis model of dual economy explains how the increased productivity in agriculture sector would become helpful in promoting industrial sector. The model posited that development can be brought about only by a complete shift in the point of progress from the agricultural to the industrial economy, such that there is increase of industrial output. This can be achieved by the transfer of labor from agriculture sector to the industrial one, which shows that the underdeveloped countries do not suffer from constraints of labor supply. The model posits that agricultural sector should not be neglected and it’s output should be sufficient to support the whole economy with food and raw material.
BASIC TENET OF THE MODEL:
This theory is concerned with a poor economy which has following properties:
(i) There is an abundance of labor in such underdeveloped countries and shortage of natural resources.
(ii) The population growth rate is very high which results in mass unemployment in the economy.
(iii) The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labor is zero and negative in agriculture sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy.
Thus the model suggests that:
“Economic development would be taking place if agricultural laborers are transferred to industrial sector where their productivity will increase”. As we told earlier that it is a dual economy where there is a stagnant agriculture sector and dynamic industrial sector. The situation where MPL – 0, labor can be transferred to industrial sector without any loss in agricultural output. The real wages in industrial sector remains fixed and it is equal to the initial level of real income in agriculture sector. Such wages are given the name of institutional wages.
Thus, three major points are highlighted in the Fei-Ranis model
(i) Growth of agriculture is as important as the growth of industry.
(ii) There should be a balanced growth of agriculture and industrial sectors.
(iii) The rate of labor absorption must be higher than the rate of population growth to get out of the “Malthusian Nightmare”.
The assumption of the model
(1) The rate at which labor transfer and employment creation in the modern sector is proportional to the rate of modern sector capital accumulation
(2) surplus labor exist in rural are while there is full employment in the Urban areas
(3) competitive modern sector labor-market that guarantee the continued existence of constant real urban wages up to the point where the supply of rural surplus is exhausted
(4) Diminishing returns in the modern industrial sector
Relating Lewis-Fei-Ranis model to the Nigeria economy
I must say that the Nigeria economy operates dualistic economy of primitive economy comprising agriculture and modern sector call comprising industrial sector. In Nigeria the agriculture sector provides raw materials for the industries and the industries in return transforms the raw materials into finished goods which will boost the economy of Nigeria.As the model rightly noted the agricultural and the industrial sector co- exist in Nigeria and one cannot do without the other.
2. HARRIS TODARO MODEL OF MIGRATION
The Harris-Todaro model named after John Harris and Michael Todaro is economic models develop in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. It is a theory that explains rural-urban migration as an economically rational process despite high urban unemployment. Migrants calculate (present value of) urban expected income (or it’s equivalent) and move if this exceeds average rural income.
THE CORE TENET OF HARRIS-TODARO MODEL
The core of the Harris-Todaro model was the following features. First, real wages (adjusted for cost-of-living differences) are higher in urban formal-sector jobs than in rural traditional-sector jobs. Second, to be hired for a formal-sector job, one has to be physically present in the urban areas where the formal-sector jobs are located.
Third, and as a consequence of the first two features, more workers search for formal-sector jobs than are hired, employers hire some of the job seekers but not all of them, and those not hired end up unemployed. Fourth, for equality to be maintained between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting is characterized by urban unemployment. And fifth, any temporary difference in the expected wages between one sector and another is eroded as workers migrate from the low-expected-wage labor market to the high-expected-wage labor market.
The Harris-Todaro model produced two powerful policy results. The first concerns the policy of formal-sector job creation to employ the unemployed (who, in the Harris-Todaro model, are all in urban areas, because that is where the formal- sector jobs are assumed to be located). Such a policy, they concluded, would increase the formal sector labor force by more than the number of new jobs created, thereby raising the number of urban unemployed. Thus, the solution to urban unemployment is not to create urban employment. The second policy option that Harris and Todaro considered was a policy of rural development. If such a program could increase the rural traditional-
sector wage, unemployment would then fall. Thus, in the Harris-Todaro model, the solution to urban unemployment is rural development.
ASSUMPTION OF HARRIS-TODARO MODEL
(A). Assumptions
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the
process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
Ya=ALaα
Where Ya denote agricultural sector output, A is the technological parameter in the rural sector (A>0), La denote the agricultural labour force, and α is production parameter (0<α0), Lf denote the urban labour force, and α is production parameter (0<β<1).
Wage in agricultural sector is flexible and determined at the margin, the marginal productivity in agriculture is,
∂Yα/∂Lα = αALa-1
The agriculture wage is the marginal productivity multiplied by the price of agricultural good, let this be denoted by p.
The agricultural wage then is,
Wα = αALa-1+αP
The urban wage is determined at the margin; however, as per the Harris-Todaro model assumption, the wage in urban sector is imposed at a level above market clearing. The marginal productivity in urban sector is
∂Yf/∂Lf =βBLf-1+β
The wage in the Harris-Todaro model is then,
Wf =βBLf-1+β Such that Lf
Where Nu denote the total urban population, if Lf 0and ρ > 0).Now, a few definitions of labour force and population must be defined. Let Na be population in rural sector, and recall La is the labour force in rural sector, in this model, it is assumed that Na=La. In the urban sector, let Nu be the population in the urban sector, and recall that Lf is the labour force in the urban sector.
As defined previously, if Lf<Nu, then there is unemployment in the urban sector, if Lf=Nu, then there is full employment in the urban sector.
Let Ntot be total population in the entire economy, both urban and rural sectors. The following identity can then be defined as,
Na+Nu =Ntot
Relating Harris-Todaro to the Nigeria economy
Harris-Tadoro model is applicable to Nigeria economy on the basis that many Nigerian migrates from rural to urban citizens due to differential in wages between rural and Urban cities.
OGUNDARE ABISOLA HELEN
2017/2495
abisola.ogundare.249546@unn.edu.ng
Department of Economics
William Arthur Lewis, with his most famous published work, “Economic Development with Unlimited Supplies of Labour” (Manchester School, May 1954) and “The Theory of Economic Growth” (Allen and Unwin, 1955), made a great contribution to the theories of economic development. Based on his findings, Ranis and Fei succeeded to extend the initial Lewis’ model and assessed the changes in the agricultural and industrial labour in more detail. I will start this paper by introducing the foundations of the model before following with the implications, basing most of my arguments on the analysis by Ranis and Fei in “A Theory of Economic Development”
Basic Thesis of the Lewis Model:
Lewis model is a classical type model which states that the unlimited supplies of labour can be had at the prevailing subsistence wages. The industrial and advanced modern sector can be developed based on agriculture to traditional sector. This can be done by transferring the labour from traditional sector and modern sector.
Lewis says that the wages in industrial sector remain constant. Consequently, the capitalists will earn ‘surplus’. Such surplus will be re-invested in the modern sector leading to absorb the labour which are migrated from subsistence sector. In this way, the surplus labour or the labour which were prey to disguised unemployment will get the employment. Thus, both the labour transfer and modern sector employment growth are brought about by output expansion in that sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector. Though the wages have been assumed constant, yet Lewis says that the urban wages are at least 30% higher than average rural income to induce the workers to migrate from their home areas.
Fei-Ranis (FR) Model of Dual Economy:
The two economists John Fei and Gustav Ranis presented their dual economy model. There was a flaw in Lewis model that it did not pay enough attention to the importance of agri. sector in promoting industrial growth. But Fei-Ranis (FR) model of dual economy explains how the increased productivity in agri. sector would become helpful in promoting industrial sector. In this respect, it presents three stages whereby a UDC moves from stagnation to self-sustained economic growth. Thus, this model is treated as an improvement over Lewis model of unlimited supply of labour.
Basic Thesis of the Model:
This theory is concerned with a poor economy which has following properties:
(i) There is an abundance of labour in such UDC and shortage of natural resources.
(ii) The population growth rate is very high which results in mass unemployment in the economy.
(iii) The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labour is zero and negative in agriculture sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy.
Thus the model suggests that:
“Economic development would be taking place if agricultural laborers are transferred to industrial sector where their productivity will increase”.
The first stage of FR model is very similar to Lewis. Disguised unemployment comes into being because the supply of labour is perfectly elastic and MPL = 0. Therefore, such disguised unemployed are to be transferred to industrial sector at the constant institutional wage.
In the second stage of FR model (phase) agri. workers add to agri. output but they produce less than institutional wage they get. In other words, in the second stage the labour surplus exists where APL > MPL, but it is not equal to subsistence (institutional) wages.
In the third stage of FR model the take-off situation comes to an end and there begins the era of self-sustained growth where the farm workers produce more than the institutional wage they get. In this stage of economic growth the surplus labour comes to an end and the agri. sector becomes commercialized sector. All such is explained with the Fig.
Criticism:
The FR model is considered to be an improvement over Lewis. This model presents a balanced growth of both the sectors of the economy, the most notable thing for the growth of UDCs. Despite this fact, this model has following shortcomings:
(i) Marginal Productivity of Labour in Phase I: The FR model is of the view that MFL = 0 in the first phase of growth, and the transfer of labour from agri. would not reduce output in the agri. sector in phase I. But the economists like Berry and Soligo are of the view that agri. output in phase I of FR model will not remain constant and may fell under different systems of land tenure, i.e., the peasant proprietorship and share cropping etc.
(ii) Marginal Productivity of Labour is Not Zero: Prof. Jorgenson who has also presented a model of ‘dual economy’ has object FR model’s contention of zero MP in phase I. He says whether MPL will be zero is an empirical issue. During the seasons of sowing and harvesting the MPL > 0. Jorgenson concluded on the basis of Japanese data even for the pre I world war period the supply of labour was not unlimited. Then how MPL can be zero.
(iii) Ignoring The Role of Capital: The FR model concentrated upon land and labour as the determinants of output, ignoring the role of capital. But Profs. Brown, Byres, Frankel, Griffen, Ghatak and Ingersent are of the view that in the UDCs there has occurred what is known as ‘Green Revolution’ in agri. which has promoted the greater use of capital and technology on lands. Consequently, there has been a greater increase in the agri. productivity and agri. Incomes.
CONCLUSION
In conclusion, having shown the main ideas behind the Lewis-Ranis-Fei model and used the consecutive analysis of the model to explain why it is important to invest in both sectors in order to remain on the balanced growth path and maintain the rate of industrialization. The existence of surplus labour in agriculture allows the industry to continue to pay the institutional wage and therefore enjoy further profits and continued investment. At the same time, as more and more people are moving away from agriculture, there will be some amount of agricultural surplus that can be used up to fuel further development. This process continues until the surplus labour is absorbed. Hence, saving and investment are a crucial part in the Lewis-Ranis-Fei to support economic development.
HARRIS-TODARO MODEL
John R. Harris and Michael P. Todaro presented the seminal ‘Two sector model’ in American Economic Association, 1970. This model is a pioneering study in the field encompassing rural-urban migration. The classical theory is used in development economics and is an economic illustration of migrants’ decision on expected income differentials between rural (agriculture) and urban (manufacturing) areas. The model of rural-urban migration is typically studied in the context of employment and unemployment situation in developing countries. The purpose of the model is to explain the critical urban unemployment problem in developing countries. The key hypothesis of Harris and Todaro’s model is that economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migration decision. In other words, this theory puts forward that rural-urban migration will occur when the urban expected wage exceeds the rural obtain wage.
The model was an academic investigation to throw light on the events following ‘Tripartite Agreement’ in Kenya. The newly independent Kenya in the 1960s was increasingly facing a serious situation of unemployment in the major urban cities. To cope with the situation of unemployment, Tripartite. Agreement was signed between the government public sector and the private sector. The agreement increased employment in the industrial jobs in exchange for unions agreeing to hold wages at their current levels. The larger number of employments was expected to reduce unemployment, but it appeared that the urban unemployment had increased following the government’s agreement. Harris and Todaro subsequently formulated a model to explain rural-urban economic preferences to migrate. The distinctive concept in the model is that the rate of migration flow from rural (agricultural) areas to urban (industrial) areas is determined by the difference between expected urban wages and rural wages. The rural-urban two-sector model centrally holds the following futures:
1) Real wages (adjusted for cost-of-living differences) were higher in urban formal sector jobs than in rural traditional sector jobs.
2) To be hired for a formal sector job, it was necessary to be physically present in the urban areas where the formal sector jobs were located.
3) Consequently, from the first two features, more workers searched for formal sector jobs than were actually hired. Employers hired some of the searchers but not all of them.
4) To maintain equality between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting would be characterized by urban unemployment.
5) Any temporary difference in the expected wages between one sector and another would be eroded as workers migrate from the low expected wage labour market to the high expected wage one.
There are two regions: rural (agricultural) and urban (industrial) in two sector economic model. The crucial assumption of the Harris and Todaro’s model is that workers base their migration decision on their expected incomes at urban (industrial) areas. As the basic model is static, the expected income is just the weighted average of the urban wage and the unemployment benefit, the weights being the probabilities to find and not to find an urban job. The model assumes that the rate of rural-urban (m= M/LR) is a function of:
i)The probability that an urban labour can successfully find a modern sector job, which can be expressed as a positive function of the current urban employment rate EU/LU,
or LU-EU/LU, a negative function of urban unemployment rate.
ii) The urban-rural real income differential is expressed as
YU/YR= W (W greater than 1),
Besides, migration will also be related to,
iii) Other factors (Z), such as distance, personal conduct, urban amenities.
Where,
m= Rate of migration from rural to urban areas
M= Actual volume of rural-urban migration
LR= Rural labour force
EU= Level of urban employment
LU= Urban labour force
YU= Urban real income
YR=Rural real income
W= Ratio between rural/urban real income
Therefore, the basic rural-migration migration model is expressed as:
(rural-urban migration) m = function of (current urban employment rate, urban-rural real income differential, and personal factors).
Thus, (rural-urban migration rate) m= f (EU /LU, W,Z) …. 1.1
= f (EU /LU) (holding W and Z constant)
= Function of the ratio between the level of urban employment and urban labour force.
Where
f (EU /LU) is greater than Zero.
f (W) is greater than Zero, and
f (Z) may have +ve or – ve values; (here is the time derivative of three elements)
That is, migration rate is a function of the ratio between the level of urban employment and urban labour force, or the probability to find a job in an urban industrial sector. Besides, urban labour force growth can be expressed as:
lU/LU=r + LR /LU(m)= r + LR/LU f (EU/LU) ……….1.2
r= natural growth rate of rural/urban labour force
lU= time derivative of LU (urban labour force)
That is, time derivative of urban labour force growth rate is a function of urban labour force growth rate and the probability of finding a job in a modern urban sector (as derived from equation 1.1 above)
The model, then tried to compare the live path of equation (1.1) or (1.2) with the growth rate of urban employment and discussed rural-urban migration and urban employment under the different assumption of population and employment growth rates.
Assumptions
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a 0 and g > 0 are a parametric constant. g is the elasticity of p with respect to the ratio Ym/Ya.
The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified:
Temporary Equilibrium
Given a parametric constant vector (Aa,Am,f,a,r,g), an initial urban population Nu, and a minimum wage wm one can calculate the temporary equilibrium of the economic system by using eqs. (1 – 6).
From eq. (4) one can find the employment level at the manufacturing sector
Replacing eq. (7) in eq. (2) we get the production level of the manufacturing sector
From eq. (6) one can obtain the relation
which is used with eq. (1) to obtain the agricultural production
By using eqs. (5), (8) and (10) the terms of trade are determined
Finally, by using eqs. (3), (9) and (11), the rural wage in units of manufacturated good is obtained
In sum, the vector (Nm,Ym,Na,Ya,p,wa) configures a temporary equilibrium that might be altered whether occurs a migration of workers, induced by the differential of sectorial wages, which changes the sectorial distribution of overall population.
The Long Run Equilibrium
Harris and Todaro, in determining the long run equilibrium, i.e., the absence of a net rural-urban migratory flow, argue that the rural workers, in their decision on migrating to the urban area, estimate the expected urban wage, , defined as:
The ratio Nm/Nu, which is the employment rate, is an estimative of the probability that a worker living at urban sector gets a job in this sector.
As mentioned before, the key assumption of the model of Harris and Todaro is that there will be a migratory flow from the rural to the urban sector while the expected urban wage is higher than the rural wage. Thus, the long run equilibrium is attained when the urban worker population reaches a level such that the expected urban wage equates the rural wage:
This equality is known in the economic literature as the Harris-Todaro condition. Harris and Todaro argue that the differential of expected wages in eq. (14) can be a constant value d ¹ 0. When this differential reaches d, the net migration ceases. This generalized Harris-Todaro condition can be expressed as follows:
The level of the urban population that satisfies the eq. (15), i.e., the equilibrium urban share = /N, is determined from the solution of the equation resulting from substitution of equations (12), (13) in eq. (15):
The solution of eq. (16) is parametrized by the vector (Aa,Am,r,g,a,f,wm).
Harris and Todaro, in order to evaluate the stability of the long run equilibrium, postulate a mechanism of adjustment that is based on the following function of sign preservation:
The differential equation that governs the state transition in the model of Harris and Todaro is obtained by replacing equations (12), (13) in eq. (17). Based on this postulated adjustment process, Harris and Todaro [1] show that the long run equilibrium is globally asymptotically stable. This means that the economy would tend to long run equilibrium with unemployment in the urban sector generated by the presence of a relatively high minimum wage for all possible initial conditions. From now on we will refer to the long run equilibrium simply as equilibrium.
CONCLUSION
The dispersed and non-coordinated individual migration decisions, made based on local information, generate aggregate regularities. Firstly, the crucial assumption of Harris and Todaro, the principle that rural-urban migration will occur while the urban expected wage exceed the rural wage, comes out as spontaneous upshot of interaction among adaptative agents.
Secondly, the migratory dynamics generated by agents that seek to adaptate to the economic environment that they co-create leads the economy toward a long run equilibrium characterized by urban concentration with urban unemployment. When this long run equilibrium is reached, the generalized Harris-Todaro condition is satisfied, i.e., there is a stabilization of the rural-urban expected wage differential.
Thirdly, the impact of the minimum wage and elasticity of terms of trade in a long run equilibrium obtained by simulations are in agreement with the predictions of the original Harris-Todaro model with Cobb-Douglas technology.
Finally, the simulations showed an aggregated pattern not found in the original Harris-Todaro model. There is the possibility of small fluctuations of the urban share around an average value. This phenomenon is known as reverse migration.
NAME: UFOMADU OSCAR ONYEKACHI
REG NO: 2017/249579
DePARTMENT: ECONOMICS
COURSE: ECO 361(DEVELOPMENT ECONOMICS)
THE HARRIS-TODARO MODEL
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
Overview
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.[1]
Formalism
The formal statement of the equilibrium condition of the Harris–Todaro model is as follows:
Let wr be the wage rate (marginal productivity of labor) in the rural agricultural sector.
Let le be the total number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
Let lus be the total number of job seekers, employed and unemployed, in the urban sector.
Let wu be the wage rate in the urban sector, which could possibly be set by government with a minimum wage law.
Rural to urban migration will take place if:
{\displaystyle \ w_{r}<{\frac {l_{e}}{l_{us}}}w_{u}} \ w_{r}{\frac {l_{e}}{l_{us}}}w_{u}} \ w_{r}>{\frac {l_{e}}{l_{{us}}}}w_{u}
At equilibrium,
{\displaystyle \ w_{r}={\frac {l_{e}}{l_{us}}}w_{u}} \ w_{r}={\frac {l_{e}}{l_{{us}}}}w_{u}
With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.
A. Assumptions
Harris and Todaro [1] studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a 0 and g > 0 are a parametric constants. g is the elasticity of p with respect to the ratio Ym/Ya.
The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified:
B. Temporary Equilibrium
Given a parametric constant vector (Aa,Am,f,a,r,g), an initial urban population Nu, and a minimum wage wm one can calculate the temporary equilibrium of the economic system by using eqs. (1 – 6).
From eq. (4) one can find the employment level at the manufacturing sector
Replacing eq. (7) in eq. (2) we get the production level of the manufacturing sector
From eq. (6) one can obtain the relation
which is used with eq. (1) to obtain the agricultural production
By using eqs. (5), (8) and (10) the terms of trade are determined
Finally, by using eqs. (3), (9) and (11), the rural wage in units of manufacturated good is obtained
In sum, the vector (Nm,Ym,Na,Ya,p,wa) configures a temporary equilibrium that might be altered whether occurs a migration of workers, induced by the differential of sectorial wages, which changes the sectorial distribution of overall population.
C. The Long Run Equilibrium
Harris and Todaro, in determining the long run equilibrium, i.e., the absence of a net rural-urban migratory flow, argue that the rural workers, in their decision on migrating to the urban area, estimate the expected urban wage, , defined as:
The ratio Nm/Nu, which is the employment rate, is an estimative of the probability that a worker living at urban sector gets a job in this sector.
As mentioned before, the key assumption of the model of Harris and Todaro is that there will be a migratory flow from the rural to the urban sector while the expected urban wage is higher than the rural wage. Thus, the long run equilibrium is attained when the urban worker population reaches a level such that the expected urban wage equates the rural wage:
This equality is known in the economic literature as the Harris-Todaro condition. Harris and Todaro argue that the differential of expected wages in eq. (14) can be a constant value d ¹ 0. When this differential reaches d, the net migration ceases. This generalized Harris-Todaro condition can be expressed as follows:
The level of the urban population that satisfies the eq. (15), i.e., the equilibrium urban share = /N, is determined from the solution of the equation resulting from substitution of equations (12), (13) in eq. (15):
The solution of eq. (16) is parametrized by the vector (Aa,Am,r,g,a,f,wm).
Harris and Todaro, in order to evaluate the stabilty of the long run equilibrium, postulate a mechanism of adjustment that is based on the following function of sign preservation:
The differential equation that governs the state transition in the model of Harris and Todaro is obtained by replacing equations (12), (13) in eq. (17). Based on this postulated adjustment process, Harris and Todaro [1] show that the long run equilibrium is globally asymptotically stable. This means that the economy would tend to long run equilibrium with unemployment in the urban sector generated by the presence of a relatively high minimum wage for all possible initial conditions. From now on we will refer to the long run equilibrium simply as equilibrium.
Based on the numerical solutions of eq. (16) one can evaluate the impact that the variation of the minimum wage and the elasticity of the terms of trade on the equilibrium. In Fig. 1 we see that under the hypothesis of a Cobb-Douglas technology, the equilibrium urban share, , does not depend on the minimum wage wm. However, changes in the value of wm reduces the labor demand on the manufacturing sector what results in higher unemployment rates in the equilibrium.
Introduction to the Lewis Model:
Lewis published his model entitled:
“Economic Development with Unlimited Supplies of Labour” in 1954. In his model Lewis divides the economy in an underdeveloped country in two sectors namely the Subsistence sector and the capitalist sector. Subsistence is identified with the agricultural sector of the economy while the capitalist sector implies mainly the manufacturing sector of the economy.
Capitalist sector also includes plantations and mining where hired labour is employed for purposes of production. The capitalist sector can either be private or public in nature. Subsistence sector, that the agricultural sector is considered to be labour intensive. It does not use reproducible capital. It uses poor techniques of production and has very low productivity.
Assumptions of the Lewis Model:
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
Lewis calls it as institutional wage because every worker gets this wage because of some institutional arrangements. This wages is equal to an average share of each worker in the total output in the subsistence sector. If market forces were allowed to operate in the subsistence sector labourers with zero margin productivity or those with a very low marginal productivity would not have received this wage.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion.
Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector.
Lewis in fact so much fascinated by the higher propensity to save of the capitalist sector that he even advocates a transfer of income from the subsistence sector to the capitalist sector. He feels that steps have to be taken to raise the rate of savings from 10% to 15% if the development of the economy has to be smooth.
The Working of the Lewis Model:
The explanation of working of the Lewis model is quite simple. He feels that if a wage higher than the institutional wage prevailing in the subsistence sector by a certain proportion of the institutional wage is fixed in the capitalist sector the capitalist sector will be able to attract an unlimited quantity, the labour from subsistence sector. This will enable the capitalist sector to expand. It will, in turn lead to the generation of more savings in the capitalists sector.
The additional saving, will not only help the entrepreneurs to invest more but also to improve the quality of capital invested. This will result in more employment of labour from the subsistence sector. This will lead to generation of more savings in the Capitalist sector which can be further invested leading to employment of more surplus labour and so on.
Explains the Process of Expansion of the Capitalists Sector.
We is the wage rate fixed in the capitalist sector. It is higher than W which represents the institutional wage. The wage in the capitalist sector has to be higher than the instructional wage because only such higher wage can attract labour from the subsistence sector. At first; ON-I labour is employed. This will lead to the generation of surplus equal to AMIS, after the wages at the rate W have been paid.
According to Lewis this surplus AMIS will be reinvested either in old type of capital or may even be used to improve the existing techniques. All this will result in marginal productivity curve of labour moving M2 M2. Now more labour at wage. We can employee, ON2 amount of labour will now be employed. More surplus will then be generated. It would be reinvested.
Marginal productivity of labour curve will shift to M3 M3 more labour can now be employed. Still more surpluse will be generated and re-invested and so on. The process of transfer of labour from the subsistence sector to the capitalist sector will continue for some time till some obstacles, hindering this transfer appear.
Role of Bank Credit:
From the above analysis, one might get the impression that it is only through the surplus generated in the capitalist sector that the development of the capitalist sector takes place. This however is not correct.
The process of development can also start if the capitalist sector initially does not invest its savings in the capital but borrows from the banks. According to Lewis the basic problems is to employ the labour from the subsistence sector and this can be initially done through investment of funds borrowed from the banks.
Lewis is conscious of the fact that creation of bank credit will give rise to inflationary increase in prices. However, he is not much perturbed by this prospect. He is of the view that inflationary pressures will not continue forever.
A time will come when the additional savings generated by the investment of borrowed funds become equal to these very funds. At that time, prices will stop rising further. As he says, an equilibrium.is reached when savings generated through the investment of additional bank credit become equal to the amount of bank credit itself.
He is also aware of another fact. Inflation can make the distribution of income unfair. However, he says, it will be good for the manufacturing sector if the distribution of income moves in favour of the capitalists. Of course, if inflation tilts the distribution of income in favour of the traders it will be bad for the economy. It will only lead to more speculative activities.
Slowing of the Pace of expansion of the Capitalist Sector.
According to Lewis, expansion of the capitalist sector will continue unhindered so long as the supply curve for labour from the subsistence sector is perfectly elastic i.e. so long as the labour can be transferred to the capitalist sector at a constant wage. Lewis, of course is conscious of the fact that under certain circumstances, the supply curve for labour can turn upwards.
These circumstances are:
(i) The pace of expansion of the capitalist sector is more rapid when compared with the rate of growth of population in the subsistence sector. The surplus labour in that case will ultimately be fully exhausted.
(ii) Technological development in the subsistence sector raise the productivity of labour with in that case will rise. We too will have to be raised them.
(iii) As population increase due to law of decreasing marginal return, prices of food and raw materials will rise. This will increase both W and W.
(iv) When workers in the capitalist sector start imitating the living pattern of the capitalist themselves, they may ask for higher wages.
If any of the above four factors start operating, then according to Lewis, the expansion of the capitalist sector will be slow down.
Impact of the Open Economy:
The open economy can encourage the immigration of labour. If this happens, it will help in the expansion of the capitalist sector. But immigration may not be so easy. If in that case the pace of expansion of the capitalist sector slows down, capital may move out of the country as the economy is an open one. This may in turn lead to balance of payments problems and the problem of stability of rate of exchange.
Critical Review of the Lewis’s Model:
Some of the objections against Lewis’s model are as follows:
(1) The assumption that disguised unemployment exists in the agriculture sector has not been accepted by many economists. Schultz, Viner, Heberler and Hopper are a few of such economists. According to them, the production in the subsistence sector will be affected when labour is withdrawn from it.
(2) Lewis ignored the cost involved in training the unskilled worker transferred from the subsistence sector. Even if it is obtained at a constant wage rate, so for as its transfer from the subsistence sector is concerned, the supply curve may slope upwards so far as the capitalist, sector is concerned if the cost of training rises as more and more labour is transferred.
(3) When labour is transferred from the subsistence sector share of agricultural output falling to each one left in the agricultural sector will go a rising. This means the institutional wage will go on rising with every transfer and so will be the wages paid in the capitalist sector.
(4) The model assumes that, besides labour, there is unlimited supply of entrepreneurs in the capitalist sector. This is not true in the case of many of the underdeveloped countries.
(5) It is wrong to assume that a capitalist will always re-invest their profits. They to can indulge in un-productive pursuits. They can use their profits for speculative purposes.
(6) It is also wrong to assume that landlords always squander away their savings. The role of landlords of Japan in industrialisation of the country is well known.
(7) The model assumes that there already exists a market for the industrial products in the country. This is wrong. People of an underdeveloped country may not be able to purchase the products perturbed by the expanding capitalist sector. Foreign markets, too, may not be available to the capitalist sector in the beginning.
(8) Inflation is not liquidating, as has been assumed by Lewis, Experience of various, countries shows that if once prices start rising, it, becomes difficult to control them.
(9) It is not easy to transfer labour from the subsistence Sector to the capitalist sector by offering them an incentive of a little higher wage.
Mobility of labour is very low. Many factors like family affection, difference in language, caste, religion etc. affect it adversely.
(10) Every underdeveloped country does not have surplus labour in the subsistence sector. As such, the model does not apply to countries which are sparsely populated.
The only positive point in the model is its ‘general’ emphasis on the role of saving in economic development and on the potential that overpopulated countries have in developing themselves with the help of surplus labour.
NAME: MMADU JOY UKAMAKA
REG NO: 2017/249528
EMAIL: joymmadu5@gmail.com
THE LEWIS FEI-RANIS GROWTH MODEL OF SURPLUS LABOUR
The structural change theory emphasizes on how the underdeveloped economies can transform their domestic economic structures from being highly concentrated on the traditional subsistence agriculture to a modern urbanized industrially diverse manufacturing and service economy. it uses the ideas of the neoclassical price and resource allocation theory and modern econometrics to explain how this transformation process can be achieved. A well-known example of this structural change theory is the one formulated by Arthur Lewis using his two-sector surplus labour.
The Lewis two- sector model of development which focused on the structural transformation of a primarily economy was formulated in the mid 1950s but was later modified and transformed by John Fei and Gustav Ranis. And it became the general theory of development during most of the 1960s and early 1970s.
The underlying features of the model
The model made use of two sectors in it’s illustration of the structural change which includes the traditional, overpopulated rural subsistence sector characterized by zero marginal labour productivity and surplus labour and
A high productivity modern urban industrial sector into which the surplus labor withdrawn from the subsistence rural sector is transferred to.
The model is primarily concerned with both how surplus labour is transferred from the rural agricultural sector to the urban industrial sector and growth of output and employment in the urban industrial sector, this can be achieved through output expansion in the industrial sector. The rate at which this output expansion occurs is determined by the rate of the industrial investment and capital accumulation in the modern sector.
Assumptions of the Model
The model implicitly assumes that the rate at which labor transfer and employment creation in the modern sector is proportional to the rate of modern sector capital accumulation.
The model assumes that surplus labor exists in the rural areas while there is full employment in the urban areas.
Competitive modern sector labor market that guarantees the continued existence of constant real urban wages up to the point where the supply of rural surplus labour is exhausted.
Diminishing returns in the modern industrial sector.
How The Lewis Two- Sector Model Of Surplus Labor Can Be Applied In Nigeria Scenario
Using Nigeria as a case study prior to the time of oil discovery agricultural sector contributed over 70% to the national GDP and also accounts for the major employment of the labour force. Agricultural sector which requires much of labour intensive techniques of production and Nigeria being naturally endowed by large mass of land which favoured agricultural activities was booming until the discovery of oil in 1959 when Nigeria abandoned agriculture which was their major source of foreign exchange and went into oil neglecting agriculture and transferring labour from agricultural sector to petroleum sector and this is one of the decision Nigeria will ever live to regret.
Just like the Lewis model advocated that economic development can only be achieved by transition from subsistence agriculture to modern industrial sector referring to agricultural sector as being inefficient for development. However, expansion in the industrial sector is nice move towards economic development but not in isolation of rural agricultural sector based on the fact that most of the raw materials used in the industrial sectors are gotten from agricultural sector.
So In Summary, Lewis two-sector surplus labour model doesn’t perfectly address the issues of some developing countries like Nigeria as regards what should be done to achieve economic development as it assumes technology to be the most important driver of economic development.
HARRIS-TODARO THEORY OF MIGRATION
The HarrisTodaro model, named after John R.Harris and Michael Todaro , is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues pertaining rural-urban migration.
H-T (1970) give explicit recognition to the interaction of agriculture and non-agriculture in ascertaining urban unemployment. They follow the now-established tradition of looking at the developing economy as a dual economy in the process of transition from a rural subsistence to modern industrial economy.
The Underlying Features of the Model
Harris and Todaro look at urban employment as a target of development policy in contrast to the earlier emphasis on growth as the unique target of development.
The essential feature of the Harris-Todaro model is the use of an expected urban wage rate. Todaro (1969) postulates that the rate of rural-urban migration is not only a function of the urban wage rate relative to the rural wage rate but also a function of the chance of finding an urban job.
The essential feature of the Harris-Todaro model is the use of an expected urban wage rate. Todaro(1969) postulates that the rate of rural-urban migration is not only a function of the urban wage rate relative to the rural wage rate but also a function of the chance of finding an urban job.
The Assumptions of the Model
The rural-urban income differential is assumed as a key determinant of migration
The H-T model assumes that unemployment exist in the urban areas in contrast to the Fei-Ranis’ agriculture surplus labour
Assumption of an institutionally determined wage rate in the modern sector and a wage rate in agricultural sector which wage is equal to marginal product of labour
H-T model assumes the rural-urban migration as the key interaction between agriculture and non-agriculture rather than transfer of food and consumer goods.
The Application of H-T Model in Nigeria Situation
Nigeria is the most populous country in Africa with a population of 55million and an area of 360,000 square miles. The population is estimated to be growing at an annual rate of 2.5 percent, with a tendency for this rate to increase with declining death rates. Unemployment in the developing world is the result of slow rates of growth of wage employment and high rates of growth of the urban labour force. Migration of labour force from rural to urban areas in search of jobs has led to unemployment and underemployment which are some of the most serious social problem of Nigeria as people leave the agrarian area where there is employment opportunity with the expectation of getting a well paid job in the big cities. Statistics has shown that over 70 percent are being employed in the agricultural sector either by self employment or otherwise and due to the high wage expectation of the labour in the big cities this sector which was our major source of foreign exchange has been neglected.
The Criticism of the Model
Conclusively, the Harris-Todaro model reveals the frustration of policies which seek to decrease unemployment by increasing the demand for employment at an existing wage rate.
There are, however, several weaknesses in their analysis in that:
They assume a closed economy,
The assumptions of a fixed stock of capital and labour give rise to a static analysis
The ignored important interactions, specifically the flow of goods and services among the agricultural and non-agriculture economies
They ignored the urban traditional sectors as a source of employment.
NAME: IDOKO PATIENCE UCHENNA
REG.NO. 2017/241111
EDUCATION ECONOMICS
TOPIC: LEWIS-FEI-RANIS MODEL(SURPLUS LABOUR THEORY)
1. INTRODUCTION
The FeiRanis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials.
COMPARISON WITH OTHER MODEL: Like in the HarrodDomar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
MAIN ARGUMENTS OF THE MODEL
A . Lewiss Model of Rural-Urban Migration:
Prof. W. Arthur Lewis in his article, Unlimited Supplies of Labour has explained the process of migration from rural to urban areas in an underdeveloped economy.
An underdeveloped economy is a dual economy having two sectors:
(i) a modern sector, and
(ii) an indigenous sector.
Out of these two, the latter is the predominant sector. The capitalist sector is defined as that part of the economy which uses reproducible capital, pays capitalists for the use thereof and employs wage labour for profit making purposes.The distinguishing feature of a capitalist sector is that it hires labour and sells output to earn profit. The subsistence sector is that part of the economy which does not use reproducible capital. Labour is abundant and disguised unemployment is the result. The marginal productivity of labour in the agricultural sector may be zero or even negative. In order to solve the problem of disguised unemployment.
Prof. Lewis would like the capitalist (industrial) sector to be expanded by transferring labour from the subsistence (rural) sector to the capitalist sector. He assumes that the supply of labour is perfectly elastic at the subsistence wage.
Since the supply of labour is unlimited, new industries can be established or existing industries can be expanded without limit at the current wage i.e. subsistence wage by withdrawing labour from the subsistence sector. When people migrate from the subsistence sector to the modern sector, the wages should be higher in the capitalist sector than in the subsistence sector by a small but fixed amount.
In the Lewis model, migration is the result of concerted effort on the part ofthe state to transfer surplus rural labour to the industrial sector by developing the latter for capital formation.
SOME ASSUMPTIONS AND CRITICISMS
The Lewis model of migration has been criticised on the following counts:
1. Wage Rate not constant in the Capitalist Sector:
The theory assumes a constant wage rate in the capitalist sector until the supply of labour is exhausted from the subsistence sector. This is unrealistic because the wage rate continues to rise over time in the industrial sector of an underdeveloped economy even when there is open unemployment in its rural sector.
2. Not Applicable if Capital Accumulation is Labour Saving: Lewis assumes that the capitalist surplus is reinvested in productive capital. But according to Reynolds, if the productive capital happens to be labour saving, it would not absorb labour and the theory breaks-down. This is shown in Fig. 2 where the curve N2D2 has a greater negative slope than the curve N1D1thereby showing labour-saving technique. With the shifting of the marginal productivity curve upwards from N1D1 to N2D2 the total output has risen substantially from ON1Q1L1to ON2Q1L1. But the total wage bill OWQ1L1 and the labour employed OL1 remain unchanged.
3. Skilled Labour not a Temporary Bottleneck: Given an unlimited supply of labour, Lewis assumes the existence of unskilled labour for his theory. Skilled labour is regarded as a temporary bottleneck which can be removed by providing training facilities to unskilled labour. No doubt skilled labour is in short supply in underdeveloped countries but skill formation poses a serious problem, as it takes a very long time to educate and train the multitudes in such countries.
4. One-sided Theory: This is a one-sided theory because Lewis does not consider the possibility of progress in the agricultural sector. As the industrial sector develops with the transfer of surplus labour, the demand for food and raw materials will rise which will, in turn, lead to the growth of the agricultural sector.
5. Mobility of Labour not so Easy: Higher capitalist wage will not lead to the movement of surplus labour from the subsistence sector to the capitalist sector. People are so intensely attached to their family and land that they do not like to leave their kith and kin. Moreover, differences in language and custom, the problems of congestion, housing and high cost of living in the capitalist sector stand in the way of mobility of labour of this sector. This is the weakness of the theory.
B. The Fei-Ranis Model on Rural-Urban Migration:
John Fei and Gustav Ranis have presented in an article entitled, A Theory of Economic Development, the process of rural-urban migration in underdeveloped countries.The model is related to an underdeveloped economy having surplus labour but scarcity of capital. The major part of the population is engaged in agriculture which is stagnant. Non-agricultural occupations use small capital. There also exists an industrial sector.The process of development involves transfer of surplus labour from the agricultural sector to the industrial sector, so as to increase its productivity from zero to a wage level equal to the institutional wage in agriculture.
ASSUMPTIONS
The assumptions of the theory are:
1. Land is fixed in supply.
2. Population growth is taken as an exogenous phenomenon.
3. There is a dual economy consisting of a stagnant agricultural sector and an active industrial sector.
4. Agricultural activity is characterised by constant returns to scale with labour as a variable factor.
5. The output of the agricultural sector is a function of land and labour alone.
6. The output of the industrial sector is a function of capital and labour alone.
7. Workers in both the sectors consume only agricultural products.
8. If population increases above the point where marginal productivity of labour becomes zero, labour can be shifted to the industrial sector without loss in agricultural output.
9. The real wage in the industrial sector remains fixed and is equal to the initial level of real income in the agrarian economy, which they call the institutional wage.
THE MODEL: ARGUMENTS
Based on these assumptions the model analysis the development process in three phases.
In the first phase, disguised unemployed workers, who are not adding to agricultural output are shifted to the industrial sector at the constant institutional wages.
In the second phase, agricultural workers add to the agricultural output but produce less than the institutional wage they get. These workers are also shifted to the industrial sector. If the migration of workers to the industrial sector continues, a point is ultimately reached when farm workers produce output equal to the institutional wage.
In the third phase, farm workers produce more than the institutional wage they get. Thus the surplus labour is exhausted and the agricultural sector becomes commercialised.
The allocation process in three phases is depicted in Panel (B) of Fig. 2 where the total labour force is measured from right to left on the horizontal axis ON and the average output on the vertical axis NY. The curve NMRU represents the marginal physical productivity of labour (MPPL) in the agricultural sector. NW is the institutional wage at which the workers are employed in this sector.
CRITICISMS
This model is not free from criticisms which are discussed below:
1. Supply of Land not Fixed:
2. Institutional Wage not above the MPP:
3. Institutional Wage not constant in the Agricultural Sector:
4. Closed Model:
5. Commercialisation of Agriculture Leads to Inflation:
6. MPP not Zero.
CONCLUSION
It should be of some interest to note that the Lewis model and its many offspring continue to be viewed as relevant in the South and considered a valuable guide to policy in places like China, India, Bangladesh, Central America and even some parts of sub-Saharan Africa, i.e., wherever heavy population pressure on scarce cultivable land remains a feature of the landscape. Most Northern development economists, on the other hand, are today focusing either on aggregate cross-section models to determine the sources of economic growth in the Barro (1991) tradition or, at the micro level, on the econometric modeling of household behavior, with very little interaction between the two approaches. In the South, dualism still holds the attention of both theoretical and empirical observers. According to Lewis, productivity changes will accrue to the importing or advanced country, leading to another version of immiserizing growth. This is one area in which Lewis adherence to Prebisch-Singer probably did not sufficiently take into account the difference between labor intensive industrial and agricultural exportsalthough he properly emphasized the growing potential for inter-LDC trade. All in all, Lewis rightly saw technology, not trade, as the more dependable engine of growth.
Surprisingly, the Lewis model of dualism also has some relevance to contemporary mainstream development models at the micro level. Lewis was basically a macro-economist, deeply immersed in economic history and the history of thought, both neglected subjects today. He always chose a general equilibrium approach, not only with respect to working within a domestic two-sector world but also with respect to the relationship of the typical developing country to the world economy, as indicated by his Wick sell and Jane way lectures (1969 and 1977). His notion of dualism, especially that focused on the labor market dimension, rural and urban, continues to offer a theoretically valid, empirically relevant and practically useful framework for dealing with some fundamental real world issues of development.
HAREIS TODARO MODEL.
Since the wage in cities is higher than one in village people migrate into the cities hoping to get urban job. The probability to get a job depends on the size of unemployment pool in relation to the number employed in industries. Therefore, in many mostly less-developed countries urban unemployment is a big issue. W. Max Corden in his book Trade Policy and Economic Welfare claims that the possible reason for urban unemployment is the wage differential. This coexists with usually high minimum wage in industries and with a marginal product of labor in agriculture less than the urban minimum wage.
John R. Harris and Michael P. Todaro presented the seminal ‘Two sector model’ in American Economic Association, 1970. This model is a pioneering study in the field encompassing rural-urban migration. The classical theory is used in development economics and is an economic illustration of migrants’ decision on expected income differentials between rural (agriculture) and urban (manufacturing) areas. The model of rural-urban migration is typically studied in the context of employment and unemployment situation in developing countries. The purpose of the model is to explain the critical urban unemployment problem in developing countries.
The key hypothesis of Harris and Todaro’s model is that economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migration decision. In other words, this theory puts forward that rural-urban migration will occur when the urban expected wage exceeds the rural obtain wage.
HISTORY OF THE HARRIS TODARO MODEL OF MIGRATION
The model was an academic investigation to throw light on the events following ‘Tripartite Agreement’ in Kenya. The newly independent Kenya in the 1960s was increasingly facing a serious situation of unemployment in the major urban cities. To cope with the situation of unemployment, Tripartite Agreement was signed between the government public sector and the private sector. The agreement increased employment in the industrial jobs in exchange for unions agreeing to hold wages at their current levels. The larger number of employment was expected to reduce unemployment, but it appeared that the urban unemployment had increased following the government’s agreement. Harris and Todaro subsequently formulated a model to explain rural-urban economic preferences to migrate. The distinctive concept in the model is that the rate of migration flow from rural (agricultural) areas to urban (industrial) areas is determined by the difference between expected urban wages and rural wages.
HARRIS TODARO MODEL OF MIGRATION EXPLAINED (ITS ARGUMENTS)
The rural-urban two-sector model centrally holds the following features:
1) Real wages (adjusted for cost-of-living differences) were higher in urban formal sector jobs than in rural traditional sector jobs.
2) To be hired for a formal sector job, it was necessary to be physically present in the urban areas where the formal sector jobs were located.
3) Consequently, from the first two features, more workers searched for formal sector jobs than were actually hired. Employers hired some of the searchers but not all of them.
4) To maintain equality between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting would be characterized by urban unemployment.
5) Any temporary difference in the expected wages between one sector and another would be eroded as workers migrate from the low expected wage labour market to the high expected wage one.
ASSUMPTIONS OF HARRIS TODARO MODEL OF MIGRATION
There are two regions: rural (agricultural) and urban (industrial) in two sector economic model.
The Assumptions are:
Migration is a primarily economic decision.
There is no unemployment in the rural sector and it is perfectly competitive such that wage is equal to marginal product
Members of the labor force rationally compare the expected value of potential wages to current wages to make the decision to migrate or not.
The crucial assumption of the Harris and Todaro’s model is that workers base their migration decision on their expected incomes at urban (industrial) areas. As the basic model is static, the expected income is just the weighted average of the urban wage and the unemployment benefit, the weights being the probabilities to find and not to find an urban job. The model assumes that the rate of rural-urban (m= M/LR) is a function of:
The probability that an urban labour can successfully find a modern sector job, which can be expressed as a positive function of the current urban employment rate EU/LU, or LU-EU/LU, a negative function of urban unemployment rate.
ii) The urban-rural real income differential is expressed as- YU/YR= W (W greater than 1),
Besides, migration will also be related to, iii) other factors (Z), such as distance, personal conduct, urban amenities. Where m= Rate of migration from rural to urban areas. M= Actual volume of rural-urban migration LR= Rural labour force EU= Level of urban employment.
LU= Urban labour force YU= Urban real income YR=Rural real income W= Ratio between rural/urban real income Therefore, the basic rural-migration migration model is expressed as: (rural-urban migration) m = function of (current urban employment rate, urban-rural real income differential, and personal factors). Thus, (rural-urban migration rate) m= f (EU /LU, W, Z)…. 1.1 = f (EU /LU) (holding W and Z constant) = Function of the ratio between the level of urban employment and urban labour force. Where f (EU /LU) is greater than Zero; f (W) is greater than Zero, and f (Z) may have +ve or – ve values; (here fis the time derivative of three elements). That is, migration rate is a function of the ratio between the level of urban employment and urban labour force, or the probability to find a job in an urban industrial sector.
Besides, urban labour force growth can be expressed as: lU/LU=r + LR/LU(m)= r + LR/LU f (EU/LU) ..1.2 r= natural growth rate of rural/urban labour force lU= time derivative of LU (urban labour force)
That is, time derivative of urban labour force growth rate is a function of urban labour force growth rate and the probability of finding a job in a modern urban sector (as derived from equation 1.1 above)
The model, then tried to compare the live path of equation (1.1) or (1.2) with the growth rate of urban employment, and discussed rural-urban migration and urban employment under the different assumption of population and employment growth rates.
CONTRIBUTIONS OF THE MODEL
The fundamental contribution of Harris and Todaro’s rural-urban two sector migration model was to build a model that fit the stylized facts of the labour market. On the lines of the theory, developing countries adopted program on integrated rural development which encouraged an increase in the rural traditional sector wage. The theory proves that the higher the unemployment rate, the lower is the probability of new migrants from the countryside actively seeking formal sector employment who are unable to find it. The significant findings of the theory are:
First, if the expected urban wage equals rural income, there is no incentive to migrate.
Second, if the expected urban wage is greater than rural income, there is a great incentive to move from rural to urban area.
Third, if the expected urban wage is less than rural incomes, there would be an incentive to move in other direction.
Fourth, the expected urban wage depends on what type of job migrant is engaged in.
Therefore, the Harris Todaro’s model helps policy-makers to avoid two mistakes. One is to assume that development efforts should necessarily be channeled to the sectors where the poor are. The other is to assume that efforts should necessarily be focused on getting the poor out of the sectors in which they presently are.
FRAME WORK OF THE MODEL
Formal Sector– Modern urban capitalist sector geared towards large scale production.
Informal Sector– An unorganized, unregistered, but most legal sector consisting mainly of small family businesses and self employed individuals.
“The self-employed were engaged in a remarkable array of activities, ranging from hawking, street vending, letter writing, knife sharpening, and junk collecting to selling fireworks, prostitution, drug peddling, and snake charming. Others found jobs as mechanics, carpenters, small artisans, barbers, and personal servants. Still others were highly successful small-scale entrepreneurs with several employees (mostly relatives) and higher incomes.”
(Todaro, Michael P.; Smith, Stephen C. (2011-04-13). Economic Development (11th Edition) (The Pearson Series in Economics) (Page 328). Prentice Hall. Kindle Edition.)
Rural Sector– Traditional subsistence farming with labor-oriented small scale production.
Okaome Esther Chioma
Economics
2017/249554
estherokaome@gmail.com
Good day Mr President and honourable members of the house.
THE LEWIS FEI RANIS MODEL OF ECONOMIC GROWTH
The Lewis Fei Ranis model of Economic growth was propounded by Arthur Lewis and wa later transformed by Fei and Ranis. This model is also known as the Surplus Labour Model, it recognises the presence of a dual economy.
This model explains the growth of a developing economy, that is it explains the growth and development of a country as a whole, and as we all know that our county Nigeria is a developing country so in respect to the use of labour surplus in agriculture to increase Economic growth we can deduce that present situations of Economic growth and development do not mainly come from agriculture but also from other sources like from technology and industrial sectors even in developing countries.
The agricultural wage rate reduces because of increase in labour is no longer in terms with the most economics in the world according to the Lewis Fei Ranis model of economic growth.
Since this dual sector model deals with the economic growth and development in respect to the use of labor surplus in agriculture to increase economic growth like that of China in the year 1965, we can deduce that present situations of economic growth and development do not mainly come from agriculture but also from other sources like technology and industry even in developing countries. With the advent of new modern technologies as regarding agriculture, less labor is needed towards agriculture. Also, agricultural wage rate has decreased drastically .
APPLICATIONS TO DEVELOPING COUNTRIES LIKE NIGERIA;
In our county Nigeria today we can see that there is labour surplus today in rural areas. A situable example is an urban area like Abuja where there is a high wage that is been offered to the workers compared to those in the rural areas (villages) the likes of kano, and this therefore tracts surplus labour to the rural areas or villages, although there is still high rate if unemployment in the sector of the economy.
Even with the less labor involved…this proves that Lewis Rei-Rannie theory that showed that agricultural wage rate reduces because of increase in labor is no longer in terms with most economies in the world.
THE HARRIS TODARO MODEL OF MIGRATION
The model was proponded by John R Harris and Michael Todaro 1970
Since the Harris Todaro model of migration as to do with the issues concerning rural and urban migration, the migration of individuals from the rural area(village) to the urban area (city) in search of greener pastures, better education, employment opportunities, business opportunities and so on and so forth.
According to Todaro the tendency of getting a job depends fully on the size of the urban population that is employed in the labour force.
The longer a labour migrant has been in the manufacturing sector the more likely he or she is to get a job there also.
APPLICATIONS TO DEVELOPING COUNTRIES LIKE NIGERIA
Using our country Nigeria as a case study we can say that we have graduates who where once based in the rural area that graduated from the University with a good grade, when they look around them and observe that where they are dwelling is not convenient for then because it doesn’t satisfy their social needs they tend to move to the urban area in search for a befitting job that will earn them a higher income in other to satisfy their numerous wants abd to boost the economy if that particular country as a whole.
In conclusion individuals of a country believes that their income will get better in the long run if they migrate from the rural (village) to the urban (city). So that’s why they tend to live their villages to the city in search of greener pastures in the city.
UNIVERSITY OF NIGERIA, NSUKKA
FACULTY OF SOCIAL SCIENCE
DEPARTMENT OF combined social science
Economic and Geography
AN ASSIGNMENT WRITTEN IN THE PARTIAL FUFUILMENT OF THE COURSE:
Eco361: Development Economics
Name :Agboeze Chidera lovina
Reg no:2017/249297
E-mail :lovinachidera370@gmail.com
LEWIS MODEL
BASIC ASSUMPTION AND SUMMARY OF LEWIS MODEL.
SUMMARY
W.Arthur Lewis analysis update the dual economy model of economic development. Lewis had characterized that sector as one which physical capital was negligible,Labour was unskilled,productivity was extremely low, and social constraints limited the usefulness of conventional neoclassical economics. Lewis,like most growth theorists before and after,preferred to treat skills as just another form of heterogeneous capital instead of treating them as an attribute of workers. He did recognize the importance of human capital, observing that even the unskilled workers is of more use to the capitalist sector after he has been there for some time than is the raw recruit from the country. Yet human capital theory was skill relatively new when Lewis wrote,and few economist fully grasped its importance for economic development. He (Lewis) understood that skilled labour might well be a bottleneck in an expanding economy, but he believed that it was only because of this he saw no reason to consider the matter explicitly.
Lewis noted that capitalists and/ or government would quickly invest to relieve human capital bottlenecks seems to have been overly optimistic. An employer may invest in the employees firm _ specific skills,but has no incentive to invest in general skills that improve a workers attractiveness to other employer’s.Government may an education ministry in charge of their school system,but this rarely coordinates with the branch of government dealing with economic development.The results is that resources for economic development go disproportionately to investment in non_human capital without explicit consideration of the relative merits of human capital investments.
Combining human and non_human capital into a single factor of production also obfuscates an important dimension of the development process itself.Although both kinds of capital are accumulated through investment,investment in human capital occurs in a market that is very different from the markets for non_human investment.Physical and other non_human capital can be accumulated in an impersonal market where investors and owners need never meet and the resulting capital can be either owned by producers or rented by them in an impersonal factor market. In contrast,human capital accumulation is governed by the physical limits and social constraints that characterize the workers as people. skills are formed by an educational process (whether formal, informal or non_formal) that is ipso facto personal and skill is embodied in inalienable form and owned by the worker who then rents out its services in exchange for a wage.
Advocates of a trickle_down policy for economic development infer from the Lewis model that expanding modern_sector capital will ultimately absorb disguised unemployment,directly or indirectly, and thus lead to economic growth.Although Lewis himself clearly states that modern_sector “capital” can be either human or non_human,there is a tendency to forget this assumption,or to dismiss it as of little importance.As a result trickle_down development policies typically allocate investment resources to non_human capital and view education and skill formation (if at all) as ancillary activities. yet,as will be demonstrated below the models transparency with respect to human capital is greatly increased simply by specifying human and non_human capital as two separate factors of production.
BASIC ASSUMPTIONS.
Lewis model assumed that all increase in labor inputs came on the extensive margin by hiring more workers.The modern sectors could expand only by drawing workers out of the traditional sector or from the rank of the unemployed,and the traditional sector could compensate for any loss of workers by drawing workers from a pool of subsistence labour (including woman and children). But human capital can be augmented on the intensive margin by investing in education or training, giving rise to markets for education broadly defined to include training and other methods of learning, that have very different characteristics than those of an investment market for physical capital.
1.There is exists surplus labour in the subsistence sector, it includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage.
2.The model assumes that profits will be reinvested in the business in the form of fixed capital.
3. It also assumes that the wages in the manufacturing sector are more or less fixed.
4. The model assume that developing economy has a surplus of unproductive labour in the agricultural sector.
5. These workers are attracted to the growing manufacturing sector where higher wages are offered.
HOW LEWIS MODEL RELATE TO THE NIGERIA ECONOMY.
Lewis model relates to the Nigeria economy in some instance based on mixed economic system we are practicing. In Nigeria we have unlimited skilled labour with limited resources.
Nigeria we have a labour surplus and a modest capital. The utility of unlimited supplies of labour to growth objective depends upon the amount of capital available at the same time. If there is surplus labour, agriculture will derive no productive use from it labour must be encouraged to move to increase productivity in agriculture.
Lewis model also relate to Nigeria economy based on capital accumulation. The process of economic growth is inextricably linked to the growth of capitalist surplus,that is as long as the capitalist surplus increase, the national income also increase raising the growth of the economy.
Lewis model relates to Nigeria economy in capitalist sector. In capital sector labour is employed up to the point where its marginal product equals wage,since a capitalist employer would be reducing his surplus if the paid labour more than he received for what is produced. But this need not be true in subsistence agriculture as wages could be equal to age product or the level of subsistence.
FEI_RANIS MODEL
SUMMARY
The fei_Ranis model of economic growth is a dualism model in developmental economic or welfare economic.it is also known as the surplus labour model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogeneous in nature.
According to this theory,the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. But the sector co_exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labour from the agricultural sector to the industrial one, showing that undeveloped countries do not suffer from constraints of labour supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials.
Fei and Ranis emphasized strongly on the industrial_ agriculture interdependency and said that a robust connectivity between the two would encourage and speed up development. if agricultural labourers look for industrial employment and industrialists employ more workers by use of larger capital good stock and labour_ intensive technology, this connectivity can work between the industrial and agricultural sector. Also, if the surplus owner invests in that section of industrial sector that is close to soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized. They took the example of japans dualistic economy in 19th century and said that connectivity between the two sectors of Japan was heightened due to the presence of a decentralized rural industry which was often linked to urban production.
According to them, economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision_making powers and use industrial capital and consumer goods for agricultural practices.
Fei_Ranis model goes a step beyond and states that agricultural has a very major role to play in the expansion of the industrial sector. In fact, it says that the rate of growth of the industrial sector depends on the amount of profits that are earned in the industrial sector. So, larger the amount of surplus and the amount of surplus put into productive investment and larger the amount of industrial profits earned, the larger will be the rate of growth of the industrial economy. As the model focuses on the shifting of the focal point of progress from the agricultural agricultural to the industrial sector, Fei and Ranis believe that the ideal shifting takes place when the investment funds from surplus and industrial profits are sufficiently larger so as to purchase industrial capital goods like plants and machinery.
These capital goods are needed for the creation of employment opportunities. Hence,the condition put by fei and Ranis for a successful transformation is that rate of increase of capital stock and rate of employment opportunities less than rate of population growth.
BASIC ASSUMPTION.
1. Fei and Ranis assume constant returns to scale in the industrial sector.
2. Fei and Ranis assume a close model and hence there is no presence of foreign trade in the economy which is very unrealistic as food or raw materials cannot be important.
HOW FEI AND RANIS MODEL RELATED TO THE NIGERIA ECONOMY.
Fei and Ranis model related to the Nigeria economy on Agricultural sectors. In examining the initial role of the agricultural sector in Nigeria. The sector is seen to be an indispensable sector in establishing the framework for the nation’s economic growth based on Fei and Ranis analysis agricultural sector is focal point for development, therefore, Nigeria government should focus more in agriculture sector for rapid economic growth in Nigeria.
Fei and Ranis model related to the Nigeria economy on important role of agricultural sector and its role in the expansion of the industrial sector. Infact,it suggests that the growth rate of the industrial sectors depends on the size of the total area of agricultural surplus and the amount of profit earned in the industrial sector. So,the larger the amount of surplus and the amount of surplus to be put into productive investment and greater the volume of industrial profits,the greater the growth rate of the industrial economy.
Fei and Ranis believe that is applicable to Nigeria economy,that the ideal switching occurs when the investment funds from the profits and industrial profit large enough so as to acquire the industrial means of production like factories and equipment. This goods are necessary to creat employment opportunities and successful transformation to growth rate of the capital stocks and assess employment opportunities
As technological progress occur in Nigeria,Fei_Ranis model relatively explained that it transit to labour saving production technology,the growth of the economy is by increased profits not economic development.
TOPIC_HARRIS TODARO MODEL OF MIGRATION.
SUMMARY
The Harris_Todaro model,named after John R Harris and Michael Todaro is an economics model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural_urban migration.
The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials.This implies that rural and urban migration in a context of high urban unemployment can be economically rational if expected rural income.
The Harris-Todaro (HT) model admits the existence, in equilibrium, of a chronic large amount of urban unemployment due to the presence of urban minimum wages. The distinguishing feature of this model is that labor migration proceeds in response to urban-rural differences in expected earnings with the urban employment rate acting as an equilibrating force on such migration;This dissertation includes three articles and deals with the topic of international trade policies of an HT-type economy with labor surplus.
BASIC ASSUMPTION
This section outlines assumption in the Harris Todaro model on migration and equations that describe it.The structure of the Harris Todaro model is based on the premises that a fixed wage leads to an outbreak of distortion and urban unemployment.By introducing the concept of expected wage in the urban sector,the Harris Todaro model presuppose that the fixed wage in one sector is added to the assumption of the SF model.
The economy considered in the Harris Todaro model is a small open economy.in the Harris Todaro model,the economy consists of two sectors, one is an agricultural rural sector, sector one,the other is a manufacturing urban sector,sector two.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
HOW HARRIS TODARO RELATE TO NIGERIA ECONOMY.
Based on Harris_Todaro model on migration,I think it will promote economic growth, Economic growth requires both a labour force of a certain size and a changing labour force in terms of skills.Economic growth and economic development both require structural change and therefore transformation in the demand for labour.
The productivity of skilled labour is thus affected by the availability of unskilled.in general,economic growth involves continual structural change,and this is now so rapid and unpredictable that national training systems cannot cope .Migration is a key factor making economic growth possible.
Investigating Harris Todaro model on migration of beings from rural to urban areas,it rises urban wage pushes up the expected wage in the urban sectors and consequently encourage workers to migrate from the rural sector to the urban sectors.we could incorporate the environment damage into our analytical framework,the damage may be generated from either the manufacturing sector or the Agricultural sector.combining the Harris_Todaro model with mixed economy is an entirely new research area, and it deserves more attention than it has MUNIVERSITY OF NIGERIA, NSUKKA
FACULTY OF SOCIAL SCIENCE
DEPARTMENT OF combined social science
Economic and Geography
AN ASSIGNMENT WRITTEN IN THE PARTIAL FUFUILMENT OF THE COURSE:
Eco361: Development Economics
BY
Agboeze lovina chidera
2017/249297
LECTURER;
DR.Olisaemeka Achime
Agboeze chiMARCH, 2021
LEWIS MODEL
BASIC ASSUMPTION AND SUMMARY OF LEWIS MODEL.
SUMMARY
W.Arthur Lewis analysis update the dual economy model of economic development.Lewis had characterized that sector as one which physical capital was negligible,Labour was unskilled,productivity was extremely low, and social constraints limited the usefulness of conventional neoclassical economics.Lewis,like most growth theorists before and after,preferred to treat skills as just another form of heterogeneous capital instead of treating them as an attribute of workers.He did recognize the importance of human capital, observing that even the unskilled workers is of more use to the capitalist sector after he has been there for some time than is the raw recruit from the country. Yet human capital theory was skill relatively new when Lewis wrote,and few economist fully grasped its importance for economic development.He (Lewis) understood that skilled labour might well be a bottleneck in an expanding economy, but he believed that it was only because of this he saw no reason to consider the matter explicitly.
Lewis noted that capitalists and/ or government would quickly invest to relieve human capital bottlenecks seems to have been overly optimistic. An employer may invest in the employees firm _ specific skills,but has no incentive to invest in general skills that improve a workers attractiveness to other employer’s.Government may an education ministry in charge of their school system,but this rarely coordinates with the branch of government dealing with economic development.The results is that resources for economic development go disproportionately to investment in non_human capital without explicit consideration of the relative merits of human capital investments.
Combining human and non_human capital into a single factor of production also obfuscates an important dimension of the development process itself.Although both kinds of capital are accumulated through investment,investment in human capital occurs in a market that is very different from the markets for non_human investment.Physical and other non_human capital can be accumulated in an impersonal market where investors and owners need never meet and the resulting capital can be either owned by producers or rented by them in an impersonal factor market. In contrast,human capital accumulation is governed by the physical limits and social constraints that characterize the workers as people. skills are formed by an educational process (whether formal, informal or non_formal) that is ipso facto personal and skill is embodied in inalienable form and owned by the worker who then rents out its services in exchange for a wage.
Advocates of a trickle_down policy for economic development infer from the Lewis model that expanding modern_sector capital will ultimately absorb disguised unemployment,directly or indirectly, and thus lead to economic growth.Although Lewis himself clearly states that modern_sector “capital” can be either human or non_human,there is a tendency to forget this assumption,or to dismiss it as of little importance.As a result trickle_down development policies typically allocate investment resources to non_human capital and view education and skill formation (if at all) as ancillary activities. yet,as will be demonstrated below the models transparency with respect to human capital is greatly increased simply by specifying human and non_human capital as two separate factors of production.
BASIC ASSUMPTIONS.
Lewis model assumed that all increase in labor inputs came on the extensive margin by hiring more workers.The modern sectors could expand only by drawing workers out of the traditional sector or from the rank of the unemployed,and the traditional sector could compensate for any loss of workers by drawing workers from a pool of subsistence labour (including woman and children). But human capital can be augmented on the intensive margin by investing in education or training, giving rise to markets for education broadly defined to include training and other methods of learning, that have very different characteristics than those of an investment market for physical capital.
1.There is exists surplus labour in the subsistence sector, it includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage.
2.The model assumes that profits will be reinvested in the business in the form of fixed capital.
3. It also assumes that the wages in the manufacturing sector are more or less fixed.
4. The model assume that developing economy has a surplus of unproductive labour in the agricultural sector.
5. These workers are attracted to the growing manufacturing sector where higher wages are offered.
HOW LEWIS MODEL RELATE TO THE NIGERIA ECONOMY.
Lewis model relates to the Nigeria economy in some instance based on mixed economic system we are practicing. In Nigeria we have unlimited skilled labour with limited resources.
Nigeria we have a labour surplus and a modest capital. The utility of unlimited supplies of labour to growth objective depends upon the amount of capital available at the same time. If there is surplus labour, agriculture will derive no productive use from it labour must be encouraged to move to increase productivity in agriculture.
Lewis model also relate to Nigeria economy based on capital accumulation. The process of economic growth is inextricably linked to the growth of capitalist surplus,that is as long as the capitalist surplus increase, the national income also increase raising the growth of the economy.
Lewis model relates to Nigeria economy in capitalist sector. In capital sector labour is employed up to the point where its marginal product equals wage,since a capitalist employer would be reducing his surplus if the paid labour more than he received for what is produced. But this need not be true in subsistence agriculture as wages could be equal to age product or the level of subsistence.
FEI_RANIS MODEL
SUMMARY
The fei_Ranis model of economic growth is a dualism model in developmental economic or welfare economic.it is also known as the surplus labour model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogeneous in nature.
According to this theory,the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. But the sector co_exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labour from the agricultural sector to the industrial one, showing that undeveloped countries do not suffer from constraints of labour supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials.
Fei and Ranis emphasized strongly on the industrial_ agriculture interdependency and said that a robust connectivity between the two would encourage and speed up development. if agricultural labourers look for industrial employment and industrialists employ more workers by use of larger capital good stock and labour_ intensive technology, this connectivity can work between the industrial and agricultural sector. Also, if the surplus owner invests in that section of industrial sector that is close to soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized. They took the example of japans dualistic economy in 19th century and said that connectivity between the two sectors of Japan was heightened due to the presence of a decentralized rural industry which was often linked to urban production.
According to them, economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision_making powers and use industrial capital and consumer goods for agricultural practices.
Fei_Ranis model goes a step beyond and states that agricultural has a very major role to play in the expansion of the industrial sector. In fact, it says that the rate of growth of the industrial sector depends on the amount of profits that are earned in the industrial sector. So, larger the amount of surplus and the amount of surplus put into productive investment and larger the amount of industrial profits earned, the larger will be the rate of growth of the industrial economy. As the model focuses on the shifting of the focal point of progress from the agricultural agricultural to the industrial sector, Fei and Ranis believe that the ideal shifting takes place when the investment funds from surplus and industrial profits are sufficiently larger so as to purchase industrial capital goods like plants and machinery.
These capital goods are needed for the creation of employment opportunities. Hence,the condition put by fei and Ranis for a successful transformation is that rate of increase of capital stock and rate of employment opportunities less than rate of population growth.
BASIC ASSUMPTION.
1. Fei and Ranis assume constant returns to scale in the industrial sector.
2. Fei and Ranis assume a close model and hence there is no presence of foreign trade in the economy which is very unrealistic as food or raw materials cannot be important.
HOW FEI AND RANIS MODEL RELATED TO THE NIGERIA ECONOMY.
Fei and Ranis model related to the Nigeria economy on Agricultural sectors. In examining the initial role of the agricultural sector in Nigeria. The sector is seen to be an indispensable sector in establishing the framework for the nation’s economic growth based on Fei and Ranis analysis agricultural sector is focal point for development, therefore, Nigeria government should focus more in agriculture sector for rapid economic growth in Nigeria.
Fei and Ranis model related to the Nigeria economy on important role of agricultural sector and its role in the expansion of the industrial sector. Infact,it suggests that the growth rate of the industrial sectors depends on the size of the total area of agricultural surplus and the amount of profit earned in the industrial sector. So,the larger the amount of surplus and the amount of surplus to be put into productive investment and greater the volume of industrial profits,the greater the growth rate of the industrial economy.
Fei and Ranis believe that is applicable to Nigeria economy,that the ideal switching occurs when the investment funds from the profits and industrial profit large enough so as to acquire the industrial means of production like factories and equipment. This goods are necessary to creat employment opportunities and successful transformation to growth rate of the capital stocks and assess employment opportunities
As technological progress occur in Nigeria,Fei_Ranis model relatively explained that it transit to labour saving production technology,the growth of the economy is by increased profits not economic development.
TOPIC_HARRIS TODARO MODEL OF MIGRATION.
SUMMARY
The Harris_Todaro model,named after John R Harris and Michael Todaro is an economics model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural_urban migration.
The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials.This implies that rural and urban migration in a context of high urban unemployment can be economically rational if expected rural income.
The Harris-Todaro (HT) model admits the existence, in equilibrium, of a chronic large amount of urban unemployment due to the presence of urban minimum wages. The distinguishing feature of this model is that labor migration proceeds in response to urban-rural differences in expected earnings with the urban employment rate acting as an equilibrating force on such migration;This dissertation includes three articles and deals with the topic of international trade policies of an HT-type economy with labor surplus.
BASIC ASSUMPTION
This section outlines assumption in the Harris Todaro model on migration and equations that describe it.The structure of the Harris Todaro model is based on the premises that a fixed wage leads to an outbreak of distortion and urban unemployment.By introducing the concept of expected wage in the urban sector,the Harris Todaro model presuppose that the fixed wage in one sector is added to the assumption of the SF model.
The economy considered in the Harris Todaro model is a small open economy.in the Harris Todaro model,the economy consists of two sectors, one is an agricultural rural sector, sector one,the other is a manufacturing urban sector,sector two.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
HOW HARRIS TODARO RELATE TO NIGERIA ECONOMY.
Based on Harris_Todaro model on migration,I think it will promote economic growth, Economic growth requires both a labour force of a certain size and a changing labour force in terms of skills.Economic growth and economic development both require structural change and therefore transformation in the demand for labour.
The productivity of skilled labour is thus affected by the availability of unskilled.in general,economic growth involves continual structural change,and this is now so rapid and unpredictable that national training systems cannot cope .Migration is a key factor making economic growth possible.
Investigating Harris Todaro model on migration of beings from rural to urban areas,it rises urban wage pushes up the expected wage in the urban sectors and consequently encourage workers to migrate from the rural sector to the urban sectors.we could incorporate the environment damage into our analytical framework,the damage may be generated from either the manufacturing sector or the Agricultural sector.combining the Harris_Todaro model with mixed economy is an entirely new research area, and it deserves more attention than it has hitherto received. received.
ASSIGNMENT ON HARRIS TODARO MODEL
INTRODUCTION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
Overview
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
Formalism
The formal statement of the equilibrium condition of the Harris–Todaro model is as follows:
• Let wr be the wage rate (marginal productivity of labor) in the rural agricultural sector.
• Let le be the total number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
• Let lus be the total number of job seekers, employed and unemployed, in the urban sector.
• Let wu be the wage rate in the urban sector, which could possibly be set by government with a minimum wage law.
Rural to urban migration will take place if:
Conversely, urban to rural migration will occur if:
At equilibrium,
With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.
Conclusions
Therefore, migration from rural areas to urban areas will increase if:
• Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
• Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
ASSIGNMENT ON THE LEWIS-FEI-RANIS MODEL
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.[1] It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Basics of the model
Depiction of Phase1, Phase2 and Phase3 of the dual economy model using average output.
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development. In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
Using the help of the figure on the left, we see that
According to Fei and Ranis, AD amount of labor (see figure) can be shifted from the agricultural sector without any fall in output. Hence, it represents surplus labor.
After AD, MP begins to rise, and industrial labor rises from zero to a value equal to AD. AP of agricultural labor is shown by BYZ and we see that this curve falls downward after AD. This fall in AP can be attributed to the fact that as agricultural laborers shift to the industrial sector, the real wage of industrial laborers decreases due to shortage of food supply, since less laborers are now working in the food sector. The decrease in the real wage level decreases the level of profits, and the size of surplus that could have been re-invested for more industrialization. However, as long as surplus exists, growth rate can still be increased without a fall in the rate of industrialization. This re-investment of surplus can be graphically visualized as the shifting of MP curve outwards. In Phase2 the level of disguised unemployment is given by AK. This allows the agricultural sector to give up a part of its labor-force until
Phase 3 begins from the point of commercialization which is at K in the Figure. This is the point where the economy becomes completely commercialized in the absence of disguised unemployment. The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor.
The amount of labor that is shifted and the time that this shifting takes depends upon:
1. The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits;
2. The nature of the industry’s technical progress and its associated bias;
3. Growth rate of population.
So, the three fundamental ideas used in this model are:
1. Agricultural growth and industrial growth are both equally important;
2. Agricultural growth and industrial growth are balanced;
3. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap.
This shifting of labor can take place by the landlords’ investment activities and by the government’s fiscal measures. However, the cost of shifting labor in terms of both private and social cost may be high, for example transportation cost or the cost of carrying out construction of buildings. In addition to that, per capita agricultural consumption can increase, or there can exist a wide gap between the wages of the urban and the rural people. These three occurrences- high cost, high consumption and high gap in wages, are called as leakages, and leakages prevent the creation of agricultural surplus. In fact, surplus generation might be prevented due to a backward-sloping supply curve of labor as well, which happens when high income-levels are not consumed. This would mean that the productivity of laborers with rise in income will not rise. However, the case of backward-sloping curves is mostly unpractical.
OGUNDARE ABISOLA HELEN
2017/249546
William Arthur Lewis, with his most famous published work, “Economic Development with Unlimited Supplies of Labour” (Manchester School, May 1954) and “The Theory of Economic Growth” (Allen and Unwin, 1955), made a great contribution to the theories of economic development. Based on his findings, Ranis and Fei succeeded to extend the initial Lewis’ model and assessed the changes in the agricultural and industrial labour in more detail. I will start this paper by introducing the foundations of the model before following with the implications, basing most of my arguments on the analysis by Ranis and Fei in “A Theory of Economic Development”
Basic Thesis of the Lewis Model:
Lewis model is a classical type model which states that the unlimited supplies of labour can be had at the prevailing subsistence wages. The industrial and advanced modern sector can be developed based on agriculture to traditional sector. This can be done by transferring the labour from traditional sector and modern sector.
Lewis says that the wages in industrial sector remain constant. Consequently, the capitalists will earn ‘surplus’. Such surplus will be re-invested in the modern sector leading to absorb the labour which are migrated from subsistence sector. In this way, the surplus labour or the labour which were prey to disguised unemployment will get the employment. Thus, both the labour transfer and modern sector employment growth are brought about by output expansion in that sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector. Though the wages have been assumed constant, yet Lewis says that the urban wages are at least 30% higher than average rural income to induce the workers to migrate from their home areas.
Fei-Ranis (FR) Model of Dual Economy:
The two economists John Fei and Gustav Ranis presented their dual economy model. There was a flaw in Lewis model that it did not pay enough attention to the importance of agri. sector in promoting industrial growth. But Fei-Ranis (FR) model of dual economy explains how the increased productivity in agri. sector would become helpful in promoting industrial sector. In this respect, it presents three stages whereby a UDC moves from stagnation to self-sustained economic growth. Thus, this model is treated as an improvement over Lewis model of unlimited supply of labour.
Basic Thesis of the Model:
This theory is concerned with a poor economy which has following properties:
(i) There is an abundance of labour in such UDC and shortage of natural resources.
(ii) The population growth rate is very high which results in mass unemployment in the economy.
(iii) The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labour is zero and negative in agriculture sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy.
Thus the model suggests that:
“Economic development would be taking place if agricultural laborers are transferred to industrial sector where their productivity will increase”.
HARRIS- TODARO MODEL
John R. Harris and Michael P. Todaro presented the seminal ‘Two sector model’ in American Economic Association, 1970. This model is a pioneering study in the field encompassing rural-urban migration. The classical theory is used in development economics and is an economic illustration of migrants’ decision on expected income differentials between rural (agriculture) and urban (manufacturing) areas. The model of rural-urban migration is typically studied in the context of employment and unemployment situation in developing countries. The purpose of the model is to explain the critical urban unemployment problem in developing countries. The key hypothesis of Harris and Todaro’s model is that economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migration decision. In other words, this theory puts forward that rural-urban migration will occur when the urban expected wage exceeds the rural obtain wage.
The model was an academic investigation to throw light on the events following ‘Tripartite Agreement’ in Kenya. The newly independent Kenya in the 1960s was increasingly facing a serious situation of unemployment in the major urban cities. To cope with the situation of unemployment, Tripartite. Agreement was signed between the government public sector and the private sector. The agreement increased employment in the industrial jobs in exchange for unions agreeing to hold wages at their current levels. The larger number of employments was expected to reduce unemployment, but it appeared that the urban unemployment had increased following the government’s agreement. Harris and Todaro subsequently formulated a model to explain rural-urban economic preferences to migrate. The distinctive concept in the model is that the rate of migration flow from rural (agricultural) areas to urban (industrial) areas is determined by the difference between expected urban wages and rural wages. The rural-urban two-sector model centrally holds the following futures:
1) Real wages (adjusted for cost-of-living differences) were higher in urban formal sector jobs than in rural traditional sector jobs.
2) To be hired for a formal sector job, it was necessary to be physically present in the urban areas where the formal sector jobs were located.
3) Consequently, from the first two features, more workers searched for formal sector jobs than were actually hired. Employers hired some of the searchers but not all of them.
4) To maintain equality between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting would be characterized by urban unemployment.
5) Any temporary difference in the expected wages between one sector and another would be eroded as workers migrate from the low expected wage labour market to the high expected wage one.
There are two regions: rural (agricultural) and urban (industrial) in two sector economic model. The crucial assumption of the Harris and Todaro’s model is that workers base their migration decision on their expected incomes at urban (industrial) areas. As the basic model is static, the expected income is just the weighted average of the urban wage and the unemployment benefit, the weights being the probabilities to find and not to find an urban job. The model assumes that the rate of rural-urban (m= M/LR) is a function of:
i)The probability that an urban labour can successfully find a modern sector job, which can be expressed as a positive function of the current urban employment rate EU/LU,
or LU-EU/LU, a negative function of urban unemployment rate.
ii) The urban-rural real income differential is expressed as
YU/YR= W (W greater than 1),
Besides, migration will also be related to,
iii) Other factors (Z), such as distance, personal conduct, urban amenities.
Where,
m= Rate of migration from rural to urban areas
M= Actual volume of rural-urban migration
LR= Rural labour force
EU= Level of urban employment
LU= Urban labour force
YU= Urban real income
YR=Rural real income
W= Ratio between rural/urban real income
Therefore, the basic rural-migration migration model is expressed as:
(rural-urban migration) m = function of (current urban employment rate, urban-rural real income differential, and personal factors).
Thus, (rural-urban migration rate) m= f (EU /LU, W,Z) …. 1.1
= f (EU /LU) (holding W and Z constant)
= Function of the ratio between the level of urban employment and urban labour force.
Where
f (EU /LU) is greater than Zero.
f (W) is greater than Zero, and
f (Z) may have +ve or – ve values; (here is the time derivative of three elements)
That is, migration rate is a function of the ratio between the level of urban employment and urban labour force, or the probability to find a job in an urban industrial sector. Besides, urban labour force growth can be expressed as:
lU/LU=r + LR /LU(m)= r + LR/LU f (EU/LU) ……….1.2
r= natural growth rate of rural/urban labour force
lU= time derivative of LU (urban labour force)
That is, time derivative of urban labour force growth rate is a function of urban labour force growth rate and the probability of finding a job in a modern urban sector (as derived from equation 1.1 above)
The model, then tried to compare the live path of equation (1.1) or (1.2) with the growth rate of urban employment and discussed rural-urban migration and urban employment under the different assumption of population and employment growth rates.
Assumptions
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a 0 and g > 0 are a parametric constant. g is the elasticity of p with respect to the ratio Ym/Ya.
The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period.
NAME:OKEKE OGADIMMA NANCY
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DEPARTMENT:ECONOMICS
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THE HARRIS TODARO MODEL OF MIGRATION
The Harris-Todaro model also known as the H-T model was developed in 1970 by John R, Harris and Michael Todaro. It is an economic model used to explain some of the issue concerning rural-urban migration.
Starting from the assumptions that migration is primarily an economic phenomenon, which for the individual can be a quite rational decision despite the existence of urban unemployment, the Todaro model postulates that migration proceeds in response to Urban-rural differences in expected income rather than actual earnings.
The fundamental premise is that migrants consider various labor market opportunities available from migration. This implies that rural-urban unemployment can be economically rational if expected urban income exceeds expected rural income.
The H-T model also assumes that unemployment is non-existent in the rural agricultural sector. Rural agricultural production and subsequent labor market is also assumed is perfectly competitive.
In the model, equilibrium is reached when the expected wage in urban areas is equal to marginal product of an agricultural worker. In addition, the rural to urban migration will be zero since the expected rural income equals the expected urban income in equilibrium. However, in equilibrium, there will be a positive unemployment in the urban sector.
With the random matching of workers to available jobs, the ratio of available job seekers gives the probability that any person moving from the agricultural sector to the rural sector will be able to find a job.
To sum up, the Todaro migration model has four basic characteristics:
1. Migration is stimulated primarily by rational economic considerations of relative benefits and costs, mostly financial but also psychological.
2. The decision to migrate depends on expected rather than actual urban-rural real-wage differentials where the expected differential is determined by the interaction of two variables, the actual urban-rural wage differential and the probability of successfully obtaining employment in the urban sector.
3. The probability of obtaining an urban job is directly related to the urban employment rate and thus inversely related to the urban unemployment rate.
4. Migration rates in excess of urban job opportunity growth rates are not only possible but also rational and even likely in the face of wide urban-rural expected income differentials. High rates of urban unemployment are therefore inevitable outcomes of the serious imbalance of economic opportunities between urban and rural areas in most underdeveloped countries.
In conclusion, migration from rural areas to urban areas will increase if:
1. Urban wages increase in the urban sector, increasing the expected urban income.
2. Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector, decreasing the expected rural income.
But, even though this migration causes unemployment and induces informal sector growth, this behavior is economically rational and utility maximizing in the context of the H-T model. As long as migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
Based on long-term trends, comparisons with developed countries, and high individual incentives, continued urbanization and rural-urban migration are probably inevitable. Urban bias spurs migration, but focused investment in agriculture raises rural productivity sufficiently to require less labor; a majority of alternative types of employment expansion tend to be concentrated in urban areas because of agglomeration effects. Moreover, as education increases in rural areas, workers gain the skills they need, and perhaps the rising aspirations, to seek employment in the city. But the pace of rural-urban migration is still often excessive from the social viewpoint.
The H-T model is applicable to developing countries like Nigeria and this is due to the fact of the high level of rural-urban migration of workers due to differences in wage rate .Also,if current agricultural policies are continued, urban unemployment and income disparities will become increasingly serious in Nigeria. Furthermore, the income differences in agriculture and non agriculture is predicted to widen leading to a continuing increase in the rate of labor migration out of agriculture.
LEWIS-FEI-RANIS MODEL OF ECONOMIC GROWTH
The Fei-Ranis model of economic growth was developed by John Fei. C. H and Gustav Ranis. The model is a dualism model in developmental or welfare economics and also an extension of the Lewis model. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. This theory is also known as surplus labor model.
The Lewis two-sector model became the general theory of the development process in surplus-labor developing nations during most of the 1960s and early 1970s.
In the Lewis model, the underdeveloped economy consists of two sectors:
1. A traditional, overpopulated rural subsistence sector characterized by zero marginal labor productivity—a situation that permits Lewis to classify this as surplus labor in the sense that it can be withdrawn from the traditional agricultural sector without any loss of output
2. A high-productivity modern urban industrial sector into which labor from the subsistence sector is gradually transferred. The primary focus of the model is on both the process of labor transfer and the growth of output and employment in the modern sector. (The modern sector could include modern agriculture, but we will call the sector “industrial” as shorthand). Both labor transfer and modern-sector employment growth are brought about by output expansion in that sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector.
In other words, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. This theory is also known as surplus labor model.
The theory recognizes the presence of a dual economy comprising both the modern and the primitive sector takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
Since the primitive sector and the modern sector co-exist in the economy, the problem of development arises. And development can happen only when there is a shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials.
The model assumes that industry-agriculture is interdependent and that a robust connectivity between the two would encourage and speedup development. For example, if agricultural laborers look for industrial employment, and industrialists employ more workers by use of larger capital good stock and labor-intensive technology, this connectivity can work between the industrial and agricultural sector.
Also, if the surplus owner invests in that section of industrial sector that is close to soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized. According to model, economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision-making powers and use industrial capital and consumer goods for agricultural practices.
The Lewis model is criticized on the grounds that it neglects agriculture. One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors.
However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.
They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development.
In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model.
In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages
Fei–Ranis model goes a step beyond and states that agriculture has a very major role to play in the expansion of the industrial sector. In fact, it says that the rate of growth of the industrial sector depends on the amount of total agricultural surplus and on the amount of profits that are earned in the industrial sector. So, larger the amount of surplus and the amount of surplus put into productive investment and larger the amount of industrial profits earned, the larger will be the rate of growth of the industrial economy.
As the model focuses on the shifting of the focal point of progress from the agricultural to the industrial sector, Fei and Ranis believe that the ideal shifting takes place when the investment funds from surplus and industrial profits are sufficiently large so as to purchase industrial capital goods like plants and machinery. These capital goods are needed for the creation of employment opportunities.
Hence, the condition put by Fei and Ranis for a successful transformation is that Rate of increase of capital stock & rate of employment opportunities > Rate of population growth. As an underdeveloped country goes through its development process, labor is reallocated from the agricultural to the industrial sector. More the rate of reallocation, faster is the growth of that economy.
The economic rationale behind this idea of labor reallocation is that of faster economic development.
The essence of labor reallocation lies in Engel’s law which states that the proportion of income being spent on food decreases with increase in the income-level of an individual, even if there is a rise in the actual expenditure on food. For example, if 90 per cent of the entire population of the concerned economy is involved in agriculture, that leaves just 10 per cent of the population in the industrial sector. As the productivity of agriculture increases, it becomes possible for just 35 per cent of population to maintain a satisfactory food supply for the rest of the population. As a result, the industrial sector now has 65 per cent of the population under it.
This is extremely desirable for the economy, as the growth of industrial goods is subject to the rate of per capita income, while the growth of agricultural goods is subject only to the rate of population growth, and so a bigger labor supply to the industrial sector would be welcome under the given conditions. In fact, this labor reallocation becomes necessary with time since consumers begin to want more of industrial goods than agricultural goods in relative terms.
However, Fei and Ranis were quick to mention that the necessity of labor reallocation must be linked more to the need to produce more capital investment goods as opposed to the thought of industrial consumer goods following the discourse of Engel’s law. This is because the assumption that the demand for industrial goods is high seems unrealistic, since the real wage in the agricultural sector is extremely low and that hinders the demand for industrial goods. In addition to that, low and mostly constant wage rates will render the wage rates in the industrial sector low and constant. This implies that demand for industrial goods will not rise at a rate as suggested by the use of Engel’s curve.
Since the growth process will observes a slow-paced increase in the consumer purchasing power, the dualistic economies follow the path of natural austerity, which is characterized by more demand and hence importance of capital goods industries as compared to consumer good ones.
However, in a developing country like Nigeria, investment in capital goods comes with a long gestation period, which drives the private entrepreneurs away. This suggests that in order to enable growth, the government must step in and play a major role, especially in the initial few stages of growth.
Additionally, the government also works on the social and economic overheads by the construction of roads, railways, bridges, educational institutions, health care facilities etc.
Harris-Todaro Model of Migration
Introduction
The fundamental contribution of Todaro model to our understanding of the migration process and its links with unemployment is that migration proceeds primarily in response to differences in expected urban and rural real incomes and that as a result of this, there is an observed accelerated rates of internal migration in developing countries.
Background of the Model
This model is named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural urban migration.
In the 1960s the government of newly independent Kenya faced a difficult situation via unemployment in Nairobi and other major cities. To cope with this problem, Tripartite Agreements were reached in which private-sector and public- sector employers agreed to increase employment in exchange for unions agreeing to hold wages at their current levels. However, in the event, urban unemployment appeared to have increased following the Tripartite Agreements rather than decreased.
Assumptions of the Model
[a] There are two sectors in the economy: the rural or agricultural sector(A) and the urban or manufacturing sector(M). [b] Each sector produces only the unit ‘X'(XA -agricultural good; XM – manufacturing sector). [c] The model operates in the short run. [d] Capital is available in fixed quantities in the two sectors. [e] There are N workers in economy with NA – NM number employed in the rural and urban respectively. [f] The numbers of urban jobs available NM is exogenous fixed. In the rural sector some work is always available. Therefore, the total urban labor force comprises N – NA along with an available supply of rural migrants. In other words, the total urban labor force equals N – NA with (N – NA) – NM unemployed. [g] The urban wages is fixed at WM and rural wage at WA, WM > WA. [h] The rural wage equals the rural marginal product of labor and the urban wage is exogenously determined. [i] Rural-urban migration continues so long as the expected urban real income is more than the real agricultural income. [j] The expected urban real income is equal to the production of urban labor force actually employed multiplied by the fixed minimum urban wage. [k] There is a perfect competition among production in both the sectors. [l] The price of the agricultural goods in determined by the relative quantity of the two goods produced in both the sectors
Criticism of the Model
a. The Harris-Todaro model does not specify alternative policy prescriptions such as giving a wage subsidy to the urban sector and at the same time restricting the migration of those rural workers who are not able to find jobs in the urban sector.
b. According to Bhajwati and Srinivasan suggested a uniform wage subsidy to both rural and urban sectors for economy to attain the optimum level of employment and output.
c. Harris and Todaro suggest non-distortionary lump sum tax to finance subsidy. But a lump-sum tax is seldom non-distortionary.
d. The Harris-Todaro model does not take into consideration the generation of savings as a source of financing subsidy. Though savings are low in less developed countries. Yet they are important source of non-distortionary finance to subside wages.
Exposition of the Model to Nigeria Economy
A study evaluated by Bright Anayo to address the issue of migration in Nigeria, in most economic criteria and observation of population tendency. The econometric model consists of 3 groups: Employment, Earn, and Leisure/Side attraction.
Migration as a result of employment is tend towards industries (manufacturing sectors) situated in major cities like Lagos, Abuja, Port Harcourt etc. People migrate to this area as a panacea to unemployment in rural or semi-rural areas of domicile. The migration varies between the age bracket of (18-40) years, but exponential to the newly college graduate as a result of expected income. However, from the trend of population tendency is observed that 40 percent of graduate produced in Nigeria colleges migrate to cities.
Furthermore, then and now, many male youth does migrate to cities because of expected income(earning). Lagos as an example where there is presence of seaport, manufacturing firms. Considering, the presence of seaport, some engaged themselves in apprenticeship with business men as for those who do not the finance, and those who have engaged in one business or the other. However, those who are neither in both is classified as unemployed; thereby increasing the inequality in the city, which they are not willing to go back to their domicile.
Lastly, due to the modernization, with regards to leisure/Side attraction. Many individuals visit hubs as means to earn and end. However, the power-ness of medical capability in major cities is fascinating for well to-do men to risk their life in hospitalities in rural areas of which they prefer going to the city. Move over, deposition of airport makes it possible for the inflow of migrants in search of job or a route to migrant to within and outside the country. This in-turn is an eye opening for opportunities in urban area.
Lewis Theory (Unlimited Supplies of Labor)
Introduction
Surplus labor according to Lewis (1954)—is defined as that part of the labor force that can be removed without reducing the total amount of output produced, even when the input of other factors remains constant. Lewis assumed a dual economy—a modern exchange sector and an indigenous subsistence economy.
Background of the theory
Professor W. Arthur Lewis developed his theory “utilization of surplus manpower” in 1950 when he wrote famous book “Economic Development with Unlimited Supplies of Labor”. Lewis gave two sector surplus model which are capitalist sector and subsistence sector. He focused on structural transformation of primary subsistence economy.
Lewis depict that an economic development takes place when capital accumulates as a result of the withdrawal of surplus labor from the subsistence sector to the capitalist sector. The capitalist sector is that part of the economy which reproducible capital and it employs labor for wages in mines, factories, and plantations for earning profits. The subsistence sector is that part of the economy which does not use reproducible capital i.e. output is per head is lower than in the capitalist sector.
Assumptions of the theory
[a] Lewis model is a two sectors which comprises of rural subsistence sector and urban industrial sector. [b] Supply of labour is perfectly elastic. [c] Surplus labour in rural sector ie. (cheap labour). [d] Marginal productivity of labour is zero. [e] Capital formation accelerated by more utilizing the unlimited supply of labour. [f] Real wage rate is constant in subsistence sector. [g] Saving is done by only capitalist. [h] There is a negative aggregate demand.
Criticism of the theory
[a] Wage rate not constant in the capitalist sector. [b] The theory is not applicable if capital accumulation is labor saving. [c] Skilled labor not a temporary bottleneck [d] The multiplier proces does not operate in less developed country. [e] Marginal propensity of labor is not zero. [f] Productivity falls with migration of labor from the subsistence sector.
Fei-Ranis Theory of Development
Introduction
The Fei-Ranis theory is also called utilization of man power 2. An improvement of Lewis’s theory of unlimited supplies of Labor because of neglect of agricultural power-ness. This theory is developed by John Fei and Rani’s in an article entitled “A Theory of Economic Development” analyze the transition process through which an underdeveloped economy hopes to move from a condition of stagnation to one of self-sustained growth.
Assumptions of the theory
[a] There is a dual economy divided into a traditional and stagnant agricultural sector and an active industrial sector. [b] The output of the agricultural sector is a function of land and labor alone. [c] There is no accumulation of capital in agriculture except in the form of land reclamation. [d] Land is fixed in supply. [e] Agricultural activity is characterized by constant returns to scale with labor as a variable factor. [f] It is assumed that the marginal productivity of labor becomes zero at some point. If population exceeds the quantity at which the marginal productivity of labor becomes zero, labor can be transferred to the industrial sector without loss in agricultural output. [g] The output of the industrial sector is a function of capital and labor alone. Land has no role as a factor of production.
Criticism of the theory
a. The model assume that the supply of land is fixed during the development process.
b. In long the run amount of land is not fixed.
c. The model is based on assumption of a constant institutional wage above MPP during phase 1 and phase 2 of the developmental process but there is no empirical evidence is labor surplus underdeveloped countries which paid to the agriculture workers are much below they are MPP.
d. The theory assume that the institutional wage remains constant in the first phases even when agricultural productivity increase, this is highly unrealistic because agricultural productivity, farm wage rise.
Exposition of Lewis – Fei-Ranis theory to Nigeria Economy
Most times due to the failure in part of a sector, any economy could choose to adopt balanced model where a two distinct sectors work together. This surely eager to boost the economic development.
A case study of Nigeria economy studied under Lewis-Fei-Ranis theory using the rural and urban sectors suggest that there is always a high unlimited supplies of labor in rural area which as a result of crude implement haven considered agricultural power-ness and understood that it is not reproducible. However, considering the structural transformation of primary subsistence economy many programs are being put in place in other to achieve their goal. Such program as International Fund for Agriculture(IFAD), Farm Settlement Scheme (FSS), Agricultural Development Projects (ADP) etc.
There is a clear indication that sometimes orientations are done in economy, in other to train and fix un-skill individual from rural sector to Urban sector, mostly in other to fit in worker in mines, factories, and plantations and earn profits. Without doubt this boost their economic development even to the exportation of agricultural produce because of the collaboration with the two sectors.
Furthermore, a state ministry in South-east of Nigeria once organize a workshop for its youth with a specified number who are already in shoe making with a Chinese company in to bring a change in old way of production.
Harris-Todaro Model of Migration
Introduction
The fundamental contribution of Todaro model to our understanding of the migration process and its links with unemployment is that migration proceeds primarily in response to differences in expected urban and rural real incomes and that as a result of this, there is an observed accelerated rates of internal migration in developing countries.
Background of the Model
This model is named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural urban migration.
In the 1960s the government of newly independent Kenya faced a difficult situation via unemployment in Nairobi and other major cities. To cope with this problem, Tripartite Agreements were reached in which private-sector and public- sector employers agreed to increase employment in exchange for unions agreeing to hold wages at their current levels. However, in the event, urban unemployment appeared to have increased following the Tripartite Agreements rather than decreased.
Assumptions of the Model
[a] There are two sectors in the economy: the rural or agricultural sector(A) and the urban or manufacturing sector(M). [b] Each sector produces only the unit ‘X'(XA -agricultural good; XM – manufacturing sector). [c] The model operates in the short run. [d] Capital is available in fixed quantities in the two sectors. [e] There are N workers in economy with NA – NM number employed in the rural and urban respectively. [f] The numbers of urban jobs available NM is exogenous fixed. In the rural sector some work is always available. Therefore, the total urban labor force comprises N – NA along with an available supply of rural migrants. In other words, the total urban labor force equals N – NA with (N – NA) – NM unemployed. [g] The urban wages is fixed at WM and rural wage at WA, WM > WA. [h] The rural wage equals the rural marginal product of labor and the urban wage is exogenously determined. [i] Rural-urban migration continues so long as the expected urban real income is more than the real agricultural income. [j] The expected urban real income is equal to the production of urban labor force actually employed multiplied by the fixed minimum urban wage. [k] There is a perfect competition among production in both the sectors. [l] The price of the agricultural goods in determined by the relative quantity of the two goods produced in both the sectors
Criticism of the Model
a. The Harris-Todaro model does not specify alternative policy prescriptions such as giving a wage subsidy to the urban sector and at the same time restricting the migration of those rural workers who are not able to find jobs in the urban sector.
b. According to Bhajwati and Srinivasan suggested a uniform wage subsidy to both rural and urban sectors for economy to attain the optimum level of employment and output.
c. Harris and Todaro suggest non-distortionary lump sum tax to finance subsidy. But a lump-sum tax is seldom non-distortionary.
d. The Harris-Todaro model does not take into consideration the generation of savings as a source of financing subsidy. Though savings are low in less developed countries. Yet they are important source of non-distortionary finance to subside wages.
Exposition of the Model to Nigeria Economy
A study evaluated by Bright Anayo to address the issue of migration in Nigeria, in most economic criteria and observation of population tendency. The econometric model consists of 3 groups: Employment, Earn, and Leisure/Side attraction.
Migration as a result of employment is tend towards industries (manufacturing sectors) situated in major cities like Lagos, Abuja, Port Harcourt etc. People migrate to this area as a panacea to unemployment in rural or semi-rural areas of domicile. The migration varies between the age bracket of (18-40) years, but exponential to the newly college graduate as a result of expected income. However, from the trend of population tendency is observed that 40 percent of graduate produced in Nigeria colleges migrate to cities.
Furthermore, then and now, many male youth does migrate to cities because of expected income(earning). Lagos as an example where there is presence of seaport, manufacturing firms. Considering, the presence of seaport, some engaged themselves in apprenticeship with business men as for those who do not the finance, and those who have engaged in one business or the other. However, those who are neither in both is classified as unemployed; thereby increasing the inequality in the city, which they are not willing to go back to their domicile.
Lastly, due to the modernization, with regards to leisure/Side attraction. Many individuals visit hubs as means to earn and end. However, the power-ness of medical capability in major cities is fascinating for well to-do men to risk their life in hospitalities in rural areas of which they prefer going to the city. Move over, deposition of airport makes it possible for the inflow of migrants in search of job or a route to migrant to within and outside the country. This in-turn is an eye opening for opportunities in urban area.
Lewis Theory (Unlimited Supplies of Labor)
Introduction
Surplus labor according to Lewis (1954)—is defined as that part of the labor force that can be removed without reducing the total amount of output produced, even when the input of other factors remains constant. Lewis assumed a dual economy—a modern exchange sector and an indigenous subsistence economy.
Background of the theory
Professor W. Arthur Lewis developed his theory “utilization of surplus manpower” in 1950 when he wrote famous book “Economic Development with Unlimited Supplies of Labor”. Lewis gave two sector surplus model which are capitalist sector and subsistence sector. He focused on structural transformation of primary subsistence economy.
Lewis depict that an economic development takes place when capital accumulates as a result of the withdrawal of surplus labor from the subsistence sector to the capitalist sector. The capitalist sector is that part of the economy which reproducible capital and it employs labor for wages in mines, factories, and plantations for earning profits. The subsistence sector is that part of the economy which does not use reproducible capital i.e. output is per head is lower than in the capitalist sector.
Assumptions of the theory
[a] Lewis model is a two sectors which comprises of rural subsistence sector and urban industrial sector. [b] Supply of labour is perfectly elastic. [c] Surplus labour in rural sector ie. (cheap labour). [d] Marginal productivity of labour is zero. [e] Capital formation accelerated by more utilizing the unlimited supply of labour. [f] Real wage rate is constant in subsistence sector. [g] Saving is done by only capitalist. [h] There is a negative aggregate demand.
Criticism of the theory
[a] Wage rate not constant in the capitalist sector. [b] The theory is not applicable if capital accumulation is labor saving. [c] Skilled labor not a temporary bottleneck [d] The multiplier proces does not operate in less developed country. [e] Marginal propensity of labor is not zero. [f] Productivity falls with migration of labor from the subsistence sector.
Fei-Ranis Theory of Development
Introduction
The Fei-Ranis theory is also called utilization of man power 2. An improvement of Lewis’s theory of unlimited supplies of Labor because of neglect of agricultural power-ness. This theory is developed by John Fei and Rani’s in an article entitled “A Theory of Economic Development” analyze the transition process through which an underdeveloped economy hopes to move from a condition of stagnation to one of self-sustained growth.
Assumptions of the theory
[a] There is a dual economy divided into a traditional and stagnant agricultural sector and an active industrial sector. [b] The output of the agricultural sector is a function of land and labor alone. [c] There is no accumulation of capital in agriculture except in the form of land reclamation. [d] Land is fixed in supply. [e] Agricultural activity is characterized by constant returns to scale with labor as a variable factor. [f] It is assumed that the marginal productivity of labor becomes zero at some point. If population exceeds the quantity at which the marginal productivity of labor becomes zero, labor can be transferred to the industrial sector without loss in agricultural output. [g] The output of the industrial sector is a function of capital and labor alone. Land has no role as a factor of production.
Criticism of the theory
a. The model assume that the supply of land is fixed during the development process.
b. In long the run amount of land is not fixed.
c. The model is based on assumption of a constant institutional wage above MPP during phase 1 and phase 2 of the developmental process but there is no empirical evidence is labor surplus underdeveloped countries which paid to the agriculture workers are much below they are MPP.
d. The theory assume that the institutional wage remains constant in the first phases even when agricultural productivity increase, this is highly unrealistic because agricultural productivity, farm wage rise.
Exposition of Lewis – Fei-Ranis theory to Nigeria Economy
Most times due to the failure in part of a sector, any economy could choose to adopt balanced model where a two distinct sectors work together. This surely eager to boost the economic development.
A case study of Nigeria economy studied under Lewis-Fei-Ranis theory using the rural and urban sectors suggest that there is always a high unlimited supplies of labor in rural area which as a result of crude implement haven considered agricultural power-ness and understood that it is not reproducible. However, considering the structural transformation of primary subsistence economy many programs are being put in place in other to achieve their goal. Such program as International Fund for Agriculture(IFAD), Farm Settlement Scheme (FSS), Agricultural Development Projects (ADP) etc.
There is a clear indication that sometimes orientations are done in economy, in other to train and fix un-skill individual from rural sector to Urban sector, mostly in other to fit in worker in mines, factories, and plantations and earn profits. Without doubt this boost their economic development even to the exportation of agricultural produce because of the collaboration with the two sectors.
Furthermore, a state ministry in South-east of Nigeria once organize a workshop for its youth with a specified number who are already in shoe making with a Chinese company in to bring a change in old way of production.
Name: Agbo Jennifer Amarachi
Reg No: 2017/249476
E-mail: jenniferamarachi.agbo@gmail.com
Blog:https://agbojenniferamarachi.blogspot.com/?m=1
FIRST TOPIC: HARRIS TODARO MODEL OF MIGRATION.
ANSWER:- HARRIS-TODARO MODEL MIGRATION
INTRODUCTION
It has been confirmed that an economy can develop effectively by transferring a huge amount of its labour from its subsistence otherwise called Agricultural, backward, and informal sector in the rural region to the modern sector or industry. The Rural sector is known to be a sector where the marginal productivity of labour is very low, or even zero, whereas in the modern sector, the marginal productivity of labour is higher, very much positive and greater than zero. The Harris-Todaro model is a model that explains the little dialogue above, and because it deals with two sector in the economy, it is also referred to as a Dualistic Model. According to the Literature of Development Economics, typical dualistic models became popular in the 1950’s. A Dualistic model in development economics contains, two sectors, which are Traditional/ rural or agricultural sector and a modern or manufacturing sector in the urban area.
However, the ground-breaking work of Harris and Todaro in 1970, was brought as a result of what Todaro called “a curious economic phenomenon” in tropical Africa. The phenomenon was a regular and increasing rural urban migration regardless, the existence or presence of higher positive marginal products in agriculture.
MAJOR CONTRIBUTION OF MICHAEL P. TODARO
The introduction of the probability of employment as an element in the decision making process of a potential migrant is considered the main contribution of Todaro. He called his proposal “a more realistic picture of labour migration in less developed countries” that is, a two-stage process.
The First Stage: is where the rural migrant enters the urban area and settles down in traditional urbans sector (the informal sector) for a given or certain period of time.
The Second Stage: it is reached when the migrant finds a more permanent job in the modern sector. Although Todaro and some other authors did not consider the employees of the informal sector, they were seen to be the same with unemployed people in the society, this is because to them they make no income of their own and always have to rely on their relatives for survival.
According to Todaro, the probability of getting a Job is dependent on:
The number of newly recent or newly created jobs in the formal or modern sector/.
The Size of the population Unemployed in the Modern sector.
The length of time a migrant has been in the urban area. It happens that the longer one stays, the greater the chance of finding Job in the urban sector.
HARRIS-TODARO MODEL – AN EXTENSION OF THE TODARO MODEL.
The Harris-Todaro Model is an extension of the Todaro Model. Prof. J.R. Harris and P. Michael Todaro in an article “Migration, Unemployment and Development: A two-Sector Analysis” in 1970 presented a model on rural-urban migration in underdeveloped countries. The core notion of Harris Todaro’s model is that the migration of labour in less developed countries is due to the rural-urban differences in average expected wages rather than actual wages. This means that the migrants will have to consider and weigh the numerous job opportunities that are provided to them in the rural and urban sectors and they will choose the one that gives the highest expected wage from Migration.
The minimum wage which is obtainable in the Urban sector is significantly higher than the rural wage. Therefore, if more job opportunities are created in the urban sector at the minimum wage, the expected wage will rise and rural-urban migration will increase. Expected wages are measured by the differences in real urban income and rural agricultural income and the probability of a migrant’s getting an Urban Job. Thus, migration in the Harris-Todaro model is seen as the wage or income gap between the rural and the urban sectors. However, all the migrants cannot be absorbed simultaneously in the urban sector at that prevailing high wage. So many of them fail to find a job and get employment in the informal urban sector at wages which are even lower than in the rural sector, this means that the number of unemployment will increase in the Urban sector.
The unique concept in the migration flow from rural(Agricultural) areas to urban (Industrial) areas is determined by the difference between expected urban wages and rural wages.
MAIN DISCUSSION OF HARRIS-TODARO MODEL
The ultimate contribution of the Harris-Todaro rural-urban two-sector migration model was to build a model that fit the schematic facts of the labour market. Developing countries implemented program on incorporated rural development which encouraged an increase in the rural traditional sector wage. The theory proves that the higher the Unemployment rate, the lower is the probability of new migrants from the country side actively seeking formal sector employment who are unable to find it.
THE NOTABLE FINDINGS
There is no incentive to migrate if the expected urban wage equals rural income.
There is a great incentive to move from rural to urban area if the expected urban wage is greater than rural income,
There would be an incentive to move in other direction if the expected urban wage is less than rural income.
The expected urban wage depends on what type of Job the migrant is engaged in.
ASSUMPTIONS OF THE HARRIS TODARO MODEL
There are two sectors in the Economy – The rural or agricultural sector (A) and the urban or manufacturing sector (M).
The Model operates in the short run.
The Marginal production of Labour in agriculture (MPLA) and of Industry (MPLM) are determined by their respective technologies.
Available Capital in the two sectors are in fixed quantities.
The number of Urban Jobs available (Lm) is exogenously fixed. In the rural sector some work is always available. Therefore, the total urban labour force Lm comprises L-LA along with an available supply of rural Migrants.
The Urban wage is fixed at Wm and the rural wage at WA , Wm> WA
The rural wage equals the rural marginal product of labour and the urban wage is exogenously determined.
Rural-Urban Migration continues so long as the expected urban real income is more that the real agricultural income.
MAJOR CRITICISMS
The lottery style of Job allocation ignores investment in Job search on the part of the migrants and the informal sector is not clearly modelled.
The assumption of a rigid wage in the modern sector cannot be supported due to lack of evidence. Besides trade union pressure or minimum wage legislation, the wage differentials among sectors could be explained as well by, say. Firm specific training costs.
The issue of discount rates and rational migrants is overlooked and the influence on decision making of risk and risk attitudes on the part of potential migrants is not included.
Differentials in skill levels among the migrants are not accounted for.
Further. Some of the assumptions of the Harris-Todaro model were judged to be too restrictive. The model also assumes that potential migrants are risk neutral where poor migrants will likely be risk averse, as in they are indifferent between a certain expected rural income and uncertain expected urban income of the same magnitude. Also, the assumption that there exist a perfect competition in rural agriculture is not realistic.
However, the main drawback of this model is that it does not incorporate the costs of rural-urban migration or the relatively higher costs of urban living which the migrants have to incur in the urban sector.
CONCLUSION
The Harris-Todaro Model elucidates the issues of rural-urban migration. The equilibrium condition of this model occurs is when the expected urban wage is equal to rural wage. For instance, when government decides to subsidize manufacturing sector Harris-Todaro Paradox may happen. According to the authors job creation instead of dealing with unemployment problem actually may cause increase of unemployment. This happens when urban–rural wage gap is high enough; so rural workers move to the cities hoping to find Job with high wage. However, not all these workers succeed in finding Jobs which leads to Unemployment.
SECOND TOPIC: LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
The Arthur Lewis (1954) theory of dualistic economic development provides the seminal contribution of theories of economic development particularly for labour surplus and resource for poor developing countries. The Economy in the Lewis theory, comprises the agricultural and non-agricultural sectors.
The Agricultural sector is assumed to have huge amounts of surplus labour that results in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is pressured to follow the sharing rule and be equal to the average productivity, that is the institutional wage.
The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30%. It accumulates capital by drawing surplus labour out of the agricultural sector. The expansion of the agricultural sector takes advantage of the infinite elastic supply of labour from the agricultural sector due to its labour surplus. When the surplus labour is exhausted, the labour supply curve in the non-agricultural sector becomes upward sloping. This model is also called Utilization of manpower
Furthermore, Gustav Ranis and John Fei in 1961, formalised and developed Lewis’ theory by combining it with Rostow’s (1956) three “linear stages of growth ” theory. Their significant contribution was the dissembling of Lewis’ two-stage Economic development into 3 phase; defined by the marginal productivity of agricultural labour.
ASSUMPTIONS
The Economy is assumed to be constant in the preconditioning stage. The break out point marks the creation of an infant non-agricultural sector and the entry into phase one.
Agricultural labour starts to be reallocated to the non-agricultural sector. Due to the abidance of surplus agricultural labour, it’s marginal productivity is extremely low and average productivity defines the agricultural institutional wage. When. The redundant agricultural labour force has been reallocated, the agricultural marginal productivity of labour starts to rise but is still lower than the institutional wage.
This marks the shortage point at which the Economy enters phase two of development. During phase two the remaining agricultural unemployment is gradually absorbed.
At the end of this process the Economy reaches the commercialization point and enters phase three where the agricultural labour market is fully commercialised.
Modern Urban industrial sector is characterised by high productivity and employment opportunities.
Output expansion leads labour transfer and Urban employment growth.
The speed which they occur is given by the rate of investment or capital accumulation in the modern sector.
Urban wages would have be at least 30% higher than average rural income to induce workers to migrate from their home areas.
Level of wages in industrial sector is assumed constant. But at this constant wage, the supply of rural labour is considered perfectly elastic.
CRITICISMS OF THE MODEL
It fails to explain the underdevelopment in third world countries in under three aspect:
✓ The model assumes that, the rate of labour transferred employment creation is proportional to the rate of capital accumulation, the faster the rate of capital accumulation, the higher the growth rate of the modern sector and the faster the rate of job creation. Although total Gross National Product would rise, all the extra income and output growth is distributed to the few owners of capital while income levels of the masses of workers remain unchanged, hence no improvement in social welfare.
✓ The model assumes that surplus labour occurs in rural areas while there is full employment in Urban areas, but this is not true with third world countries. There is substantial open unemployment in Urban areas but almost no general surplus labour in rural locations.
✓ The model assumes constant constant real wages in Urban areas, this however is not the case with the developing countries where in most cases real wages both in absolute and relative terms tends to increase.
This model has been applied to analysis for instance the dualistic economic development of China and many other countries.
CONCLUSION
According to this theory, the primitive sector consist of the existing agricultural sector, the modern sector which is rapidly emerging and a small industrial sector. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy such that there is augmentation of industrial output.
This is done by transfer of labour from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labour supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole Economy with food and raw materials.
Ogba ifeanyi favour
Economics dept
2017/243369
oifeanyi621@gmail.com
LEWIS FEI RANIS MODEL
Developmental economist rejected the Solow model as not being a proper standard for development prospect and they brought in place the Lewis model, the development economics emerge during the early post war era Lewis school is based on the classical school foundation with various asymmetric behavior for each other.
The model laid emphasis on the structural transformation of the primitive economy and Its was formulated May, 1954 by a Nobel prize winner, W. Arthur Lewis and its was first called the Lewis theory of development, which explain the phrase of developing nation in view with the movement of labor between the two sectors in their economy. In 1960 and 1970 its became the General theory of development process of surplus labor in developing nation ,in recent times it’s still applicable in the study of under developed nation . The economy is divided into agriculture (subsistence) sector and capitalist sector or industrial .The aim of the Lewis model deal with process of labor transfer and the improvement of output and employment in the industrial sector which can be seen as a modern sector ,the Lewis model emphasis on the organizational dualism and much lesser on product dualism .The main focus was on the reallocation of labor until the turning point has been attained ,His reason for anticipation an initial worsening of national income redistribution was that labor shift from an equally distributed agricultural sector to a less equal distributed industrial sector.
CRITICISM OF THE LEWIS MODEL
Agriculture role in the active participation in the economy growth was under rated, the model laid more emphasis in the industrial sector of the economy .
The model fail to account on the various changes that take place with development of agriculture it also didnt account that growth in labor productivity should be place before the shift in labor between agricultural and industrial sector .
The model was criticize because of the classical assumption which is not necessary which state that all profit made are saved and all wage has been retained which was consumed .
Contemporary development economist, working in line with the neoclassical paradigm didnt accept the place of an exogenous unqualified real wage to the one that is determined by the endogenous force of invisible hand
The Lewis model was criticized because it assumed capital was a major determinant to long run growth which it not truth because improved in government policies can increased growth
The model assume all the profit made should be re invested which is untrue
The Lewis model also assume that there are many unproductive agricultural laborer but the number of laborer varies seasonally moving laborer to the industrial sector may lead to fall in agricultural output
EXTENTION OF THE LEWIS MODEL
It was extended by two economists John C.H. Fei and Gustav Ranis because of Lewis model limitation who named the model Fei-Ranis. Fei-Rani’s model explain how increase in productivity in the agricultural sector will foster growth in industrial sector .it is an improved version of the Lewis model, its a dualism model in the aspect of both development and welfare economics. The Fei-Ranis model assume, that there is abundant of labor and resource is not available in undeveloped country, there is high population growth rate leading to mass unemployment ,the agricultural sector is not developed making the marginal productivity zero which can be transfer to the industrial sector. The model give account of the two economy which is the modern /capitalist and the traditional economy putting in place the economic condition of how they make use of the available resource. Development occur when there is a shift in progress from the agricultural sector to industrial sector which brings about output increase to the industrial sector than the agricultural sector. This output increase are brought as a result of labor transfer and industrial sector employment growth , the rate of the output expansion depend on the industrial investment and capital accumulation
The connectivity nature that is in place between the industry and agriculture was emphasis in the model and there was a great connection between the two sector that will speed development, the model highlight a balanced growth that existence among both sectors.
The above diagram it divided into three phrases , phrase one (AL=MP=0) of the model has some similarity with Lewis model they exist an infinite elasticity of working labor force of the agricultural sector ,there exist zero marginal productivity the available working labor force there also suffer from unemployment moving to the second phrase of the Fei-Ranis model(AP > MP) there exist surplus in agriculture as a result of increase in their average product which is shown above to higher than the marginal product on a different level to the subsistence level of wage .Phrase3 above start from the standard point of commercialization the supply curve above is steeper the two sectors start alerting for labor there is a shift in labor which depend on population rate of growth, the industrial structure of technical progress (Phrase3; MP > CIW).
AGRICULTURAL SECTOR (LABOUR AND LAND FUNCTION)
The point (B) Show the total physical productivity of labor in the curve ,the curve raise at a decreasing level and more unit of labor is added to an input factor which is land ( known to be fixed )at point N the curve shapes horizontally and the point at N intersect to the angle at G (which indicate the marginal productivity of labor) curve.
THE INDUSTRIAL SECTOR OF THE ECONOMY
However the industry sector capital and labor is a major factor of production and like the agricultural sector they exist a constant return to scale which has a positive relationship between input (capital and labor )and output ,increased in capital (ko to k1 and k2 ) in the above graph will lead to an increase in labor (from lo to l2) and the industrial output will also increase from Ao to A3.The model highlight the main source of labor in the industrial sector is from the agricultural sector (B) in the graph indicate the supply curve of labor for the industrial sector as a result of redundant agricultural force the real wage remain the same on the curve. The marginal physical productivity labor rise alongside with the capital stock above ,there is a rise in the industrial employment owing to the rise in the overall industrial activity which indicate there is a progressive supply of fund meant for investment.
AGRICULTURE SURPLUS
This are goods harvested in the agricultural sector at a particular time that is more than the needed in the society which is kept for future uses or send out the country based on demand for it .It is shown in the diagram below.
AGRICULTURAL SURPLUS FOR DUAL ECONOMY OF FEI AND RANIS
Graph (B) help us to actualize the agricultural surplus, there is need to get the average physical productivity of the total agriculture labor force (APPl). There exist a constant institutional wage hypothesis according to Ranis and Fei if real wage is equal to average physical productivity ie APPL=MP/OP, YZ above represent output produced by the working labor while XY indicate the real income of the labor force. Therefore the agricultural surplus is gotten from the difference between the both term above.
AGRICULTURAL SURPLUS AS A WAGE FUND
The composition of agricultural and industrial sectors is use to illustrate wage fund of agricultural surplus in a dualistic economy of the model.
The place of agricultural surplus is irreplaceable in wage fund in the economy . Its vital roles can be analysis with the aid of diagram in the right side of the graph above, which is the combination of the industrial sector graph together with the inverted agricultural sector graph, in a way that the start point of the agricultural sector comes on the right corner on top. The start point of the inversion has an impact on the graph. The value of the labor force is been analysis from left side of zero, while the possible output are view from a down sloped vertically from zero. The major purpose of the inversion is for convenience area of commercialization as explained earlier ,is noticed at point R, where the tangent to the line ORX move toward parallel to OX in the diagram .
The whole labor OA is shown in the agricultural sector before the portion of the redundant labor is taken into the industrial economy. When AG amount of labor force is taken, it is show along OG’ in the industrial sector, and the labor force available in the agricultural sector is the OG. (A) indicate the supply curve of labor force in the sector SS’ and various demand curves for labor df, d’f’ and d”f”. The point G above shows the point of intersection of supply and demand , when the demand for labor is df, OG shows the amount of labor employed into the industrial sector. The labor for agricultural sector that is still available there is OG. There is an output of GF produces as a result of the OG amount of labor, from which GJ amount of labor is consumed by the agricultural sector and JF shows the agricultural surplus for that each level of employment. The inactive labor force from the agricultural sector make productive once it is taken by the industrial sector, and there is an output of OG’Pd as indicated in the graph, getting a wage income in total of OG’PS.
JF which is the agricultural surplus and there is demand for consumption by the particular laborer who left for the industrial sector. Agriculture sector has made not only made the worker for production process, but in addition wage fund necessary available in the cycle.
COMPARISON OF LEWIS FEI RANIS WITH OTHER MODEL
The Lewis-Fei-Rani’s model account for an economic situation of unemployment and the under employment of the available resources into consideration not like the other growth model like Harrod-domar model, Exogenous growth model , Endogenous growth model and Harris-Todaro model of migration which consider developing countries to be homogeneous in structure.
Lewis-Fei-Rani’s model underlying factor for development is structural transformation while in Harrod-Domar model saving and investment is an underlying factor for development .
Harrod-Domar model focused on the steady state properties of the developed countries while Lewis- Fei-Ranis model focused on the search for application of known theory to the various problem of developing countries.
Harris-Todaro accepted the position of institutional intervention as a factor that act in the level of urban unskilled real wage for industrial sector due to the result of minimum wage ,and they advocated for neoclassical agricultural competitive wage which was against the view of Lewis- Fei -Ranis model .
COMPARISON OF LEWIS FEI RANIS MODEL TO REAL WORLD
Lewis model was used to explain the breakdown of the movement of surplus labor from the Maghreb countries of northern Africa and the turkey down to Europe in the era of the after world war boom in the European nations .
“Labor surplus which is interpreted with zero marginal labor productivity in agriculture the event in India show that withdrawal of a greater number of agricultural population will not lead to a fall in agricultural output.
In 1982, it’s was discovered that in Indonesia that wage wont adjust on ground with labor marginal product but in conjunction with subsistence nature of time and various social program”
For the Lewis model, there was a historical event in country like England between 1780 to 1840,Taiwan from 1950-1970 and Japan between 1870-1920 which the abundant labor for agriculture showing a great rise in the average agricultural labor productivity while that of the agricultural and real wage for non agricultural raise slowly until Lewis turning point is attained in the economy.
The Lewis model has been recorded and satisfied fully efficacious in Singapore.
Harris – Todaro
The Harris-Todaro Model it can be seen as the H – T Model ,it assume the difference in wage is the underlined factor for the migration from the rural to the urban areas depends primarily on the between the rural and urban sector of the markets (which is the difference in wage in the market). That is the assume wage of urban is the actual urban wage multiplied by the certainty of getting a paid job, calculated as
PWu=WEU
Which ,
Weu = wage Expected in Urban setting
P = certainty of getting a paid job where P is indicated
as: P = where,
Eu = available Employment at the urban setting
Uu = the rate of Unemployment of urban setting
and L = sum Labour force.
Second assumption of the Harris-Todaro is that all the members of the urban labour force have equal chances of obtaining or getting the jobs available for them. So Weu = Urban Wage multiplied by the Urban Employment Rate.
In Nigeria it can this can be seen that there is migration from rural areas llike the village to urban areas like the industrialized part like people move from nsukka a village to Lagos in search of greener pastures which occur as a result of differences in wage in the different zone .
Let’s picture it from this viewpoint , if the government of a country is concerned with promoting industrial development in an urban area, employment would increase and this would lead to an increase in productive of getting urban employment in the minds of the rural inhabitants. The movement from the urban area would have a mutliper effect and the result would can be seen in the urban areas can cause an increase more than how it was before the improvement in industry happens. At this moment labour migrants would like to accept the payment for services in the informal urban sector rather than returning to wait for a longer period of time for work that will be delay as employmen in urban setting is now in a state of balance .
Name:Elendu Esther Ogechi
Reg no : 2017/243875
Department:Education/Economics
Course:Eco 361(development economics 1)
Harris -Todaro theory of migration
The fundamental contribution of Harris and Todaro’s rural-urban two sector migration model was to build a model that fit the stylized facts of the labour market. On the lines of the theory, developing countries adopted program on integrated rural development which encouraged an increase in the rural traditional sector wage. The theory proves that the higher the unemployment rate, the lower is the probability of new migrants from the countryside actively seeking formal sector employment who
are unable to find it. The significant findings of the theory are: first, if the expected urban wage equals rural income, there is no incentive to migrate. Second, if the expected urban wage is greater than rural income,there is a great incentive to move
from rural to urban area. Third, if the expected urban wage is less than rural incomes,there would be an incentive to move in other direction. Fourth, the expected urban wage depends on what type of job migrant is engaged in. Therefore, the Harris
Todaro’s model helps policy-makers to avoid two mistakes. One is to assume that development efforts should necessarily be channeled to the sectors where the poor are. The other is to assume that efforts should necessarily be focused on getting the poor out of the sectors in which they presently are.
The distinctive concept in the model is that the rate of migration flow from rural (agricultural) areas to urban(industrial) areas is determined by the difference between expected urban wages and
rural wages.
The rural-urban two-sector model centrally holds the following features;
a. Real wages (adjusted for cost-of-living differences) were higher in urban
formal sector jobs than in rural traditional sector jobs.
b. Harris and Todaro’s model is that economic incentives, earnings differentials,
and the probability of getting a job at the destination have influence on the
migration decision. In other words, this theory puts forward that rural-urban
migration will occur when the urban expected wage exceeds the key
hypothesis of rural obtain wage.
c. Tobe hired for a formal sector job, it was necessary to be physically present in
the urban areas where the formal sector jobs were located.
d. ,.Consequently, from the first two features, more workers searched for formal
sector jobs than were actually hired. Employers hired some of the searchers
but not all of them.
e. To maintain equality between the expected wage associated with searching for
an urban job and the expected wage associated with taking up a lower-paying
rural job, the equilibrium arising in such a setting would be characterized by
urban unemployment.
Some of the assumptions of the Harris-Todaro’s model were judged to be too restrictive. The model also assumes that potential migrants are risk neutral where the poor migrants will likely be risk averse, as in they are indifferent between a certain expected rural income and an uncertain expected urban income of the same magnitude.
The assumption that there exists a perfect competition in rural agriculture sector is not
realistic.
Starting from the assumption that migration is based primarily on privately rational
economic calculations despite the existence of high urban unemployment, the Todaro
model postulates that migration proceeds in response to urban-rural differences in
expected rather than actual earnings. The fundamental premise is that as
decision-makers migrants consider the various labor-market opportunities available to
them as, say, between the rural and urban sectors, choosing the one that maximizes
their “expected” gains from migration. Expected gains are measured by the difference
in real incomes between rural and urban work opportunities and the probability of a
new migrant’s obtaining urban job.
The dispersed and non-coordinated individual migration decisions, made based on
local information, generate regularities. Firstly, the crucial assumption of Harris and
Torado, the principle that rural-urban migration will occur while wage exceeds the
rural wage, comes out as spontaneous upshot of interaction among adaptive agents.
Secondly, the impact of the minimum wage and elasticity of terms of trade in a long
run equilibrium obtained by simulations are in agreement with the prediction of the
original Harris-Todaro model with cobb-Douglas technology.
Significant finding of Harris Todaro theory
If the expected urban wage equals rural income, there is no incentive to
migrate
If the expected urban wage is greater than rural income ,then there is a great
incentive to move from rural to urban areas.
If the expected urban wage is less than the rural income ,there would be an
incentive to move in other direction.
The expected urban wage depends on what type of job migrant is engaged in.
Lewis-fei-Ranis model theory of surplus labor
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector.Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
LEWIS’ – FEI- RANIS MODEL OF LABOR SURPLUS.
HARRIS – TODARO MODEL OF MIGRATION.
Main argument,
Nigerian perspective and
Conclusion.
MAIN ARGUMENT ON
LEWIS’ – FEI- RANIS MODEL OF LABOR SURPLUS.
First we look at Lewis’ theory of unlimited supplies of labor.
The Lewis’ theory propounded by Pro. W. Arthur Lewis: this theory is based on dual economy ( subsistence sector and capitalist sector ),Lewis’ believe that in many underdeveloped countries there exist surplus labor availability at the agricultural sector with subsistence wage rate ( RURAL AREA ) going further Lewis’ argued that for development to take place when capital accumulation is as a result of the transfer of surplus labor from subsistence to the capitalist sector where there large production and higher wage..
Meanwhile: Subsistence sector is that part of the economy which does not use reproducible capital. In this sector output per head is very low than the capitalist sector.
And the capitalist sector is the part of the economy which uses the reproducible capital and pays capitalist for the use.
Some important assumptions:
1. The movement of some rural sector worker does not reduce its production level.
2.Only the capitalist sector saves for investment.
FEI – RANIS THEORY.
Fei – Ranis theory named after John Fei and Gustav Ranis, this theory is based on the transition process through which, an under developed economy hope to move from a condition of stagnant economy to self – sustained growth and this theory is an improvement on Lewis’ model of surplus labor as he failed to provide a satisfactory analysis of the growth of the agrarian economy with some provided information on the agrarian sector on the assumptions postulated by John and Gustav. This theory relates to underdeveloped countries which the majority of its population is engaged is agrarian sector combined with widespread unemployment rate and high population growth rate. And also there exist non – agrarian pursuit but are characterized by the use of capital, that is active and dynamic industrial sector. Therefore, development consists of the reallocation of surplus labor from agrarian sector to capitalist sector.
NIGERIAN PERSPECTIVE ON LEWIS’ – FEI- RANIS MODEL OF LABOUR SURPLUS:
A practical example is in Nigeria between 1950s and early 1980s job opportunities where dominant in the urban sector than the rural sector including skilled and none skilled labor as rural labor was dominant both skilled and none skilled but majorly none skilled but currently in Nigerian, a practical example is in my home town we have young youths both skilled and none skilled labor and are unemployment, with the assumption of Lewis on moving labor from agrarian sector to capitalist sector with the current unemployment rate in Nigerian will not solve the problems but rather endanger the capitalist sector.
Thus Mr. President as the special adviser to the President on development issues, I propose the idea of moving development to the rural sector with a practical example from what China is doing currently, take for example the presence of university of Nigeria in Nsukka and consider the level of development and before the introduction of the school which have led to people from different state in Nigeria even outside the country now come to Nsukka for work with good wage rate and it also take in some of its citizens on skilled and none skilled labor.
Thank you.
HARRIS – TODARO MODEL.
Main argument: The model named after the two founders John R. Harris and Micheal Todaro, is a development and welfare economic model propounded from experience of tropical Africa with dominant rural-urban migration and urban unemployment.
Harris – Todaro argued that the courses of rural- urban migration and urban unemployment rate is the average wage difference of the urban sector from the rural sector and urban unemployment rate is as a result of movement of workers or labor from rural sector to urban sector for jobs and this led to urban unemployment because work available at the urban cannot take all the number of workers from the rural sector.
Harris – Todaro now proposed a non-distortionary lump-sum tax to solve the problem, the lump-sum tax is a situation where everyone in a society where tax is fixed and not based on income.
This model is based on some major assumption.
1. There exist two sectors in the economy (rural sector and urban sector)
2. Each sector produce one good each
3. There exist wage difference between rural and urban sector.
Nigerian perspective of Harris – Todaro.:
Currently in Nigeria the main idea of this model is dominant as people moves from rural area to urban area for job and some end up not securing any job. Now to solve this problem in Nigeria with lump-sum tax will not solve the problem.
Mr. President Sir, I propose that government should start to build some of the urban sector infrastructures in the rural sector economy to reduce wage difference and rural-urban migration and urban high unemployment.
Conclusion:
In a short note, the two model are all development model with Lewis-Fei-Ranis theory providing solution on capitalist lack of labor and Harris – Todaro providing solution on rural-urban migration and urban unemployment rate.
Mr. President Sir, in all the models and their argument, with the government paying more attention to developing rural sector will solve our problem that is taking development to rural sector.
Thank you Mr. president for audience to express my idea based on some development model and better solutions.
Name: Okafor Festus Obinna
Reg no: 2017/249550
Email: festusoby@gmail.com
A great economic scholar by name; aurther lewis, put forward his model of “Economic Development with unlimited supplies of labour” which envisages the capital accumulation in the modern industrial sector so as to draw labour from the subsistence agricultural sector . Lewis model has been somewhat modified and extended by Fei and Ranis. But the essence of the two models is the same. Both the models (that is, one by lewis and the other modified by Ranis) assume the existence of surplus labor in the economy, the main component of which is the enormous disguised unemployment in agriculture. Further , they visualize “dual economic structure” with manufacturing, mines and plantations representing the modern sector, the salient feature of which are the use of reproducible capital, production for market and for the profit , employing labor on wage payment basis and modern methods of industrial organizations. On the other hand, agriculture represents the subsistence or traditional sector using non-reproducible land on self –consumption with inferior techniques of production and containing surplus labor in the modern sector is much higher than that in agriculture.
Unlike the Harrod Domer growth model, which is a functional economic growth relationship in which the growth rate of gross domestic product (g) depends directly on the national net savings rate(s) and inversely on the national capital output ratio(c) , the lewis theory of development is a structural change model theory of development in which surplus labour from the traditional agriculture sector is transferred to the modern industrial sector ,the growth of which absorbs the surplus labour , promotes industrialization and stimulate sustained development.
Though the marginal productivity in agriculture over a wide range is taken to be zero, the average productive and equal to the bare subsistence level.
LEWIS MODEL OF DEVELOPMENT WITH SURPLUS LABOUR
In the labour surplus labour models of lewis and Fei-Ranis, the wage rate in the modern industrial sector is determined by the average productivity in the agriculture. To this average productivity is added a margin (Lewis fixes this margin at 30%) which is required for furnishing an incentive for labourers to transfer themselves from the countryside to the urban industrial as well as for meeting the higher cost of urban living. In this setting, the model shows how the expansion in the industrial investment and production or in other words, capital accumulation outside agriculture will generate sufficient employment opportunities so as to absorb all the surplus labour from agriculture and elsewhere.
In the model lewis assumes that all wages are consumed and all profits saved and invested. So when the capitalists will reinvest their profit for securing up new factories or expanding the old ones, the stock of capital assets in the modern sector will increase. As a result of the increase in the stock of industrial capital, the demand for labour or marginal productivity curve of labour will shift outward, for instance, from Mp1 to Mp2 in our diagram with Mp2 as the new demand curve for labour and the wage rate remaining constant at Ow1 amount of labour Ol2 will be employed in the modern sector . In this new equilibrium situation profit or surplus accruing to the capitalist class will rise to WQ2E which is larger than the previous WQ1D. The new surplus or profit of WQ2E will be further invested with the result that capital stock will increase and the demand or marginal productivity curve for labour will further shift upward, say to mp3 postion. When the demand curve for labour is Mp3 employment of labour will rise to OL3. In this way, the profits earned will go on being reinvested and the expansion of the modern sector will go in absorbing surplus labour from the subsistence sector until all the labour surplus is fully absorbed in productive employment.
ASSUMPTIONS OF THE LEWIS MODEL OF DEVELOPMENT WITH SURPLUS LABOUR.
It is worth mentioning that in lewis model, the rate of accumulation of industrial capital and, therefore, the absorption of surplus labour depends upon the distribution of income. With the aid of classical assumption that a all wages are consumed and all profits saved, lewis shows that the share of profits and therefore rate of saving and investment will rise continuously in the modern sector and capital will continue to be expanded until all the surplus labour has been absorbed. Rising share of profits serves as an incentive to reinvest them in building industrial capacity as well as a source of savings to finance it. Some other assumptions to back up his model are as follows ;
The model implicitly assumes that the rate of labour transfer and employment creation in the modern sector is proportional to the rate of modern sector capital accumulation. i.e the faster the rate of capital accumulation, the higher the growth rate of modern sector and the faster the rate of new job creation.
They exist surplus labour in rural areas while there is full employment in the urban areas
Presence of competetative modern sector labour market that guarantees the continued existence of constant real urban wages up to the point where the surplus labour is exhausted
Diminishing returns in the modern industrial sector
MAJOR COMPONENTS OF THE LEWIS MODEL
Profit as the main source of capital formation:
It is clear from the above analysis of lewis model with unlimited supply of labour that profits constitute the main source of capital formation. The greater the share of profits in national income, the greater the rate of savings and capital accumulation. Thus with the expansion of the modern or capitalist sector, the rate of savings and investment as percentage of national income will continuously rise, As a result, rate of capital accumulation will also increase relative to national income. It is of course assumed that all profits or a greater parts of profits is saved and automatically invested . it is also evident from above that share of the capitalist sector in the national product . As the capitalist or modern sector expands, the share of profits in national product is due to the assumption of the model that wage rate remains constant and prices of the products produced by the capitalist sector do not fall with the expansion in output. To quote Lewis himself “if unlimited supplies of labour are available at constant real wage rate, and if any part of the profits is reinvested in productive capacity ; profits will grow continuously relative to the national income.
Credit-financed money; Another source of capital formation:
Furthermore, profits are not the only source of capital formation in the lewis model, it is equally possible to create capital through credit –financed money. Prof. Lewis holds that in an economy marked by scarcity and capital and abundance of the resources, credit creation would have the same effect on capital accumulation as to the more respectable means of profits. In both cases, the ultimate result would be the increase in output and employment.
However, capital formation resulting from a net increase in the money supply would necessarily be accompanied by an inflationary rise in prices. What happens is that while purchasing power in the hands of workers immediately increases , the output of the consumer goods remains constant for a time. However the moment the newly formed capital created by the credit money is put to use, the output of consumption goods would also rise .
Therefore, after a time –lag, the output of the consumer goods catches up with the increase purchasing power, and thus the prices start taking in downturn.
Introducing technical progress:
What about the role of technical progress in the type of economic expansion exposed in the lewis model?. Prof Lewis contends that for the purpose of his analysis, the growth of technical knowledge and the growth of productive capital can be taken to work in the same direction. I,e, to increase profits and wage employment. He argues that to be able to apply new technical, we ought to have new investments.
Tapering off of the Expansion process:
Now if there is no hitch in the process of expansion ad things go on smoothly, the capitalist sector will continue to expand till it has completely absorbed the suplus labour , then comes stage where capital accumulation has matched the excess supply of labour. Therefore, the supply of labour ceases to be perfectly elastic .As a result , “ real wage” instead of of remaining constant, start rising . also, the share of profits in the national ceases to show any further rise. And thus, investment rather than growing relative to the national income comes almost to a standstill.
However, the expansion process may come to a halt much before the surplus labour has completely been absorbed. Prof. Lewis suggest three ways whereby the expansionary process might be halted before its natural conclusion, these are as follows ;
The expansion of the capitalist sector may be raped enough, so that the absolute population in the subsistence sector is greatly reduced, without of course , affecting the total product. As a result, the average productivity of labour in the subsistence sector will rise. Consequently the level subsistence earnings (s)and the capitalists wage(w) are raised thereby reducing the volume of the capitalist ‘s surplus.
Technical progress may occur in the subsistenc sector and may , therefore rise the productivity there . this will in turn be reflected in a rise in the level of subsistence earnings(s) and the capitalist wage (w). the result , again, would be squeezing of the the capitalist’ surplus.
The terms of trade may turn against the capitalist sector due to a rise in the prices of raw materials and food. This is very liking to happen especially where the modern capitalist sector produces no food. Now as the capitalist sector expands the demand for food will increase .As such , the food process must rise in terms of the prices of the product of capitalist sector. But if the real income of the worker is to be kept constant , the capitalist wage(w) must rise and also the subsistence earnings(s). the effect is that the capitalist surplus is reduced.
APPLICATION OF THE LEWIS FEI RANIS MODEL TO THE NIGERIAN ECONOMY
It is evident that the assumptions envisioned by Fei and RANIS in the model are not fully realistic. Firstly, all developing countries do not have all the same features. In the case of Nigeria, the country has so much population that is still on the increase. However, the big question is “Is there surplus labour in the Nigerian agricultural sector?”. To answer this question, one should check the scope of imports in the country. A vivid study of goods imported will expose that the rate of agricultural imports is still on the increase. This shows that labour in the Nigerian context is not sufficient to feed the ever increasing population. Goods like Palm oil, wheat, sugar, cashew and coconut are still imported.
Furthermore, the model assumes that for growth to occur in the industrial sector, labour has to be transfered to the latter. However, the transfer of labour is just a necessary condition for growth in the sector. This growth should also be aggravated by the capital accumulation, and the rate of industrial investment coupled with the reinvestment of profits by investors. In Nigeria, it has been noticed that the rate of investment has been on the decrease. This means that the growth expected as a result of investment might not fully occur, thereby exposing the unrealistic nature of this model.
HARRIS – TODARO MODEL OF MIGRATION
Developed in 1970, the Harris Todaro model is named after Michael P. Todaro and John Harris. It is based on the problem of rural-urban migration and urban unemployment. The model assumes that the economy is divided into two sectors: the rural/agricultural and urban/manufacturing sector. It further assumes that migration continues as long as the expected urban income exceeds the rural income. Coupled with these the model expects that perfect competition exists in the rural agricultural production and labour market. The sole purpose of the model is to explain the urban unemployment problem in developing countries. As described, the economic incentives, earning differentials and the probability of getting a job at the destination have influence on the migration decision. Harris and Todaro built this model in a bid to fit the stylized facts of the labour market. The theory proves that with a higher unemployment rate, there is a lower probability of immigrants in the country seeking for employment. Hence, if the expected urban wage equals rural income, then there is no incentive to migrate. If this holds, then it is important to note that it’s implication is that if the expected urban wage is greater than the rural income, there is a great incentive to move from rural to urban area.
APPLICATION OF THE HARRIS – TODARO MODEL TO THE NIGERIAN ECONOMY
The tenets of this model are also unrealistic, just like it’s sister model, the Lewis FEI Ranis model. The country’s population is large and majority reside in the rural areas. However, when deciding on whether to move to the urban areas, individuals do not only take the expected wage into consideration. They also consider the living standard, the security and even political conditions.
One more note worthy point is that migrants do not expect to be employed on arrival. Therefore, the average Nigerian will not just move to the urban area without considering these factors.
Nnadi olivia ijeoma
2016/232856
Education/economics
ijeoma.nnadi.232856@unn.edu.ng
Due to excess labour in subsistence sectors whose marginal productivity is zero, it is necessary for these labour to be put to productive use, there’s need for utilization of these labour or human capital i.e moving them from where they are under-utilized to where there’re effectively utilized.
According to Harris-Todaro’s model developed in 1970, which is used to explain some of the issue concerning rural-urban migration, it is necessary for mobility of labour to exist. This model believes migration is based on expected income difference between rural and urban areas. The model interprets the transitional dynamics with continuous growth of the urban fraction of overall population toward an equilibrium. This model focuses on rural-urban migration.
The Harris-Todaro’s model is mostly relevant for labour surplus countries like India, Nigeria, China, Pakistan, etc. This is because, there’s an assumption that lives in the rural areas will improve greatly if they migrate to urban areas rather than I’m the rural environment, unless the workers are comfortable in the rural areas.
The expected real wage difference between Urban and rural areas is the main determinant of migration decision. The urban market is according to H-T is imperfect cause it is assumed there’s a fixed wage rate.
Migration from rural to urban is inevitable as the Urban sector is seen as a lucrative sector where opportunities are open for better standard of living condition compared to the rural sectors.
The Lewis Fei-Ranis model developed in 1954 divides the economy into two sectors namely the subsistence or agricultural sector and the capitalist or manufacturing sector. This model believes in a dual sector where the unemployed and underemployed resources are taking into consideration. The model emphasized strongly on the industry and agricultural interdependency and encourages partnership between these sectors as one is the producer of raw materials and the other is the manufacturer of finished goods by transforming the raw materials into utilities.
The main assumption of this model is that there exist surplus labour in the subsistence sector. The surplus labour in the subsistence or agricultural sector acts as a source of unlimited supply of labour for the manufacturing sector. Lewis believes supply of labour is perfectly elastic at a particular wage which in most cases is higher than the wage each worker in the agricultural sector gets.
Lewis also made an assumption based on savings, he believed the capitalist invests all it’s savings for it’s further expansion while those in the agricultural sector squander away their savings. The propensity to save is low in the agricultural sector compared to the capitalist. Lewis even advocated for a transfer of income from the agricultural sector to the capitalist sector. The additional savings will not only help the capitalist to invest more but also improve the quality of capital invested leading to more employment from the agricultural sector which will bring more Cash for the capitalist which can re-invested leading to more employment of surplus labour.
Though Lewis model was criticized by experts, as some argued that he didn’t include the cost of training the unskilled labour transferred from the agricultural sector to the capitalist sector. This model assumes besides labour, there’s unlimited supply of manufacturers which is not true as seen in some developing countries. The experts also argued that it is wrong to assume the capitalist will re-invest while the agricultural worker squanders all his savings, cause propensity to save is an individual ideology. Also it is wrong to assume there’s an already existing market for the industrial products in the country. The experts believed not all underdeveloped country have surplus labour as some surplus labour depend on the size of the population.
Both models are emphasized on savings and investment, as the driving forces for economic development of underdeveloped countries.
The HT model is very applicable in Nigeria, as there’s high rate of unemployment in the rural areas since the limited industries cannot fully the growing labour force, so there’s need for migration to areas where such humain capital will be effective.
Name: AGBO EBUBE EDITH
Reg No: 2017/249475
THE LEWIS- FEI- RANIS MODEL OF ECONOMIC GROWTH.
Lewis- Fei- Ranis model of Economic growth recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
The Lewis (1954) theory of dualistic economic development provides the seminal
contribution to theories of economic development particularly for labour-surplus and
resource-poor developing countries. In the Lewis theory, the economy is assumed to
comprise the agricultural and non-agricultural sectors. The agricultural sector is
assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow
the sharing rule and be equal to average productivity, which is also known as the
institutional wage. The non-agricultural sector has an abundance capital and resources
relative to labour. It pursues profit and employs labour at a wage rate higher than the
agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150). The
non-agricultural sector accumulates capital by drawing surplus labour out of the
agricultural sector. The expansion of the non-agricultural sector takes advantage of the
infinitely elastic supply of labour from the agricultural sector due to its labour surplus.
When the surplus labour is exhausted, the labour supply curve in the non-agricultural
sector becomes upward-sloping.
Ranis and Fei (1961) formalised Lewis’s theory by combining it with Rostow’s
(1956) three “linear-stages-of-growth” theory. They disassembled Lewis’s two-stage
economic development into three phases, defined by the marginal productivity of
agricultural labour. They assume the economy to be stagnant in its pre-conditioning
stage. The breakout point marks the creation of an infant non-agricultural sector and the entry into phase one. Agricultural labour starts to be reallocated to the non-agricultural sector. Due to the abundance of surplus agricultural labour, its marginal productivity is extremely low and average labour productivity defines the agricultural institutional
wage. When the redundant agricultural labour force has been reallocated, the
agricultural marginal productivity of labour starts to rise but is still lower than the
institutional wage.
Furthermore, According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials.
Thus the model suggests that:
“Economic development would be taking place if agricultural laborers are transferred to industrial sector where their productivity will increase”.
Relating to the Nigerian Economy, Economic Diversification of the agricultural sector to the industrial sector will lead to a high level Growth in Nigeria. This was also the case of China, as their Economic growth can be attributed to the development of their non agricultural (industrial and service) sector, driven by labour migration and Capital accumulation.
Therefore the Agricultural labour surplus of the Nigeria Economy should be well driven, in other to develop the industrial sector of the economy which will boost our production, and several other Economic activities.
THE HARRIS-TODARO MODEL OF MIGRATION.
Harris–Todaro model was named after John R. Harris and Michael Todaro. It is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The work of Harris and Todaro together is considered one of the starting points of the classic rural-urban migration theory.
The key hypothesis of Harris and Todaro are that migrants react mainly to wage differentials/Wage expectations. That is, economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migration decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceeds the rural wage. From this crucial assumption, as denominated by Harris-Todaro, is deduced that the migratory dynamics leads the economic system toward equilibrium with urban concentration and high urban unemployment.
Relating to the Nigeria Economy, we see that the assumptions of the Harris-Todaro Migration model is very application, as there is a huge differences in the rural-urban wages. This has led to increased rural-urban migration, and the over-population of most of the urban cities in Nigeria. A very prominent example is Lagos State.
Due to excess labour in subsistence sectors whose marginal productivity is zero, it is necessary for these labour to be put to productive use, there’s need for utilization of these labour or human capital i.e moving them from where they are under-utilized to where there’re effectively utilized.
According to Harris-Todaro’s model developed in 1970, which is used to explain some of the issue concerning rural-urban migration, it is necessary for mobility of labour to exist. This model believes migration is based on expected income difference between rural and urban areas. The model interprets the transitional dynamics with continuous growth of the urban fraction of overall population toward an equilibrium. This model focuses on rural-urban migration.
The Harris-Todaro’s model is mostly relevant for labour surplus countries like India, Nigeria, China, Pakistan, etc. This is because, there’s an assumption that lives in the rural areas will improve greatly if they migrate to urban areas rather than I’m the rural environment, unless the workers are comfortable in the rural areas.
The expected real wage difference between Urban and rural areas is the main determinant of migration decision. The urban market is according to H-T is imperfect cause it is assumed there’s a fixed wage rate.
Migration from rural to urban is inevitable as the Urban sector is seen as a lucrative sector where opportunities are open for better standard of living condition compared to the rural sectors.
The Lewis Fei-Ranis model developed in 1954 divides the economy into two sectors namely the subsistence or agricultural sector and the capitalist or manufacturing sector. This model believes in a dual sector where the unemployed and underemployed resources are taking into consideration. The model emphasized strongly on the industry and agricultural interdependency and encourages partnership between these sectors as one is the producer of raw materials and the other is the manufacturer of finished goods by transforming the raw materials into utilities.
The main assumption of this model is that there exist surplus labour in the subsistence sector. The surplus labour in the subsistence or agricultural sector acts as a source of unlimited supply of labour for the manufacturing sector. Lewis believes supply of labour is perfectly elastic at a particular wage which in most cases is higher than the wage each worker in the agricultural sector gets.
Lewis also made an assumption based on savings, he believed the capitalist invests all it’s savings for it’s further expansion while those in the agricultural sector squander away their savings. The propensity to save is low in the agricultural sector compared to the capitalist. Lewis even advocated for a transfer of income from the agricultural sector to the capitalist sector. The additional savings will not only help the capitalist to invest more but also improve the quality of capital invested leading to more employment from the agricultural sector which will bring more Cash for the capitalist which can re-invested leading to more employment of surplus labour.
Though Lewis model was criticized by experts, as some argued that he didn’t include the cost of training the unskilled labour transferred from the agricultural sector to the capitalist sector. This model assumes besides labour, there’s unlimited supply of manufacturers which is not true as seen in some developing countries. The experts also argued that it is wrong to assume the capitalist will re-invest while the agricultural worker squanders all his savings, cause propensity to save is an individual ideology. Also it is wrong to assume there’s an already existing market for the industrial products in the country. The experts believed not all underdeveloped country have surplus labour as some surplus labour depend on the size of the population.
Both models are emphasized on savings and investment, as the driving forces for economic development of underdeveloped countries.
The HT model is very applicable in Nigeria due to the low infrastructural facilities and low standard of living that is very high in rural areas. the labour force in the rural areas has to move so as to improve their lives and access better living standards.
Nnadi olivia Ijeoma
2016/232856
Education/economics
ijeoma.nnadi.232856@unn.edu.ng
Due to excess labour in subsistence sectors whose marginal productivity is zero, it is necessary for these labour to be put to productive use, there’s need for utilization of these labour or human capital i.e moving them from where they are under-utilized to where there’re effectively utilized.
According to Harris-Todaro’s model developed in 1970, which is used to explain some of the issue concerning rural-urban migration, it is necessary for mobility of labour to exist. This model believes migration is based on expected income difference between rural and urban areas. The model interprets the transitional dynamics with continuous growth of the urban fraction of overall population toward an equilibrium. This model focuses on rural-urban migration.
The Harris-Todaro’s model is mostly relevant for labour surplus countries like India, Nigeria, China, Pakistan, etc. This is because, there’s an assumption that lives in the rural areas will improve greatly if they migrate to urban areas rather than I’m the rural environment, unless the workers are comfortable in the rural areas.
The expected real wage difference between Urban and rural areas is the main determinant of migration decision. The urban market is according to H-T is imperfect cause it is assumed there’s a fixed wage rate.
Migration from rural to urban is inevitable as the Urban sector is seen as a lucrative sector where opportunities are open for better standard of living condition compared to the rural sectors.
The Lewis Fei-Ranis model developed in 1954 divides the economy into two sectors namely the subsistence or agricultural sector and the capitalist or manufacturing sector. This model believes in a dual sector where the unemployed and underemployed resources are taking into consideration. The model emphasized strongly on the industry and agricultural interdependency and encourages partnership between these sectors as one is the producer of raw materials and the other is the manufacturer of finished goods by transforming the raw materials into utilities.
The main assumption of this model is that there exist surplus labour in the subsistence sector. The surplus labour in the subsistence or agricultural sector acts as a source of unlimited supply of labour for the manufacturing sector. Lewis believes supply of labour is perfectly elastic at a particular wage which in most cases is higher than the wage each worker in the agricultural sector gets.
Lewis also made an assumption based on savings, he believed the capitalist invests all it’s savings for it’s further expansion while those in the agricultural sector squander away their savings. The propensity to save is low in the agricultural sector compared to the capitalist. Lewis even advocated for a transfer of income from the agricultural sector to the capitalist sector. The additional savings will not only help the capitalist to invest more but also improve the quality of capital invested leading to more employment from the agricultural sector which will bring more Cash for the capitalist which can re-invested leading to more employment of surplus labour.
Though Lewis model was criticized by experts, as some argued that he didn’t include the cost of training the unskilled labour transferred from the agricultural sector to the capitalist sector. This model assumes besides labour, there’s unlimited supply of manufacturers which is not true as seen in some developing countries. The experts also argued that it is wrong to assume the capitalist will re-invest while the agricultural worker squanders all his savings, cause propensity to save is an individual ideology. Also it is wrong to assume there’s an already existing market for the industrial products in the country. The experts believed not all underdeveloped country have surplus labour as some surplus labour depend on the size of the population.
Both models are emphasized on savings and investment, as the driving forces for economic development of underdeveloped countries.
The HT model is very applicable in Nigeria due to the low infrastructural facilities and low standard of living that is very high in rural areas. the labour force in the rural areas has to move so as to improve their lives and access better living standards.
Due to excess labour in subsistence sectors whose marginal productivity is zero, it is necessary for these labour to be put to productive use, there’s need for utilization of these labour or human capital i.e moving them from where they are under-utilized to where there’re effectively utilized.
According to Harris-Todaro’s model developed in 1970, which is used to explain some of the issue concerning rural-urban migration, it is necessary for mobility of labour to exist. This model believes migration is based on expected income difference between rural and urban areas. The model interprets the transitional dynamics with continuous growth of the urban fraction of overall population toward an equilibrium. This model focuses on rural-urban migration.
The Harris-Todaro’s model is mostly relevant for labour surplus countries like India, Nigeria, China, Pakistan, etc. This is because, there’s an assumption that lives in the rural areas will improve greatly if they migrate to urban areas rather than I’m the rural environment, unless the workers are comfortable in the rural areas.
The expected real wage difference between Urban and rural areas is the main determinant of migration decision. The urban market is according to H-T is imperfect cause it is assumed there’s a fixed wage rate.
Migration from rural to urban is inevitable as the Urban sector is seen as a lucrative sector where opportunities are open for better standard of living condition compared to the rural sectors.
The Lewis Fei-Ranis model developed in 1954 divides the economy into two sectors namely the subsistence or agricultural sector and the capitalist or manufacturing sector. This model believes in a dual sector where the unemployed and underemployed resources are taking into consideration. The model emphasized strongly on the industry and agricultural interdependency and encourages partnership between these sectors as one is the producer of raw materials and the other is the manufacturer of finished goods by transforming the raw materials into utilities.
The main assumption of this model is that there exist surplus labour in the subsistence sector. The surplus labour in the subsistence or agricultural sector acts as a source of unlimited supply of labour for the manufacturing sector. Lewis believes supply of labour is perfectly elastic at a particular wage which in most cases is higher than the wage each worker in the agricultural sector gets.
Lewis also made an assumption based on savings, he believed the capitalist invests all it’s savings for it’s further expansion while those in the agricultural sector squander away their savings. The propensity to save is low in the agricultural sector compared to the capitalist. Lewis even advocated for a transfer of income from the agricultural sector to the capitalist sector. The additional savings will not only help the capitalist to invest more but also improve the quality of capital invested leading to more employment from the agricultural sector which will bring more Cash for the capitalist which can re-invested leading to more employment of surplus labour.
Though Lewis model was criticized by experts, as some argued that he didn’t include the cost of training the unskilled labour transferred from the agricultural sector to the capitalist sector. This model assumes besides labour, there’s unlimited supply of manufacturers which is not true as seen in some developing countries. The experts also argued that it is wrong to assume the capitalist will re-invest while the agricultural worker squanders all his savings, cause propensity to save is an individual ideology. Also it is wrong to assume there’s an already existing market for the industrial products in the country. The experts believed not all underdeveloped country have surplus labour as some surplus labour depend on the size of the population.
Both models are emphasized on savings and investment, as the driving forces for economic development of underdeveloped countries.
The HT model is very applicable in Nigeria due to the low infrastructural facilities and low standard of living that is very high in rural areas. the labour force in the rural areas has to move so as to improve their lives and access better living standards.
Due to excess labour in subsistence sectors whose marginal productivity is zero, it is necessary for these labour to be put to productive use, there’s need for utilization of these labour or human capital i.e moving them from where they are under-utilized to where there’re effectively utilized.
According to Harris-Todaro’s model developed in 1970, which is used to explain some of the issue concerning rural-urban migration, it is necessary for mobility of labour to exist. This model believes migration is based on expected income difference between rural and urban areas. The model interprets the transitional dynamics with continuous growth of the urban fraction of overall population toward an equilibrium. This model focuses on rural-urban migration.
The Harris-Todaro’s model is mostly relevant for labour surplus countries like India, Nigeria, China, Pakistan, etc. This is because, there’s an assumption that lives in the rural areas will improve greatly if they migrate to urban areas rather than I’m the rural environment, unless the workers are comfortable in the rural areas.
The expected real wage difference between Urban and rural areas is the main determinant of migration decision. The urban market is according to H-T is imperfect cause it is assumed there’s a fixed wage rate.
Migration from rural to urban is inevitable as the Urban sector is seen as a lucrative sector where opportunities are open for better standard of living condition compared to the rural sectors.
The Lewis Fei-Ranis model developed in 1954 divides the economy into two sectors namely the subsistence or agricultural sector and the capitalist or manufacturing sector. This model believes in a dual sector where the unemployed and underemployed resources are taking into consideration. The model emphasized strongly on the industry and agricultural interdependency and encourages partnership between these sectors as one is the producer of raw materials and the other is the manufacturer of finished goods by transforming the raw materials into utilities.
The main assumption of this model is that there exist surplus labour in the subsistence sector. The surplus labour in the subsistence or agricultural sector acts as a source of unlimited supply of labour for the manufacturing sector. Lewis believes supply of labour is perfectly elastic at a particular wage which in most cases is higher than the wage each worker in the agricultural sector gets.
Lewis also made an assumption based on savings, he believed the capitalist invests all it’s savings for it’s further expansion while those in the agricultural sector squander away their savings. The propensity to save is low in the agricultural sector compared to the capitalist. Lewis even advocated for a transfer of income from the agricultural sector to the capitalist sector. The additional savings will not only help the capitalist to invest more but also improve the quality of capital invested leading to more employment from the agricultural sector which will bring more Cash for the capitalist which can re-invested leading to more employment of surplus labour.
Though Lewis model was criticized by experts, as some argued that he didn’t include the cost of training the unskilled labour transferred from the agricultural sector to the capitalist sector. This model assumes besides labour, there’s unlimited supply of manufacturers which is not true as seen in some developing countries. The experts also argued that it is wrong to assume the capitalist will re-invest while the agricultural worker squanders all his savings, cause propensity to save is an individual ideology. Also it is wrong to assume there’s an already existing market for the industrial products in the country. The experts believed not all underdeveloped country have surplus labour as some surplus labour depend on the size of the population.
Both models are emphasized on savings and investment, as the driving forces for economic development of underdeveloped countries.
The HT model is very applicable in Nigeria due to the low infrastructural facilities and low standard of living that is very high in rural areas. the labour force in the rural areas has to move so as to improve their lives and access better living standards.
AGBO EBUBE EDITH
2017/249475
THE LEWIS- FEI- RANIS MODEL OF ECONOMIC GROWTH
Lewis- Fei- Ranis model of Economic growth recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
The Lewis (1954) theory of dualistic economic development provides the seminal contribution to theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is
assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the
agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150). The non-agricultural sector accumulates capital by drawing surplus labour out of the
agricultural sector. The expansion of the non agricultural sector takes advantage of the
infinitely elastic supply of labour from the agricultural sector due to its labour surplus.
When the surplus labour is exhausted, the labour supply curve in the non-agricultural
sector becomes upward-sloping.
Ranis and Fei (1961) formalised Lewis’s theory by combining it with Rostow’s
(1956) three “linear-stages-of-growth” theory. They disassembled Lewis’s two-stage
economic development into three phases, defined by the marginal productivity of
agricultural labour. They assume the economy to be stagnant in its pre-conditioning
stage. The breakout point marks the creation of an infant non-agricultural sector and the entry into phase one. Agricultural labour starts to be reallocated to the non-agricultural sector. Due to the abundance of surplus agricultural labour, its marginal productivity is extremely low and average labour productivity defines the agricultural institutional
wage. When the redundant agricultural labour force has been reallocated, the
agricultural marginal productivity of labour starts to rise but is still lower than the
institutional wage.
Furthermore, According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials.
Thus the model suggests that:
“Economic development would be taking place if agricultural laborers are transferred to industrial sector where their productivity will increase”.
Relating to the Nigerian Economy, Economic Diversification of the agricultural sector to the industrial sector will lead to a high level Growth in Nigeria. This was also the case of China, as their Economic growth can be attributed to the development of their non agricultural (industrial and service) sector, driven by labour migration and Capital accumulation.
Therefore the Agricultural labour surplus of the Nigeria Economy should be well driven, in other to develop the industrial sector of the economy which will boost our production, and several other Economic activities.
THE HARRIS-TODARO MODEL OF MIGRATION
Harris–Todaro model was named after John R. Harris and Michael Todaro. It is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The work of Harris and Todaro together is considered one of the starting points of the classic rural-urban migration theory.
The key hypothesis of Harris and Todaro are that migrants react mainly to wage differentials/Wage expectations. That is, economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migration decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceeds the rural wage. From this crucial assumption, as denominated by Harris-Todaro, is deduced that the migratory dynamics leads the economic system toward equilibrium with urban concentration and high urban unemployment.
Relating to the Nigeria Economy, we see that the assumptions of the Harris-Todaro Migration model is very application, as there is a huge differences in the rural-urban wages. This has led to increased rural-urban migration, and the over-population of most of the urban cities in Nigeria. A very prominent example is Lagos State.
NAME: IFETAYO KOSI ANWOLUWA
REG NO: 2017/249343
DEPARTMENT: ECONOMICS
THE LEWIS FEI RANIS MODEL ( SURPLUS LABOUR THEORY)
One of the best-known early theoretical models of development that focused on the structural transformation of a primarily subsistence economy was that formulated by Nobel laureate W. Arthur Lewis in the mid-1950s and later modified, formalized, and extended by John Fei and Gustav Ranis. It is a dualism model in development and welfare economics. It is also known as the Surplus Labour Model. The Lewis two-sector model became the general theory of the development process in surplus-labor developing nations during most of the 1960s and early 1970s, and it is sometimes still applied, particularly to study the recent growth experience in China and labor markets in other developing countries. There was a flaw in Lewis model that it did not pay enough attention to the importance of the agricultural sector in promoting industrial growth. But Fei-Ranis (FR) model of dual economy explains how the increased productivity in agricultural sector would become helpful in promoting industrial sector. In this respect, it presents three stages whereby a underdeveloped country moves from stagnation to self-sustained economic growth. Thus, this model is treated as an improvement over Lewis model of unlimited supply of labor. This is because the assumption of unlimited supply of labour is unrealistic. Since Fei-Ranis model builds on the proponents of Lewis two-sector model, both are generally referred to as Lewis-Fei-Ranis model. Therefore, it is a matter of necessity to first define the Lewis two-sector model.
tries. In the Lewis model, the underdeveloped economy consists of two sectors:a traditional, overpopulated rural subsistence sector characterized by zero marginal labor productivity ( a situation that permits Lewis to classify this as surplus labor in the sense that it can be withdrawn from the traditional agricultural sector without any loss of output) and a high-productivity modern urban industrial sector into which labor from the subsistence sector is gradually transferred.The Lewis two-sector theory of development in which surplus labor from the traditional agricultural sector is transferred to the modern industrial sector, the growth of which absorbs the surplus labor, promotes industrialization, and stimulates sustained development. Here, Surplus Labour means the excess supply of labor over and above the quantity demanded at the going free-market wage rate. In the Lewis two-sector model of economic development, surplus labor refers to the portion of the rural labor force whose marginal productivity is zero or negative
In this line with this mode of thinking, the Lewis-Fei-Ranis model recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Like most economic theories, the Lewis-Fei-Ranis model relies on various assumptions:
(i) There is an abundance of labor in such underdeveloped countries and shortage of natural resources.
(ii) The population growth rate is very high which results in mass unemployment in the economy.
(iii) The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labor is zero and negative in agriculture
sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy.
These assumptions are necessary for the justifications of the various conclusions reach in the model. That is, it is necessary for restating the model. The model suggests that if agricultural labourers are transferred to industrial sector, there will be economic development since the labour force in the economy will become more productive. This model is classified under the structural change theory (The hypothesis that undevelopment is due to underutilization of resources arising from structural or institutional factors that have their origins in both domestic and international dualism) and their solution to this problem is transfer of surplus labour from agricultural sector ,where it is less utilised, to industrial sector for better productivity. The model divided into three phases:
– Breaking Point: The first stage of Fei-Ranis model is very similar to Lewis. Disguised unemployment comes into being because the supply of labor is perfectly elastic and MPL(Marginal Productivity of Labour) = 0. Therefore, such disguised unemployed are to be transferred to industrial sector at the constant institutional wage. That is, there is redundant agricultural labour.
– Shortage Point: In the second stage of Fei-Ranis model (phase) agricultural sector workers add to agricultural output but they produce less than institutional wage they get. In other words, in the second stage the labor surplus exists where APL(average productivity of labour) > MPL, but it is not equal to subsistence (institutional) wages. That is, at this point, the constitutional institutional wage(CIW)>MP>AP. This means there is disguised agricultural unemployment. This, such disguised unemployed also have to be transferred to industrial sector. If the migration to industrial sector continues a situation is eventually reached where the farm workers produce output equal to institutional wages. This would mean that productivity in agricultural sector has gone up. With this the third phase (stage) starts.
– The Lewis turning point or Commercialization Point: In the third stage of FR model , the take-off situation comes to an end and there begins the era of self-sustained growth where the farm workers produce more than the institutional wage they get. In this stage of economic growth the surplus labor comes to an end and the agricultural sector becomes commercialized sector. Accordingly, they have to be shifted to industrial sector. As labor are transferred to industrial sector a shortage of labor will develop in agricultural sector. In other words, it will be difficult for the industrial sector to get the labor at same prevailing constant wages. That is, there is self-sustaining agricultural growth with commercialization of agricultural sector. This is because MPL>CIW. Here, the economy is fully commercialized in the absence of disguised unemployment. Such commercialization took place at the cost of absorption of disguised unemployment in industrial sector. Lewis was a great proponent of balanced growth strategy and it is only natural that this theory will be of the above policy impications. And this has influenced various policies in developing countries. For empirical analysis has shown that China development miracles was as a result of it going through this stages systematically. China’s economic growth is mainly attributable to the development of the non-agricultural (industrial and service) sector, driven by rapid labor migration and capital accumulation. It was found that the sectoral reallocation of labor plays a significant role inpromoting China’s economic growth. Further, it was found that in China marginal productivity of agricultural labor stopped stagnating in 1978, which indicates that China entered quickly into phase two of economic development with the initiation of market reforms. Moreover, by 2009, the marginal productivity of labor has likely exceeded the institutional wage, as defined by the initially low average labor productivity, indicating that China may be now in th The same cannot be said for Japan.
Although the Lewis two-sector development model is simple and roughly reflects the historical experience of economic growth in the West, four of its key assumptions do not fit the institutional and economic realities of most contemporary developing countries. This, it has been subjected to various criticism:
(i) Marginal Productivity of Labor in Phase I: The FR model is of the view that MFL = 0 in the first phase of growth, and the transfer of labor from agriculture would not reduce output in the agri. sector in phase I. Various economists are of the view that agri. output in phase I of Fei-Ranis model will not remain constant and may fell under different systems of land tenure, i.e., the peasant proprietorship and share cropping etc.
(ii) Marginal Productivity of Labor is Not Zero: Prof. Jorgenson, a development economist, who has also presented a model of ‘dual economy’ has object FR model’s contention of zero MP in phase I. He says whether MPL will be zero is an empirical issue. During the seasons of sowing and harvesting the MPL > 0. Jorgenson concluded on the basis of Japanese data even for the pre I world war period the supply of labor was not unlimited. Then how MPL can be zero.
(iii) Ignoring The Role of Capital: The Fei-Ranis model concentrated upon land and labor as the determinants of output, ignoring the role of capital. But Profs. Brown, Byres, Frankel, Griffen, Ghatak and Ingersent are of the view that in the UDCs there has occurred what is known as ‘Green Revolution’ in agri. which has promoted the greater use of capital and technology on lands. Consequently, there has been a greater increase in the agri. productivity and agrcultural incomes.
(iv) Open Economy: FR model ignored the role of foreign trade as it assumed a closed economy model. In the 2nd phase when agri. product decreases the Terms of Trade goes against industrial sector. This would occur in the presence of closed economy. But if the model is made open such would not happen as the goods could be imported in the presence of then-scarcity. This was especially observed in case of Japan which imported cheap farm products to improve her Terms of Trade.
(v) Supply of Land in Long Run: Fei-Ranis model assumed that in the process of economic development the supply of land remained fixed. But it is not true. The supply of land can be increased in case of long run.
(vi) Commercialization Of Agriculture And Inflation: According to FR model when 3rd phase starts the agri. sector becomes commercialized. But it is criticized by saying that this phase does not start so easily The shifting of labor to industrial sector will create labor shortage in agri. sector. This will create shortage of food stuff leading to increase their prices. In this way, the inflation will generate which may obstruct the process of development.
(vii) Low Productivity in Agricultural Sector: According to Jorgenson it has been observed that there has been a very slow rise in the productivity of agri. sector. Consequently, the surplus will hardly be created in agri. sector. Accordingly, agri. sector will not contribute to development Thus the growth requires that the surplus must be generated and it should persist.
THE HARRIS-TODARO MODEL OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration.Harris and Todaro subsequently formulated amodelto explain rural-urban economic preferences to migrate. The distinctive concept in the model is that the rate of migration flow from rural (agricultural) areas to urban (industrial) areas is determined by the difference between expected urban wages and rural wages.In the Harris–Todaro model, the rising urban wage pushes up the expected wage in the urban sector and consequently encourages workers to migrate from the rural sector to the urban sector. This phenomenon is referred to as Todaro paradox.The Harris-Todaro model assumes that migration from rural to urban areas depends primarily on the difference in wages between the rural and urban labour markets. where Eu is urban employment, Uu is urban unemployment and L is total urban work force. … So Weu becomes simply the urban wage times the urban employment rate.
THEORETICAL IMPLICATIONS OF THE MODEL
There is no denying the fact that any development project can be evaluated using social cost- benefit analysis. An important part of the social cost of any input is opportunity cost, its value in its next best alternative use. Labour hired for an urban formal-sector project might well be drawn from the urban informal sector also.
The worker who moves out of the urban informal sector may, in turn, be replaced by someone from the rural sector. In this case, the output lost is that of the worker who was formerly in the rural sector, i.e., the worker at the end of the employment chain. For this reason, some analysts believe that the wage paid to casual agricultural labourers provides a good measure of the social cost of unskilled labour.
However, this measure, although a good indicator of output foregone through labour reallocation, probably understates the true social cost of employing labour, which has other components that are likely to be significant. One such component is induced migration. No doubt there are both pull and push factors behind internal labour migration that occurs in the course of economic development from rural to urban areas.
Such migration can result either from favourable economic developments in the towns or from adverse developments in the rural areas. The Harris-Todaro model integrates these two sets of forces in their analysis of the process of labour reallocation that is likely to occur during economic development. This is why the model was sort of innovation in the literature of development economics when it appeared for the first time in 1970′. The H-T model has far-reaching implications from the policy point of view. For example, if the government of the country concerned were successful in fostering industrial development in an urban area, employment would increase there.
The effect would be to increase the subjective productivity of getting urban employment in the minds of rural inhabitants. Migration would increase and the eventual effect of the new industrial development could be that urban unemployment becomes higher that the level prevailing before the new development took place.
There will be some level of urban employment which ensures equilibrium in the sense that no further migration takes place. Potential migrants may take a long-term view in arriving at a decision. They may consider that their desireness of obtaining an urban job will be higher after a waiting period of some months. Thus they will compare the present value of the sum of expected urban earnings with that of expected rural earnings.
They may be content to accept a low wage in the urban informal sector for some time. This might be a rational decision on a long-term basis. The root of the problem is the large difference between earnings in the modern industrial sector and those in the rural areas.
Often the former are well above the market clearing levels for varies reasory. The long-term solution to the problem lies in adopting policies for both urban and rural areas which reduces the real income differences between the two areas. In any case, the Harris Todaro model suffers from theoretic oversimplification, among which several are likely to overestimate the link. The critiques revolve around the three major points;
1. The model framework is only a static model describing migration, which is a dynamic phenomenon by nature. Even though the model can be thought of as representing a steady state equilibrium,this is a limitation. Furthermore, the formalization is made in a partial equilibrium context which greatly weakens the justification for policy recommendations.
2. The assumptions that urban workers are either employed in the manufacturing sector or unemployed has been criticized as too simplistic even though, in the authors’ minds, it was implicit that unemployment could also be interpreted as underemployment in the informal sector.
3. The Harris-Todaro model assumes that the urban wage is exogenously set above the endogenous rural wage . The assumption that wages are high find several explanations ranging from the existence of trade unions to the agglomeration of economic activities. It is confirmed in practice,since wages are often reported three to four times higher in urban areas than in rural areas (Todaro, 2000). What is more problematic, however, is the assumption that the urban wage is fixed, especially in the presence of an informal sector as typical of many developing economies. In fact, the argument of a minimum wage should only hold for low wages in the formal sector, unless remunerations in the informal sector align themselves with those in the formal sector (due to the competition for labor between employers)In addition, the wage in the Harris-Todaro model is not related to unemployment in any manner. If the urban wage tends to decrease with an increase in the unemployment rate as argued by Hoddinott (1996) in his study on urban African labor markets, then this would tend to reduce the expected earnings differential in the transition towards the equilibrium in the model. This gives another reason why migration flows could be overestimated, making the Todaro paradox even less likely to occur. Migration in any given time then depends on three factors:
(a) The urban-rural wage gap,
(b) The urban employment rate and
(c) The responsiveness of potential migrants to the resulting opportunities.
NAME:OKEKE NANCY OGADIMMA
REGNO:2017/249557
DEPARTMENT:EECONOMICS
I will be giving a summary of the Harris-Todaro model of migration and the Lewis-Fei-Ranis model of Economic growth.
THE HARRIS TODARO MODEL OF MIGRATION
The Harris-Todaro model also known as the H-T model was developed in 1970 by John R, Harris and Michael Todaro. It is an economic model used to explain some of the issue concerning rural-urban migration.
Starting from the assumptions that migration is primarily an economic phenomenon, which for the individual can be a quite rational decision despite the existence of urban unemployment, the Todaro model postulates that migration proceeds in response to Urban-rural differences in expected income rather than actual earnings.
The fundamental premise is that migrants consider various labor market opportunities available from migration. This implies that rural-urban unemployment can be economically rational if expected urban income exceeds expected rural income.
The H-T model also assumes that unemployment is non-existent in the rural agricultural sector. Rural agricultural production and subsequent labor market is also assumed is perfectly competitive.
In the model, equilibrium is reached when the expected wage in urban areas is equal to marginal product of an agricultural worker. In addition, the rural to urban migration will be zero since the expected rural income equals the expected urban income in equilibrium. However, in equilibrium, there will be a positive unemployment in the urban sector.
With the random matching of workers to available jobs, the ratio of available job seekers gives the probability that any person moving from the agricultural sector to the rural sector will be able to find a job.
To sum up, the Todaro migration model has four basic characteristics:
1. Migration is stimulated primarily by rational economic considerations of relative benefits and costs, mostly financial but also psychological.
2. The decision to migrate depends on expected rather than actual urban-rural real-wage differentials where the expected differential is determined by the interaction of two variables, the actual urban-rural wage differential and the probability of successfully obtaining employment in the urban sector.
3. The probability of obtaining an urban job is directly related to the urban employment rate and thus inversely related to the urban unemployment rate.
4. Migration rates in excess of urban job opportunity growth rates are not only possible but also rational and even likely in the face of wide urban-rural expected income differentials. High rates of urban unemployment are therefore inevitable outcomes of the serious imbalance of economic opportunities between urban and rural areas in most underdeveloped countries.
In conclusion, migration from rural areas to urban areas will increase if:
1. Urban wages increase in the urban sector, increasing the expected urban income.
2. Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector, decreasing the expected rural income.
But, even though this migration causes unemployment and induces informal sector growth, this behavior is economically rational and utility maximizing in the context of the H-T model. As long as migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
Based on long-term trends, comparisons with developed countries, and high individual incentives, continued urbanization and rural-urban migration are probably inevitable. Urban bias spurs migration, but focused investment in agriculture raises rural productivity sufficiently to require less labor; a majority of alternative types of employment expansion tend to be concentrated in urban areas because of agglomeration effects. Moreover, as education increases in rural areas, workers gain the skills they need, and perhaps the rising aspirations, to seek employment in the city. But the pace of rural-urban migration is still often excessive from the social viewpoint.
LEWIS-FEI-RANIS MODEL OF ECONOMIC GROWTH
The Fei-Ranis model of economic growth was developed by John Fei. C. H and Gustav Ranis. The model is a dualism model in developmental or welfare economics and also an extension of the Lewis model. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. This theory is also known as surplus labor model.
The Lewis two-sector model became the general theory of the development process in surplus-labor developing nations during most of the 1960s and early 1970s.
In the Lewis model, the underdeveloped economy consists of two sectors:
1. A traditional, overpopulated rural subsistence sector characterized by zero marginal labor productivity—a situation that permits Lewis to classify this as surplus labor in the sense that it can be withdrawn from the traditional agricultural sector without any loss of output
2. A high-productivity modern urban industrial sector into which labor from the subsistence sector is gradually transferred. The primary focus of the model is on both the process of labor transfer and the growth of output and employment in the modern sector. (The modern sector could include modern agriculture, but we will call the sector “industrial” as shorthand). Both labor transfer and modern-sector employment growth are brought about by output expansion in that sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector.
In other words, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. This theory is also known as surplus labor model.
The theory recognizes the presence of a dual economy comprising both the modern and the primitive sector takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
Since the primitive sector and the modern sector co-exist in the economy, the problem of development arises. And development can happen only when there is a shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials.
The model assumes that industry-agriculture is interdependent and that a robust connectivity between the two would encourage and speedup development. For example, if agricultural laborers look for industrial employment, and industrialists employ more workers by use of larger capital good stock and labor-intensive technology, this connectivity can work between the industrial and agricultural sector.
Also, if the surplus owner invests in that section of industrial sector that is close to soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized. According to model, economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision-making powers and use industrial capital and consumer goods for agricultural practices.
The Lewis model is criticized on the grounds that it neglects agriculture. One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors.
However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.
They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development.
In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model.
In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages
Fei–Ranis model goes a step beyond and states that agriculture has a very major role to play in the expansion of the industrial sector. In fact, it says that the rate of growth of the industrial sector depends on the amount of total agricultural surplus and on the amount of profits that are earned in the industrial sector. So, larger the amount of surplus and the amount of surplus put into productive investment and larger the amount of industrial profits earned, the larger will be the rate of growth of the industrial economy.
As the model focuses on the shifting of the focal point of progress from the agricultural to the industrial sector, Fei and Ranis believe that the ideal shifting takes place when the investment funds from surplus and industrial profits are sufficiently large so as to purchase industrial capital goods like plants and machinery. These capital goods are needed for the creation of employment opportunities.
Hence, the condition put by Fei and Ranis for a successful transformation is that Rate of increase of capital stock & rate of employment opportunities > Rate of population growth. As an underdeveloped country goes through its development process, labor is reallocated from the agricultural to the industrial sector. More the rate of reallocation, faster is the growth of that economy.
The economic rationale behind this idea of labor reallocation is that of faster economic development.
The essence of labor reallocation lies in Engel’s law which states that the proportion of income being spent on food decreases with increase in the income-level of an individual, even if there is a rise in the actual expenditure on food. For example, if 90 per cent of the entire population of the concerned economy is involved in agriculture, that leaves just 10 per cent of the population in the industrial sector. As the productivity of agriculture increases, it becomes possible for just 35 per cent of population to maintain a satisfactory food supply for the rest of the population. As a result, the industrial sector now has 65 per cent of the population under it.
This is extremely desirable for the economy, as the growth of industrial goods is subject to the rate of per capita income, while the growth of agricultural goods is subject only to the rate of population growth, and so a bigger labor supply to the industrial sector would be welcome under the given conditions. In fact, this labor reallocation becomes necessary with time since consumers begin to want more of industrial goods than agricultural goods in relative terms.
However, Fei and Ranis were quick to mention that the necessity of labor reallocation must be linked more to the need to produce more capital investment goods as opposed to the thought of industrial consumer goods following the discourse of Engel’s law. This is because the assumption that the demand for industrial goods is high seems unrealistic, since the real wage in the agricultural sector is extremely low and that hinders the demand for industrial goods. In addition to that, low and mostly constant wage rates will render the wage rates in the industrial sector low and constant. This implies that demand for industrial goods will not rise at a rate as suggested by the use of Engel’s curve.
Since the growth process will observes a slow-paced increase in the consumer purchasing power, the dualistic economies follow the path of natural austerity, which is characterized by more demand and hence importance of capital goods industries as compared to consumer good ones.
However, investment in capital goods comes with a long gestation period, which drives the private entrepreneurs away. This suggests that in order to enable growth, the government must step in and play a major role, especially in the initial few stages of growth. Additionally, the government also works on the social and economic overheads by the construction of roads, railways, bridges, educational institutions, health care facilities etc.
Ezeamaku chukwuemeka victor
2017/243370
Victorezeamaku76@gmail.com
The Lewis Fei-Ranis model
The model know as the Fei–Ranis model of economic growth is a dualism model in developmental economics, it was developed by John C. H. Fei and Gustav Ranis and is viewed to be an extension of the model developed by lewis. It is also known as the Surplus Labor model.
It recognizes the presence of two economy that consists of both the modern & the primitive sector and takes the economic situation of unemployment & underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
As postulated by this theory, the primitive sector consists of the already existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the major focus of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.[4] They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
This model again stresses the importance of Nigeria making a shift in the amount of labour availability for agriculture to labour available for industrialization, which goes against the current economic policy being pursued by the present Nigerian government, which is an insistence on labour migration to agriculture, this move my the Nigerian government goes against the generally accepted principle for developing nation’s that the more the rate of reallocation from agriculture, the faster the growth of that economy.
The Harris-Todaro model
The Harris–Todaro model was developed in the 1970s and is named after two economists, John R. Harris and Michael Todaro, it is an economic model used in development economics to explain some of the issues concerning rural-urban migration.
The main assumption of the model is that the migration decision is based on expected difference in income between the rural and urban areas rather than just differences in wages.
It has long been realized that in order for an economy to develop or grow, a large amount of labor has to be transferred from the traditional (or backward) agricultural sector in rural areas, where the productivity of labor is low (or negligible, or zero, or even negative) to the modern manufacturing sector where the productivity of labor is higher and rising due to capital accumulation in that sector.
It should not be surprising, therefore, that, in the literature of development economics, dualistic models gained popularity over the single-commodity or single-sector theories
in the 1950’s. A typical dualistic model in development economics contains two sectors, a traditional or agricultural sector in the rural area and a modern or manufacturing sector in the urban area and there is large scale migration from the traditional sectors to the modern sector
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector.
Therefore, migration from rural areas to urban areas will increase if:
Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
UGWU PERPERTUA ODINAKA
2O17/244848
everlastinggift9507@gmail.com
LEWIS-RANIS FEI MODEL (SURPLUS LABOUR)
INTRODUCTION
The Lewis dual economy model is widely recognised in development economics for providing profound explanatory insights into the early stages of development. Although its general framework is inspiring, its fundamental concepts and micro-mechanisms – especially, the definition of surplus labour, the wage determination mechanisms in both the traditional and modern sectors and the dynamics of labour flows between the two sectors – lack sufficient detail.
The dual-sector model is a model in development economics. It is commonly known as the Lewis model after its inventor W. Arthur Lewis. It explains the growth of a developing economy in terms of a labour transition between two sectors, the capitalist sector and the subsistence sector.
Initially the dual-sector model as given by W. Arthur Lewis was enumerated in his article entitled “Economic Development with Unlimited Supplies of Labor” written in 1954, the model itself was named in Lewis’s honor
ASSUMPTIONS
The model assumes that a developing economy has a surplus of unproductive labor in the agricultural sector.
These workers are attracted to the growing manufacturing sector where higher wages are offered.
It also assumes that the wages in the manufacturing sector are more or less fixed.
Entrepreneurs in the manufacturing sector make profit because they charge a price above the fixed wage rate.
The model assumes that these profits will be reinvested in the business in the form of fixed capital.
An advanced manufacturing sector means an economy has moved from a traditional to an industrialized one.
W. A. Lewis divided the economy of an underdeveloped country into 2 sectors:
The capitalist sector
Lewis defined this sector as “that part of the economy which uses reproducible capital and pays capitalists thereof”. The use of capital is controlled by the capitalists, who hire the services of labour. It includes manufacturing, plantations, mines etc. The capitalist sector may be private or public.
The subsistence sector
This sector was defined by him as “that part of the economy which is not using reproducible capital”. It can also be adjusted as the indigenous traditional sector or the “self employed sector”. The per head output is comparatively lower in this sector and this is because it is not fructified with capital.
The “DUAL SECTOR MODEL” is a theory of development in which surplus labor from traditional agricultural sector is transferred to the modern industrial sector whose growth over time absorbs the surplus labour, promotes industrialization and stimulates sustained development.
In the model, the subsistence agricultural sector is typically characterized by low wages, an abundance of labour, and low productivity through a labour-intensive production process. In contrast, the capitalist manufacturing sector is defined by higher wage rates as compared to the subsistence sector, higher marginal productivity, and a demand for more workers. Also, the capitalist sector is assumed to use a production process that is capital intensive, so investment and capital formation in the manufacturing sector are possible over time as capitalists’ profits are reinvested in the capital stock. Improvement in the marginal productivity of labour in the agricultural sector is assumed to be a low priority as the hypothetical developing nation’s investment is going towards the physical capital stock in the manufacturing sector.
RELATIONSHIP BETWEEN THE TWO SECTORS
The primary relationship between the two sectors is that when the capitalist sector expands, it extracts or draws labour from the subsistence sector. This causes the output per head of labourers who move from the subsistence sector to the capitalist sector to increase. Over time as this transition continues to take place and investment results in increases in the capital stock, the marginal productivity of workers in the manufacturing will be driven up by capital formation and driven down by additional workers entering the manufacturing sector. Eventually, the wage rates of the agricultural and manufacturing sectors will equalize as workers leave the agriculture sector for the manufacturing sector, increasing marginal productivity and wages in agriculture whilst driving down productivity and wages in manufacturing.
The end result of this transition process is that the agricultural wage equals the manufacturing wage, the agricultural marginal product of labour equals the manufacturing marginal product of labour, and no further manufacturing sector enlargement takes place as workers no longer have a monetary incentive to transition.
SURPLUS LABOUR AND THE GROWTH OF THE ECONOMY
Surplus labour can be used instead of capital in the creation of new industrial investment projects, or it can be channeled into nascent industries, which are labour-intensive in their early stages. Such growth does not raise the value of the subsistence wage, because the supply of labor exceeds the demand at that wage, and rising production via improved labour techniques has the effect of lowering the capital coefficient. Although labour is assumed to be in surplus, it is mainly unskilled. This inhibits growth since technical progress necessary for growth requires skilled labor. But should there be a labor surplus and a modest capital, this bottleneck can be broken through the provision of training and education facilities. The utility of unlimited supplies of labour to growth objectives depends upon the amount of capital available at the same time. Should there be surplus labour, agriculture will derive no productive use from it, so a transfer to a non agriculture sector will be of mutual benefit. It provides jobs to the agrarian population and reduces the burden of population from land. Industry now obtains its labour. Labour must be encouraged to move to increase productivity in agriculture.
Since the wages in the capitalist sector depend on the earnings of the subsistence sector, capitalists would like to keep down productivity/wages in the subsistence sector, so that the capitalist sector may expand at a fixed wage. In the capitalist sector labor is employed up to the point where its marginal product equals wage, since a capitalist employer would be reducing his surplus if he paid labor more than he received for what is produced. But this need not be true in subsistence agriculture as wages could be equal to average product or the level of subsistence. The total product labor is divided between the payments to labor in the form of wages, OWPM, and the capitalist surplus,. The growth of the capitalist sector and the rate of labor absorption from the subsistence sector depends on the use made of capitalist surplus. When the surplus is reinvested, the total product of labor will rise. This amount can now be reinvested and the process will be repeated and all the surplus labor would eventually be exhausted. When all the surplus labor in the subsistence sector has been attracted into the capitalist sector, wages in the subsistence sector will begin to rise, shifting the terms of trade in favor of agriculture, and causing wages in the capitalist sector to rise.
CAPITAL ACCUMULATION
The process of economic growth is inextricably linked to the growth of capitalist surplus, that is as long as the capitalist surplus increases, the national income also increases raising the growth of the economy. The increase in capitalist surplus is linked to the use of more and more labor which is assumed to be in surplus in case of this model. This process of capital accumulation does come to an end at some point.
This point is where capital accumulation catches up with population so that there is no longer any surplus labor left. Lewis says that the point where capital accumulation comes to a stop can come before also that is if real wages rise so high so as to reduce capitalists’ profits to the level at which profits are all consumed and there is no net investment.
CRITICISM
Lewis model has attracted attention of underdeveloped countries because it brings out some basic relationships in dualistic development. However it has been criticized on the following grounds:
Economic development takes place via the absorption of labor from the subsistence sector where opportunity costs of labor are very low. However, if there are positive opportunity costs.
Lewis seems to have ignored the role of extractive industries in economic modernization. He explicitly excludes mining sector from his analysis.
Absorption of surplus labor itself may end prematurely because competitors may raise wage rates and lower the share of profit.
The Lewis model underestimates the full impact on the poor economy of a rapidly growing population.
Lewis seems to have ignored the balanced growth between agriculture and industry. Given the linkages between agricultural growth and industrial expansion in poor countries, if a section of the profit made by the capitalists is not devoted to agricultural development, the process of industrialization would be jeopardized.
Possible leakages from the economy seem to have been ignored by Lewis. He assumes boldly that a capitalist’s marginal propensity to save is close to one, but a certain increase in consumption always accompanies an increase in profits, so the total increment of savings will be somewhat less than increments in profit.
The transfer of unskilled workers from agriculture to industry is regarded as almost smooth and costless, but this does not occur in practice because industry requires different types of labor.
EMPIRICAL TESTS AND PRACTICAL APPLICATION OF THE LEWIS MODEL
Empirical evidence does not always provide much support for the Lewis model. Theodore Schultz in an empirical study of a village in India during the influenza epidemic of 1918–19 showed that agricultural output declined, although his study does not prove whether output would have declined had a comparable proportion of the agricultural population left for other occupations in response to economic incentive. Again disguised unemployment may be present in one sector of the economy but not in others. Further, empirically it is important to know not only whether the marginal productivity is equal to zero, but also the amount of surplus labor and the effect of its withdrawal on output.
The Lewis model was applied to the Egyptian economy by Mabro in 1967 and despite the proximity of Lewis’s assumptions to the realities of the Egyptian situation during the period of study, the model failed firstly because Lewis seriously underestimated the rate of population growth and secondly because the choice of capital intensiveness in Egyptian industries did not show much labor using bias and as such, the level of unemployment did not show any tendency to register significant decline.
The validity of the Lewis model was again called into question when it was applied to Taiwan. It was observed that, despite the impressive rate of growth of the economy of Taiwan, unemployment did not fall appreciably and this is explained again in reference to the choice of capital intensity in industries in Taiwan. This raised the important issue whether surplus labor is a necessary condition for growth.
This model has been employed quite successfully in Singapore. Ironically however it has not been employed in Sir Arthur Lewis’ home country of St. Lucia.
Lewis model is not applicable in real life.
HARRIS-TODARO’S MODEL OF MIGRATION
INTRODUCTION
Employment policy in developing countries like India cannot be formulated and implemented without answering a basic question, viz., how can underutilised labour be used in a development strategy? Ragnar Nurkse and W. A. Lewis asserted that large numbers of people remain engaged in work which adds nothing to national output. Nurkse saw the reallocation of a surplus labour to more productive uses, especially labour-intensive construction projects, as a major source of capital formation and economic growth.
Lewis envisaged a similar reallocation process but he pictured the ‘capitalist sector’, essentially industry, as the principal employer of surplus labour. Both theories regarded the labour reallocation process as nearly costless but they worried about how to capture from the agricultural sector the food necessary to feed the transferred workers.
While criticising the Lewis model J. R. Harris and M. P. Todaro have developed a new model of economic development which is relevant for labour surplus countries like India. It is the best known model of internal migration in the context of present-day developing countries. The model has focused on migration of labour from rural to urban areas induced by certain incentives. They have referred to two types of migration—induced migration and internal migration.
According to this model migrating workers are essentially participants in a lottery of relatively high-paid jobs in the towns. When new urban jobs are created the lottery becomes more attractive to potential migrants. Depending on their responsiveness to this improved opportunity, more than one worker are likely to migrate for each job created.
If so, the output foregone may be that of two or more agricultural workers, not just one. If the migrants bring some of their family members to urban areas more output will be lost. The reason is that the wife and children of migrants find fewer employment opportunities in towns than in the rural areas because they do not have land in the towns on which to grow food.
Internal Migration:
Most of the internal labour migration which occurs in the course of economic development is from rural to urban areas. The model sets out to explain why the observed high rates of small- urban migration found in most developing countries is quite natural from an economic view point.
In this model the expected real wage-differential between urban and rural areas is the main motivating force behind migration or the main determinant of the migration decision. The potential migrant first calculates the real income which he would get in the urban area for a job with his present effort. He next makes a personal judgement of the probability of obtaining such a job.
He then compares the expected income with that which he hopes so obtain in the rural area. His migration decision is based on the difference. For example, suppose the expected rural income is Rs 1000 per month, and that real income of an urban job which is commensurate with his qualification is Rs 2000.
However, this information alone is not sufficient to make the migration decision. If the subjective probability of getting the urban job was 0.4, than the expected income would be Rs 800 and no migration would take place on this case expected urban wage = actual urban wage x the probability of getting a job
800 = 0.4 x Rs 2000
If the probability were 0.8 the expected income would be Rs 1600 (= 0.8 x Rs 2000) and the worker would migrate. (To this one may, of course, add the cost of transfer.) Thus the model brings into focus the role of economic incentive in the migration decision.
The Basic Model:
The Harris-Todaro model assumes that migration from rural to urban areas depends primarily on the difference in wages between the rural and urban labour markets.
Since there is unemployment in the town (and it is assumed that there is no unemployment in rural areas), and every migrant cannot expect to find a job there, the model postulates that the expected urban wage with the rural wage. The expected urban wage is the actual urban wage times the probability of getting a job.
Harris and Todaro assume that all members of the urban labour force have equal chances of obtaining the jobs available.
Migration in any given time then depends on three factors:
(a) The urban-rural wage gap,
(b) The urban employment rate and
(c) The responsiveness of potential migrants to the resulting opportunities.
Theoretical Implication of the Model:
There is no denying the fact that any development project can be evaluated using social cost- benefit analysis. An important part of the social cost of any input is opportunity cost, its value in its next best alternative use. Labour hired for an urban formal-sector project might well be drawn from the urban informal sector also.
The worker who moves out of the urban informal sector may, in turn, be replaced by someone from the rural sector. In this case, the output lost is that of the worker who was formerly in the rural sector, i.e., the worker at the end of the employment chain. For this reason, some analysts believe that the wage paid to casual agricultural labourers provides a good measure of the social cost of unskilled labour.
However, this measure, although a good indicator of output foregone through labour reallocation, probably understates the true social cost of employing labour, which has other components that are likely to be significant. One such component is induced migration. No doubt there are both pull and push factors behind internal labour migration that occurs in the course of economic development from rural to urban areas.
Such migration can result either from favourable economic developments in the towns or from adverse developments in the rural areas. The Harris-Todaro model integrates these two sets of forces in their analysis of the process of labour reallocation that is likely to occur during economic development. This is why the model was sort of innovation in the literature of development economics when it appeared for the first time in 1970′.
The Policy Implications of the Model:
The H-T model has far-reaching implications from the policy point of view. For example, if the government of the country concerned were successful in fostering industrial development in an urban area, employment would increase there.
The effect would be to increase the subjective productivity of getting urban employment in the minds of rural inhabitants. Migration would increase and the eventual effect of the new industrial development could be that urban unemployment becomes higher that the level prevailing before the new development took place.
There will be some level of urban employment which ensures equilibrium in the sense that no further migration takes place. Potential migrants may take a long-term view in arriving at a decision. They may consider that their desireness of obtaining an urban job will be higher after a waiting period of some months. Thus they will compare the present value of the sum of expected urban earnings with that of expected rural earnings.
They may be content to accept a low wage in the urban informal sector for some time. This might be a rational decision on a long-term basis. The root of the problem is the large difference between earnings in the modern industrial sector and those in the rural areas.
Often the former are well above the market clearing levels for varies reasory. The long-term solution to the problem lies in adopting policies for both urban and rural areas which reduces the real income differences between the two areas.
Name: Ugorji Ijeoma Judith
Reg no: 2017/243088
Department: ECONOMICS
Email: peppyhijay@gmail.com
Blog: peppyxperience.blogspot.com
INTRODUCTION
In times past, various economists have come up with different approaches and models of economic growth in a bid to explain and possibly proffer solution(s) to the patterns and problems of economic growth of developing countries. This approaches ranges from the linear stages of growth model to the structural change models down to the traditional neoclassical growth theories.
Various types of growth models include the Harrod-Domar growth model which highlights the mobilization of domestic and foreign savings to generate investment and hence economic growth. The Solow growth model also known as the exogenous growth model analyses the changes in the levels of economic growth (output) over time as a result of the changes in the population growth rate and the rate of technological process. The endogenous growth model is another model placing more emphasis on internal factors which brings about economic growth than external factors. These internal factors according to the model includes improvement in innovation, knowledge, and human capital. There is the Lewis growth model which divided the economy of an underdeveloped nation into subsistence sector and the capitalist sector and then the Harris- Todaro growth model of migration. These models however have their strength and weaknesses.
Harris -Todaro model of migration
The model is named after two economists John R. Harris and Micheal Todaro who developed it in the year 1970. The model is used in development and welfare economics to explain some of the phenomena concerning rural-urban migration as it affects economic growth of developing countries. Harris-Todaro model just like Lewis model divided the economy into two sectors(region);
The rural region (agricultural) and the urban region (industrial) in order to explain the influence or rural-urban migration and critical urban unemployment problems in developing countries.
The model tries to answer the question “why rural-urban migration is still taking place despite high unemployment in urban areas. The model sees migration as an economic decision. People migrate on the basis of wages and probability of unemployment. Migrants take into account present value of urban expected income or it’s equivalent and then move if it exceeds average rural income.
The model assumes that the urban minimum wage is set to be higher than the wage rate paid to rural labour. This results in a wage differential between the two sectors. Rural workers have an incentive to migrate to the urban areas despite of increasing level of urban unemployment, because of the potential of higher earnings in the urban sector brought about by a high concentration of Industries in the cities.
Such migration will continue as long as there is a possibility for migrants to increase their income by moving to a city. Some migrants will have arranged employment before leaving the countryside. Others will begin job search only once they have arrived at their destination, while some still will join the pool of urban unemployed with the hope of finding a meaningful and sustaining means if livelihood in the future. This explains why there is a continuous flow of migrants observed in developing countries irrespective of the high unemployment rates.
BASIC ASSUMPTIONS OF HARRIS-TODARO GROWTH MODEL
Migration is primarily an economic phenomenon based on private rational economic decisions.
Wage difference (wage gap) between the two sectors of the economy. Migration proceeds in response to urban-rural differences in expected earnings rather than actual earnings and the urban employment rate acting as an equilibrating force on such migration.
The model also assumes that potential migrants are risk neutral where the poor migrants will likely be risk aversive in that they are indifferent between a certain a certain expected rural income and an uncertain expected urban income.
They also assume that there is a perfect competition and there is no unemployed in rural agricultural sector. Although this was countered as unrealistic.
Harris-Todaro two sectors model is characterised by the following;
Real wages (adjusted for cost of living difference) were higher in urban sector jobs than in the rural traditional sector jobs.
To be hired for a formal sector job, it was necessary to be physically present in the urban areas where the jobs were located.
More workers searched for the industrial sector jobs than were hired leaving the many others to join the league of the unemployed.
To maintain the equality between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower paying rural job, the equilibrium arising in such a setting would be characterised by urban unemployment.
Any temporary difference in the expected wage between one sector and another would be eroded as workers migrate from the low expected wage labour market to the high expected wage labour market.
A graphical illustration of the Harris-Todaro two sector model of migration.
Fig 1. Harris-Todaro model.
The graph above explains the Harris-Todaro two sector model where there is declining marginal productivity in both sectors. Hence, the higher the wage is, the lower the demand for workers in both sectors (according to law of demand for labour).
Total labour force is represented by L, and it does not depend on wages. There are LA workers in agricultural sector and LM workers in the mirdern sector and the remaining Lu are unemployed. If we assume a flexible wage in both sectors then we get equal wages in both agricultural and modern sector and no unemployment. The situation is depicted in the diagram above, where AA curve is the demand for labour in agricultural sector and MM curve is the demand for labour in the modern sector.
COMPARISON OF THE HARRIS-TODARO MODEL OF MIGRATION WITH THE LEWIS MODEL OF MIGRATION
The Harris-Todaro model of migration has a basic similarity with the Lewis model if migration in that both models adopted the system of two sector model in their analysis. While Harris-Todaro two sector model is divided into the rural (agricultural sector) and urban (modern/industrial sector), Lewis two sector model on the other hand comprises of the subsistence sector and the capitalist sector. Lewis mentioned that of the two sectors, the capitalist sector is predominant. He defined the capitalist sector as “that part of the economy which uses reproducible capital, pays capitalists for the use thereof and employs wages labour for profit making purpose”.
The distinguishing feature of a capitalist sector is that it hires labour from the subsistence sector at a given wage rate and sells output to earn profit. The subsistence sector on the other hand is that part of the economy which does not use reproducible capital. Labour is abundant and disguised unemployment is the result. The Lewis model auggests that the capitalist sector to be expanded by transferring labour from the subsistence (rural) sector to the capitalist sector because he assumes that the supply of labour is perfectly elastic at the subsistence wage. However this was a major criticism of the model. The model assumes a constant wage rate in the capitalist sector until the supply of labour is exhausted from the subsistence sector. This is unrealistic as a result of the continuous increase in the wage rate overtime in the industrial sector of an underdeveloped economy even when there is open unemployment in it’s rural sector. From this , the following deductions can be made on comparison of the two models;
Both models adopts two sector model in their analysis.
Harris-Todaro model tries to explain why there is continuous increase in rural-urban migration despite increasing rate of unemployment in the urban sector while Lewis model suggest for migration of labour from subsistence sector to the capitalist sector.
Lewis model is interested in the expansion of the capitalist sector at the expense of the subsistence sector.
Harris-Todaro model assumes no unemployment in the rural area, Lewis on the other hand assumes a disguised unemployment in the rural (substantence sector).
Harris-Todaro model operates in the short run while Lewis model operates in the long run.
Both assumes fixed wage rate in the urban sector.
Significance of thE HARRIS-TODARO MODEL OF MIGRATION.
The fundamental contribution if Harris and Todaro’s two sector model of migration was to build a model that fits the stylized facts of the labour market. On the lines if the theory, developing nations adopted program on integrated rural development which encouraged an increase in the rural traditional sector wage. The theory proves that the higher the unemployment rate in the urban area, the lower is the probability of migrants from the rural to the rural area actively seeking formal sector employment who are unable to find it. The significant findings of the model are;
Firstly, if expected urban wage equals rural income, there is no incentive to migrate.
Secondly, if the expected urban wages is greater than the rural income, there is great incentive to move from rural to urban migration.
Thirdly, if the expected urban wages is less than rural income, there would be an incentive to move in other direction.
Lastly, the expected urban wage depends on what type of job migrants are engaged in.
LIMITATIONS OF THE MODEL
Some of the assumption of the Harris-Todar’s model were judges to be too restricted. The model also assumes that’s the potential migrants are risk neutral where the poor migrants will likely be risk averse as in they are indifferent between a certain expected rural income of the same magnitude. The assumption that there exists a perfect competition in rural agricultural sector is not realistic.
Implications and conclusion
The migration of labour from rural to urban area is an important part of urbanisation in the developing nations. Infact, it is the major source of labour for industries mostly concentrated in the modern sector. The question is, to what extent is internal migration a desirable phenomenon and under what circumstances?. There is need for government of developing nations to encourage programs that would boost the rural sector economy and encourage more people to stay back. This would reduce the increasing rate of unemployment in the urban area.
Considering developing nations of Africa and taking Nigeria as a case study, the migration of labour from rural sector to urban sector is evident in the over population, increase in crime rate and unemployment that characterizes the industrialised urban area. Young people tend to leave the rural areas which are majorly villages and small towns characterised by majorly subsistence agriculture and other menial jobs as blacksmith, carpentery, craftsmanship, petty trades to mention a few with little or no industries in search of “greener pastures” in forms of better paying jobs with good working conditions that would eventually lead to a better or higher standard of living. The rural sector is therefore left to the weak and aged who are mostly farmer and could produce little that would sustain them to say nothing of any surplus to sell to the urban area. This leads to reduction in production of agricultural sector.
LEWIS-FEI-RANIS MODEL OF SURPLUS THEORY.
The Lewis model of surplus labour is an example of structural-change theory which focuses on the mechanism and strategies by which underdeveloped economies transform their domestic economic structure from a more dominant rural agricultural sector to a more urbanised industrial economy.
The surplus labour theory one of the best known early models of development was developed by Nobel laureate W. Arthur Lewis in the 1950s and was later modified and extended by John Fei and Gustav Ranis. The Lewis-Fei-Ranis model of surplus theory was named after these there men.
The surplus labour theory uses the analysis of two sector model in explaining growth experiences of developing nations. These two sectors are the traditional rural subsistence sector characterised by surplus labour (the excess supply of labour over and above the quantity demanded at the going free market wage rate). And the modern urban sector with high industrialization. This the Lewis model also calls the capitalist sector. The surplus theory assuming zero marginal productivity of labour in the rural sector posits that surplus labour should be transferred from the overpopulated rural sector to the high productive industrial sector. The model focuses on the movement/transfer of surplus labour from the rural to the urban sector and also the growth of the industrial urban sector in terms of output and employment. It is majorly interested in the growth and expansion of the modern sector.
Assumptions of the model
The model assumes the economy is divided into two sector, traditional rural sector and urban industrial sector( the capitalist sector).
There exists surplus labour in the traditional rural sector
There is mobility of labour from the rural to urban area.
The model assumes there is a perfectly competitive labour market in the modern sector given fixed wage rate and horizontal supply of labour.
Explaining the Lewis model
Given the subsistence and capitalist sector where the subsistence sector is identified with agriculture and considered labour intensive. Poor technices of production are employed Which leads to low productivity. It does not use reproducible capital. The capital sector on the other hand implies mainly the manufacturing sector of the economy where hired labour is required for the purpose of mass production and which can be private or public in nature.
The model opined that if a wage higher than the institutional wage prevailing in the subsistence sector by a certain proportion of the institutional wage is fixed in the capitalist sector. that is, if the labour wage in the capitalist sector is higher than what is obtained in the rural area then the capitalist sector have an an incentive to obtain more labour force from the rural area.
By so doing, the manufacturing sector is expanded and growth is experienced. More wealth is created and hence savings is increased. This increase in savings leads to capital accumulation. Investment is increased. More investment therefore means more employment of labour from the subsistence rural sector.
This process of capitalist (modern sector ) self sustaining growth and employment expansion is assumed to continue until the surplus rural labour is absorbed in the new modern sector, there after additional can be withdrawn from the subsistence sector only at a higher cost of food production because the declining labour to land production means that the marginal product of rural labour is no longer zero.
Criticism of the model
Even though the Lewis two sector model of development to a large extent relects the growth experiences of many developing countries, some of it’s basic assumptions has been brought under questioning and is considered invlid. These criticism include but not limited to;
The Lewis model is of the notion that surplus labour exists in the rural areas while there is full employment in the urban sector. However, most recent development economists are of the opinion that this notion not always true although there is seasonal and geographical exception to this. Labour availability varies by geographical and seasonal conditions.
Another criticism of the model is its assumption of a perfectly competitive modern market which guarantees continues existence of constant real urban wages up to the point where the supply of rural labour is exhausted. This assumption is considered not to hold as wages in modern sector are not constant but rises substantially over time birh in absolute terms and in relation to average rural wages. Institutional factors such as trade union bargaining power , civil service wage scales tends to oppose competitive forces in modern sector labour market in developing countries.
The model was also criticized for assuming diminishing returns in modern industrial sector when infact increasing returns are evidenced as prevailing in industrial sector.
IMPLICATION OF THE MODEL AND CONCLUSION.
The Lewis model analysis is obviously expressed in the growth experience of developing countries, Nigeria inclusive and most expecially China in recent times. It is common for labour to be shifted from the rural agricultural sector to the urban industrialised sector of the economy for the purpose of hiring in the manufacturing and service sectors to boost production.
This leads to expansion of the modern sector at the expense of the agricultural rural sector. An extreme effect would result in decline in agricultural productivity and eventually rise in price of essential goods such as food which is a major product of agriculture. This would also lead to increase in the price of industrial inputs such as raw materials from agriculture. In the long run, unemployment rate would increase in the modern sector.
The Harri’s Todaro Model of Migration
This was developed by 1970 and it was named after John R. Harris and Michael Todaro. It is used to explain rural-urban migration in development economics. The model assumes that the decision to migrate is based on based on expected income differentials between rural and urban areas instead of just wage differentials.This means rural-urban migration in the light of high urban unemployment can be economically rational if expected urban income is more than expected rural income.
In the H-T model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that there is nothing like unemployment in the rural sector. It is also assumed that there is perfect competition in the rural agricultural production and the subsequent labor market. Therefore, the agricultural rural wage is at par with agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income.
Conclusions and opinions
Harris Todaro model explains some issues of rural-urban migration. This migration happens in case when expected rural income is higher than rural wages. In this case economy may have high rates of unemployment. The equilibrium condition of this model is when expected rural wage is equal to rural wage. When government subsidize manufacturing sector Harris Todaro paradox may happen. According to the authors job creation instead of dealing with unemployment problem actually may cause increase of unemployment. This happens when urban-rural wage differential is high enough, so rural workers move to the cities hoping to find a job with high wage. Obviously, not all these workers succeed in finding jobs which leads to unemployment. Another issue is that inducing minimum wages creates labor market distortions. Therefore, policy makers should not set the minimum wage rates.
In addition, simulations showed that different policies’ outcomes depend on elasticity of labor demand in different sectors and on marginal product of labor.
As Harris and Todaro suggested the first-best policy would be subsidizing manufacturing along with restrictions of rural migration.
THE LEWIS-FEI-RANIS MODEL
It should be of some interest to note that the Lewis model and its many offspring
continue to be viewed as relevant in the South and considered a valuable guide to policy in
places like China, India, Bangladesh, Central America and even some parts of sub-Saharan
Africa, i.e., wherever heavy population pressure on scarce cultivable land remains a feature of
the landscape. Most Northern development economists, on the other hand, are today focusing
either on aggregate cross-section models to determine the sources of economic growth in the
Barro (1991) tradition or, at the micro level, on the econometric modeling of household
behavior, with very little interaction between the two approaches. In the South, dualism still
holds the attention of both theoretical and empirical observers. Bourguignon-Morrison (1995)
still see the persistence of economic dualism as a powerful explanatory factor underlying cross-
country differences in inequality in the Lewis and Kuznets tradition, explicitly or implicitly
embracing the dualistic model, with wages kept relatively low and savings rates rising as long as
there is a labor surplus, followed by the eventual improvement of equity with the upswing of real
wages. This yielded, in Kuznets’ view, the likelihood of the famous inverse U-shaped pattern,
depicting the relationship between growth and the distribution of income over time. Work by
Fei, Ranis and Kuo (1979), Fields (2001) and others has shown that indeed no inevitability
attaches to the Kuznets curve. But it is also clear that the nature of the growth pattern itself
needs to be viewed in an expressly dualistic context to determine the relationship between the
functional and the family distribution of income over time, all of which differs markedly in the
period before and after the Lewis turning point.
Name: Ojigwe Shalom Chinaza
Department: Economics
Registration No: 2017/249549
Email address: shalomoj1@gmail.com
Harris-Todaro Model of Migration
This model was named after John R Harris and Michael Todaro in 1970, it was used to address development and welfare economics to explain certain issue that arose due to rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income. This simply means that people migrate to urban areas because they feel that there is a higher tendency to receive more income in the urban area than in rural areas
A simplified Harris-Todaro Model is given below:
• Let Wr be the wage rate (marginal productivity of labor) in the rural agricultural sector.
• Let Le be the total number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
• Let Lus be the total number of job seekers, employed and unemployed, in the urban sector.
• Let Wu be the wage rate in the urban sector, which could possibly be set by government with a minimum wage law.
According to Harris-Todaro, Rural- Urban migration will take place if:
Wr (Le/Lus) * Wu
At equilibrium,
Wr=(Le/Lus) * Wu
With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.
Looking at the situation of Nigeria, people actually move to the urban regions because they believe that they will be able to make it in those places. They refer to the urban regions as “greener pastures”, but unfortunately, they ignore the fact that they could be worse-off in the cities because jobs are not being created to accommodate the new migrants. Also, certain jobs require specificities, in that it could be academic, intellectual and so on which often times these labourers from the rural area might not possess.
Also, an increase in inflow of labour to the urban area would have a negative impact on the wage rate.
Lewis-Fei Ranis model( Surplus Labour Theory)
The Lewis -Fei Ranis model is one of the best-known early theoretical models of development that focused on the structural transformation of a primarily subsistence economy was that formulated by Nobel laureate W. Arthur Lewis in the mid-1950s and later modified, formalized, and extended by John Fei and Gustav Ranis. The Lewis-Fei Ranis model is an improved version of the Lewis method of economic development. In 1954, Sir Arthur Lewis published a paper, “Economic Development with unlimited supplies of Labour”(The Manchester School), which was an elaborate discussion of the labour surplus economy. This model concentrated on a dual sector economy. A central theme of that article was that, labour in dual economies is available to the urban, industrialized sector at a constant wage determined by minimum levels of existence in traditional family farming because of ‘disguised unemployment in agriculture, there is practically unlimited supply of labour and available of industrialization, at least in the early stages of development. The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. According to Lewis model, this surplus labour is common in the rural areas and it’s basically agricultural. Lewis talks of an institutional wage, which he refers to as the wage which is as a result of institutional arrangements. The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector.
The Lewis model is really simple. Sir Arthur Lewis feels that if a wage higher than the institutional wage prevailing in the subsistence sector by a certain proportion of the institutional wage is fixed in the capitalist sector the capitalist sector will be able to attract an unlimited quantity, the labour from subsistence sector. This will enable the capitalist sector to expand. It will, in turn lead to the generation of more savings in the capitalists sector.
The additional saving, will not only help the entrepreneurs to invest more but also to improve the quality of capital invested. This will result in more employment of labour from the subsistence sector. This will lead to generation of more savings in the Capitalist sector which can be further invested leading to employment of more surplus labour and so on. One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. Arthur Lewis saw the agricultural sector as just a source of labour (surplus labour) to the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. Fei-Ranis believed that labour could be transferred from the subsistence sector without a change in output. This simply implies that Fei-Ranis did not view the agricultural sector as just a source of labour for the industrial sector.Fei and Ranis emphasized strongly on the industry-agriculture interdependency and said that a robust connectivity between the two would encourage and speedup development. If agricultural laborers look for industrial employment, and industrialists employ more workers by use of larger capital good stock and labor-intensive technology, this connectivity can work between the industrial and agricultural sector. Also, if the surplus owner invests in that section of industrial sector that is close to soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized
Fei–Ranis model goes a step beyond and states that agriculture has a very major role to play in the expansion of the industrial sector. In fact, it says that the rate of growth of the industrial sector depends on the amount of total agricultural surplus and on the amount of profits that are earned in the industrial sector. So, larger the amount of surplus and the amount of surplus put into productive investment and larger the amount of industrial profits earned, the larger will be the rate of growth of the industrial economy. As the model focuses on the shifting of the focal point of progress from the agricultural to the industrial sector, Fei and Ranis believe that the ideal shifting takes place when the investment funds from surplus and industrial profits are sufficiently large so as to purchase industrial capital goods like plants and machinery. These capital goods are needed for the creation of employment opportunities. Hence, the condition put by Fei and Ranis for a successful transformation is that:Rate of increase of capital stock & rate of employment opportunities > Rate of population growth
In Nigeria, the assumption that labour employment must be higher than the population is highly impossible. The Fei-Ranis model ignored the aspect of population distribution, this is because there could be a case of the dependent population being higher than the independent population. In this situation, the population rate would be higher than those employed and the economy would not grow. Also, the concept of an institutional wage is quite far-fetched, it might not always be fair because there are other externalities that could affect the institutional wage. For example, In Nigeria today, politics, nepotism and corruption affects the institutional wage or rather the minimum wage.
Moreover, both models ignored the aspect of international trade, foreign direct investment and comparative advantage which in reality has a major role to play in labour supply, production of goods and services and economic growth.
Name : Ani, Gabriel ogbonna
Reg. Number: 2017/249483
Email: anigabriel05@gmail.com
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
INTRODUCTION
The concept labour surplus theory was advanced by Lewis in 1954 and later expanded by Gustav Ranis and John C.H. Fei in 1961, 1964 and 1997. Lewis in his theory posited that an economy transits from the first stage, labour-surplus to the second, labour-scarce stage of development. Later, Ranis and Fei (1961) modified the Lewis theory and defined three phases of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model. The movement into each phase is marked three turning points:
The breakout point leads to phase one growth with exceeding agricultural labour.
The shortage point leads to phase two growths with false appearance of agricultural unemployment.
The commercialization point leads to phase three of self-sustaining economic growth with the commercialization of the agricultural sector.
In the model, the dual nature of the economy comprises of both the modern and the primitive sector and it takes in account the economic situation of unemployment and underemployment of resources, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is industrial sector. The two sectors co-exist in the economy, which brought about the development problem. Development can be gotten only by complete shift from agricultural economy to industrial economy, such that there is an increase in industrial output. This is done by transfer of labour from the agricultural sector to industrial sector, indicating that underdeveloped countries do not suffer from constraints of labour supply. As well, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod Domar model, saving and investment become the backbone of economic development of the underdeveloped countries.
THE MAIN ARGUMENTS OF THE MODEL
The labour surplus theory is concerned with poor economy that is the under developing countries. The main argument of the model is focused on the following backgrounds.
There is an abundance of labour in under developed countries and shortage of natural resources.
The population growth rate is very high which results in mass unemployment in the economy.
There is a dynamic industrial sector in the economy.
There are certain non-agrarian sectors in the economy where there is reduced use of capital.
The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labour is zero and negative in agricultural sector. The situation where MPL-0, labour can be transferred to industrial sector without any loss in agricultural output. The real wages in industrial sector remains fixed and it is equal to the initial level of real income in agricultural sector. Such wages are given the name of institutional wages.
ASSUMPTIONS OF THE LEWIS-FEI-RANIS MODEL
The assumptions of the Lewis-Fei-Ranis model includes the following:
It assumes that the wages in the manufacturing sector are more or less fixed.
The model assumes that a developing economy has a surplus of unproductive labour in the agricultural sector.
Entrepreneurs in the manufacturing sector make profit because they set a price above the fixed wage rate.
The model assumes that workers are attracted to the growing manufacturing sector where higher wages are offered.
An advanced manufacturing sector means an economy has moved from a traditional to an industrialized one.
The model assumes that these profits will be reinvested in the business in the form of fixed capital.
PERSONAL OPINION AND THE MODEL APPLICATION TO NIGERIA ECONOMY
The Lewis-Fei-Ranis model which is also known as labour surplus theory focused on the capital accumulation in the modern industrial sector so as to draw labour from the subsistence agricultural sector. Lewis model was modified and extended by Fei and Ranis but essence of the two models is the same. The both the models assume the existence of surplus labour in the economy, the main component of which is the enormous disguised unemployment in agriculture. This model has proved to be a very good base, upon which country can extract to achieve a very good rapid economic development. China is one of the countries that used the model and it was evident in their country. The assumptions of this model have a direct relationship with Nigeria Economy, in which Nigeria has labour surplus in it’s Agricultural sector. Therefore, Nigeria can adopt the model by transferring the labour surplus in Agricultural sector to industrial sector to spur growth/Development in Nigeria Economy.
HARRIS -TODARO MODEL OF MIGRATION
INTRODUCTION
The concept ” Harris- Todaro model of migration” is based on the theory of rural-urban migration which is usually viewed in the context of employment and unemployment in the developing countries. The labour migration is due to rural-urban differences in average expected wages. The minimum Urban wage is substantially higher than the rural wage. When the employment opportunities in the urban sector at the minimum wage increase, the expected wage increase and rural-urban migration set in leading to increase in unban unemployment. With this, Harris and Todaro suggest that this Urban unemployment can be removed by reducing the minimum wage through tax. The main aim of this model is to explore the Urban unemployment problem in developing countries in which there is a diverse in the concept of migration flow which is determined by the difference between expected Urban wages and rural wages. One of the consequences of this rural-urban migration is that job creation in the urban sector worsens the situation because more rural migration would be induced.
ASSUMPTIONS OF THE MODEL
The Harris-Todaro model is based on the following assumptions;
Rural- urban migration continues so long as the expected urban real income is more than the real agricultural income.
There are two sectors in the economy; the rural or agricultural sector (A) and the urban or manufacturing sector (M).
The urban wage if fixed at WM and the rural wage at WA, such that WM > WA.
The rural wage equals the rural marginal product of labour, and the urban wage is exogenously determined.
There is perfect competition among producers in both sectors
The price of the agricultural good is determined directly by the relative quantity of the two goods produced in both the sectors.
PERSONAL OPINIONS AND THE MODEL APPLICATION TO NIGERIA ECONOMY
The Harris-Todaro model of migration draws an important policy of development. This development may not be uniform in the economy because the Urban sector tends to have more employment opportunities than the rural sector, therefore the payment system between the two sectors differs. The payment of minimum wage to the additional industrial worker will induce more rural-urban migration. People will prefer leaving rural area to the Urban area were the wage is higher and this will lead to unequal development in the economy. This model can as well be applied to Nigeria Economy. There is no uniform development in Nigeria, some region tends to be more developed than the other which make people to migrate to those area were there employment opportunities and high wage rate. For example, people migrate to lagos, Abuja. etc. because those regions have more employment opportunities and economic development will concentrate more on those area. Moreover, the Nigeria government can disrupt such method of development by implementing policy that will favor rural industrialization which will create more employment opportunities leading to balanced growth among the economy and eliminating rural-urban migration.
LEWIS FEI RANIS MODEL
INTRODUCTION
The Fei Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be seen as the extention of the Lewis model. It is often also known as the Surplus Labour Model. It recognizes the presence of a dual economy or the existence of two separate economic sectors within a country which in this case comprises of the Modern and the Primitive sectors.
In the Lewis Fei Ranis model, the model takes into account the economic situation or economic problems of unemployment or underemployment of the various economic resources unlike many other models that retain that underdeveloped or developing countries are homogeneous in nature.
According to the assumption of the dual economy of the primitive and the modern economic sectors, the Primitive sectors comprises of the existing agricultural sectors in the economy while the modern sector is the fast growing but small industrial sector. The two sectors coexist in the economy. The model is quite unique in its own right but it agrees with the Harrod Domar model that both savings and investments becomes strong driving forces when it comes to the economic development of developing or underdeveloped countries.
THE MODEL
The Fei Ranis model assumed two sectors in the economy; the Primitive and the Modern economic sectors. These two sectors were believed to coexist in the economy together and this is where the crux of the development problem is. In this model, development can only brought about by a complete shift in the focal point of progress or a complete change of attention from the agricultural sector(primitive sector) to the industrial (modern) sector such that there is an augmentation of industrial output.
This is done by transfer of Labour from the agricultural sector to the industrial sector showing that underdeveloped or developing countries do not suffer from a shortage of labour or constraints of labour supply.
One of the biggest drawbacks or flaws of the Lewis model was the undermining or neglect of the role of agriculture in the in the boosting or in the aiding of growth of the industrial sector. In addition to that he (Lewis) did not acknowledge that the increase in productivity of labour was to take place prior or before the shift or movement of labour from the agricultural sector to the industrial sector. These two flaws were however was taken into account in the Fei Ranis dual economy model of three growth stages. They also argues that the model lacks in proper application of concentrated analysis to the change that takes place with agricultural sector.
In phase 1 of the Fei Ranis model, the elasticity of the agricultural labour work force is infinite and from this as a result suffers from hidden or disguised unemployment. Also the marginal product of labour is zero. This phase is similar to the Lewis model. In phase two of the Fei Ranis model, the agricultural sector of the dual economy sees a rise in productivity and this leads to an increase in the productivity of the industrial sector or an increase in the growth of the industrial sector. Here (phase 2), the agricultural Surplus may exist as the increasing average product (AP) higher than the marginal product (MP) but regardless not equal to the subsistence level of wages.
fig 1.1
According to the Fei and Ranis, AD amount of labour (from the figure above) can be shifted from the agricultural sector without any fall in output, hence it shows or represents “Surplus Labour”.
PHASE 1 : AL (from figure fig 1.1) = MP= 0, and AB = AP
After AP, MP begins to rise and industrial labour rises from zero to a value equal to AD. AP of agriculture labour is shown as BYZ a. D we see that the curve falls downward after AD. This fall in AP can be attributed or it is because of the fact that as agricultural laborers shift to the industrial sector, the real wage of labour decreased due to shortage of food also due to reduced productivity from the agricultural sector since compared to before the shift, there are now less labour or less workers in the agricultural sector. The decrease in wage rate also results in decrease in profits and the size of surplus that could have been reinvested for more industrialisation.
PHASE 2 = AP greater than MP
However, as long as surplus exists, growth rate can still be increased without a fall in the rate of industrialisation. This re-investment can be graphically realised in fig 1.1 as the outward shifting of the curve of the MP. In Phase 2, the disguised unemployment is represented as AK. This allows the industrial sector to give up some or part of its own labour force until MP equals Real wages
MP = REAL Wages = AB = Constant Institutional Wages(CIW).
Phase 3 begins at the point where the economy becomes conpletely and totally commercialized in the absence of the disguised unemployment. It (phase 3) starts at the point of commercialization which is “k” in the fig 1.1. The supply curve of labour in phase 3 is steeper and both the two sectors starts bidding or building for equity or equality in labour force
PHASE 3 = MP greater than CIW.
We know that there would be shifts in labour from the primitive or agricultural sector to the industrial or modern sector. The amount labour that is being shifted from the agricultural sector to the industrial sector and also the time that this shifting takes depends on;
1. The growth of surplus gotten or generated from or within agricultural sector and the growth of the capital stock gotten from the industrial sector dependent on the growth of industrial profits.
2. The nature of the industry’s technical progress and its associated bias
3. Growth rate of population.
Therefore the three main and fundamental ideas used in this model are;
1. The growth of the agricultural or primitive sector and the growth of the industrial sector or modern sector are both very important.
2. The growth of the industrial sector and also the agricultural sector is balanced.
3. Only if the rate at which labour is shifted from the agricultural sector or primitive sector to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the the Malthusian population trap which occur when the growth of the population becomes so much compared to the growth of agricultural products which would lead to famine or war causing poverty and de -population.
This shifting of labour can take place by landlord’s investments and also by the government’s fiscal policies or measures. However, the cost of the shifting of labour work force in terms of both private cost or social cost may be high for example transportation cost or the cost of buildings. Furthermore, per capita agricultural consumption can be increased or there can be a wide gap between the wages earned by the urban people and the wages earned by the rural workers.
These three occurences; High cost, High consumption and High gap in wages are known as “Leakages” and unfortunately leakage prevent the production or creation of agricultural Surplus. In fact surplus generation might be prevented due to a backward sloping supply curve of labour as well which happens when high income levels are not consumed. This would invariably mean that the productivity of labourers will not rise with a rise in income this however the case of backward sloping supply curves is clearly unpractical.
Fei and Ranis emphasized strongly on the agricultural-industrial interdependence and said that a large relationship between the two would speed up and encourage development. If agricultural laborers look for industrial employment and industrialists employ more workers by use of larger capital good stock and labour intensive technology, this connectivity can work between the agricultural and the industrial sector. Also if the Surplus owner invests in that section of industrial sector that is close to soil and is in known surroundings he would basically choose that productivity out of which future savings can be channeled.
AGRICULTURAL SECTOR
Fig 1.2
From fig 1.2 above, in land A land is measured in the vertical axis while labour is measured in the horizontal axis. OU and OV represent two ridged lines and the
production contour lines or curves are depicted by M, M1 and M2. The region or the area enclose by the ridge lines depict the region of factor substitutability or the area where factors can easily be substituted. The repercussion of this is that if the total amount of labour is the total labour in the agricultural sector, the intersection of the ridge line OV with the production curve M1 at point S renders M1 perfectly horizontal under or below OV. The horizontal behavior of the production line implies that outside the region of factor substitutability, output stops and labour becomes redundant once land is fixed and labour is increased.
If Ot is the total land in the agricultural sector, “ts” amount of labour can be employed without it being redundant and “es” is the redundant agricultural labour force. This led Fei and Ranis to develop the concept of LABOUR UTILIZATION RATIO (R) which they defined as the units of labour that can be productively employed without redundancy per unit of the land in use.
R=ts/Ot
They also built the concept of ENDOWNMENT RATIO (S) which is the measure of the relative availability of the two factors of production. From the figure above if Ot represents agricultural land and tE represents agricultural labour, then the endowment ratio is given as
S=tE/Ot
Which is equal to the inverted slope OE. The actual point of endownment is given by E
The third concept that Fei and Ranis came up with was that of the NON REDUNDANCY RATIO (T) which is measured by
T=ts/te.
These three concepts helped them in formulation a relationship between T, R and S given mathematically as
T= R/S
N/B
This mathematical relation shows that or proves that the non redundancy coefficient is directly proportional to labour utilization ratio and inversely to the endowment ratio.
Land B shows the total physical productivity of labour (TPPl) curve. The curve increases at a decreasing rate as more units of labour are added to a fixed amount of land. At point N, the curve shapes horizontally and this point N conforms to the point G in graph C which shows the marginal productivity of labour (MPPl) curve and with point S on the ridge line OV in graph A.
INDUSTRIAL SECTOR
Fig 1.3
Like in the agricultural sector, Fei and Ranis assumed a constant return to scale in the industrial sector. However, the main factors of production are labour and capital. In the graph A, we see that the production functions have plotted taking labour on the horizontal axis while capital is on the vertical axis. The expansion path or the road to development of the industrial sector is shown in the line 0A0A1A3. As capital increases from K0 to K1 to K2 and labour increases from L0 to L1 to L2, the industrial output represented by the production contour A0, A1 and A3 increases accordingly.
As earlier stated this model assumes the prime labour supply source of the industrial sector is the agricultural sector. Graph B shows the labour supply curve of the industrial sector S. PP2 represents the straight line part of the curve and is a measure of the redundant agricultural labour force on a graph with industrial labour force on the horizontal axis and output or real wages on the vertical axis. Due to the redundant agricultural labour force, the real wages remain constant. But once the curve starts going upwards from P2, the upward sloping indicates that additional labour would be supplied only with a corresponding rise in the real wages level. Total industrial activity rises with or due to the increase in the supply of investment funds, leading to more or increased industrial employment.
CONLUSION
The model has strong theoretical and policy implications on the underdeveloped countries’ efforts towards development. However the model has been criticized on many grounds. One of the criticisms is that Fei and Ranis did not have a clear understanding of the slow economic situation in the developing countries. If they had done more research, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed. Another criticism is that Fei and Ranis assumed the MPPl to be zero during the early phases of economic development which was criticized by Harry T Oshima on the grounds that MPPl of labour is zero if only the agricultural population is very large. And if it is very large, some of that labour would rather shift to cities in search of work. Although in the short run, these labour that moved to the city would be unemployed but in the long run they would be absorbed by the informal sector. Fei and Ranis also assumed a closed economy leaving no room for foreign trade which is not only wrong but also unrealistic as goods can not be imported. Also foreign exchange is very vital for development especially for the developing countries.
Stagnation also was not taken into account and no distinction or difference was made between labour through family and labour through wages. There is also no explanation of the process of self sustained growth or of the investment function. There is a complete neglegence of the terms of trade between agriculture and industrial when the shift is to be made, foreign exchange, money and price.
HARRIS TODARO MODEL OF MIGRATION
The Harris TODARO model named after John R Harris and Micheal TODARO is an economic model that was developed in the early 1970s. This model is readily used in development economics and welfare economics to explain many problems or factors that relate to rural – urban migration. The model assumes primarily that the real reason why people would migrate from the rural to the urban areas is because of the expected wage rate, meaning that they believe that they would see or get a better income when they work. This means that tbe people would only migrate when the urban wage rate exceeds with a significant difference, the rural wage rate. This is mostly seen in developing countries as the move from less developed areas like their villages in search of “greener pastures”.
Name: Orji Ephraim Ndubisi
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A SUMMARY OF HARRIS TODARO AND LEWIS-FEI-RANIS MODELS.
Lewis-Fei_Ranis Model Of Labor Supply:
The Fei–Ranis model of economic growth was developed by John C. H. Fei and Gustav Ranis and is an extension of the Lewis model. It is also known as the Surplus Labor model. This model recognizes the presence of a dual economy that comprises of the modern and the primitive sector. It is therefore known as a dualism model in developmental economics or welfare economics. The Fei-Ranis model of economic growth also takes into account the issue of unemployment and underemployment of resources.
The primitive sector comprises the agricultural sector in the economy, while the modern sector consists of rapidly emerging but small industrial sector. According to this model both the sectors co-exist in the economy, wherein lies the core of the problem of development.
In order for development to occur in this model, there has to be an absolute shift in the focal point of progress from the agricultural to the industrial economy, such that there is an increase of industrial output. This is done by transferring more labor from the agricultural sector to the industrial sector, showing that underdeveloped countries do not suffer lack of available labor. At the same time, growth in the agricultural sector must not be neglected and its output should be enough or sufficient to support the whole economy with resources like food and raw materials. This model takes on a principle from the Harrod–Domar model, it posits that saving and investment are the driving forces when it comes to economic development of underdeveloped countries.
Though Nigeria is upcoming in industrialization, poorly managed infrastructures have done more harm than good to the nation. The agricultural sector has suffered too as fewer and fewer people focus on farming.
The Harrod-Todaro Model Of Migration.
In this model, the focus is on rural-urban migration. Since the wage in cities is higher than one in village people migrate into the cities hoping to get urban job. The probability to get a job depends on the size of unemployment pool in relation to the number employed in industries. Therefore, in many mostly less-developed countries urban unemployment posses to be a great challenge. W. Max Corden in his book Trade Policy and Economic Welfare claims that the possible reason for urban unemployment is the wage differential. This coexists with usually high minimum wage in industries and with a marginal product of labor in agriculture less than the urban minimum wage .
The model presented is derived from Migration, Unemployment and Development: A Two Sector Analysis original article by John R. Harris and Michael P. Todaro (1970)2 and W.M. Corden’s book mentioned above. This model assumes that the expected urban wage is equal to the average wage of both urban employed and unemployed. The main claim is that the best policy to improve employment is to protect agricultural sector rather that manufacturing sector of the country. Highlighting more that agricultural sector is superior to manufacturing sector.
In Nigeria alone, rural urban migration has become an underlying problem especially within cities like Lagos where over population has posed a major challenge, making the city difficult to navigate due to excessive congestion. Jobs have become harder and harder to find as major focus is on industrial sectors. Even those migrating from rural areas to the city find it difficult to survive due to the high cost of living.
NAME: OMADA DORATHY AMARACHUKWU
REG NUMBER: 2017/243131
DEPARTMENT: ECONOMICS EDUCATION
COURSE CODE: ECO 361
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THE LEWIS- FEI-RANIS MODEL OF ECONOMIC GROWTH
INTRODUCTION
The Lewis (1954) theory of dualistic economic development provides the seminal contribution to theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent. The non agricultural sector accumulates capital by drawing surplus labour out of the agricultural sector. The expansion of the non-agricultural sector takes advantage of the infinitely elastic supply of labour from the agricultural sector due to its labour surplus. When the surplus labour is exhausted, the labour supply curve in the non-agricultural sector becomes upward-sloping. Ranis and Fei (1961) formalised Lewis’s theory by combining it with Rostow’s (1956) three “linear-stages-of-growth” theory. They disassembled Lewis’s two-stage economic development into three phases, defined by the marginal productivity of agricultural labour. They assume the economy to be stagnant in its pre-conditioning stage. The breakout point marks the creation of an infant non-agricultural sector and the entry into phase one. Agricultural labour starts to be reallocated to the non-agricultural sector. Due to the abundance of surplus agricultural labour, its marginal productivity is extremely low and average labour productivity defines the agricultural institutional wage. When the redundant agricultural labour force has been reallocated, the agricultural marginal productivity of labour starts to rise but is still lower than the institutional wage. This marks the shortage point at which the economy enters phase two of development. During phase two the remaining agricultural unemployment is gradually absorbed. At the end of this process the economy reaches the commercialisation point and enters phase three where the agricultural labour market is fully commercialised.
THE FEI- RANIS MODEL
The Fei –Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been develop by Johnc.h.fei and Gaustav Ranis and can be understood as an extension of the Lewis Model. It is also known as the The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod-Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries, in this model both primary and secondary sector are both driving force of economic development in developing countries.
COMPARISON BETWEEN THE TWO MODELS
Like Lewis model, Fei-Ranis model is also based on the Nurkse’s model of Economic Development. Fei-Ranis model tries to overcome the limitations of the Lewis model by incorporating certain major departures from it due to which Fei-Ranis model is seen as an improvement over the Lewis model. These departures are as under:
1. Lewis model invariably underscores the significance of the agriculture sector, it talks about a model of growth in which there is no interaction between the capitalist sector and agriculture sector, except that the surplus labour force moves from agriculture sector to the capitalist sector. In this model, one sector continues to grow while the other to lag behind, i.e. capitalist sector grows at the expense of the agriculture sector. However, Fei-Ranis model emphasize that the interaction between K sector and agriculture sector is significant and this interaction accelerates the process of overall economic development in the economy.
2. Fei-Ranis model is closer to reality prevailing in the LDC as it takes into account the impact of population growth on labour force. This feature is completely missing in Lewis model.
3. Lewis model does not assign any role to the landlord i.e. landlord is a passive factor and does not have any important role to play. But in Fei-Ranis model landlord plays an important role in the sense that he may be prompted to introduce innovation and technological progress in the agriculture sector under two circumstances:
(a) if the price of agriculture sector products is allowed to rise
(b) In case of subsidization of input cost
4. In Lewis model, the speed of transfer of labour force from agriculture to capitalist sector depends upon the growth of profits of the capitalist sector only. In Fei-Ranis model, it depends upon rate of growth of population, nature of technological progress and growth of industrial capital. Industrial capital depends upon growth of profits of industries and surplus generated in agriculture sector.
5. In the Lewis model, the end result is a lopsided pattern of development because capitalist sector grows at the expense of agriculture sector. The two cannot grow simultaneously and the gap tends to increase overtime. In the Fei-Ranis model on the other hand, balanced growth of capitalist and agriculture sector is necessary because otherwise the end product will be stagnation.
6. In Fei-Ranis model when the surplus labour force is exhausted, the supply of labour curve turns upward implying thereby that higher wage rate must be paid to the workers if more labourers are to be employed. In Lewis model, the supply curve is perfectly elastic.
Assumptions of Fei-Ranis Model
1. There is a presence of dual economy. Traditional or agriculture sector is passive and stagnant in nature while the capitalist sector is active and progressive in nature.
2. Supply of land is fixed, and both A sector and K sector makes use of the land.
3. Population is an exogenous factor i.e. it is determined by factors other than those present in the model.
4. Real wage rate in the industrial sector is fixed. This wage rate is equal to initial level productivity and is also called constant institutional wage rate.
5. There are constant returns to scale with respect to labour where labour acts as a variable factor in both A Sr and K Sr.
IMPACT OF THIS THEORY ON THE ECONOMY
The Lewis model of dualism also has some relevance to contemporary mainstream development models at the micro level. For example, the “informal insurance mechanism” of Townsend (1994) by which farmers smooth consumption by insuring each other across space is not radically different from the aforementioned “moral peasant” of Scott (1976) who is concerned with supporting others over time as well as space. Whether all this can be forced into a comforting neoclassical model or comes close to institutional altruism remains a point of contention, and one would hope that the current emphasis on the new institutional economics could potentially be an ally of the revival of the concept of dualism as an important guide to development theory and policy. In Townsend’s world, income is reallocated expost, i.e., after neoclassical distribution rules have been observed, while in the Lewis world, income is divided exante among members of the extended family or wider community. The policy implications for achieving a successful transition to modern economic growth probably don’t differ fundamentally depending on which of the concepts is deployed. But what remains relevant is which model fits better the basic empirical reality in successful labor abundant countries: which is better suited to analyze agricultural neglect in failure cases; which provides a better explanation of the marked early rise in the system’s savings rate; which is more capable of explaining discontinuities in income distribution and technical choice and the direction of technology change, a model that assumes full employment and smooth neoclassical equilibrium everywhere or one that recognizes initial underemployment and disequilibrium en route to a one sector modern economic growth epoch.
Lewis was basically a macro-economist, deeply immersed in economic history and the history of thought, both neglected subjects today. He always chose a general equilibrium approach, not only with respect to working within a domestic two-sector world but also with respect to the relationship of the typical developing country to the world economy, as indicated by his Wicksell and Janeway lectures (1969 and 1977). His notion of dualism, especially that focused on the labor market dimension, rural and urban, continues to offer a theoretically valid, empirically relevant and practically useful framework for dealing with some fundamental real world issues of development.
THE HARRIS- TODARO MODEL OF MIGRATION
INTRODUCTION
The model was an academic investigation to throw light on the events following ‘Tripartite Agreement’ in Kenya. The newly independent Kenya in the 1960s was increasingly facing a serious situation of unemployment in the major urban cities. To cope with the situation of unemployment, Tripartite Agreement was signed between the government public sector and the private sector. The agreement increased employment in the industrial jobs in exchange for unions agreeing to hold wages at their current levels. The larger number of employment was expected to reduce unemployment, but it appeared that the urban unemployment had increased following the government’s agreement. Harris and Todaro subsequently formulated a model to explain rural-urban economic preferences to migrate. The distinctive concept in the model is that the rate of migration flow from rural (agricultural) areas to urban (industrial) areas is determined by the difference between expected urban wages and rural wages.
The rural-urban two-sector model centrally holds the following futures:
1) Real wages (adjusted for cost-of-living differences) were higher in urban formal sector jobs than in rural traditional sector jobs.
2) To be hired for a formal sector job, it was necessary to be physically present in the urban areas where the formal sector jobs were located.
3) Consequently, from the first two features, more workers searched for formal sector jobs than were actually hired. Employers hired some of the searchers but not all of them.
4) To maintain equality between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting would be characterized by urban unemployment.
5) Any temporary difference in the expected wages between one sector and another would be eroded as workers migrate from the low expected wage labour market to the high expected wage one.
There are two regions: rural (agricultural) and urban (industrial) in two sector economic model. The crucial assumption of the Harris and Todaro’s model is that workers base their migration decision on their expected incomes at urban (industrial) areas. As the basic model is static, the expected income is just the weighted average of the urban wage and the unemployment benefit, the weights being the probabilities to find and not to find an urban job.
The fundamental contribution of Harris and Todaro’s rural-urban two sector migration model was to build a model that fit the stylized facts of the labour market. On the lines of the theory, developing countries adopted program on integrated rural development which encouraged an increase in the rural traditional sector wage. The theory proves that the higher the unemployment rate, the lower is the probability of new migrants from the countryside actively seeking formal sector employment who are unable to find it. The significant findings of the theory are: first, if the expected urban wage equals rural income, there is no incentive to migrate. Second, if the expected urban wage is greater than rural income, there is a great incentive to move from rural to urban area. Third, if the expected urban wage is less than rural incomes, there would be an incentive to move in other direction. Fourth, the expected urban wage depends on what type of job migrant is engaged in. Therefore, the Harris Todaro model helps policy-makers to avoid two mistakes. One is to assume that development efforts should necessarily be channeled to the sectors where the poor are. The other is to assume that efforts should necessarily be focused on getting the poor out of the sectors in which they presently are.
ASSUMPTIONS OF THE HARRIS- TODARO MODEL OF MIGRATION
Harris and Todaro studied the migration of workers in a two-sector economic system,
Namely, rural sector and urban sector. The differences between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
Ya = AaNa (1)
Where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < _ 0 and 0 < _ 0 and > 0 are a parametric constants. Is the elasticity of p with respect to the ratio Ym/Ya. The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified:
Na + Nu = N.
CONCLUSION AND POLICY RECOMMENDATION
In this work we developed various assumptions model which formalizes the rural-urban allocation of workers as a process of social learning by imitation. We analyze a two-sectorial economy composed by adaptative agents, i.e., individuals that grope over time for best location in terms of earnings. This search is a process of imitation of successful neighbor agents. The dispersed and non-coordinated individual migration decisions, made based on local information, generate aggregate regularities. Firstly, the crucial assumption of Harris and Todaro, the principle that rural-urban migration will occur while the urban expected wage exceed the rural wage, comes out as spontaneous upshot of interaction among adaptative agents.
Secondly, the migratory dynamics generated by agents that seek to adapt to the economic environment that they concrete leads the economy toward a long run equilibrium characterized by urban concentration with urban unemployment. When this long run equilibrium is reached, the generalized Harris-Todaro condition is satisfied, i.e., there is a stabilization of the rural-urban expected wage differential. Thirdly, the impact of the minimum wage and elasticity of terms of trade in a long run equilibrium obtained by simulations are in agreement with the predictions of the original Harris-Todaro model with Cobb-Douglas technology. Finally, the simulations showed an aggregated pattern not found in the original Harris-Todaro model. There is the possibility of small fluctuations of the urban share around an average value. This phenomenon is known as reverse migration.
Name: Nnamani Great Ogomuegbunam
Reg No: 2017/249532
Email: nnamanigreat20@gmail.com
LEWIS FEI RANIS MODEL OF ECONOMIC GROWTH
The perturbing question of “how to revive the failing economy of underdeveloped countries?” has continued to prevail over time, since the early post world war II era. Theories upon theories emerge, based on varieties of assumptions. However, some of these assumptions, which end up as unrealistic, make these theories inapplicable in so many underdeveloped countries. Fully called the Lewis-Ranis-Fei theory of dualistic economic development, the model provides a suitable theoretical framework for studying the growth path of labor-surplus in developing countries. In the theory, the economy is assumed to be divided into agricultural and industrial (also called non-agricultural) sectors. Whilst the agricultural sector is abundant in labor which leads to close to zero marginal productivity of labor, the industrial or non-agricultural sector has an abundance capital and resources relative to labor.
The Lewis Fei Ranis model is a pure extension of the Lewis model of 1954. Lewis in his model of “Development with Unlimited Supplies of Labor” represented a growth model of early industrialization in developing countries over the long run, which is now regarded as canonical to development economics (Fitzgerald, 2004). The model assumes a dual economy, of which there are two sectors, hereinafter called ‘modern’ and ‘traditional’, such that the modern sector grows by recruiting labor from the traditional. On a second note, unskilled labor is [aid less in the traditional sector compared to the modern sector. Additionally, unskilled labor is at inception more abundant such that at the current wage, much more labor is offered to the modern sector than that sector wishes to hire.
Lewis argued that the driver of capital accumulation was a sectoral movement of the factor of production abundant in developing countries, labor, from the ‘traditional’ or ‘noncapitalist’ sector (of low productivity, low wage, priced to average product not marginal product, and thus with widespread disguised unemployment) to the ‘modern’ or ‘capitalist’ sector (of higher productivity and where wages are set by productivity in the ‘subsistence sector’).
The Lewis model emerged as a criticism of the neoclassical approach. This is in tandem to its tenets that labor is available to the modern or capitalist sector of an economy, not in a perfectly elastic supply but upward sloping rather than flat, and with a distinction between surplus-producing labor and subsistence labor. Conversely, the neoclassicals believe that the supply of labor is inelastic. Lewis equally criticized the assumptions of neoclassical economists of perfect competition, market clearing and full employment. Generally, in the Lewis model, growth is sustained by the transition of labor from traditional to modern sectors and this from low productivity to higher productivity sectors.
It was on this ground that Ranis and Fei (1964) modified the theory by combing the famous Rostow’s (1956) three “linear-stages-of-growth” theory. They formalized Lewis’s two-stage
economic development model into three phases, defined by the marginal productivity of
agricultural labor.
The following are the key assumptions of the Lewis Fei Ranis model. They include:
1.Surplus labor in subsistence sectors
2. Disguised unemployment exists in the agricultural sector
3. The capitalist sector invests all its savings for its expansion.
4. Besides labor, there is unlimited supply of entrepreneurs in the capitalist sector.
5. Capitalists will always reinvest their profit.
6.Landlords will always squander their savings.
APPLICATION OF THE LEWIS FEI RANIS MODEL IN THE NIGERIAN ECONOMY
As aforementioned, the Lewis Fei Rani’s model focuses on structural transformation. Structural transformation in this case is the process of transforming an economy in such a way that the contribution to the national income by the manufacturing sector exceeds the contribution by the agricultural sector. Just like Lewis connoted, it is obvious that the two sectors, traditional/agricultural and modern/industrial, are dominant in the Nigerian economy. However, several assumptions outlined by the model do not hold water in Nigeria.
There’s no doubt the country has a population of over 200 million, with a good number living in the rural areas. However, majority of this population do not engage in agriculture. In tandem with this, it is very important to understand that living in the rural area does not entail engaging in agricultural activities. In other words, the assumption that surplus labour exist in the agricultural sector does not fully apply to Nigeria. Take a look around and you’ll be amazed at the rate of agricultural import. Goods like coconut, cashew, raw sugar, wheat e.t.c, are imported. These goods would have been cultivated or better still, exported had the giant of Africa utilised it’s advantageous population.
Additionally, the model denoted that with labour transfer, growth is expanded in the modern sector. This growth is propelled and determined by the rate of industrial investment and capital accumulation in the modern sector. If this be the case, then there is little chances for the Lewis model. Taking the first determinant, the rate of industrial investment. Over time, the rate of investment in the country has been on the decline. This is as a result of the ever increasing political unrest coupled with insurgency of all size and shape. Also included is the increasing level of insecurity ravaging the economy and scaring away investors. All these put together will drastically reduce the level of capital accumulation, which is the second determinant.
HARRIS-TODARO MODEL OF MIGRATION
The Harris-Todaro model was developed in 1970 to explain imperative issues relating to rural-urban migration. The model was named after John R. Harris and Michael P. Todaro. The front line tenet of the model is that the decision to migrate is based on expected income differentials between rural and urban areas rather than just wage differences. According to the proponents of the model, unemployment is non existent in the rural agricultural sector. It further assumes perfect competition in the rural agricultural production and labour market.
MAJOR ARGUMENTS OF THE MODEL
The model propose that the sole purpose of the model is to explain the urban unemployment problem in developing countries. As described, the economic incentives, earning differentials and the probability of getting a job at a destination have influence on the migration decision. Harris and Todaro built this model in a bid to fit the stylized facts of the labour market. The theory clearly proves that with a higher unemployment rate, there is a lower probability of new immigrants seeking for employment. In other words, if the expected urban wage equals rural income, then there is no incentive to migrate.
APPLICATION OF THE HARRIS-TODARO MODEL TO THE NIGERIAN ECONOMY
As a third-world country, Nigeria is characterized by a very high population. One that is not necessarily common in other world countries. The analysis by Harris and Todaro is unrealistic in the Nigerian context especially with the nature of migration that the country is facing. It’s true that majority of the Nigerian populace are located in the rural area, but one flaw of the model is the assumption that the migration decision is determined by wage expectation. It is important to note that migration decision in Nigeria is not only determined by the wage differentials between the rural and urban sectors. Several other factors affect individuals decision during migration including traditional beliefs. So, migrants do not really expect to become employed on arrival. Finally, with increased migration from rural to urban areas, it is possible for quick adjustments to occur in the general employment level.
Name: Nnamani, Great Ogomuegbunam
Reg No: 2017/249532
Email: nnamanigreat20@gmail.com
LEWIS FEI RANIS MODEL OF ECONOMIC GROWTH
The perturbing question of “how to revive the failing economy of underdeveloped countries?” has continued to prevail over time, since the early post world war II era. Theories upon theories emerge, based on varieties of assumptions. However, some of these assumptions, which end up as unrealistic, make these theories inapplicable in so many underdeveloped countries. Fully called the Lewis-Ranis-Fei theory of dualistic economic development, the model provides a suitable theoretical framework for studying the growth path of labor-surplus in developing countries. In the theory, the economy is assumed to be divided into agricultural and industrial (also called non-agricultural) sectors. Whilst the agricultural sector is abundant in labor which leads to close to zero marginal productivity of labor, the industrial or non-agricultural sector has an abundance capital and resources relative to labor.
The Lewis Fei Ranis model is a pure extension of the Lewis model of 1954. Lewis in his model of “Development with Unlimited Supplies of Labor” represented a growth model of early industrialization in developing countries over the long run, which is now regarded as canonical to development economics (Fitzgerald, 2004). The model assumes a dual economy, of which there are two sectors, hereinafter called ‘modern’ and ‘traditional’, such that the modern sector grows by recruiting labor from the traditional. On a second note, unskilled labor is [aid less in the traditional sector compared to the modern sector. Additionally, unskilled labor is at inception more abundant such that at the current wage, much more labor is offered to the modern sector than that sector wishes to hire.
Lewis argued that the driver of capital accumulation was a sectoral movement of the factor of production abundant in developing countries, labor, from the ‘traditional’ or ‘noncapitalist’ sector (of low productivity, low wage, priced to average product not marginal product, and thus with widespread disguised unemployment) to the ‘modern’ or ‘capitalist’ sector (of higher productivity and where wages are set by productivity in the ‘subsistence sector’). (Andy, 2018)
The Lewis model emerged as a criticism of the neoclassical approach. This is in tandem to its tenets that labor is available to the modern or capitalist sector of an economy, not in a perfectly elastic supply but upward sloping rather than flat, and with a distinction between surplus-producing labor and subsistence labor. Conversely, the neoclassicals believe that the supply of labor is inelastic. Lewis equally criticized the assumptions of neoclassical economists of perfect competition, market clearing and full employment. Generally, in the Lewis model, growth is sustained by the transition of labor from traditional to modern sectors and this from low productivity to higher productivity sectors.
It was on this ground that Ranis and Fei (1964) modified the theory by combing the famous Rostow’s (1956) three “linear-stages-of-growth” theory. They formalized Lewis’s two-stage
economic development model into three phases, defined by the marginal productivity of
agricultural labor.
The following are the key assumptions of the Lewis Fei Ranis model. They include:
Surplus labor in subsistence sectors
Disguised unemployment exists in the agricultural sector
The capitalist sector invests all its savings for its expansion.
Besides labor, there is unlimited supply of entrepreneurs in the capitalist sector.
Capitalists will always reinvest their profit.
Landlords will always squander their savings.
APPLICATION OF THE LEWIS FEI RANIS MODEL IN THE NIGERIAN ECONOMY
As aforementioned, the Lewis Fei Rani’s model focuses on structural transformation. Structural transformation in this case is the process of transforming an economy in such a way that the contribution to the national income by the manufacturing sector exceeds the contribution by the agricultural sector. Just like Lewis connoted, it is obvious that the two sectors, traditional/agricultural and modern/industrial, are dominant in the Nigerian economy. However, several assumptions outlined by the model do not hold water in Nigeria.
There’s no doubt the country has a population of over 200 million, with a good number living in the rural areas. However, majority of this population do not engage in agriculture. In tandem with this, it is very important to understand that living in the rural area does not entail engaging in agricultural activities. In other words, the assumption that surplus labour exist in the agricultural sector does not fully apply to Nigeria. Take a look around and you’ll be amazed at the rate of agricultural import. Goods like coconut, cashew, raw sugar, wheat e.t.c, are imported. These goods would have been cultivated or better still, exported had the giant of Africa utilised it’s advantageous population.
Additionally, the model denoted that with labour transfer, growth is expanded in the modern sector. This growth is propelled and determined by the rate of industrial investment and capital accumulation in the modern sector. If this be the case, then there is little chances for the Lewis model. Taking the first determinant, the rate of industrial investment. Over time, the rate of investment in the country has been on the decline. This is as a result of the ever increasing political unrest coupled with insurgency of all size and shape. Also included is the increasing level of insecurity ravaging the economy and scaring away investors. All these put together will drastically reduce the level of capital accumulation, which is the second determinant.
HARRIS-TODARO MODEL OF MIGRATION
The Harris-Todaro model was developed in 1970 to explain imperative issues relating to rural-urban migration. The model was named after John R. Harris and Michael P. Todaro. The front line tenet of the model is that the decision to migrate is based on expected income differentials between rural and urban areas rather than just wage differences. According to the proponents of the model, unemployment is non existent in the rural agricultural sector. It further assumes perfect competition in the rural agricultural production and labour market.
MAJOR ARGUMENTS OF THE MODEL
The model propose that the sole purpose of the model is to explain the urban unemployment problem in developing countries. As described, the economic incentives, earning differentials and the probability of getting a job at a destination have influence on the migration decision. Harris and Todaro built this model in a bid to fit the stylized facts of the labour market. The theory clearly proves that with a higher unemployment rate, there is a lower probability of new immigrants seeking for employment. In other words, if the expected urban wage equals rural income, then there is no incentive to migrate.
APPLICATION OF THE HARRIS-TODARO MODEL TO THE NIGERIAN ECONOMY
As a third-world country, Nigeria is characterized by a very high population. One that is not necessarily common in other world countries. The analysis by Harris and Todaro is unrealistic in the Nigerian context especially with the nature of migration that the country is facing. It’s true that majority of the Nigerian populace are located in the rural area, but one flaw of the model is the assumption that the migration decision is determined by wage expectation. It is important to note that migration decision in Nigeria is not only determined by the wage differentials between the rural and urban sectors. Several other factors affect individuals decision during migration including traditional beliefs. So, migrants do not really expect to become employed on arrival. Finally, with increased migration from rural to urban areas, it is possible for quick adjustments to occur in the general employment level.
THE LEWIS- FEI-RANIS MODEL OF ECONOMIC GROWTH
INTRODUCTION
The Lewis (1954) theory of dualistic economic development provides the seminal contribution to theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent. The non agricultural sector accumulates capital by drawing surplus labour out of the agricultural sector. The expansion of the non-agricultural sector takes advantage of the infinitely elastic supply of labour from the agricultural sector due to its labour surplus. When the surplus labour is exhausted, the labour supply curve in the non-agricultural sector becomes upward-sloping. Ranis and Fei (1961) formalised Lewis’s theory by combining it with Rostow’s (1956) three “linear-stages-of-growth” theory. They disassembled Lewis’s two-stage economic development into three phases, defined by the marginal productivity of agricultural labour. They assume the economy to be stagnant in its pre-conditioning stage. The breakout point marks the creation of an infant non-agricultural sector and the entry into phase one. Agricultural labour starts to be reallocated to the non-agricultural sector. Due to the abundance of surplus agricultural labour, its marginal productivity is extremely low and average labour productivity defines the agricultural institutional wage. When the redundant agricultural labour force has been reallocated, the agricultural marginal productivity of labour starts to rise but is still lower than the institutional wage. This marks the shortage point at which the economy enters phase two of development. During phase two the remaining agricultural unemployment is gradually absorbed. At the end of this process the economy reaches the commercialisation point and enters phase three where the agricultural labour market is fully commercialised.
THE FEI- RANIS MODEL
The Fei –Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been develop by Johnc.h.fei and Gaustav Ranis and can be understood as an extension of the Lewis Model. It is also known as the The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod-Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries, in this model both primary and secondary sector are both driving force of economic development in developing countries.
COMPARISON BETWEEN THE TWO MODELS
Like Lewis model, Fei-Ranis model is also based on the Nurkse’s model of Economic Development. Fei-Ranis model tries to overcome the limitations of the Lewis model by incorporating certain major departures from it due to which Fei-Ranis model is seen as an improvement over the Lewis model. These departures are as under:
1. Lewis model invariably underscores the significance of the agriculture sector, it talks about a model of growth in which there is no interaction between the capitalist sector and agriculture sector, except that the surplus labour force moves from agriculture sector to the capitalist sector. In this model, one sector continues to grow while the other to lag behind, i.e. capitalist sector grows at the expense of the agriculture sector. However, Fei-Ranis model emphasize that the interaction between K sector and agriculture sector is significant and this interaction accelerates the process of overall economic development in the economy.
2. Fei-Ranis model is closer to reality prevailing in the LDC as it takes into account the impact of population growth on labour force. This feature is completely missing in Lewis model.
3. Lewis model does not assign any role to the landlord i.e. landlord is a passive factor and does not have any important role to play. But in Fei-Ranis model landlord plays an important role in the sense that he may be prompted to introduce innovation and technological progress in the agriculture sector under two circumstances:
(a) if the price of agriculture sector products is allowed to rise
(b) In case of subsidization of input cost
4. In Lewis model, the speed of transfer of labour force from agriculture to capitalist sector depends upon the growth of profits of the capitalist sector only. In Fei-Ranis model, it depends upon rate of growth of population, nature of technological progress and growth of industrial capital. Industrial capital depends upon growth of profits of industries and surplus generated in agriculture sector.
5. In the Lewis model, the end result is a lopsided pattern of development because capitalist sector grows at the expense of agriculture sector. The two cannot grow simultaneously and the gap tends to increase overtime. In the Fei-Ranis model on the other hand, balanced growth of capitalist and agriculture sector is necessary because otherwise the end product will be stagnation.
6. In Fei-Ranis model when the surplus labour force is exhausted, the supply of labour curve turns upward implying thereby that higher wage rate must be paid to the workers if more labourers are to be employed. In Lewis model, the supply curve is perfectly elastic.
Assumptions of Fei-Ranis Model
1. There is a presence of dual economy. Traditional or agriculture sector is passive and stagnant in nature while the capitalist sector is active and progressive in nature.
2. Supply of land is fixed, and both A sector and K sector makes use of the land.
3. Population is an exogenous factor i.e. it is determined by factors other than those present in the model.
4. Real wage rate in the industrial sector is fixed. This wage rate is equal to initial level productivity and is also called constant institutional wage rate.
5. There are constant returns to scale with respect to labour where labour acts as a variable factor in both A Sr and K Sr.
IMPACT OF THIS THEORY ON THE ECONOMY
The Lewis model of dualism also has some relevance to contemporary mainstream development models at the micro level. For example, the “informal insurance mechanism” of Townsend (1994) by which farmers smooth consumption by insuring each other across space is not radically different from the aforementioned “moral peasant” of Scott (1976) who is concerned with supporting others over time as well as space. Whether all this can be forced into a comforting neoclassical model or comes close to institutional altruism remains a point of contention, and one would hope that the current emphasis on the new institutional economics could potentially be an ally of the revival of the concept of dualism as an important guide to development theory and policy. In Townsend’s world, income is reallocated expost, i.e., after neoclassical distribution rules have been observed, while in the Lewis world, income is divided exante among members of the extended family or wider community. The policy implications for achieving a successful transition to modern economic growth probably don’t differ fundamentally depending on which of the concepts is deployed. But what remains relevant is which model fits better the basic empirical reality in successful labor abundant countries: which is better suited to analyze agricultural neglect in failure cases; which provides a better explanation of the marked early rise in the system’s savings rate; which is more capable of explaining discontinuities in income distribution and technical choice and the direction of technology change, a model that assumes full employment and smooth neoclassical equilibrium everywhere or one that recognizes initial underemployment and disequilibrium en route to a one sector modern economic growth epoch.
Lewis was basically a macro-economist, deeply immersed in economic history and the history of thought, both neglected subjects today. He always chose a general equilibrium approach, not only with respect to working within a domestic two-sector world but also with respect to the relationship of the typical developing country to the world economy, as indicated by his Wicksell and Janeway lectures (1969 and 1977). His notion of dualism, especially that focused on the labor market dimension, rural and urban, continues to offer a theoretically valid, empirically relevant and practically useful framework for dealing with some fundamental real world issues of development.
THE HARRIS- TODARO MODEL OF MIGRATION
INTRODUCTION
The model was an academic investigation to throw light on the events following ‘Tripartite Agreement’ in Kenya. The newly independent Kenya in the 1960s was increasingly facing a serious situation of unemployment in the major urban cities. To cope with the situation of unemployment, Tripartite Agreement was signed between the government public sector and the private sector. The agreement increased employment in the industrial jobs in exchange for unions agreeing to hold wages at their current levels. The larger number of employment was expected to reduce unemployment, but it appeared that the urban unemployment had increased following the government’s agreement. Harris and Todaro subsequently formulated a model to explain rural-urban economic preferences to migrate. The distinctive concept in the model is that the rate of migration flow from rural (agricultural) areas to urban (industrial) areas is determined by the difference between expected urban wages and rural wages.
The rural-urban two-sector model centrally holds the following futures:
1) Real wages (adjusted for cost-of-living differences) were higher in urban formal sector jobs than in rural traditional sector jobs.
2) To be hired for a formal sector job, it was necessary to be physically present in the urban areas where the formal sector jobs were located.
3) Consequently, from the first two features, more workers searched for formal sector jobs than were actually hired. Employers hired some of the searchers but not all of them.
4) To maintain equality between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting would be characterized by urban unemployment.
5) Any temporary difference in the expected wages between one sector and another would be eroded as workers migrate from the low expected wage labour market to the high expected wage one.
There are two regions: rural (agricultural) and urban (industrial) in two sector economic model. The crucial assumption of the Harris and Todaro’s model is that workers base their migration decision on their expected incomes at urban (industrial) areas. As the basic model is static, the expected income is just the weighted average of the urban wage and the unemployment benefit, the weights being the probabilities to find and not to find an urban job.
The fundamental contribution of Harris and Todaro’s rural-urban two sector migration model was to build a model that fit the stylized facts of the labour market. On the lines of the theory, developing countries adopted program on integrated rural development which encouraged an increase in the rural traditional sector wage. The theory proves that the higher the unemployment rate, the lower is the probability of new migrants from the countryside actively seeking formal sector employment who are unable to find it. The significant findings of the theory are: first, if the expected urban wage equals rural income, there is no incentive to migrate. Second, if the expected urban wage is greater than rural income, there is a great incentive to move from rural to urban area. Third, if the expected urban wage is less than rural incomes, there would be an incentive to move in other direction. Fourth, the expected urban wage depends on what type of job migrant is engaged in. Therefore, the Harris Todaro model helps policy-makers to avoid two mistakes. One is to assume that development efforts should necessarily be channeled to the sectors where the poor are. The other is to assume that efforts should necessarily be focused on getting the poor out of the sectors in which they presently are.
ASSUMPTIONS OF THE HARRIS- TODARO MODEL OF MIGRATION
Harris and Todaro studied the migration of workers in a two-sector economic system,
Namely, rural sector and urban sector. The differences between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
Ya = AaNa (1)
Where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < _ 0 and 0 < _ 0 and > 0 are a parametric constants. Is the elasticity of p with respect to the ratio Ym/Ya. The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified:
Na + Nu = N.
CONCLUSION AND POLICY RECOMMENDATION
In this work we developed various assumptions model which formalizes the rural-urban allocation of workers as a process of social learning by imitation. We analyze a two-sectorial economy composed by adaptative agents, i.e., individuals that grope over time for best location in terms of earnings. This search is a process of imitation of successful neighbor agents. The dispersed and non-coordinated individual migration decisions, made based on local information, generate aggregate regularities. Firstly, the crucial assumption of Harris and Todaro, the principle that rural-urban migration will occur while the urban expected wage exceed the rural wage, comes out as spontaneous upshot of interaction among adaptative agents.
Secondly, the migratory dynamics generated by agents that seek to adapt to the economic environment that they concrete leads the economy toward a long run equilibrium characterized by urban concentration with urban unemployment. When this long run equilibrium is reached, the generalized Harris-Todaro condition is satisfied, i.e., there is a stabilization of the rural-urban expected wage differential. Thirdly, the impact of the minimum wage and elasticity of terms of trade in a long run equilibrium obtained by simulations are in agreement with the predictions of the original Harris-Todaro model with Cobb-Douglas technology. Finally, the simulations showed an aggregated pattern not found in the original Harris-Todaro model. There is the possibility of small fluctuations of the urban share around an average value. This phenomenon is known as reverse migration.
NAME: UGOCHUKWU ONYINYECHI MARYCYNTHIA
REG NO: 2017/249580
DEPARTMENT: ECONOMICS
THE LEWIS FEI RANIS MODEL (SURPLUS LABOUR THEORY)
In 1954, in his model Lewis divides the economy in an underdeveloped country in two sectors namely the subsistence sector and the capitalist sector. The subsistence is identified into agricultural sector while the capitalist was identified under the manufacturing sector of the economy.
The FEI RANIS model of Economic growth is a dualism model in developmental Economics or welfare Economics that has been developed by John C.H Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the surplus labour model. It recognises the presence of a dual economy comprising both the modern and the primitive sector and takes the Economic situation of unemployment and underemployment of resources into account, unlike other growth models that consider underdeveloped countries to the homogeneous in nature. One of the biggest drawback of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labour should take place prior to the labour shift between the two sectors. However, these two ideas were taken into account in the Fei Ranis dual economy model of three growth stages. They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place in the agricultural development.
The three fundamental ideas used in this model are: 1. Agricultural growth and industrial growth are both equally important.
2. Agricultural growth and industrial growth are balanced.
3. Only if the rate at which labour is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusium population trap.
THE ASSUMPTIONS OF THE LEWIS MODEL
* Surplus labour in the subsistence sectors – The basic assumptions of the model is that there exists surplus labour in the subsistence sectors. It include labour whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourer and so on.
* Importance of Saving – Another important assumptions of Lewis model is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion those in subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery and for construction of temples. The propensity to save of the people in subsistence sector is lower when compared with that of those in the capitalist sector.
The Lewis model assumptions are:
1. There is surplus labour in the subsistence sectors.
2. Population growth is an exogenous phenomenon.
3. Land has no rule as a factor of production.
4. Industrial sector is a function of capital and land alone.
5. Supply of labour is fixed.
The model of Economic growth has been criticized on multiple grounds, although if the model is accepted then it will have a significant theoritical and policy implications on the underdeveloped countries efforts towards development and on the persisting controversial statements regarding the balanced and unbalanced growth debate.
1. The assumptions that disguised unemployment exists in the agriculture sector has not been accepted by many Economists like Schultz, Viner and so on. According to them, production in subsistence sector will be affected when labour is withdrawn from it.
2. Lewis ignored the cost involved in training the unskilled worker transferred from the subsistence sector. Even if it is obtained at a constant wage rate, so far as it’s transfer from the subsistence sector is concerned, the supply curve may slope upwards so far as the capitalist.
3. The model assumes that, besides labour, there is unlimited supply of entrepreneurs in the capitalist sector. This is not true in the case of many of the underdeveloped countries.
4. It is wrong to assume that a capitalist will always re-invest their profits they can indulge in unproductive pursuits. They can use their profits for speculative purposes.
5. The model assumes that there already exists a market for the industrial products in the country. This is wrong people of an underdeveloped country may not be able to purchase the products perturbed by the expanding capitalist sector. Foreign markets, too may not be available to capitalist sector in the beginning.
6. It is not easy to transfer labour from the subsistence sector to the capitalist sector by offering them an incentive of a little higher wage. Mobility of labour is very low. Many factors like family affection, difference in language, caste, religion etc. affect it adversely.
In conclusion, although Lewis FEI RANIS MODEL is flawed in multiple direction, it is still instrumental in explaining the stages of development in various cases.
THE HARRIS-TODARO MODEL OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
The formal statement of the equilibrium condition of the Harris–Todaro model is as follows:
1. Let wr be the wage rate (marginal productivity of labor) in the rural agricultural sector.
2. Let le be the total number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
3. Let lus be the total number of job seekers, employed and unemployed, in the urban sector.
4. Let wu be the wage rate in the urban sector, which could possibly be set by government with a minimum wage law.
Rural to urban migration will take place if:
Wrle/Lus Wu
At equilibrium,
Wr=le/Lus Wu
With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.Therefore, migration from rural areas to urban areas will increase if:
Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
Todaro (1969) and Harris and Todaro (1970), the problem of underemployment and unemployment in the urban sector has long been a major focus in the economic analyses of LDCs. The Harris–Todaro model (hereafter, HT model), proposed in the two papers mentioned above, provides an interesting short-run analysis of labor migration between rural and urban areas and urban unemployment and underemployment in the urban informal sector.
In the HT model, workers determine migration between the sectors based on their expected wages. Thus, the workers decide to migrate to the urban sector when their expected wages there are higher than those in the rural sector. It is assumed in the HT model that the urban wage is institutionally and legally fixed, so that as a result of the migration of workers, if there are more workers than the number of new jobs, some workers would necessarily be unemployed. They have to enter the urban informal sector and be unemployed or underemployed there.
In general, capital accumulation in the urban sector is indispensable for economic development in LDCs. Although they all might be lumped together as “capital”, there are a lot of types and features. From the micro-perspective of a firm, machinery and equipment for production are one of the capital, capital stock such as internal reserves is also a capital. On the other hand, from the macro-perspective of an economy, social infrastructure such as airports, loading and port facilities, is also included in the capital. In this sense, industrial parks including the special economic zones (hereafter, SEZs) are one of the most important social capital. Accumulated capital, such as the SEZs in the urban industrial parks creates new job opportunities. In particular, construction of the SEZs invites many foreign companies, since in the SEZs the corporation tax is treated well. Therefore, through the exemption or discount from the corporation tax, the companies operating in the SEZs can reduce their operation costs and could become profitable.
In the process of economic development in LDCs, it has been repeatedly observed that as foreign capital creates new employment opportunities, there is an increase in worker flow from rural areas to urban areas with a concomitant decrease in per-capita income in the urban area. This phenomenon is generally referred to as the “Todaro paradox” in the field of development economics
The most significant feature of this model is that it made it possible for analysts to deal with unemployment, within the framework of general equilibrium, by including still unemployed workers who were waiting for job opportunities in the urban sector, a factor that had previously been difficult to assess. It gave rise to a more realistic description of developing economies and helped to explain migration between urban and rural areas theoretically.
The HT model is a specific form of the “neo-classical two sectors model”, represented by the “Heckscher, Ohlin and Samuelson model” (hereafter HOS model), and it can be understood as a “specific factor model” (hereafter SF model), proposed by Jones (1971). In the SF model, each sector has its own specific production factor which cannot move between sectors, and the specific factor endowments are also fixed. The HT model is a short-run model with fixed specific capital endowment in each sector. In this paper, however, we examine the effects that the urban capital is exogenously increased by such as economic supports or development aid by advanced foreign countries. The Harris-Todaro model of the rural-urban migration process is revisited under an agent-based approach. The migration of the workers is interpreted as a process of social learning by imitation, formalized by a computational model. By simulating this model, we observe a transitional dynamics with continuous growth of the urban fraction of overall population toward an equilibrium. Such an equilibrium is characterized by stabilization of rural-urban expected wages differential (generalized Harris-Todaro equilibrium condition), urban concentration and urban unemployment. These classic results obtained originally by Harris and Todaro are emergent properties of our model.
ARGUMENTS AND ASSUMPTIONS OF THE HARRIS-TODARO MODEL OF MIGRATION
Harris Todaro model explains some issues of rural-urban migration. ThisHarris Todaro model explains some issues of rural-urban migration. This migration happens in case when expected rural income is higher than rural wages. In this case economy may have high rates of unemployment. The equilibrium condition of this model is when expected rural wage is equal to rural wage. migration happens in case when expected rural income is higher than rural wages. In this case economy may have high rates of unemployment. The equilibrium condition of this model is when expected rural wage is equal to rural wage.The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function.
The rate of population growth is the rate of natural increase combined with the effects of migration. Thus a high rate of natural increase can be offset by a large net out-migration, and a low rate of natural increase can be countered by a high level of net in-migration.
The assumptions of the Harris Todaro model of migration include;
1. Two sectors: Urban(manufacturer) and rural(agriculture).
2. Rural – Urban migration condition when urban real wage exceeds real agricultural product.
3. Perfect competition.
4. Cobb-Douglas production function.
5. Low risk aversion.
6. Static approach.
7. No migration cost.
In any case, the Harris Todaro model suffers from theoretic oversimplification, among which several are likely to overestimate the link. The critiques revolve around the three major points;
1. The model framework is only a static model describing migration, which is a dynamic phenomenon by nature. Even though the model can be thought of as representing a steady state equilibrium,this is a limitation. Furthermore, the formalization is made in a partial equilibrium context which greatly weakens the justification for policy recommendations.
2. The assumptions that urban workers are either employed in the manufacturing sector or unemployed has been criticized as too simplistic even though, in the authors’ minds, it was implicit that unemployment could also be interpreted as underemployment in the informal sector.
3. The Harris-Todaro model assumes that the urban wage is exogenously set above the endogenous rural wage . The assumption that wages are high find several explanations ranging from the existence of trade unions to the agglomeration of economic activities. It is confirmed in practice,since wages are often reported three to four times higher in urban areas than in rural areas (Todaro, 2000). What is more problematic, however, is the assumption that the urban wage is fixed, especially in the presence of an informal sector as typical of many developing economies. In fact, the argument of a minimum wage should only hold for low wages in the formal sector, unless remunerations in the informal sector align themselves with those in the formal sector (due to the competition for labor between employers)In addition, the wage in the Harris-Todaro model is not related to unemployment in any manner. If the urban wage tends to decrease with an increase in the unemployment rate as argued by Hoddinott (1996) in his study on urban African labor markets, then this would tend to reduce the expected earnings differential in the transition towards the equilibrium in the model. This gives another reason why migration flows could be overestimated, making the Todaro paradox even less likely to occur.
In concluion, The model explains some issues of the rural urban migration. The migration happens in case when expected rural income is higher than rural wage. In this case economy may have high rates of unemployment. The equilibrium condition of this model is expected when rural wage is equal to rural wage.
Therefore, migration from rural areas to urban areas will increase if:
Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
Name: Assi kaetti Marian
Reg number: 2017/241454
Email: Kaettimarian@gmail.com
THE LEWIS FEI- RANIS MODEL.
The Lewis Fei-Ranis model, developed Gustay Ranis and John. H. C fei. This model is regarded as an extension of the Lewis model also known as the Surplus Labour theory.
The model take into consideration a dual economy and recognizes the existence of only two sectors which are the modern / industrial sector and the rural agricultural sector.
The model is actively interested in solving the problems of lack of utilization of scare resources and the problems of unemployment.
The model states that both sectors cannot exist without the other and advocated for the development of the modern industrial sector over the rural sector for development of the economy to occur or take place. And this is achieved when there is adequate transfer of Labour from the unproductive sector or agricultural sector to the industrial sector. This leads to increase output in the industrial areas.
ASSUMPTIONS OF THE MODEL
1. The assumption of a dual economy which includes a traditional agricultural sector and an industrial sector.
2. The assumption of land supply being fixed and agricultural sector output is a function of only land and labor with no other factors in consideration.
3. The Assumption of the act of reclamation of land as the only form of accumulation of capital in the agricultural sector.
The model is divided into three stages.
1. Breaking Point: This is the first stage of the model. Disguised unemployment comes in play because the supply of labor is perfectly elastic and MPL (Marginal Productivity of Labour) is equals to zero (0). Therefore, such disguised unemployed are to be transferred to industrial sector at the constant institutional wage. That is, there is redundant agricultural labour.
2. Shortage Point: This is the second stage of Fei-Ranis model (phase). Here the agricultural sector workers add to agricultural output but produce less than institutional wage they get. In other words, the labor surplus exists where APL (average productivity of labour) > MPL, but it is not equal to subsistence (institutional) wages. At this point, the constitutional institutional wage (CIW)>MP>AP. This means there is disguised agricultural unemployment. This, such disguised unemployed also have to be transferred to industrial sector. If the migration to industrial sector continues a situation is eventually reached where the farm workers produce output equal to institutional wages. This would mean that productivity in agricultural sector has gone up. This is the beginning of the third phase (stage).
3. The turning point or Commercialization Point: In the third stage of FR model , the take-off situation comes to an end and there begins the era of self-sustained growth where the farm workers produce more than the institutional wage they get. In this stage of economic growth, the surplus labor comes to an end and the agricultural sector becomes commercialized sector. Accordingly, they have to be shifted to industrial sector. As labor are transferred to industrial sector a shortage of labor will develop in agricultural sector.
In other words, it will be difficult for the 6 sector to get the labor at same prevailing constant wages. That is, there is self-sustaining agricultural growth with commercialization of agricultural sector. This is because MPL>CIW. Here, the economy is fully commercialized in the absence of disguised unemployment. Such commercialization took place at the cost of absorption of disguised unemployment in industrial sector.
Critical Review of the Lewis’s Model:
1. According to the model, the production output and efficiency in the subsistence sector is affected positively when Labour is withdrawn from it.
2. The cost involved in training the unskilled worker transferred from the subsistence sector is completely and totally ignored.
3. It is assumed that capitalist re invest all their profit into production. This is not so as they may decide to engage in un-productive pursuit and for speculative purposes.
4. There is low productivity in the agricultural sector.
HOW IT RELATES TO THE NIGERIAN ECONOMY
The Nigerian economy consist of both the agricultural sector and industrial sector. Both provide each functions for the growth and development of the economy.
In conclusion, the Lewis model is an eminent explanation of the experience evident in Nigeria economy and most of the countries of the world. United Nations and various international bodies used this to inform policy decisions in the 1960s
HARRIS-TODARO’S MIGRATION THEORY
John R. Harris and Michael P. Todaro developed the Theory of migration. This theory is used in development economics and it illustrates a migrants’ decision on his expected income difference between a rural (agriculture) and urban (manufacturing) areas.
This model was developed for developing countries, although it’s general mechanism can also be applied to developed countries. It is used in development economics as an economic illustration of the migrant’s decision based on expected income differentials between rural and urban areas rather than just wage differentials.
The core assumption of the model is that the decision to migrate is based on the conclusion about expected income differentials. This is between rural -urban migration rather than differentials in wages. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if urban income expectancy exceeds the expected rural income.
ASSUMPTIONS OF THE MODEL
1. The presence of two sectors: urban (manufacture) and rural (agriculture).
2. The Rural-urban migration condition which states that urban real wage exceeds real agricultural product.
3. The assumption of no migration cost (from rural to urban sector).
4. There is the application of Cobb-Douglas production function and it uses Static approach.
CONCLUSION
Harris Todaro model helps to explains some issues of rural-urban migration. According to the model, when expected urban income is higher than rural wages, migration is bound to occur. In this case, the urban sector of the economy may have high rates of unemployment. The model condition for equilibrium occurs when the expected urban wage is equal to rural wage. When government subsidize manufacturing sector Harris Todaro paradox scenerio may happen.
According to the Harris and Todaro, job creation may lead to increase in unemployment if the problems of unemployment is not solved.
In relation to the Nigerian economy, in solving the economic growth problem of the country, the Harris-Todaro model application can come in handy. It helps policy makers avoiding diverse Economics mistakes. Economics development efforts should be channeled to the under developed sectors where resources are under utilized, unemployment rate and wage rate is very high and with the aim of improving the standard of living of the people.
Name: Egbo Chiinemelum Chinonso
Reg no: 2017/249493
Email: egboemecs@gmail.com
Answer:
Harris-Todaro Migration Model
The Harris-Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
Todaro accepts the logistics of Lewis-Fei-Ranis model of rural-urban migration but only with reservations. According to him, this theory may correspond to the historical scenario of migration in the western socio-economic milieu but does not explain the trends of rural-urban migration in less developed countries.
Starting from the assumption that migration is primarily an economic phenomenon, which for the individual migrant can be a quite rational decision despite the existence of urban unemployment, the Todaro model postulates that migration proceeds in response to urban-rural differences in expected income rather than actual earnings. The fundamental premise is that migrants consider the various labor market opportunities available to them in the rural and urban sectors and choose the one that maximizes their expected gains from migration.
Todaro migration model: A theory that explains rural-urban migration as an economically rational process despite high urban unemployment. Migrants calculate (present value of) urban expected income (or its equivalent) and move if this exceeds average rural income.
Harris-Todaro model: An equilibrium version of the Todaro migration model that predicts that expected incomes will be equated across rural and urban sectors when taking into account informal sector activities and outright unemployment.
The Harris-Todaro equation is
wa= βwm
Where wa is the flexible wage in the agricultural sector which is equated to the value of the marginal product in that sector, β is the probability of employment, depending on the number of newly created jobs and the size of the population of the urban unemployed, and wm is the wage in the manufacturing sector and is assumed to be fixed institutionally (either because of union activities or a friendly government towards to the workers in the modern sector) above the competitive level.
Migration and how it affects the Real World
Migration worsens rural-urban structural imbalances in two direct ways.
First, on the supply side, internal migration disproportionately increases the growth rate of urban job seekers relative to urban population growth, which itself is at historically unprecedented levels because of the high proportion of well-educated young people in the migrant system. Their presence tends to swell the urban labor supply while depleting the rural countryside of valuable human capital. Second, on the demand side, urban job creation is generally more difficult and costly to accomplish than rural job creation because of the need for substantial complementary resource inputs for most jobs in the industrial sector. Moreover, the pressures of rising urban wages and compulsory employee fringe benefits in combination with the unavailability of appropriate, more labor-intensive production technologies means that a rising share of modern-sector output growth is accounted for by increases in labor productivity. Together this rapid supply increase and lagging demand growth tend to convert a short-run problem of resource imbalances into a long-run situation of chronic and rising urban surplus labor.
But the impact of migration on the development process is much more pervasive than its exacerbation of urban unemployment and underemployment. In fact, the significance of the migration phenomenon in most developing countries is not necessarily in the process itself or even in its impact on the sectoral allocation of human resources. Rather, its significance lies in its implications for economic growth in general and for the character of that growth, particularly its distributional manifestations. We must therefore recognize that migration in excess of job opportunities is both a symptom of and a contributor to underdevelopment. Understanding the causes, determinants, and consequences of internal rural-urban labor migration is thus central to understanding the nature and character of the development process and to formulating policies to influence this process in socially desirable ways. A simple yet crucial step in underlining the centrality of the migration phenomenon is to recognize that any economic and social policy that affects rural and urban real incomes will directly or indirectly influence the migration process. This process will in turn itself tend to alter the pattern of sectoral and geographic economic activity, income distribution, and even population growth. Because all economic policies have direct and indirect effects on the level and growth of urban or rural incomes or both, they all will have a tendency to influence the nature and magnitude of the migration stream. Although some policies may have a more direct and immediate impact (e.g., wages and income policies and employment promotion programs), there are many others that, though less obvious, may in the long run be no less important. Included among these policies, for example, would be land tenure arrangements; commodity pricing; credit allocation; taxation; export promotion; import substitution; commercial and exchange-rate policies; the geographic distribution of social services; the nature of public investment programs; attitudes toward private foreign investors; the organization of population and family planning programs; the structure, content, and orientation of the educational system; the functioning of labor markets; and the nature of public policies toward international technology transfer and the location of new industries. There is thus a clear need to recognize the central importance of internal and, for many countries, even international migration and to integrate the two-way relationship between migration and population distribution on the one hand and economic variables on the other into a more comprehensive framework designed to improve development policy formulation.
In addition, we need to understand better not only why people move and what factors are most important in their decision-making process but also what the consequences of migration are for rural and urban economic and social development. If all development policies affect migration and are affected by it, which are the most significant, and why? What are the policy options and trade-offs among different and sometimes competing objectives (e.g., curtailing internal migration and expanding educational opportunities in rural areas)?
Part of our task in the following sections will be to seek answers to these and other questions relating to migration, unemployment, and development. Migration patterns are complex. The most important type of migration from the standpoint of long-run development is rural-urban migration, but a great deal of rural-rural, urban-urban, and even urban-rural migration also takes place. Rural-urban migration is most important because the population share of cities is growing, despite the fact that fertility is much lower in urban areas, and the difference is accounted for by rural-urban migration. It is also important because of the potential development benefits of economic activity of cities, due to agglomeration economies and other factors. However, urban-rural migration is important to understand because it usually occurs when hard times in cities coincide with increases in output prices from the country’s cash crops, as occurred in Ghana not long ago. Thus the overall picture is one of a remarkable amount of “churning,” or continuous movements of people within developing countries, especially over short distances.
Critiques of the Todaro Model by Williamson (1988)
1. The lottery style job allocation excludes investment in job search on the part of the immigrants;
2. The informal sector is not explicitly modelled;
3. There is not enough evidence to support the assumption of a rigid wage in the modern sector. Moreover, besides trade union pressure or minimum wage legislation, the wage differentials among sectors could be explained as well by, say, firm-specific training costs;
4. The issue of discount rates and rational migrants is ignored;
5. The influence on decision making of risk and risk attitudes on the part of the potential immigrants is not included; and
6. Differentials in skill levels among the migrants are not accounted for.
Basic Characteristics of the Todaro Migration Model
1. Migration is stimulated primarily by rational economic consideration of relative benefits and costs, mostly financial but also psychological.
2. Migration is decided on the basis of expected, rather than actual, urban-rural wage differentials where the expected differential is determined by the interaction of two variables, the actual urban-rural wage differential and the probability of successfully obtaining employment in the urban sector.
3. Probability of obtaining urban job is inversely related to the urban unemployment rate and thus inversely related to the urban unemployment rate.
4. Migration rates in excess of urban job opportunity growth rates are not only possible but also rational and even likely in the face of wide urban-rural expected income differentials.
Implications of the Todaro Migration Model
First, imbalances in urban-rural employment opportunities caused by the urban bias, particularly first-city bias, of development strategies must be reduced. Because migrants are assumed to respond to differentials in expected incomes, it is vitally important that imbalances between economic opportunities in rural and urban sectors be minimized. When urban wage rates rise faster than average rural incomes, they stimulate further rural-urban migration in spite of rising levels of urban unemployment.
Second, urban job creation is an insufficient solution for the urban unemployment problem. The traditional (Keynesian) economic solution to urban unemployment (the creation of more urban modern-sector jobs without simultaneous attempts to improve rural incomes and employment opportunities) can result in the paradoxical situation where more urban employment leads to higher levels of urban unemployment! Once again, the imbalance in expected income-earning opportunities is the crucial concept. Because migration rates are assumed to respond positively to both higher urban wages and higher urban employment opportunities (or probabilities), it follows that for any given positive urban-rural wage differential (in most developing countries, urban wages are typically three to four times as large as rural wages), higher urban employment rates will widen the expected differential and induce even higher rates of rural-urban migration. For every new job created, two or three migrants who were productively occupied in rural areas may come to the city.
Finally, programs of integrated rural development should be encouraged. Policies that operate only on the demand side of the urban employment picture, such as wage subsidies, direct government hiring, elimination of factor price distortions, and employer tax incentives, are probably far less effective in the long run in alleviating the unemployment problem than policies designed directly to regulate the supply of labor to urban areas. Clearly, however, some combination of both kinds of policies is most desirable.
Solutions to the Rural-Urban Migration Problem
1. Creating an appropriate rural-urban economic balance. A more appropriate balance between rural and urban economic opportunities appears to be indispensable to ameliorating both urban and rural unemployment problems and to slowing the pace of rural-urban migration. The main thrust of this activity should be in the integrated development of the rural sector, the spread of rural nonfarm employment opportunities, improved credit access, better agricultural training, the reorientation of social investments toward rural areas, improving rural infrastructure, and addressing shortcomings of rural institutions (including corruption, discrimination, and stratification), the presence of which has the effect of raising the cost of delaying out-migration.
2. Eliminating factor price distortions. There is ample evidence to demonstrate that correcting factor price distortions-primarily by eliminating various capital subsidies and curtailing the growth of urban wages through market-based pricing-would increase employment opportunities and make better use of scarce capital resources. But by how much or how quickly these policies would work is not clear. Moreover, their migration implications would have to be ascertained. Correct pricing policies by themselves are insufficient to fundamentally alter the present employment situation.
3. Reducing population growth. This is most efficiently accomplished through reductions in absolute poverty and inequality, particularly for women, along with the expanded provision of family-planning and rural health services. The labor force size for the next two decades is already determined by today’s birth rates, and hidden momentum of population growth applies as well to labor force growth.
Egbo Chiinemelum Chinonso
The Lewis-Fei- Ramis Model
One of the best-known early theoretical models of development that focused on the structural transformation of a primarily subsistence economy was that formulated by Nobel laureate W. Arthur Lewis in the mid-1950s and later modified, formalized, and extended by John Fei and Gustav Ranis. The Lewis two-sector model became the general theory of the development process in surplus-labor developing nations during most of the 1960s and early 1970s, and it is sometimes still applied, particularly to study the recent growth experience in China and labor markets in other developing countries. In the Lewis model, the underdeveloped economy consists of two sectors: a traditional, overpopulated rural subsistence sector characterized by zero marginal labor productivity—a situation that permits Lewis to classify this as surplus labor in the sense that it can be withdrawn from the traditional agricultural sector without any loss of output—and a high-productivity modern urban industrial sector into which labor from the subsistence sector is gradually transferred. The primary focus of the model is on both the process of labor transfer and the growth of output and employment in the modern sector. (The modern sector could include modern agriculture, but we will call the sector “industrial” as a shorthand). Both labor transfer and modern-sector employment growth are brought about by output expansion in that sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector. Such investment is made possible by the excess of modern-sector profits over wages on the assumption that capitalists reinvest all their profits. Finally, Lewis assumed that the level of wages in the urban industrial sector was constant, determined as a given premium over a fixed average subsistence level of wages in the traditional agricultural sector. At the constant urban wage, the supply curve of rural labor to the modern sector is considered to be perfectly elastic.
Lewis two-sector model: A theory of development in which surplus labor from the traditional agricultural sector is transferred to the modern industrial sector, the growth of which absorbs the surplus labor, promotes industrialization, and stimulates sustained development.
Surplus labor: The excess supply of labor over and above the quantity demanded at the going free-market wage rate. In the Lewis two-sector model of economic development, surplus labor refers to the portion of the rural labor force whose marginal productivity is zero or negative.
Production function: A technological or engineering relationship between the quantity of a good produced and the quantity of inputs required to produce it.
Average product (AP): Total output or product divided by total factor input (e.g., the average product of labor is equal to total output divided by the total amount of labor used to produce that output).
Marginal product (MP): The increase in total output resulting from the use of one additional unit of a variable factor of production (such as labor or capital). In the Lewis two sector model, surplus labor is defined as workers whose marginal product is zero.
Criticisms of the Lewis Model
First, the model implicitly assumes that the rate of labor transfer and employment creation in the modern sector is proportional to the rate of modern sector capital accumulation. The faster the rate of capital accumulation, the higher the growth rate of the modern sector and the faster the rate of new job creation. But what if capitalist profits are reinvested in more sophisticated laborsaving capital equipment rather than just duplicating the existing capital, as is implicitly assumed in the Lewis model? (We are, of course, here accepting the debatable assumption that capitalist profits are in fact reinvested in the local economy and not sent abroad as a form of “capital flight” to be added to the deposits of Western banks.)
The second questionable assumption of the Lewis model is the notion that surplus labor exists in rural areas while there is full employment in the urban areas. Most contemporary research indicates that there is little surplus labor in rural locations. True, there are both seasonal and geographic exceptions to this rule (e.g., at least until recently in parts of China and the Asian subcontinent, some Caribbean islands, and isolated regions of Latin America where land ownership is very unequal), but by and large, development economists today agree that Lewis’s assumption of rural surplus labor is generally not valid.
The third dubious assumption is the notion of a competitive modern sector labor market that guarantees the continued existence of constant real urban wages up to the point where the supply of rural surplus labor is exhausted. Prior to the 1980s, a striking feature of urban labor markets and wage determination in almost all developing countries was the tendency for these wages to rise substantially over time, both in absolute terms and relative to average rural incomes, even in the presence of rising levels of open modern-sector unemployment and low or zero marginal productivity in agriculture. Institutional factors such as union bargaining power, civil service wage scales, and multinational corporations’ hiring practices tend to negate competitive forces in modern-sector labor markets in developing countries.
A final concern with the Lewis model is its assumption of diminishing returns in the modern industrial sector.
Okaome Esther Chioma
Economics
2017/249554
estherokaome@gmail.com
Good day Mr President and honourable members of the house.
The lewis fei Ranis model of Economics was propounded by Arthur Lewis, (the Lewis theory of dualistic economy development) it recognises the present of a dual economy it was later transformed by Fei Ranis this model explains how the growth of a developing county, that is it explains the growth and development of a country for example our county Nigeria is a developing country like we all know, in respect to the use of labour surplus in agriculture to increase economic growth and development we can deduce that the present situations of economic growth and development do not mainly come from agriculture but also from other sources like from the technology and industrial sector even in developing countries.
This applies to Nigeria in the sense that the agricultural wage rate reduces because of increase In labour is no longer in terms with the most economics in the world according to the Lewis fei Ranis model of Economic growth.
The Harris Todaro model of migration by John R Harris and Michael Todaro 1970s
This model as to do with the issues concerning rural and urban migration that is the movement of persons from a rural area (village) to an urban area(city) in search of business opportunities, better education, employment. This model also encourage citizens to seek for greener pastures in a more developed area in other to survive and to increase their standard of living and also increase the economic growth and development of that particular country as a whole.
According to Todaro the tendency of getting a job depends fully on the size of the urban population that is employed in the labour force.
The longer a labour migrant has been in the manufacturing sector the more likely he or she is to get a job there.
The Harris-Todaro model assumes that unemployment is non-existent in the rural agricultural sector which makes the wage equal to marginal productivity in the rural agricultural sector.
Individuals of a country believes that their income will eventually increase or get better in the long run if they migrate from the rural sector to the urban sector.
Okoye Felix Onyekachi 2017/241446
Felix.okoye.241447@unn.edu.ng
THE LEWIS-FEI-RANIS MODEL OF ECONOMIC GROWTH
This model was originally proposed by W. Arthur Lewis in 1954 and was later expanded upon by two Economists, John C. H. Fei and Gustav Ranis in 1961. It was drawn out from the Lewis model, and it is as well known as the Surplus labour model.
Unlike many development theories, theLewis- Fei-Ranis models takes into account a situation of unemployment and underemployment of Labour. The theory begins with the assumption of a two-sector economy comprising the primitive sector and the modern sector. The primitive sector is primarily agrarian in nature constituting the agricultural sector whilst the modern sector is made up of the industrial sector.
The central thesis of the model is that an economy can only achieve economic development by prioritising the development and expansion of the modern sector so as to increase industrial output. This can be achieved by channeling labour from the agricultural sector to the industrial sector. This does not mean however that the agricultural sector should be totally neglected. The agricultural sector should be competitive enough to supply the economy with food and the industrial sector with raw mmaterials.
In the Lewis theory an economy transits from ‘labour Surplus’ to the ‘labour scarce’ stage but in the Fei-Ranis Model the first stage in the Lewis model is split into two stages, thereby having three growth stages . This three growth stages are explained thus:
The first growth stage is characterised by superfluos labour and thus has a marginal productivity of zero due to the excess supply of labour.The second growth stage is characterised by disguised unemployment which arises as a result of regallocation of the Surplus labour from the agricultural sector to the industrial sector. In this stage, the marginal productivity of labour in the agricultural sector is rising but is still below the institutional wage they earn. This implies that APL<MPL and there's still room for further re-allocation of labour from the agricultural sector to the industrial sector.
The third stage describes an economy in which MPL is greater than the institutional wage received and this stage kick-starts the era of self-sustainable economic growth wherein there is a complete commercialisation of the agricultural sector and the Surplus labour no longer exist.
Unlike many growth models which propose for a complete neglect of the agricultural sector in the process of advancing the industrial sector, the Lewis-Fei-Ranis Model still recognises the importance of the agricultural sector to economic development. This can be seen in the assumption of Surplus agricultural labour which they argue should be transferred to the industrial sector for a sustained economic growth.
Bringing it to the Nigerian economy, Nigerian economy is still primarily agrarian in nature as the bulk of the country's foreign exchange earnings come from the sale of raw materials and agricultural products. In comparison with the Lewis-Fei-Ranis Model, Nigeria seems to be lying either in the first stage, the stage of Surplus labour where the marginal productivity of labour is zero or the second stage, the stage of disguised unemployment, wherein the marginal productivity of labour is rising but is still below the institutional wage rate. Following the argument of the Lewis-Fei-Ranis Model, more Surplus labour had to be re-allocated to the industrial sector for the Nigerian economy to achieve the the third stage i.e the stage of sustainable economic growth. But in reality, what the Nigerian economy needs to take off is not further re-allocation of Surplus agricultural labour to the urban sector. This is because the Nigerian urban sector is already saturated with labour Surplus to requirement thus leading to a situation of great underemployment and unemployment. Nigeria has to devise a way of solving her urban unemployment problem by expanding the industrial sector so as to increase the industrial output.
THE HARRIS-TODARO MODEL OF MIGRATION
INTRODUCTION
John Harris and Michael Todaro formulated the Harris-Todaro model to explain the high unemployment rate besetting the economies of the less developed countries in the 1960's.
The Harris-Todaro model studied in particular the economy of Kenya.Shortly after independence, Kenya's economy experienced a high rate of unemployment in their major cities . In an effort to overturn this problem, the Kenyan government implemented some policies that aimed at increasing employment in the urban areas.
However, while this policy indeed increased the number of jobs in the urban sector, the rate of urban unemployment increased rather than reduced.The Harris-Todaro model was an attempt to explain this paradox.
The Harris-Todaro hypothesis sharply contrasts with the structural change models, particularly the Lewis theory of labour transfer which postulates that for developing countries to experience a significant growth, they need to transfer a significant proportion of their labour force from the agricultural sector to the industrial sector through rural-urban migration.
The main argument of the Harris and Todaro's theory of migration is that economic incentives, earning differetials and the probability of getting a job at the new destination are the major factors influencing migration decisions of individuals.
ASSUMPTIONS
The Harris-Todaro's theory is built on the following underlying assumptions:
(i)Emphasis is laid on two sectors of the economy, the rural sector and the urban sector.The two sectors differ from each other on th type of goods produced, the technology employed in its production and th proces of wage determination.The rural sector specializes in the production of agricultural goods and uses labour as the only input factor.The rural sector on the other hand specializes in the production of industrial goods and like the rural sector uses labour as the only input factor.
(ii)Migration decisions are based on expected income differentials between the rural and urban sectors rather than just wage differentials.This assumption implies that migration is primarily an economic phenomenon, which for the individual migrant can be a quite rational decision despite the existence of urban unemployment, the Harris-Todaro's model postulates that migration proceeds in response to urban-rural differences in expected income rather than actual earnings. The fundamental premise is that migrants consider the various labor market opportunities available to them in the rural and urban sectors and choose the one that maximizes their expected gains from migration.
(iii)Both goods and labor markets are perfectly competitive.This implies that the agricultural wage is equal to the agricultural marginal productivity.Although both the goods and labour markets are perfectly competitive, there is a segmentation in the labor market due to a high minimum urban wage politically determined.
(iv)Unemployment is nonexistent in the rural sector.This implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period.
It is also assumed that equilibrium is reached when the expected wage in the urban sector is equal to the marginal product of the rural worker.In equilibrium, the rural-urban migration will be zero since the expected rural income equals the expected urban income.
Analysing the Assumptions:
In a full-employment environment,the decision to migrate can be based solely on the desire to secure the highest-paid job wherever it becomes available. Simple economic theory would then indicate that such migration should lead to a reduction in wage differentials through the interaction of the forces of supply and demand .
Sadly, such an assumption is not realistic in the context of the institutional and economic framework of most developing nations.This is because, these countries are faced with a high unemployment problem, which implies that a typical migrant cannot expect to gain a high-paying urban job immediately.In reality, most migrants who do not have high educational qualifications or those who are not highly skilled often find themselves doing manual jobs. In the case of migrants with considerable human capital in the form of a secondary or university certificate, opportunities are much brighter, and a lot will find formal-sector jobs relatively fast. But they make up only a tiny fraction of the total migration. As a result of this, in deciding to migrate, the migrant must balance the probabilities and risks of being unemployed or underemployed for a considerable period of time against the positive urban-rural real income differential.
The fact that a typical migrant who gains an urban sector job can expect to earn double the yearly real income in an urban area than in a rural area may not really be an issue of great importance if the chances of his securing the higher-paying job within a particular period is one chance in eight and the urban wage is $80 against rural wage of $40.Thus the actual probability of his being successful in securing the higher-paying urban job is 10%, and thus his expected urban income for that period is in fact 10 units and not the 80 units that an urban worker in a full-employment environment would expect to receive. Note that we are assuming that his rural income is 40 units. So it would not be rational for this particular migrant to seek urban employment despite the fact he will earn double of his rural income if he migrated .
However, if the chances of success were 70% and the expected urban income thus 56 units, pursuing an urban employment will be a rational decision even though urban unemployment might be high.If we approach this analysis using a longer time frame, then the decision to migrate will still be rational because the chances of the migrant securing urban job gets brighter as he stays in the city.As long as the expected urban income is higher than the expected rural income over a longer time horizon, migration decisions will always be rational. Thus instead of equating urban and rural wage rates, we see that rural-urban migration in the Harris-Todaro model equates rural and urban expected incomes.
Thus, equilibrium is reached in the Harris-Todaro model when the agricultural wage equals the the ratio of urban employment and urban Labour force multiplied by the urban wage. In this equilibrium, there will be no tendency to migrate since the expected rural income equals the expected urban income. Hence migration will be zero.
CONCLUSION
We observed that even though migrants respond sharply to differences in economic opportunities between the two sectors as postulated by Harris and Todaro, in reality, all urban migrants are not the same in terms of human capital endowments. The more educated ones tend to migrate more because they have brighter chances of securing urban job.
Migrants create positive externalities for future potential migrants by providing them with information about job availabilities. In reality, this lowers their unemployment probabilities.
The Harris-Todaro model contends that migration is determined mainly by rational economic considerations of relative benefits and costs. The actual urban-rural wage differentials and the probability of successfully obtaining employment in the urban sector are the major determinants of migration decisions. While we agree with this postulation, it is important to point out that in the real world, migration is not purely an economic phenomenon. Other factors such as psychological factors affect migration as well.
The probability of getting an urban employment is directly proportional to the urban environment rate and indirectly proportional to the urban unemployment rate.
Wide imbalances in economic opportunities between the the urban and rural sectors is the reason for urban unemployment. This economic imbalance is in form of wage differences but in the real world, it could include other economic opportunities such as the chances of accessing a better health care and education. Moreover, migration in the face of high urban unemployment is not only possible but rational due to the wide margin between the two sectors with respect to economic opportunities.
Governments should not place greater priority to the cities in terms of development strategies. This is because, developing the urban sector while neglecting the rural sector creates a huge economic imbalances, and as we pointed earlier, this scenario creates further rural-urban migration despite the rising urban unemployment rate, thereby causing a lot of socioeconomic problems like the increase in crime wave in the cities and shortage of food due to the shortage of agricultural workers. Reducing the economic imbalances between the rural sector and the urban sector is key to solving the rural-urban migration and its associated negative repercussions.
Creating more urban employment with the purpose of solving the urban unemployment problem without cuncurrently developing the rural sector is a mistaken policy.This could worsen the unemployment situation in the urban sector. This is because, in the face of a sharp contrast between the two sectors in terms of economic opportunities, any increase in urban employment rate will result to a tripple increase in rural-urban migration rate.
Therefore, any policy that will reduce urban unemployment will aim to develope the rural sector so as to reduce or minimize the rate of rural-urban migration.
Name: Asangolo Joseph Dallas
Reg No: 2017/241436
Email: asangoljoseph@yahoo.com
LEWISVILL -FEI-RANIS MODEL ( THE SURPLUS LABOUR THEORY)
One of the best-known early theoretical models of development that focused on the structural transformation of a primarily subsistence economy was that formulated by Nobel laureate W. Arthur Lewis in the mid-1950s and later modified, formalized, and extended by John Fei and Gustav Ranis. It is a dualism model in development and welfare economics. It is also known as the Surplus Labour Model. The Lewis two-sector model became the general theory of the development process in surplus-labor developing nations during most of the 1960s and early 1970s, and it is sometimes still applied, particularly to study the recent growth experience in China and labor markets in other developing countries. There was a flaw in Lewis model that it did not pay enough attention to the importance of the agricultural sector in promoting industrial growth. But Fei-Ranis (FR) model of dual economy explains how the increased productivity in agricultural sector would become helpful in promoting industrial sector. In this respect, it presents three stages whereby a underdeveloped country moves from stagnation to self-sustained economic growth. Thus, this model is treated as an improvement over Lewis model of unlimited supply of labor. This is because the assumption of unlimited supply of labour is unrealistic. Since Fei-Ranis model builds on the proponents of Lewis two-sector model, both are generally referred to as Lewis-Fei-Ranis model. Therefore, it is a matter of necessity to first define the Lewis two-sector model.
In the Lewis model, the underdeveloped economy consists of two sectors:a traditional, overpopulated rural subsistence sector characterized by zero marginal labor productivity ( a situation that permits Lewis to classify this as surplus labor in the sense that it can be withdrawn from the traditional agricultural sector without any loss of output) and a high-productivity modern urban industrial sector into which labor from the subsistence sector is gradually transferred.The Lewis two-sector theory of development in which surplus labor from the traditional agricultural sector is transferred to the modern industrial sector, the growth of which absorbs the surplus labor, promotes industrialization, and stimulates sustained development. Here, Surplus Labour means the excess supply of labor over and above the quantity demanded at the going free-market wage rate. In the Lewis two-sector model of economic development, surplus labor refers to the portion of the rural labor force whose marginal productivity is zero or negative
In this line with this mode of thinking, the Lewis-Fei-Ranis model recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
THE HARRIS-TODARO MODEL
The Harris–Todaro model, is an economic model developed in 1970 and is used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of this model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
Therefore, migration from rural areas to urban areas will increase if:
Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
Okoye Felix Onyekachi
2017/241446
Felix.okoye.241447@unn.edu.ng
THE LEWIS-FEI-RANIS MODEL OF ECONOMIC GROWTH
This model was originally proposed by W. Arthur Lewis in 1954 and was later expanded upon by two Economists, John C. H. Fei and Gustav Ranis in 1961. It was drawn out from the Lewis model, and it is as well known as the Surplus labour model.
Unlike many development theories, the Lewis- Fei-Ranis models takes into account a situation of unemployment and underemployment of Labour. The theory begins with the assumption of a two-sector economy comprising the primitive sector and the modern sector. The primitive sector is primarily agrarian in nature constituting the agricultural sector whilst the modern sector is made up of the industrial sector.
The central thesis of the model is that an economy can only achieve economic development by prioritising the development and expansion of the modern sector so as to increase industrial output. This can be achieved by channeling labour from the agricultural sector to the industrial sector. This does not mean however that the agricultural sector should be totally neglected. The agricultural sector should be competitive enough to supply the economy with food and the industrial sector with raw materials.
In the Lewis theory an economy transits from ‘labour Surplus’ to the ‘labour scarce’ stage but in the Fei-Ranis Model the first stage in the Lewis model is split into two stages, thereby having three growth stages . This three growth stages are explained thus:
The first growth stage is characterised by superfluous labour and thus has a marginal productivity of zero due to the excess supply of labour.The second growth stage is characterised by disguised unemployment which arises as a result of re-allocation of the Surplus labour from the agricultural sector to the industrial sector. In this stage, the marginal productivity of labour in the agricultural sector is rising but is still below the institutional wage they earn. This implies that APL< MPL and there's still room for further re-allocation of labour from the agricultural sector to the industrial sector.
The third stage describes an economy in which MPL is greater than the institutional wage received and this stage kick-starts the era of self-sustainable economic growth wherein there is a complete commercialisation of the agricultural sector and the Surplus labour no longer exist.
Unlike many growth models which propose for a complete neglect of the agricultural sector in the process of advancing the industrial sector, the Lewis-Fei-Ranis Model still recognises the importance of the agricultural sector to economic development. This can be seen in the assumption of Surplus agricultural labour which they argue should be transferred to the industrial sector for a sustained economic growth.
Bringing it to the Nigerian economy, Nigerian economy is still primarily agrarian in nature as the bulk of the country's foreign exchange earnings come from the sale of raw materials and agricultural products. In comparison with the Lewis-Fei-Ranis Model, Nigeria seems to be lying either in the first stage, the stage of Surplus labour where the marginal productivity of labour is zero or the second stage, the stage of disguised unemployment, wherein the marginal productivity of labour is rising but is still below the institutional wage rate. Following the argument of the Lewis-Fei-Ranis Model, more Surplus labour had to be re-allocated to the industrial sector for the Nigerian economy to achieve the the third stage i.e the stage of sustainable economic growth. But in reality, what the Nigerian economy needs to take off is not further re-allocation of Surplus agricultural labour to the urban sector. This is because the Nigerian urban sector is already saturated with labour Surplus to requirement thus leading to a situation of great underemployment and unemployment. Nigeria has to devise a way of solving her urban unemployment problem by expanding the industrial sector so as to increase the industrial output.
THE HARRIS-TODARO MODEL OF MIGRATION
INTRODUCTION
John Harris and Michael Todaro formulated the Harris-Todaro model to explain the high unemployment rate besetting the economies of the less developed countries in the 1960's.
The Harris-Todaro model studied in particular the economy of Kenya.Shortly after independence, Kenya's economy experienced a high rate of unemployment in their major cities . In an effort to overturn this problem, the Kenyan government implemented some policies that aimed at increasing employment in the urban areas.
However, while this policy indeed increased the number of jobs in the urban sector, the rate of urban unemployment increased rather than reduced.The Harris-Todaro model was an attempt to explain this paradox.
The Harris-Todaro hypothesis sharply contrasts with the structural change models, particularly the Lewis theory of labour transfer which postulates that for developing countries to experience a significant growth, they need to transfer a significant proportion of their labour force from the agricultural sector to the industrial sector through rural-urban migration.
The main argument of the Harris and Todaro's theory of migration is that economic incentives, earning differetials and the probability of getting a job at the new destination are the major factors influencing migration decisions of individuals.
ASSUMPTIONS
The Harris-Todaro's theory is built on the following underlying assumptions:
(i)Emphasis is laid on two sectors of the economy, the rural sector and the urban sector.The two sectors differ from each other on the type of goods produced, the technology employed in its production and the process of wage determination.The rural sector specializes in the production of agricultural goods and uses labour as the only input factor.The rural sector on the other hand specializes in the production of industrial goods and like the rural sector uses labour as the only input factor.
(ii)Migration decisions are based on expected income differentials between the rural and urban sectors rather than just wage differentials.This assumption implies that migration is primarily an economic phenomenon, which for the individual migrant can be a quite rational decision despite the existence of urban unemployment, the Harris-Todaro's model postulates that migration proceeds in response to urban-rural differences in expected income rather than actual earnings. The fundamental premise is that migrants consider the various labor market opportunities available to them in the rural and urban sectors and choose the one that maximises their expected gains from migration.
(iii)Both goods and labor markets are perfectly competitive.This implies that the agricultural wage is equal to the agricultural marginal productivity.Although both the goods and labour markets are perfectly competitive, there is a segmentation in the labor market due to a high minimum urban wage politically determined.
(iv)Unemployment is nonexistent in the rural sector.This implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period.
It is also assumed that equilibrium is reached when the expected wage in the urban sector is equal to the marginal product of the rural worker.In equilibrium, the rural-urban migration will be zero since the expected rural income equals the expected urban income.
Analysing the Assumptions:
In a full-employment environment,the decision to migrate can be based solely on the desire to secure the highest-paid job wherever it becomes available. Simple economic theory would then indicate that such migration should lead to a reduction in wage differentials through the interaction of the forces of supply and demand .
Sadly, such an assumption is not realistic in the context of the institutional and economic framework of most developing nations.This is because, these countries are faced with a high unemployment problem, which implies that a typical migrant cannot expect to gain a high-paying urban job immediately.In reality, most migrants who do not have high educational qualifications or those who are not highly skilled often find themselves doing manual jobs. In the case of migrants with considerable human capital in the form of a secondary or university certificate, opportunities are much brighter, and a lot will find formal-sector jobs relatively fast. But they make up only a tiny fraction of the total migration. As a result of this, in deciding to migrate, the migrant must balance the probabilities and risks of being unemployed or underemployed for a considerable period of time against the positive urban-rural real income differential.
The fact that a typical migrant who gains an urban sector job can expect to earn double the yearly real income in an urban area than in a rural area may not really be an issue of great importance if the chances of his securing the higher-paying job within a particular period is one chance in eight and the urban wage is $80 against rural wage of $40.Thus the actual probability of his being successful in securing the higher-paying urban job is 10%, and thus his expected urban income for that period is in fact 10 units and not the 80 units that an urban worker in a full-employment environment would expect to receive. Note that we are assuming that his rural income is 40 units. So it would not be rational for this particular migrant to seek urban employment despite the fact he will earn double of his rural income if he migrated .
However, if the chances of success were 70% and the expected urban income thus 56 units, pursuing an urban employment will be a rational decision even though urban unemployment might be high.If we approach this analysis using a longer time frame, then the decision to migrate will still be rational because the chances of the migrant securing urban job gets brighter as he stays in the city.As long as the expected urban income is higher than the expected rural income over a longer time horizon, migration decisions will always be rational. Thus instead of equating urban and rural wage rates, we see that rural-urban migration in the Harris-Todaro model equates rural and urban expected incomes.
Thus, equilibrium is reached in the Harris-Todaro model when the agricultural wage equals the the ratio of urban employment and urban Labour force multiplied by the urban wage. In this equilibrium, there will be no tendency to migrate since the expected rural income equals the expected urban income. Hence migration will be zero.
CONCLUSION
We observed that even though migrants respond sharply to differences in economic opportunities between the two sectors as postulated by Harris and Todaro, in reality, all urban migrants are not the same in terms of human capital endowments. The more educated ones tend to migrate more because they have brighter chances of securing urban job.
Migrants create positive externalities for future potential migrants by providing them with information about job availabilities. In reality, this lowers their unemployment probabilities.
The Harris-Todaro model contends that migration is determined mainly by rational economic considerations of relative benefits and costs. The actual urban-rural wage differentials and the probability of successfully obtaining employment in the urban sector are the major determinants of migration decisions. While we agree with this postulation, it is important to point out that in the real world, migration is not purely an economic phenomenon. Other factors such as psychological factors affect migration as well.
The probability of getting an urban employment is directly proportional to the urban environment rate and indirectly proportional to the urban unemployment rate.
Wide imbalances in economic opportunities between the the urban and rural sectors is the reason for urban unemployment. This economic imbalance is in form of wage differences but in the real world, it could include other economic opportunities such as the chances of accessing a better health care and education. Moreover, migration in the face of high urban unemployment is not only possible but rational due to the wide margin between the two sectors with respect to economic opportunities.
Governments should not place greater priority to the cities in terms of development strategies. This is because, developing the urban sector while neglecting the rural sector creates a huge economic imbalances, and as we pointed earlier, this scenario creates further rural-urban migration despite the rising urban unemployment rate, thereby causing a lot of socioeconomic problems like the increase in crime wave in the cities and shortage of food due to the shortage of agricultural workers. Reducing the economic imbalances between the rural sector and the urban sector is key to solving the rural-urban migration and its associated negative repercussions.
Creating more urban employment with the purpose of solving the urban unemployment problem without concurrently developing the rural sector is a mistaken policy.This could worsen the unemployment situation in the urban sector. This is because, in the face of a sharp contrast between the two sectors in terms of economic opportunities, any increase in urban employment rate will result to a triple increase in rural-urban migration rate.
Therefore, any policy that will reduce urban unemployment will aim to develope the rural sector so as to reduce or minimize the rate of rural-urban migration.
Okoye Obinna Chidiebere
2014/191864
obinna.okoye.191864@unn.edu.ng
The Harris-Todaro Model of Labor Migration
It has long been realized that in order for an economy to develop or grow, a large amount of labor has to be transferred from the traditional (or backward) agricultural sector in rural areas, where the productivity of labor is low (or negligible, or zero, or even negative) to the modern manufacturing sector where the productivity of labor is higher and rising due to capital accumulation in that sector.
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
The probability of landing a job, according to Todaro, depends on the number of newly created jobs in the modern sector, the size of the population of the urban unemployed, and the length of time a migrant has been in the urban area. At any time, jobs were allocated as if by lottery. Understandably, the longer one has been in the urban area, the more likely he will find a job in the manufacturing sector. The criterion used in making the decision to migrate or not is the expected relative present real values of the two choices.
An important extension in this direction was done by Harris and Todaro, where they formulated the idea that the rural wage is equated to the expected urban wage, into the
now famous Harris-Todaro equation, or
where w^ is the flexible wage in the agricultural sector which is equated to the value of the marginal product in that sector, /3 is the probability of employment, depending on the
number of newly created jobs and the size of the population of the urban unemployed, and w„ is the wage in the manufacturing sector and is assumed to be fixed institutionally (either
because of union activities or a friendly government towards to the workers in the modern sector) above the competitive
level.
Unlike in the orthodox models, the urban wage, not the sectoral wage differential, is assumed to be fixed.
ASSUMPTIONS
Assumptions for this basic, simplified model:
The above equation actually assumes traditional wage = 0
Assumes there is only one period
Assumes Income is the only thing valued (no “bright city lights” effects or required premium to move from home, etc)
Assumes Risk neutrality
Assumes Equal probability that each job seeker will find a job
Assumes Rural(agricultural) income now with certainty other we must to comer expected Income in that sector)
Assumes No moving costs
Assumes All migrating to seek modern jobs, not traditional urban jobs
Mots of these assumptions can be relaxed with more elaborate models
Assumes that migration is a rational decision The decision depends on expected rather than
actual wage differentials
The probability of obtaining a city job is inversely related to the urban unemployment rate
High rates of migration are outcomes of rural
urban imbalances.
THE LEWIS-FEI-RANIS MODEL OF ECONOMIC GROWTH.
Dual-sector model as given by W. Arthur Lewis was enumerated in his article entitled “Economic Development with Unlimited Supplies of Labour” written in 1954, the model itself was named in Lewis’s honor. First published in The Manchester School in May 1954, the article and the subsequent model were instrumental in laying the foundation for the field of development economics. But One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labour should take place prior to the labour shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economic growth model
Fei-Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis. It can also be understood as an extension of the Lewis model. The model is also known as the Surplus Labour model that recognizes the presence of a dual economy comprising both the modern and the primitive sectors, and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labour from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labour supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials.
Some of the major assumptions of this model are (i) There is a duel economy i.e., the economy is characterized by a traditional, over-populated rural subsistence sector furnished with zero MPL, and the high productivity modern industrial sector.
(ii) According to Lewis, the supply of labour is perfectly elastic. In other words, the supply of labour is greater than demand for labour.
(iii) Entrepreneurs in the manufacturing sector make profit because they charge a price above the fixed wage rate.
Though this model has helped enormously in Economic development it has been criticized on the ground that Economic development takes place via the absorption of labor from the subsistence sector where opportunity costs of labor are very low. However, if there are positive opportunity costs, e.g. loss of crops in times of peak harvesting season, labor transfer will reduce agricultural output.
Secondly absorption of surplus labor itself may end prematurely because competitors may raise wage rates and lower the share of profit. It has been shown that rural-urban migration in the Egyptian economy was accompanied by an increase in wage rates of 15 per cent and a fall in profits of 12 per cent. Wages in the industrial sector were forced up directly by unions and indirectly through demands for increased wages in the subsistence sector, as payment for increased productivity
Again it was criticized for it’s assumption of rationality, perfect information and unlimited capital formation in industry. These do not exist in practical situations and so the full extent of the model is rarely realized.
UGWOKE FAITH CHINAZAEKPERE
2017/249582
ECO.361-DEVELOPMENT ECONOMICS
HARRIS- TODARO MODEL OF MIGRATION
INTRODUCTION
The Harris –Todaro model was named after after John R.Harris and Micheal Todaro,it is an economic model developed in 1970 and used in development economics and welfare economics to explain some issues concerning rural urban migration .The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. It is equally the rural- urban migration process is revisited under an agent- based approach, such an equilibrium is characterized by stabilization of rural –urban expected wage differential.
The policy implication of the HT model is understanding different from the orthodox models. When there is a wage differential with no urban unemployment ,a wage subsidy in the manufacturing sector is clearly in the first best policy, which restores the output of the modern sector to its level under no market distortion. With urban employment, a wage subsidy to the manufacturing sector is clearly the first best policy, which restores the output of a modern sector. In the traditional sector however, labor surplus is no longer a prominent phenomenon and labor surplus is no longer and labor productivity have improved, partly due to technological investment taken place in the sector. We are aware of the fact that the first best policies to correct the labor market distortion caused by minimum wages are wage subsidies or package that include wage subsidy. In practice however, wage subsidies are often politically and financially infeasible.
ASSUMPTION OF HARRIS-TODARO MODEL OF MIGRATION
The key assumption of the model of Harris –Todaro is that there will be a migratory flow from rural to urban sector while the expected urban wage will be higher than the rural wage. The model assumes that employment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. The structure of HT model is based on the premises that a fixed wage leads to an outbreak of distortation and urban unemployment. By introducing the concept of expected wage in one sector is added to the assumptions of the model. The rural sector is specialized in production of agricultural goods. The productive process of this sector can be described by a cob-douglas production function.
Ym=AmNma
Where ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa>0and 0<f<1 are parametric constants.
Similarly, the urban sector also has a productive process described as cobb-Douglas production function:
Ym=AmNma
CRITISIM OF HARRIS- TODARO MODEL
Cole and Sander(1985) has critized the harris- Todaro model for not explicitly modeling the subsistence sector employing uneducated migrants, arguing that it flawed the selection process and expected income calculations if, by lack of qualification, uneducated migrants could not find a job in the modern urban sector.
The model assumes that unemployment is non-existent in the rural agricultural sector. it is also assumed that rural wage is equal to agricultural marginal productivity .In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in china as a regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local government’s main concern in many cities.
Migration from rural to urban areas will increase if:
1) Urban wages increase in the urban sector, increasing the expected urban income
2) Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector, decreasing the expected rural income.
However, even though migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility maximizing in the context of the Harris –Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income- maximizing decision.
CONCLUSION
There is a large portion of migrants do follow Harris-Todaro model who search for better job in terms of greater income, it is not 100% concrete for making migration decision. This model is applicable in under developing and developing countries. Therefore in order to solve the problem of urban–rural migration, Government has to develop and establish the rural sector in order for people to be comfortable and not see any reason to leave the rural sector such as creating employment opportunity ,provision of social amenities etc.
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
INTRODUCTION
Fei-ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C.H.Fei and Gustavo Rican is understood as an extension of Lewis model. It can equally be known as the surplus labor model. It recognizes the presence of dual Economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector is the rapidly emerging but small industrial sector. Both sectors co-exist in the economy, wherein lies the crux of the development problem .
article entitled “Economic Development with unlimited Supplies of labor” written in 1954, the model itself was named in Lewis’s honor. First published in Manchester School in May 1954, the article and the subsequent model were instrumental in laying the foundation for the field of development economics. The article itself has been characterized by some as the influential contribution to the establishment of the discipline.
ASSUMPTIONS OF LEWIS-FEI RANIS MODEL
1) The model assumes that a developing economy has a surplus of unproductive labor in the agricultural sector
2) These workers are attracted to the growing manufacturing sector where higher wage.
3) It also assume that the wages in the manufacturing sector are more or less fixed
4) Entrepreneurs in the manufacturing sector make profit because they charge a price above the fixed wage rate
5) The model assumes that these profit will be reinvested in the business in form of fixed capital
CRITISM OF LEWIS-FEI RANIS MODEL
One of the biggest drawbacks of Lewis- rains model was undermining of the role of agriculture in boosting the growth of the industrial sector. Others include the following:
1) MARGINAL PRODUCTIVITY OF LABOUR IN PHASE 1: The FR model is of the view that MFL=0 in the first phase of growth, and the transfer of labor from agricultural sector to phase 1.
2) PRODUCTIVITY OF LABOUR IS NOT ZERO: Prof.jorgenson who has also presented a model of dual economy has object FR model’s contention of zero MP in phase 1.He says whether MPL will be zero is an empirical issue.
3) IGNORING THE ROLE IF CAPITAL: The FR labor concentrated upon land and labor as determinants of output ignoring the role of capital.
4) SUPPLY OF LAND IN THE LONG RUN: FR model assumed that in the process of economic development the supply of land remained fixed. But is not true. The supply of land can be increased in case of long run fellowship.
5) COMMERCIALIZATION OF AGRI. AND INFLATION: According to the FR model, when third phase start the agri. Sector becomes commercialized. LOW PRODUCTIVITY OF AGRICLUTURAL SECTOR: According to Jorgensen, it has been observed that there has been a very slow rise in productivity of agricultural sector.
CONCLUSION
In my own opinion, Lewis fei -Ranis model is mostly applicable in an underdeveloped country because our present world, mostly underdeveloped country which comprises both the primitive and modern sector. There is a gradual shift agricultural sector to industrial sector .the primitive sector is rapidly emerging to small industrial sector which help to complete the focal point of progress and develop
NWANKWO BASIL CHUKWUEMEKA
2016/233850
jnrharry5@gmail.com
ECONOMICS DEPARTMENT
THE HARIS-TODARO MODEL OF MIGERATION
In recent years, the urban areas in less developed countries have grown very rapidly. Between 1950 and 1960, urban areas in Africa grew by 69%, in Latin America by 67%, and in Asia by 51%, while rural areas grew by only 20% over the same period. Since biological growth rates rarely exceed 3% per annum, much of the urban growth is due to rural-urban migration.
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
ASSUMPTIONS OF THE HARIS-TODARO MODEL
This section outlines assumptions in the Harris Todaro model and the equations that describe it. The structure of the Harris Todaro model is based on the premise that a fixed wage leads to an outbreak of distortion and urban unemployment. By introducing the concept of expected wage in the urban sector, the Harris Todaro model presupposes that the fixed wage in one sector is added to the assumptions of the SF model.
The economy considered in the Harris Todaro model is a small open economy. In the Harris Todaro model, the economy consists of two sectors, one is an agricultural rural sector, sector 1, and the other is a manufacturing urban sector, sector 2. There are three kinds of production factors, specific production factor in sector 1, K1, specific production factor in sector 2, K2, and labor, L, which is employed in both sectors and mobile between sectors. In this paper, the specific production factor in the urban sector, K2, includes not only equipment and facilities for production but also social infrastructure, such as airports, roads, and industrial parks, which are related to production. Therefore, an improvement of the social infrastructure means an increase in K2. Accordingly, those specific production factors are immobile between the sectors.
The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity.
It assumes that employment transfer proceeds at the same rate as capital accumulatesin the modern sector. However, there may be labor saving advances going on. Indeed, in most third world countries, the capacity of the industrial sector to absorb labor has turned out to be rather small; Implicit in the model is the notion that there is surplus labor in rural areas andfull employment in urban areas; nominal and real urban wages in the capitalist sector of manythird world countries appear to be able to rise rapidly; the model presumes the existence ofentrepreneurs who will act in the way specifically.
COMPARISON WITH THE REAL WORLD
For economic development in LDCs, capital accumulation in the urban sector is a crucial element. The accumulated capital forms many production bases and creates job opportunities in the urban sector. At the same time, the increase in employment raises the wage level in the urban sector. In the Harris–Todaro model, the rising urban wage pushes up the expected wage in the urban sector and consequently encourages workers to migrate from the rural sector to the urban sector. If, in the resulting migration, there are more workers than the number of job opportunities created in the urban sector, some will necessarily be unemployed. Occasionally, the increase in unemployment lowers the per-capita income level before the capital is accumulated. This phenomenon is referred to as Todaro paradox. Previous studies have not, however, determined what effect an increase in capital stock in the urban sector has on urban unemployment.
LEWIS MODEL OF ECONOMIC GROWTH
The Nobel Laureate, W. Arthur Lewis in the mid 1950s presented his model of unlimited supply of labor or of surplus labor economy. By surplus labor it means that part of manpower which even if is withdrawn from the process of production there will be no fall in the amount of output.
Urban workers, engaged in manufacturing, tend to produce a higher value of output than their agricultural counterparts. The resultant higher urban wages (Lewis stated that a 30% premium was required) might therefore tempt surplus agricultural workers to migrate to cities and engage in manufacturing activity. High urban profits would encourage firms to expand and hence result in further rural-urban migration.
The Lewis model is a model of STRUCTURAL CHANGE since it outlines the development from a traditional economy to an industrialized one.
Assumptions of the Lewis Model:
Lewis model makes the following assumptions:
(i) There is a duel economy i.e., the economy is characterized by a traditional, over-populated rural subsistence sector furnished with zero MPL, and the high productivity modern urban industrial sector.
(ii) The subsistence sector does not make the use of ‘Reproducible Capital’, while the modern sector uses the produced means of capital.
(iii) The production in the advanced sector is higher than the production in traditional and backward sector.
(iv) According to Lewis, the supply of labor is perfectly elastic. In other words, the supply of labor is greater than demand for labor.
The followings are the sources of unlimited supply of labor in UDCs.
(i) Because of severe increase in population more, than required number of labors are working with lands, the so called disguised unemployed.
(ii) In UDCs so many people are having temporary and part time jobs, as the shoe-shines, loaders, porters and waiters etc. There will be no fall in the production even their number are one halved.
(iii) The landlords and feudals are having an army of tenants for the sake of their influence, power and prestige. They do not make any contribution towards production, and they are prepared to work even at less than subsistence wages.
(iv) The women in UDCs do not work, but they just perform house-hold duties. Thus they also represent unemployment.
(v) The high birth rate in UDCs leads to grow unemployment.
Criticism on the Lewis Model:
Although Lewis two-sector development model is simple and roughly it is in conformity with the historical growth in the West, but it has following weakness and most of its assumptions do not fit in the institutional and economic realities of under developed countries.
(i) Proportionality Between Employment Creation and Capital Accumulation: Lewis model assumes that there exists a proportionality in the labor transfer and employment creation in modern sector and rate of capital accumulation in the modern sector. The faster the rate of capital accumulation, the higher the growth rate of the modern sector and faster the rate of new job creation.
COMPARISON WITH THE REAL WORLD
The successful East Asian Countries of Taiwan, Korea, and Singapore, as well as the not-so successful countries like Brazil, Chile, and several others, is usually the example that is given to explain the comparison of this model with the real world. It is argued that the import substitution policies in many LDCs are based against the primary agricultural sector which is the exporting sector while the export-oriented polices provide similar incentives to the two sectors. Countries that adopt inward-looking strategies, the limitation of the domestic markets and the lack of competition leads to the allocative and technological inefficiency. As in contrast with the onward-looking countries which are able to mobilize domestic resources effectively in the production if goods that are in competition in the wide markets worldwide which would result in technology. It is now in our own opinion that majority of the LDCs have approached what is said to be the take-off stage as described by Lewis (1954) and Fei and Ranis (1961) characterized by the rapidly growing economies, transfer of labour from the traditional sector, and the persistent or continuous problems of the high urban unemployment and underemployment rates.
Udeh Amarachi M.
2017/249576
maryamarachi2010@gmail.com
Maryudeh.blogspot.com
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
In this model lewis divided the economy in an underdeveloped country into two parts namely; the subsistence sector and the capitalist sector the subsistence sector is characterized by agricultural sector while the capitalist sector is characterized by manufacturing of goods and services whereby labor is employed for the sole purpose of production. The subsistence sector, that is the agricultural sector is considered to be labor intensive, meanwhile, the capitalist sector can be either private or public. The basic assumption of the model is that there exists surplus labor in the subsistence sectors. It includes labor whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labor comprises farmers, agricultural laborers, petty traders, domestic servants and women. The surplus labor in the agriculture sector acts as a source of unlimited supply of labor for the manufacturing sector. By unlimited supply of labor, Lewis means that the supply of labor is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes into account the economic situation of unemployment and underemployment of resources, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries. One of the biggest challenges which Lewis model encountered was the unrecognition of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development.
The three fundamental ideas used in this model are:
1. Agricultural growth and industrial growth are both equally important;
2. Agricultural growth and industrial growth are balanced;
3. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap.
This shifting of labor can take place by the landlords’ investment activities and by the government’s fiscal measures. However, the cost of shifting labor in terms of both private and social cost may be high, for example transportation cost or the cost of carrying out construction of buildings. In addition to that, per capita agricultural consumption can increase, or there can be a wide gap between the wages of the urban and the rural people. These three occurrences- high cost, high consumption and high gap in wages are called leakages, and leakages prevent the creation of agricultural surplus. In fact, surplus generation might be prevented due to a backward-sloping supply curve of labor as well, which happens when high income-levels are not consumed. This would mean that the productivity of laborers with rise in income will not rise. However, the case of backward-sloping curves is mostly unpractical.
THE HARRIS TODARO MODEL OF MIGRATION
The Harris-Todaro model named after John R. Harris and Michael Todaro was developed in 1970 and used in development economics and welfare economics to explain some of the issues that concerns rural-urban migration. The model assumes that migration decision (i.e. the decision to move from one place to another) is based on expected income differentials between rural and urban areas rather than just wage differentials. This by implication shows that in a context of high urban unemployment, rural-urban migration will be economically rational if expected urban income is greater than expected rural income. In the model, when the expected wage in urban areas equals the marginal product of an agricultural worker, we say that an equilibrium level has been reached. The massive influx of rural migrant in the cities has been instrumental in breeding an overwhelmingly faster population growth in urban areas than in rural areas. Rural workers are lured to migrate by economic incentives as well as by other attractions of an urban life. While some migrants do manage to secure jobs in industries, the less fortunate ones get absorbed only in the urban informal sector and the rest wait for their own opportunity to get employed and thus increase the number of open urban unemployment. The most relevant idea of the Harris-Todaro model is that labor migration in underdeveloped countries is due to rural-urban differences in average expected wages rather than actual wages. The migrants consider the various opportunities of employment available to them in rural and urban sector and choose the one that maximize their expected wages from migration. The Harris-Todaro model can be compared with other models such as; Lewis’s model of rural-urban migration and the Fei-Ranis model on rural-urban migration. The Lewis model elaborated the unlimited supply of labor which explains the migration process from rural to urban areas in an underdeveloped economy. Unlimited supply of labor causes establishment of new industries and expansion of already existing industries without limit at current wage. In other words, these authors posit that rural-urban migration will occur while the urban expected wage, exceed the rural wage. From this crucial assumption, as denominated by Harris-Todaro, is deduced that the migratory dynamics leads the economic system towards equilibrium with urban concentration and high urban unemployment. There was an analysis that the rural-urban migration by means of an agent-based computational model, takes into account the influence of the neighborhood in the migration decision. The inclusion of the influence of neighbors was done via an Ising like model. The economic analogous to the external field in the Ising Hamiltonian was the differential of expected wages between urban and rural sectors. Therefore, the crucial assumption of Harris and Todaro were taken for granted. Now, we are motivated by the following question: can the crucial assumption and equilibrium with urban concentration and urban unemployment obtained from the original Harris-Todaro model be generated as emergent properties from the interaction among adaptative agents? In order to answer this question we implemented an agent-based computational model in which workers grope for best sectorial location over time in terms of earnings. The economic system simulated is characterized by the assumption originally made by Harris and Todaro. The paper is arranged as follows. Section describes the analytical Harris-Todaro model showing its basic equilibrium properties. In Section we present the implementation of the computational model via an agent-based simulation and compare its aggregate regularities with the analytical equilibrium properties. Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The differences between these sectors are the type of goods produced, the technology of production and the process of wage determination.
Uta-Daniel Nneoma Blossom
2017/249592
Economics department
daniel.uta.249592@unn.edu.ng
HARRIS-TODARO MODEL OF MIGRATION
The model was named after John R. Harris and Michael Todaro. The Harris-Todaro odaro model is a pioneering general equilibrium model describing the labor migration mechanism from rural to urban areas due to a wage gap and the existence of urban unemployment and underemployment in developing countries. It was developed in 1970 and was used in explaining the problems concerning rural urban migration.
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. Migration from rural to urban areas will increase if any of the the following three things occur:
Urban wages increase
Urban employment declines
Rural(agricultural) productivity decreases
The key hypothesis of the model is that migrants react mainly to economic incentives. Earning differentials(expected income differentials between rural and urban areas rather than wage differentials) and the probability of getting a job at the destination influences migration decision. The expected rural income must equal the expected urban income.In the Harris-Todaro model, workers determine migration between the sectors based on their expected wages. Thus, the workers decide to migrate to the urban sector when their expected wages there are higher than those in the rural sector.
The migration decision has been shown to be selective. Migration mainly concerns young adults who are more likely to have a positive net expected return on migration due to their longer remaining life expectancy, or because social norms require that young adults migrate in search of a better life (De Haan and Rogally, 2002). Family strategies can involve sending young adults to the city, and investing in a potentially remitting child (Lucas and Stark, 1985). Both low and high skilled individuals are more likely to migrate but usually for different reasons: “surplus” low-skilled individuals have strong incentives to move to the city in search of a manual job they may not find in the rural area, while “scarce” educated workers may find that their human capital is better rewarded in cities than in rural areas (Lanzona, 1998, Agesa, 2001).
The assumptions of the model include:
1. Migration depends on expected income differentials rather than wage differentials This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income
2. Unemployment is non-existent in rural agricultural sector
3. Rural agricultural production and labour market is perfectly competitive. As a result, agricultural rural wage equals agricultural marginal productivity.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector.
By expressing the expected wage of the rurally based potential migrants in terms of modern asector wage it assumes that the potential migrants has the ability to gain employment in the modern sector. It therefore does not explain the migration behavior if the less educated rural individuals who’s aspirations are keyed to modern employment in the informal sector.
An alternative explanation is required for their migration (as well as for those who move back and forth- particularly in response to planting and harvesting seasons in the agricultural sector)
The analysis presented here points to the importance of factor prices for resource allocation and employment creation and the urban bias inherent in policies designed to promote industrialization at the expense of agriculture.
In any case, the Harris-Todaro model suffers from theoretic oversimplifications, among which several are likely to overestimate the link between migration and urban unemployment.
Therefore, migration from rural areas to urban areas will increase if:
Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
This condition concerns the relationship between the institutionally and legally set minimum wage in the urban area and agricultural productivity in the rural area. Unsurprisingly, if agricultural productivity rises and income in the rural area increases, rural workers have no need to migrate to the urban sector to find jobs and face the risk of unemployment.
Despite the simplicity of this condition, it provides two important suggestions for economic policy. The first concerns the legal minimum wage in the urban sector: The setting of a minimum wage in defiance of the productivity of the rural sector may give rise to Todaro paradox.
The other relates to support for urban development: It has been observed in Asian countries that, particularly in the urban sector, concentrated improvement of social capital such as harbors, roads, and industrial parks gives rise to Todaro paradox.
Name: Assi Kaetti Marian
Reg number: 2017/241454
Dept : Economics
THE LEWIS FEI- RANIS MODEL.
The Lewis Fei-Ranis model, developed Gustay Ranis and John. H. C fei. This model is regarded as an extension of the Lewis model also known as the Surplus Labour theory.
The model take into consideration a dual economy and recognizes the existence of only two sectors which are the modern / industrial sector and the rural agricultural sector.
The model is actively interested in solving the problems of lack of utilization of scare resources and the problems of unemployment.
The model states that both sectors cannot exist without the other and advocated for the development of the modern industrial sector over the rural sector for development of the economy to occur or take place. And this is achieved when there is adequate transfer of Labour from the unproductive sector or agricultural sector to the industrial sector. This leads to increase output in the industrial areas.
ASSUMPTIONS OF THE MODEL
1. The assumption of a dual economy which includes a traditional agricultural sector and an industrial sector.
2. The assumption of land supply being fixed and agricultural sector output is a function of only land and labor with no other factors in consideration.
3. The Assumption of the act of reclamation of land as the only form of accumulation of capital in the agricultural sector.
The model is divided into three stages.
1. Breaking Point: This is the first stage of the model. Disguised unemployment comes in play because the supply of labor is perfectly elastic and MPL (Marginal Productivity of Labour) is equals to zero (0). Therefore, such disguised unemployed are to be transferred to industrial sector at the constant institutional wage. That is, there is redundant agricultural labour.
2. Shortage Point: This is the second stage of Fei-Ranis model (phase). Here the agricultural sector workers add to agricultural output but produce less than institutional wage they get. In other words, the labor surplus exists where APL (average productivity of labour) > MPL, but it is not equal to subsistence (institutional) wages. At this point, the constitutional institutional wage (CIW)>MP>AP. This means there is disguised agricultural unemployment. This, such disguised unemployed also have to be transferred to industrial sector. If the migration to industrial sector continues a situation is eventually reached where the farm workers produce output equal to institutional wages. This would mean that productivity in agricultural sector has gone up. This is the beginning of the third phase (stage).
3. The turning point or Commercialization Point: In the third stage of FR model , the take-off situation comes to an end and there begins the era of self-sustained growth where the farm workers produce more than the institutional wage they get. In this stage of economic growth, the surplus labor comes to an end and the agricultural sector becomes commercialized sector. Accordingly, they have to be shifted to industrial sector. As labor are transferred to industrial sector a shortage of labor will develop in agricultural sector.
In other words, it will be difficult for the 6 sector to get the labor at same prevailing constant wages. That is, there is self-sustaining agricultural growth with commercialization of agricultural sector. This is because MPL>CIW. Here, the economy is fully commercialized in the absence of disguised unemployment. Such commercialization took place at the cost of absorption of disguised unemployment in industrial sector.
Critical Review of the Lewis’s Model:
According to the model, the production output and efficiency in the subsistence sector is affected positively when Labour is withdrawn from it.
The cost involved in training the unskilled worker transferred from the subsistence sector is completely and totally ignored.
It is assumed that capitalist re invest all their profit into production. This is not so as they may decide to engage in un-productive pursuit and for speculative purposes.
There is low productivity in the agricultural sector.
HOW IT RELATES TO THE NIGERIAN ECONOMY
The Nigerian economy consist of both the agricultural sector and industrial sector. Both provide each functions for the growth and development of the economy.
In conclusion, the Lewis model is an eminent explanation of the experience evident in Nigeria economy and most of the countries of the world. United Nations and various international bodies used this to inform policy decisions in the 1960s
HARRIS-TODARO’S MIGRATION THEORY
John R. Harris and Michael P. Todaro developed the Theory of migration. This theory is used in development economics and it illustrates a migrants’ decision on his expected income difference between a rural (agriculture) and urban (manufacturing) areas.
This model was developed for developing countries, although it’s general mechanism can also be applied to developed countries. It is used in development economics as an economic illustration of the migrant’s decision based on expected income differentials between rural and urban areas rather than just wage differentials.
The core assumption of the model is that the decision to migrate is based on the conclusion about expected income differentials. This is between rural -urban migration rather than differentials in wages. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if urban income expectancy exceeds the expected rural income.
ASSUMPTIONS OF THE MODEL
The presence of two sectors: urban (manufacture) and rural (agriculture).
The Rural-urban migration condition which states that urban real wage exceeds real agricultural product.
The assumption of no migration cost (from rural to urban sector).
There is the application of Cobb-Douglas production function and it uses Static approach.
CONCLUSION
Harris Todaro model helps to explains some issues of rural-urban migration. According to the model, when expected urban income is higher than rural wages, migration is bound to occur. In this case, the urban sector of the economy may have high rates of unemployment. The model condition for equilibrium occurs when the expected urban wage is equal to rural wage. When government subsidize manufacturing sector Harris Todaro paradox scenerio may happen.
According to the Harris and Todaro, job creation may lead to increase in unemployment if the problems of unemployment is not solved.
In relation to the Nigerian economy, in solving the economic growth problem of the country, the Harris-Todaro model application can come in handy. It helps policy makers avoiding diverse Economics mistakes. Economics development efforts should be channeled to the under developed sectors where resources are under utilized, unemployment rate and wage rate is very high and with the aim of improving the standard of living of the people.
Name: Oforka Blessing Oluchi
Reg no: 2017/243365
Email: blesscolls@gmail.com
Answer:
LEWIS-FEI-RANIS MODEL
The model is a dualism model in development economics that has been developed by John C. H. Fei and Gustav Ranis “A Theory of Economics Development” (1961) and it can be seen as an improvement of Williams Arthur Lewis article “Economic Development with Unlimited Supplies of Labour” (1954). The model is also known as Surplus Labour theory. In formalizing the Lewis theory, Fei-Ranis combined it with Rostow’s (1956) three “linear stages of growth” theory. They disassembled Lewis’s two-stage economic development into three phases, defined by the marginal productivity of agriculture labour.
The Lewis model had a flaw as it did not pay enough attention to the importance of the agriculture sector in promoting industrial growth but the Fei-Ranis improved the model by explaining how the increased productivity in agriculture would become helpful in promoting industrial sector. The dual sector in this model is the agriculture sector and the industrial sector. The model analyzes the problem of economic development in a country with an insignificant industrial sector and a labour surplus in the agriculture sector of the economy. Thus, the model suggests that: “economic development would be taking place if agriculture labourers are transferred to industrial sector where their productivity will increase”.
There are the three stages in the Lewis-Fei-Ranis model. These stages are distinguished by the marginal productivity of labour of the agriculture sector. The entry into each phase is marked by three turning points:
• The breakout point leads to phase one growth with a redundant agriculture labour. In phase one the supply of labour is perfectly elastic and MPL=0.
• The shortage point leads to phase two growth with disguised agriculture unemployment. In phase two, constant institutional wage (CIW) > MPL >0.
• The stage three growth is the commercialization point of self-sustaining economic growth with commercialization of the agriculture sector. In phase MPL > CIW.
Criticisms of the Model
• Prof. Jorgenson who also presented a dual economy model disagreed with Fei-Ranis argument of zero marginal productivity in phase I. The underdeveloped countries during the seasons of sowing and harvesting have the MPL>0.
• The model failed to recognize the importance of capital and focused on labour and land as the major determinants of output. To maintain technical progress, capital accumulation is important.
• The model assumed a close economy and hence there is no presence of international trade, which is unrealistic as food or raw materials cannot be imported.
The oil boom in the 1970s and 1980s caused a neglect in the agriculture sector in Nigeria. Improving the agricultural not only secures food for the nation but also provides raw materials needed in the industrial sector. A relationship exists between the two sectors. Increase in the labour productivity in the agriculture sector leads to increase the supply of raw materials to the industrial sector and the industrial sector provides the agriculture sector with industrial machines.
HARRIS-TODARO MODEL
The Harris-Todaro model of migration is named after John R. Harris and Michael P. Todaro developed in the 1970s and is used in development economics. Harris and Todaro in two seminal papers (1969 & 1970) brought about a canonical model of rural-urban migration which was so influential that they are referred to as the Harris-Todaro model of migration.
This model – although made for developing countries – its general mechanism can also be applied to developed countries. It is used in development economics as an economic illustration of the migrant’s decision based on expected income differentials between rural and urban areas rather than just wage differentials. It is typically studied in the context of developing countries employment and unemployment situations. It follows from the Harris-Todaro model that earning differences, economic incentives, and the probability of actually getting a job at the place being migrated to plays an active role in the decision to migrate.
The theory assumes that members of labor forces make comparison between the income expected in the urban area for a given time horizon (that is, the difference between the cost of migration and the returns on migrating) with the current average rural income. Therefore, accordingly, rural-urban migration will only occur and be economically rational when the urban expected wage exceeds the rural obtained wage.
The model also assumes that unemployment is non-existent in the rural agriculture sector. It also assumed that rural agriculture production and the subsequent labour market is competitive. As a result, the agriculture rural wage is equal to agriculture marginal productivity.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agriculture worker. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector.
The rural-urban migration is one problem affecting the socio-economic development in Nigeria. A situation whereby both the young migrate from the rural areas to the urban areas for the desire of better employment opportunities. Over time, due to the rural-urban migration of labour, the supply of labour has outweighed the demand for labour and has overstretched the available social and infrastructural facilities in the urban areas.
With the exit of the youth from the rural areas in Nigeria, there is a reduction of labour which causes a reduction in the production of agricultural products and causes a decrease in the income and standard of living of the inhabitants in the rural sector. The government and policy makers in Nigeria should make conscious efforts towards the development of the rural areas to ensure the reduction in the migration of labour from the rural areas to the urban areas.
Name: Oforka Blessing Oluchi
Reg No: 2017/243365
Email: blesscolls@gmail.com
Answer:
LEWIS-FEI-RANIS MODEL
The model is a dualism model in development economics that has been developed by John C. H. Fei and Gustav Ranis “A Theory of Economics Development” (1961) and it can be seen as an improvement of Williams Arthur Lewis article “Economic Development with Unlimited Supplies of Labour” (1954). The model is also known as Surplus Labour theory. In formalizing the Lewis theory, Fei-Ranis combined it with Rostow’s (1956) three “linear stages of growth” theory. They disassembled Lewis’s two-stage economic development into three phases, defined by the marginal productivity of agriculture labour.
The Lewis model had a flaw as it did not pay enough attention to the importance of the agriculture sector in promoting industrial growth but the Fei-Ranis improved the model by explaining how the increased productivity in agriculture would become helpful in promoting industrial sector.
The dual sector in this model is the agriculture sector and the industrial sector. The model analyzes the problem of economic development in a country with an insignificant industrial sector and a labour surplus in the agriculture sector of the economy.
Thus, the model suggests that: “economic development would be taking place if agriculture labourers are transferred to industrial sector where their productivity will increase”.
There are the three stages in the Lewis-Fei-Ranis model. These stages are distinguished by the marginal productivity of labour of the agriculture sector. The entry into each phase is marked by three turning points
• The breakout point leads to phase one growth with a redundant agriculture labour. In phase one the supply of labour is perfectly elastic and MPL=0.
• The shortage point leads to phase two growth with disguised agriculture unemployment. In phase two, constant institutional wage (CIW) > MPL >0.
• The stage three growth is the commercialization point of self-sustaining economic growth with commercialization of the agriculture sector. In phase MPL > CIW.
Criticisms of the model
• Prof. Jorgenson who also presented a dual economy model disagreed with Fei-Ranis argument of zero marginal productivity in phase I. The underdeveloped countries during the seasons of sowing and harvesting have the MPL>0.
• The model failed to recognize the importance of capital and focused on labour and land as the major determinants of output. To maintain technical progress, capital accumulation is important.
• The model assumed a close economy and hence there is no presence of international trade, which is unrealistic as food or raw materials cannot be imported.
The oil boom in the 1970s and 1980s caused a neglect in the agriculture sector in Nigeria. Improving the agricultural not only secures food for the nation but also provides raw materials needed in the industrial sector. A relationship exists between the two sectors. Increase in the labour productivity in the agriculture sector leads to increase the supply of raw materials to the industrial sector and the industrial sector provides the agriculture sector with industrial machines.
HARRIS-TODARO MODEL
The Harris-Todaro model of migration is named after John R. Harris and Michael P. Todaro developed in the 1970s and is used in development economics. Harris and Todaro in two seminal papers (1969 & 1970) brought about a canonical model of rural-urban migration which was so influential that they are referred to as the Harris-Todaro model of migration.
This model- though made for developing countries- its general mechanism can also be applied to developed countries. It is used in development economics as an economic illustration of the migrant’s decision based on expected income differentials between rural and urban areas rather than just wage differentials. It is typically studied in the context of developing countries employment and unemployment situations. It follows from the Harris-Todaro model that earning differences, economic incentives, and the probability of actually getting a job at the place being migrated to plays an active role in the decision to migrate.
The theory assumes that members of labor forces make comparison between the income expected in the urban area for a given time horizon (that is, the difference between the cost of migration and the returns on migrating) with the current average rural income. Therefore, accordingly, rural-urban migration will only occur and be economically rational when the urban expected wage exceeds the rural obtained wage.
The model also assumes that unemployment is non-existent in the rural agriculture sector. It also assumed that rural agriculture production and the subsequent labour market is competitive. As a result, the agriculture rural wage is equal to agriculture marginal productivity.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agriculture worker. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector.
The rural-urban migration is one problem affecting the socio-economic development in Nigeria. A situation whereby both the young migrate from the rural areas to the urban areas for the desire of better employment opportunities. Over time, due to the rural-urban migration of labour, the supply of labour has outweighed the demand for labour and has overstretched the available social and infrastructural facilities in the urban areas.
With the exit of the youth from the rural areas in Nigeria, there is a reduction of labour which causes a reduction in the production of agricultural products and causes a decrease in the income and standard of living of the inhabitants in the rural sector.
The government and policy makers in Nigeria should make conscious efforts towards the development of the rural areas to ensure the reduction in the migration of labour from the rural areas to the urban areas.
Name: UGWUEGEDE CHIAMAKA PRECIOUS
Reg No: 2017/249463
Dept: COMBINED SOCIAL SCIENCES (ECONOMICS AND GEOGRAPHY)
Email address: clarechiamaka18@gmail.com
Answer: BRIEFLY DISCUSS THE FEI RANIS AND HARROD DOMER MODEL AND ITS APPLICATION TO THE NIGERIAN ECONOMY.
THE FEI RANIS MODEL OF DUAL ECONOMY.
The two Economists John Fei And Gustav Ranis presented the Dual Economy and explains how the increased productivity in the agricultural sector would become helpful in promoting the industrial sector. Thus the model is treated as an improvement over the Lewis model of the unlimited supply of labour.
The Fei Ranis model took the example of Japan’s dualistic Economy in the 19th century and concluded that the connectivity between the two sectors of Japan was heightened due to the presence of a decentralized rural industry which was often linked to an urban population.
BASIC THESIS OF THE MODEL.
The Fei Ranis model is concerned with poor Economies with the following characteristics:
1. Labour is abundant in such under developing countries and shortage of natural resources.
2. The population growth is very high which results in mass unemployment in the Economy.
3. The major share of the population is engaged in Agriculture yet the agricultural sector is stagnant.
4. There is a dynamic industrial sector in the Economy.
CRITICISMS OF THE MODEL.
1. The FR model concentrated upon land and labour as the determinants of output, ignoring the role of capital.
2. The model ignored the role of foreign trade as it assumed a closed Economy model.
3. The model assumed that in the process of Economic Development, the supply of land remained fixed.
APPLICATION OF THE MODEL TO THE NIGERIAN ECONOMY.
The Fei Ranis can be applied in the Nigerian Economy by placing much emphases and concentration on the once-abandoned agricultural sector in the Economy.
Productivity in the Agricultural sector has been rising but at a very slow pace while its contribution to Gross Domestic Product (GDP) was oscillating around 33 per cent to 40 per cent. This could be due to several reasons such as neglect of the sector after the oil boom of the 1970s, the impediments in the Land Use Act of Nigeria and the failure of the youths to be gainfully involved in agriculture in Nigeria. From 1981, the growth rate of agricultural GDP maintained a continuous rise but its sectorial contribution decline at decreasing rate till 2001 with a sharp rise in 2002 and a continuous decline. This shows that the renewed interest in the agricultural sector can go a long way in boosting the Economy.
2. THE HARROD DOMAR MODEL.
The Harrod Domar model was formulated in 1939 by Roy. F. Harrod and Evsey Domar in 1946. Though a similar model was proposed by Gustav Gassel in 1924.
The Harrod Domar model argues that there are 3 kinds of growth:
1. The Warranted growth: which is the rate of growth at which the Economy does not expand indefinitely or go into recession.
2. The Actual growth: which is the real rate increase in a country’s GDP per year.
3. The Natural growth: which is the growth an Economy requires to maintain full Employment.
FEATURES OF THE MODEL.
The Harrod Domar model suggests that the rate of Economic growth depends on two things:
1. Level of savings (Higher savings equals higher investment).
1. Capital-Output ratio: A lower capital output ratio means investment is more efficient and the growth rate will be higher.
CRITICISMS OF THE MODEL.
1. Developing Countries find it difficult to increase savings.
2. The model ignores factors such as labour productivity,technological innovation and levels of corruption.
3. There are examples of countries who have experienced rapid growth rates despite a lack of savings such as Thailand.
4. Harrod assumed there was no reason for the actual growth to equal natural growth and that an Economy had no tendency to full Employment.
APPLICATION OF HARROD DOMAR MODEL TO THE NIGERIAN ECONOMY.
Harrod Domar growth model can be applied to the Economy by increasing savings either domestically or from abroad. It is argued that in developing countries, low rates of Economic growth and development are linked to low saving rates.
A. THE SURPLUS VALUE THEORY
The surplus labour theory show a dual system of economy; traditional sector (agricultural sector) and the modern sector (industrial sector). In this model the agricultural sector dominates in the developing countries and the industrial sector dominates in the developed country. The theory was initiated by Arthus Lewis and later modified by Fei and Ranis. In the model there exist surplus unproductive labour which are absorped by the industrial sector, as a result the increase in the employment of labour by the industrial sector the industrial sector expands until all the excess labour is absorped. All this processes bring the economy to a state whereby the industrial sector dominates, hence, the economy (country or nation) is said to be or assumed to be developed. The model argued that an economy transits from the stage of excess labour (first stage) to a stage of scarce labour (second stage) of economic development/advancement.
Using Nigeria as a Case Studies to Analyze the Model:
From the model, if excess labour in the Nigeria’s agricultural sector is moved from traditional sector (agricultural sector) to the modern sector (industrial sector), Nigeria as a developing country would advance to develop country where the higher percentage of the labour force is found in the modern sector (industrial sector). And at this stage of development the labour force in agricultural sector would not be excess or surplus.
But the question is, is this model really applicable in Nigeria? The answer is NO, because Nigeria government has shown zero or little interest in the development of industries, even our so called oil sectors is being neocolonized by the higher powers (industrialized countries). Therefore the excess labour in the traditional sectors have little or zero provisional employment in the modern sectors (industrial sectors). Hence traditional sector (agricultural sector) continues to have dominance in Nigeria economy, with less commercialized (export) product and majorly the one of subsistence agricultures.
B. HARRIS TODARO MODEL
The Harris-Todaro model is an economic model developed in 1970 and used in development economics to explain some of the issues concerning rural-urban migration. The model was named after John R. Harris and Michael Todaro. The major assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. Therefore, rural migration in a context of high urban unemployment can be economically rational if expected urban income exceed expected rural income. The main position of the model analyzes that labour migration in underdeveloped countries is due to rural-urban differences in average expected wages rather than the actual wage.
The major assumption of Harris Todaro.
1. Migration flow exist when the expected urban wage is higher than the rural wage.
2. Long run equilibrium is attained when the urban worker population reaches a level such that the expected urban wage equates the rural wage.
3. There is fixed amount of capital and labour factor input.
4. Labour unemployment exist in urban sector because the fixed urban wage is higher than the flexible rural wage but in the side of capital, it is fully employed
5. All the urban Labour force has equal chance of getting job available for them
6. The model assumed a small economy where urban outputs is imported and rural output (agricultural outputs is exported.
Using Nigeria as a Case Study to Analyze the Model:
Nigerian government could decide to enhance industrial development, in urban areas employment would increase and this facilitate increase in getting urban employment in for rural dwellers. Let say because of the increase in employment a place like Abuja with a reasonably expected higher wage rate, many rural dwellers would migrate to Abuja to make more money since the wage rate is expected to be higher there. The outcome becomes, unemployment level in Abuja will increase more than it was before the industrial development took place, as a result, labour migrants would chose to accept the wage in urban sector than going back to the rural area to wait for vacancy that might take long run to come. When the wage rate in urban area equates the wage rate in rural area equilibrium level occurs.
Now the question is, is this model really applicable in Nigeria? YES. This is because rural dweller will always go to urban cities to look for greener pasture.
It’s actually a short summary and personal views of the two models
Department : Econonmics/philosophy
Reg no: 2017/251702
Email: emomotimi.samari.251702@unn.edu.ng
LEWIS FEI RANIS MODEL (SURPLUS LABOUR THEORY)
INTRODUCTION:
Lewis (1954) proposed a seminal theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development. Later, Ranis and Fei (1961) formalised the Lewis theory and defined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model.
Subsequently, Ranis’ and Fei’s extension to Lewis’ model can be analysed. They observed the model by reading it from left to right and assessed the changes in the output and wage as more and more people moved from agriculture to the industry. A new concept was added – namely, disguised unemployment, which appears in the traditional subsistence sector. The marginal product of labour, which is observed as the slope of the production function, in agricultural sector is lower than in industry – in fact, it is zero before point B on Figure 1.3. Under competitive assumptions, the real wage rate would fall to zero, but due to the presence of institutional or non-market forces, the institutional wages are sustained. Therefore, there are gains to be had by switching resources away to the industrial sector. Nevertheless, it is generally not likely to happen because the market, left on its own, does not change. If the industrial sector does pay according to marginal product, then, as noted by Ray (1998), there would be efficiency gains available as long as the marginal product of the agricultural labour is less than the wage, whether it is zero or not. By decreasing the labour force in agriculture by a small amount (whilst still remaining in the surplus labour area), the total wage bill in agriculture falls along the diagonal straight line in FigureFigure6provided that the wage in agriculture does not rise. Since output does not fall, the reduction in the total wage bill gives an economy an agricultural surplus. Only at point C will this process come to an end because there is no more disguised unemployment – it only appears at points at which the marginal product of labour is less than the institutional wage. Hence, condition for the existence of disguised unemployment is:
W > MPL
Ranis and Fei subsequently claimed that the average wage bill in agricultural sector is no longer measured as a straight line. At point C, the slope of the production function is parallel to the wage bill line, yielding that the disguised unemployment is no longer observed. Furthermore, beyond point C the slope of the production function is parallel to the wage bill line, yielding that the disguised unemployment is no longer observed. Furthermore, beyond point C (when the disguisedly unemployed have been absorbed) the marginal product of labour exceeds the traditionally given wage rate (Ranis and Fei, 1961). The wage in agriculture begins to rise, because it becomes profitable to bid for labour[2]. As a result, wage bill falls more slowly.
LEWIS- FEI- RANIS MODEL
The Lewis (1954) theory of dualistic economic development provides the seminal contribution to theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150). The non-agricultural sector accumulates capital by drawing surplus labour out of the agricultural sector. The expansion of the non-agricultural sector takes advantage of the infinitely elastic supply of labour from the agricultural sector due to its labour surplus. When the surplus labour is exhausted, the labour supply curve in the non-agricultural sector becomes upward-sloping.
Ranis and Fei (1961) formalised Lewis’s theory by combining it with Rostow’s (1956) three “linear-stages-of-growth” theory. They disassembled Lewis’s two-stage economic development into three phases, defined by the marginal productivity of agricultural labour. They assume the economy to be stagnant in its pre-conditioning stage. The breakout point marks the creation of an infant non-agricultural sector and the entry into phase one. Agricultural labour starts to be reallocated to the non-agricultural sector. Due to the abundance of surplus agricultural labour, its marginal productivity is extremely low and average labour productivity defines the agricultural institutional wage. When the redundant agricultural labour force has been reallocated, the agricultural marginal productivity of labour starts to rise but is still lower than the institutional wage. This marks the shortage point at which the economy enters phase two of development. During phase two the remaining agricultural unemployment is gradually absorbed. At the end of this process the economy reaches the commercialisation point and enters phase three where the agricultural labour market is fully commercialised. Diagram 1 below illustrates the three phases defined by Ranis-Fei (1961, diagram 1.3):
Diagram 1. Agricultural output (QA), labour input (LA) and Lewis-Rains-Fei phases of economic development
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector.
BASICS OF THE MODEL
Depiction of Phase 1, Phase 2 and Phase 3 of the dual economy model using average output.
One of the biggest drawbacks of theLewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.
They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development. In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
Using the help of the figure on the left, we see that
PHASE ONE : AL (FROM FIGURE)=
According to Fei and Ranis, AD amount of labor (see figure) can be shifted from the agricultural sector without any fall in output. Hence, it represents surplus labor.
PHASE TWO: AP>MP
After AD, MP begins to rise, and industrial labor rises from zero to a value equal to AD. AP of agricultural labor is shown by BYZ and we see that this curve falls downward after AD. This fall in AP can be attributed to the fact that as agricultural laborers shift to the industrial sector, the real wage of industrial laborers decreases due to shortage of food supply, since less laborers are now working in the food sector. The decrease in the real wage level decreases the level of profits, and the size of surplus that could have been re-invested for more industrialization. However, as long as surplus exists, growth rate can still be increased without a fall in the rate of industrialization. This re-investment of surplus can be graphically visualized as the shifting of MP curve outwards. In Phase2 the level of disguised unemployment is given by AK. This allows the agricultural sector to give up a part of its labor-force until
MP=REAL WAGES=AB
Phase 3 begins from the point of commercialization which is at K in the Figure. This is the point where the economy becomes completely commercialized in the absence of disguised unemployment. The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor.
PHASE THREE : MP>CIW
The amount of labor that is shifted and the time that this shifting takes depends upon:
1. The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits;
2. The nature of the industry’s technical progress and its associated bias;
3. Growth rate of population.
So, the three fundamental ideas used in this model are:
1. Agricultural growth and industrial growth are both equally important;
2. Agricultural growth and industrial growth are balanced;
3. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the
Malthusian population trap.
CONCLUSION
below, are distinguished by the marginal productivity of agricultural labour. The entry into each phase is marked three turning points:
• The breakout point leads to phase one growth with redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural unemployment.
• The commercialisation point leads to phase three of self-sustaining economic growth with the commercialisation of the agricultural sector. The Lewis-Ranis-Fei theory of dualistic economic development therefore provides a suitable theoretical framework for studying the growth path of labour-surplus developing economies.
This shifting of labor can take place by the landlords’ investment activities and by the government’s fiscal measures. However, the cost of shifting labor in terms of both private and social cost may be high, for example transportation cost or the cost of carrying out construction of buildings. In addition to that, per capita agricultural consumption can increase, or there can exist a wide gap between the wages of the urban and the rural people. These three occurrences- high cost, high consumption and high gap in wages, are called as leakages , and leakages prevent the creation of agricultural surplus. In fact, surplus generation might be prevented due to a backward-sloping supply curve of labor as well, which happens when high income-levels are not consumed. This would mean that the productivity of laborers with rise in income will not rise. However, the case of backward-sloping curves is mostly unpractical.
Harris-Todaro model
INTRODUCTION OF HARRIS-TODARO MODEL :
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income. John R. Harris and Michael P. Todaro presented the seminal ‘Two sector model’ in American Economic Association, 1970. This model is a pioneering study in the field encompassing rural-urban migration. The classical theory is used in development economics and is an economic illustration of migrants’ decision on expected income differentials between rural (agriculture) and urban (manufacturing) areas. The model of rural-urban migration is typically studied in the context of employment and unemployment situations in developing countries. The purpose of the model is to explain the critical urban unemployment problem in developing countries. The key hypothesis of Harris and Todaro’s model is that economic incentives, earnings differentials, and the probability of getting a job at the destination have an influence on the migration decision. In other words, this theory put forward that rural-urban migration will occur when the urban expected wage exceeds the rural obtain wage.
THE ASSUMPTIONS
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the types of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
Ya=AaN (1)
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a < 1 are parametric constants.
Both goods and labor markets are perfectly competitive. Nevertheless, there is segmentation in the labor market due to a high minimum urban wage politically determined.
In the rural sector, the real wage, perfectly flexible, is equal to the marginal productivity of labor in this sector:
Wa=AaN p, (3)
where wa is the real wage and p is the price of the agricultural good, both expressed in units of manufactured good. In the urban sector, a minimum wage, wm, is assumed fixed institutionally at a level above equilibrium in this labor market. It can be formalized as
Wa=AaN , such that Nm 0 and g > 0 are a parametric constants. g is the elasticity of p with respect to the ratio Ym/Ya.
The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified:
Na+Nu=N (6)
EQUILIBRIUM CONDITION OF THE HARRIS–TODARO MODEL
The formal statement of the equilibrium condition of the Harris–Todaro model is as follows:
Let wr be the wage rate (marginal productivity of labor) in the rural agricultural sector.
Let le be the total number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
Let us be the total number of job seekers, employed and unemployed, in the urban sector.
Let wu be the wage rate in the urban sector, which could possibly be set by the government with a minimum wage law.
Rural to urban migration will take place if:
wr Wu
At equilibrium,
wr = Wu
With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.
Therefore, migration from rural areas to urban areas will increase if:
Urban wages (w u ) increase in the urban sector (l e ), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (w r), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
CONCLUSION
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium, there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary driver of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
Samari Emomotimi Akpobulou
Department : Economics/philosophy
Reg no: 2017/251702
Email: emomotimi.samari.251702@unn.edu.ng
NAME: IWUALA CHIOMA FAVOUR
REG NO: 2017/249520
DEPT: ECONOMICS
EMAIL: iwualafavour573@gmail.com
THE LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
Lewis in his book “Economic Development with Unlimited Supplies of Labour” (1954) proposed a theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus stage to the second, labour-scarce stage of development. One of the drawbacks of the Lewis model was undermining of the role of agricultural sector in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labour should take place prior to the labour shift between the two sectors.
`Later John C.H. Fei and Gustav Ranis (1961) formalised the Lewis theory by combining it with Rostow’s (1956) three linear-stages of growth theory and defined three phases of dualistic economic development by sub-dividing the first stage of Lewis model into two phases. They assume the economy to be stagnant in its pre-conditioning stage. The breakout point marks the creation of infant non-agricultural sector and the entry into phase one. Agricultural labour starts to be reallocated to the non-agricultural sector. Due to the abundance of surplus agricultural labour, its marginal productivity is extremely low and average labour productivity defines the agricultural institutional wage. When the redundant agricultural labour force has been reallocated, the agricultural marginal productivity of labour starts to rise but is still lower than the institutional wage. This marks the shortage point at which the economy enters the second phase of development. During phase two the remaining agricultural unemployment is gradually absorbed. At the end of this process the economy reaches the commercialisation point and enters third stage where the agricultural labour market is fully commercialised.
Comparing to the real-world using Nigeria as a case study since Nigeria is a developing country. Using the Fei-Ranis theory of dualistic economic development as a framework to investigate Nigeria’s rapid growth over the years. It is notable that Nigeria’s economic growth is mainly attributable to the development of the agricultural sector. Agriculture remains the predominant activity in the rural African economy, with up to 90 percent of the region’s total population working in agriculture, and with youth accounting for 65 percent of that agricultural labour force. Some African countries have been able to harness their agricultural potential and lead the world in exporting certain crops, while more countries are still developing the technologies, skills, and infrastructure that will allow them to both feed their domestic populations and also introduce their goods to regional and international markets. But many of the Nigerian’s youth who work in the agricultural sector face obstacles that prevent their farms from being fully productive. They do not use enhancing materials such as fertilizers that could increase agricultural output. In examining the initial role of the agricultural sector in Nigeria, the sector is seen to be an indispensable sector in establishing the framework for the nation’s economic growth. It is advisable that Nigeria should improve her agricultural sector. First and foremost, more effort should be put in promoting employment of more labour force for higher productivity to promote economic growth and development. This will not only help facilitate employment of rural migrants but also satisfy the increasing demand for labour in the growing agricultural sector. Agriculture could be promoted by tax breaks, direct subsidies and most importantly, by removing price controls on agricultural products.
THE HARRIS-TODARO MODEL OF MIGRATION
The Harris-Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income. In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labour market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the sector.
The formal statement of the equilibrium condition of the Harris-Todaro model is as follows:
Let wr be the wage rate (marginal productivity of labour) inn the rural agricultural sector.
Let le be the total number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
Let lus be the total number of job seekers, employed and unemployed, in the urban sector.
Let wu be the wage rate in the urban sector, which could possibly be set by government with minimum wage law.
Rural to urban migration will take place if:
Wr > le/lus wu
Urban to rural migration will occur if:
Wr < le/lus wu
At equilibrium:
Wr = le/lus wu
Therefore, migration from rural areas to urban areas will increase if:
Urban wages (wu) increase in the urban sectors (le), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and includes informal sector growth, this behaviour is economically rational and utility-maximizing in the context of the Harris-Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
Okere success chigoziem
2017/243145
Successchigoziem@gmail.com
Keresuccess.blogspot.com
HARRIS TODARO MODEL OF MIGRATION
INTRODUCTION
The Harris–Todaro model, named after John R. Harris and Michael Todaro , is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
The main idea of the Harris-Todaro model is that labour migration in underdeveloped countries is due to rural-urban differences in average expected wages rather than actual wages. The migrants consider the various opportunities of employment available to them in rural and urban sectors and choose the one that maximizes their expected wages from migration.
The minimum urban wage is substantially higher than the rural wage. If more employment opportunities are created in the urban sector at the minimum wage, the expected will rise and rural-urban migration will increase. Expected wages are measured by the difference in real urban income and rural agricultural income and the probability of a migrant’s getting an urban job. In fact, a migrant compares his expected income for a given time horizon in the urban sector with his prevailing average rural income and migrates if the former is more than the latter.
Thus migration in the Harris-Todaro modal is viewed as the wage or income gap between the urban and the rural sectors. But all migrants cannot be absorbed in the urban sector at high wages. Many fail to find a job and get employment in the informal urban sector at wages which are even lower than in the rural sector. Thus they join the queue of the underemployed or disguised unemployed in the urban sector
Harris-Todaro model of the rural-urban migration process is revisited under an agent-based approach. The migration of the workers is interpreted as a process of social learning by imitation, formalized by a computational model. By simulating this model, we observe a transitional dynamics with continuous growth of the urban fraction of overall population toward an equilibrium. Such an equilibrium is characterized by stabilization of rural-urban expected wages differential (generalized Harris-Todaro equilibrium condition), urban concentration and urban unemployment. These classic results obtained originally by Harris and Todaro are emergent properties of our model.
In this paper we turn upon the seminal Harris and Todaro work, which together with Todaro is considered one of the starting points of the classic rural-urban migration theory. The hypothesis and predictions of Harris-Todaro model have been subjected to econometric evaluation and have been corroborated by several studies. The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migration decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage. From this crucial assumption, as denominated by Harris-Todaro , is deduced that the migratory dynamics leads the economic system toward an equilibrium with urban concentration and high urban unemployment.
Now, we are motivated by the following question: can the crucial assumption and equilibrium with urban concentration and urban unemployment obtained from the original Harris-Todaro model be generated as emergent properties from the interaction among adaptative agents? In order to answer this question we implemented an agent-based computational model in which workers grope for best sectorial location over time in terms of earnings.
MAIN ARGUMENT OF THE MODEL
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
The formal statement of the equilibrium condition of the Harris–Todaro model is as follows:
Let wr be the wage rate (marginal productivity of labor) in the rural agricultural sector.
Let lc be the total number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
Let lus be the total number of job seekers, employed and unemployed, in the urban sector.
Let wu be the wage rate in the urban sector, which could possibly be set by government with a minimum wage law.
Rural to urban migration will take place if;
wr lc/lus(wu)
At equilibrium,
wr =lc/lus(wu)
With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.
Therefore, migration from rural areas to urban areas will increase if:
Urban wages (w u ) increase in the urban sector (l e ), increasing the expected urban income. Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (w r), decreasing the expected rural income.
Assumptions Of The Model:
The Harris-Todaro model is based on the following assumptions:
1. There are two sectors in the economy – the rural or agricultural sector (A) and the urban or manufacturing sector (M).
2. The model operates in the short run.
3. The marginal production of labour in agriculture (MPLA) and of industry (MPLM) are determined by their respective technologies.
4. Capital is available in fixed quantities in the two sectors.
5. There are L workers in economy with LA and LM numbers employed in the rural and urban sectors respectively.
6. The number of urban jobs available (LM) is exogenously fixed. In the rural sector some work is always available. Therefore, the total urban labour force LM comprises L-LAalong with an available supply of rural migrants.
7. The urban wage is fixed at WM and the rural wage at WA, WM> WA.
8. The rural wage equals the rural marginal product of labour and the urban wage is exogenously determined.
9. Rural-urban migration continues so long as the expected urban real income is more that the real agricultural income.
HARRIS TODARO MODEL OF MIGRATION AND IT’S APPLICATION TO NIGERIA’S ECONOMY
Throughout the developing world, countries are experiencing rapid rates of urbanization. In Africa using Nigeria as a case study, urban growth rates are among the highest in the world averaging about 7 percent annually, with several cities having growth rate in excess of 10 percent. Association with this urbanization has been a large increase in the open urban unemployment which generally exceeds 10 percent of the urban labor force and consists largely of young school leavers.
Although rapid urbanization and it’s associated unemployment is due partly to high population growth rates, rural-urban migration accounts for over half the growth of most African cities. At the same time, out-migration of labor from agriculture has been one factor leading to national food do and rising food prices in many African countries.
For these reasons, there is a widespread concern that the rate of rural-urban migration should be slowed. From Nigeria’s economic view point, the mass of unemployed coupled with at least seasonal labor deficits in rural areas represents under- utilization of resources and contributes to inequitable distribution of income.
Therefore, migration from rural areas to urban areas will increase if:
Urban wages increase in the urban sector, increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector, decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
LEWIS FEI RANIS (surplus labor theory)
Introduction
Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.
It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. [2] According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. [3] Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
BASICS OF THE MODEL
Depiction of Phase1, Phase2 and Phase3 of the dual economy model using average output.
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. [4] They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development [5] In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
According to Fei and Ranis, AD amount of labor (see figure) can be shifted from the agricultural sector without any fall in output. Hence, it represents surplus labor. After AD, MP begins to rise, and industrial labor rises from zero to a value equal to AD. AP of agricultural labor is shown by BYZ and we see that this curve falls downward after AD. This fall in AP can be attributed to the fact that as agricultural laborers shift to the industrial sector, the real wage of industrial laborers decreases due to shortage of food supply, since less laborers are now working in the food sector. The decrease in the real wage level decreases the level of profits, and the size of surplus that could have been re-invested for more industrialization. However, as long as surplus exists, growth rate can still be increased without a fall in the rate of industrialization. This re-investment of surplus can be graphically visualized as the shifting of MP curve outwards. In Phase2 the level of disguised unemployment is given by AK. [4] This allows the agricultural sector to give up a part of its labor-force until
Phase 3 begins from the point of commercialization which is at K in the Figure. This is the point where the economy becomes completely commercialized in the absence of disguised unemployment. The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor.
The amount of labor that is shifted and the time that this shifting takes depends upon:
1. The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits;
2. The nature of the industry’s technical progress and its associated bias;
3. Growth rate of population.
So, the three fundamental ideas used in this model are:
1. Agricultural growth and industrial growth are both equally important;
2. Agricultural growth and industrial growth are balanced;
3. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap .
This shifting of labor can take place by the landlords’ investment activities and by the government’s fiscal measures. However, the cost of shifting labor in terms of both private and social cost may be high, for example transportation cost or the cost of carrying out construction of buildings. In addition to that, per capita agricultural consumption can increase, or there can exist a wide gap between the wages of the urban and the rural people. These three occurrences- high cost, high consumption and high gap in wages, are called as leakages , and leakages prevent the creation of agricultural surplus. In fact, surplus generation might be prevented due to a backward-sloping supply curve of labor as well, which happens when high income-levels are not consumed. This would mean that the productivity of laborers with rise in income will not rise. However, the case of backward-sloping curves is mostly unpractical.
ASSUMPTIONS OF THE MODEL
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means thatthe supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
Lewis calls it as institutional wage because every worker gets this wage because of some institutional arrangements. This wages is equal to an average share of each worker in the total output in the subsistence sector. If market forces were allowed to operate in the subsistence sector labourers with zero margin productivity or those with a very low marginal productivity would not have received this wage.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion. Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector. Lewis in fact so much fascinated by the higher propensity to save of the capitalist sector that he even advocates a transfer of income from the subsistence sector to the capitalist sector. He feels that steps have to be taken to raise the rate of savings from 10% to 15% if the development of the economy has to be smooth.
Lewis growth theory of unlimited supply of labor’s application to Nigeria economy
Like the classical economists, Lewis believes that in many underdeveloped economies, an unlimited supply of labor is available at subsistence wage. Economic development takes place when capital accumulate as a result of the withdrawal of surplus labor for the subsistence sector to the capitalist sector. Lewis however, rejected the neo-classical assumption of full employment, market clearance and perfect competition, even though he saw it as a distant goal, along with Arrow. He explicitly recognized that not only the owner-operated agriculture but also the urban informal sector, lacking cooperating capital instead of land, was characterized by a system of bargaining rather than cooperative wages.
This theory has undergone several modification by Ranis and Fei, and Minami among others. They have pointed out that Lewis contribute a major way to transit growth theory, to the notion of development phases and sub-phase, en-route to modern economic growth. The Lewis theory is applicable to overpopulated developing countries under certain assumption. But, the model assumption of constant wage rate in capitalist sector until the supply of labor is exhausted from the subsistence sector was refuted. This is unrealistic assumption because the wage rate continues to rise overtime in the industrial sector. However, the most challenging of the assumptions of Lewis growth model is the notion that “labor surplus” was interpreted as zero marginal productivity of agricultural labor, a highly unlikely event, statistically or conceptually, and one which was subjected to rigorous attacked by Schultz, who introduced evidence from India to show the withdrawal of a large portion of the agricultural output. This claim was also repudiated by Sen, who pointed out that as people leave agricultural, those who remain work harder. Hence, this theory is one sided theory because Lewis does not consider the possibility of progress in the agricultural sector. As the industrial sector develops with the transfer of surplus labor, the demand for food and raw materials will rise which will, in turn, lead to the growth of the agricultural sector. Hence, the theory neglects total demand in the long run.
Trend of agricultural GDP and share of AGDP in Nigeria
Productivity in Agricultural sector has been rising but at a very slow pace while its contribution to Gross Domestic Product (GDP) was oscillating around 33 percent to 40 percent. This could be due to a number of reasons such as neglect of the sector after the oil boom of 1970s, the impediments in Land Use Act of Nigeria and the failure of the youths to be gainfully involved in agriculture in Nigeria (Figure 1). From 1981, the growth rate of agricultural GDP maintained a continuous rise but its sectorial contribution decline at decreasing rate till 2001 with a sharp rise in 2002 and a continuous decline till 2014.
Trends analysis of unemployment rate in Nigeria
The level of unemployment in Nigeria was stable, oscillating around 5 percent from 1981 to 1998 but rose significantly to two digit in 1999. The unemployment rate fell and rose marginally from 2000 to 2005 after which it remain on the upward trend till 2014. However, the rate of unemployment in the country was two digits above 12 percent from the beginning of the 21th century till date and majority of those affected are the youth (Figure 2).
Trend of share of agriculture in GDP and per capita income (GNIk)
The per capita income (in local currency unit – naira) rose at decreasing rate from 1981 to 1998, rising at increasing rate from 1999 till 2014. However, the agricultural contribution to productivity was rising and falling but fell in most of the years from 1981 to 2014. This suggests that agricultural productivity might not be responsible for the increase in income per head in Nigeria during the period (Figure 3).
CONCLUSION
In conclusion to the Lewis Ranis-Fei’s model (surplus labour theory), taking it to the real life situation, Stagnation has not been taken into consideration, and no distinction is made between labor through family and labor through wages. There is also no explanation of the process of self-sustained growth, or of the investment function. There is complete negligence of terms of trade between agriculture and industry, foreign exchange, money and price.
This study also investigates the effects of agricultural performance on inclusive growth in Nigeria, using the time series data from 1981 to 2014; the endogenous theory formed the theoretical framework. This theory explains the long run growth rate of an economy on the basis of endogenous factors as against exogenous factors of the neoclassical growth theory.
Ogbodo peace chinenyenwa
2017/249543
nenyepeace2010@gmail.com
peacenenye.blogspot.com
Harris-Todaro model of migration
Introduction
The context migration is a shift from one system mode of operation or enterprise to another. The Harris-Todaro model named after John R. Harris and Michael Todaro was developed in 1970 and used in development economics and welfare economics to explain some of the issues that concerns rural-urban migration. The model assumes that migration decision (i.e. the decision to move from one place to another) is based on expected income differentials between rural and urban areas rather than just wage differentials. This by implication shows that in a context of high urban unemployment, rural-urban migration will be economically rational if expected urban income is greater than expected rural income. In the model, when the expected wage in urban areas equals the marginal product of an agricultural worker, we say that an equilibrium level has been reached. The massive influx of rural migrant in the cities has been instrumental in breeding an overwhelmingly faster population growth in urban areas than in rural areas. Rural workers are lured to migrate by economic incentives as well as by other attractions of an urban life. While some migrants do manage to secure jobs in industries, the less fortunate ones get absorbed only in the urban informal sector and the rest wait for their own opportunity to get employed and thus increase the number of open urban unemployment. The most relevant idea of the Harris-Todaro model is that labor migration in underdeveloped countries is due to rural-urban differences in average expected wages rather than actual wages. The migrants consider the various opportunities of employment available to them in rural and urban sector and choose the one that maximize their expected wages from migration. The Harris-Todaro model can be compared with other models such as; Lewis’s model of rural-urban migration and the Fei-Ranis model on rural-urban migration. The Lewis model elaborated the unlimited supply of labor which explains the migration process from rural to urban areas in an underdeveloped economy. Unlimited supply of labor causes establishment of new industries and expansion of already existing industries without limit at current wage.
In the Lewis model, when people migrate from the subsistence sector to the modern sector, the wage should be higher in capitalist sector than in the subsistence sector by a small but fixed amount. In the Lewis model, migration is the result of concerted effort on surplus rural, labor to the industrial sector by developing the latter for capital formation. The Fei-Ranis model on rural-urban migration. The model is related to an underdeveloped economy having surplus labor but scarcity of capital. The higher part of the population engaged themselves in agricultural which are stagnant while the non-agricultural occupation uses small capital. In the model industries/industrial sectors also exist. The Fei-Ranis model of migration assumes that land is fixed in supply. They also assumed that population growth is taken as an exogenous phenomenon and there is dual economy consisting of a stagnant agricultural sector and an active industrial sector.
The key hypothesis of Harris and Todaro are that migrants react directly to economic incentives, earnings differentials, and the probability of getting a job at the destination, have influence on the migration decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage, exceed the rural wage. From this crucial assumption, as denominated by Harris-Todaro, is deduced that the migratory dynamics leads the economic system towards equilibrium with urban concentration and high urban unemployment. There was an analysis that the rural-urban migration by means of an agent-based computational model, takes into account the influence of the neighborhood in the migration decision. The inclusion of the influence of neighbors was done via an Ising like model. The economic analogous to the external field in the Ising Hamiltonian was the differential of expected wages between urban and rural sectors. Therefore, the crucial assumption of Harris and Todaro were taken for granted. Now, we are motivated by the following question: can the crucial assumption and equilibrium with urban concentration and urban unemployment obtained from the original Harris-Todaro model be generated as emergent properties from the interaction among adaptative agents? In order to answer this question we implemented an agent-based computational model in which workers grope for best sectorial location over time in terms of earnings. The economic system simulated is characterized by the assumption originally made by Harris and Todaro. The paper is arranged as follows. Section describes the analytical Harris-Todaro model showing its basic equilibrium properties. In Section we present the implementation of the computational model via an agent-based simulation and compare its aggregate regularities with the analytical equilibrium properties. Section shows concluding remarks. Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The differences between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods.
The main drawback of this model is that it does not incorporate the costs of rural-urban migration or the relatively higher costs of urban living which the migrants have to incur in the urban sector. Compared to the real world, migration from the rural to the urban areas is due to the fact that jobs in the rural area might not fit in to the trends of the day thereby luring the individuals to migrate to the urban area. They can term this to be the search for greener pasture because those incentives that they fill are gotten from urban area will be their only pursuit. But in the real sense it will be better for individuals in the rural sector to concentrate on agriculture, in other to create job opportunities and to increase income circulation. Wages been paid to laborers in the rural setting, given an increase in agriculture, might be higher than wages paid in urban sectors and this can reduce migration from the rural to the urban drastically.
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
According to this model, the economy in an underdeveloped country was divided into two parts namely; the subsistence sector and the capitalist sector. The subsistence sector is featureed by agricultural sector while the capitalist sector is featured by manufacturing of goods and services whereby labor is employed for the sole purpose of production. The subsistence sector, that is the agricultural sector is considered to be labor intensive, meanwhile, the capitalist sector can be either private or public. The basic assumption of the model is that there exists surplus labor in the subsistence sectors. It includes labor whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labor comprises farmers, agricultural laborers, petty traders, domestic servants and women. The surplus labor in the agriculture sector acts as a source of unlimited supply of labor for the manufacturing sector. By unlimited supply of labor, Lewis means that the supply of labor is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes into account the economic situation of unemployment and underemployment of resources, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model , saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Reg no: 2017/249320
Economics/philosophy
Dencitychidera@gmail.com
Harris Todaro model of migration. In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market are perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium, there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary driver of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
The Harris-Todaro model produced two powerful policy results. The first concerns the policy of formal-sector job creation to employ the unemployed (who, in the Harris-Todaro model, are all in urban areas, because that is where the formal-sector jobs are assumed to be located). Such a policy, they concluded, would increase the formal sector labor force by more than the number of new jobs created, thereby raising the number of urban unemployed. Thus, the solution to urban unemployment is not to create urban employment. The second policy option that Harris and Todaro considered was a policy of rural development. If such a program could increase the rural traditional-sector wage, unemployment would then fall. Thus, in the Harris-Todaro model, the solution to urban unemployment is rural development. Soon after the model was published, the government of Kenya followed the Harris-Todaro precepts by putting into place an integrated program of rural development. The result was that unemployment in Kenya fell.
THE ASSUMPTIONS
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors is the types of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
Ya=AaN (1)
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a < 1 are parametric constants.
Both goods and labor markets are perfectly competitive. Nevertheless, there is segmentation in the labor market due to a high minimum urban wage politically determined.
In the rural sector, the real wage, perfectly flexible, is equal to the marginal productivity of labor in this sector:
Wa=AaN p, (3)
where Wa is the real wage and p is the price of the agricultural good, both expressed in units of manufactured good. In the urban sector, a minimum wage, wm, is assumed fixed institutionally at a level above equilibrium in this labor market. It can be formalized as
Wa=AaN , such that Nm 0 and g > 0 are a parametric constants. g is the elasticity of p with respect to the ratio Ym/Ya.
The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption, there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living in the rural sector are employed at any period. Then at any period, the following equality is verified:
Na+Nu=N (6)
B. Temporary Equilibrium
Given a parametric constant vector (Aa, Am,f, a,r,g), an initial urban population Nu, and a minimum wage wm one can calculate the temporary equilibrium of the economic system by using eqs. (1 – 6).
From eq. (4) one can find the employment level in the manufacturing sector
Nm= () (7)
Replacing eq. (7) in eq. (2) we get the production level of the manufacturing sector
Ym=Am () (8)
From eq. (6) one can obtain the relation
Na+N-Nu (9)
which is used with eq. (1) to obtain the agricultural production
Ya=Aa(N-Nu) (10)
The Long-Run Equilibrium
Harris and Todaro, in determining the long-run equilibrium, i.e., the absence of a net rural-urban migratory flow, argue that the rural workers, in their decision on migrating to the urban area, estimate the expected urban wage, defined as
The ratio Nm/Nu, which is the employment rate, is estimative of the probability that a worker living in the urban sector gets a job in this sector.
As mentioned before, the key assumption of the model of Harris and Todaro is that there will be a migratory flow from the rural to the urban sector while the expected urban wage is higher than the rural wage. Thus, the long-run equilibrium is attained when the urban worker population reaches a level such that the expected urban wage equates to the rural wage:
Lewis-Fei-Rannis, surplus labour theory also known as an economic growth model. Fei and Ranis assume that MPPL is zero during the early phases of economic development, which has been criticized by Harry T.Oshima and some others on the grounds that MPPL of labor is zero only if the agricultural population is very large, and if it is very large, some of that labor will shift to cities in search of jobs. In the short run, this section of labor that has shifted to the cities remains unemployed, but over the long run it is either absorbed by the informal sector, or it returns to the villages and attempts to bring more marginal land into cultivation. They have also neglected seasonal unemployment, which occurs due to seasonal change in labor demand and is not permanent.
It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is an augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to the economic development of underdeveloped countries.
Fei and Ranis emphasized strongly the industry-agriculture interdependency and said that robust connectivity between the two would encourage and speed up development. If agricultural laborers look for industrial employment, and industrialists employ more workers by use of larger capital good stock and labor-intensive technology, this connectivity can work between the industrial and agricultural sectors. Also, if the surplus owner invests in that section of the industrial sector that is close to the soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized. They took the example of Japan’s dualistic economy in the 19th century and said that connectivity between the two sectors of Japan was heightened due to the presence of a decentralized rural industry which was often linked to urban production. According to them, economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision-making powers and use industrial capital and consumer goods for agricultural practices.
Chukwudebelu Chidera Christian
Economics/philosophy
Dencitychidera@gmail.com
Name:Chiedozie Stephanie chizoba
Reg no:2017/251644
Dept:Economics/political science(CSS)
ANSWER
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector.Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development.In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
So, the three fundamental ideas used in this model are:Agricultural growth and industrial growth are both equally important;
Agricultural growth and industrial growth are balanced;
Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap.
THE HARRIS–TODARO MODEL OF MIGRATION (HT MODEL)
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration,significant hypothesis of Harris and Todaro are that migrants react more to economic incentives, wage differentials, and the probability of finding work at the destination have great influence on the migraton decision. Which also means thatt rural-urban migration will occur which will make the urban expected wage surpass the rural wage.,Pritchett points out that migration can benefit developing countries and their population much more significantly than any aid attempts.
The model expect that unemployment is non-existent in the rural agricultural sector, it is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income is equal to the expected urban income.
Firstly, the main assumption of Harris and Todaro, the principle that rural-urban migration will occur while the urban expected wage exceed the rural wage, comes out as spontaneous upshot of interaction among adaptative agents.
Secondly, the migrating vigor created by agents that seek to adaptate to the economic environment that they co-makee leads the economy toward a long run equilibrium characterized by urban concentration with urban unemployment. When this long run equilibrium is reached, the generalized Harris-Todaro condition is satisfied, i.e., there is a stabilization of the rural-urban expected wage differential. Also migration from rural areas to urban areas will increase if:
Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model.
In conclusion
In the HT model, workers determine migration between the sectors based on their expected wages. Thus, the workers decide to migrate to the urban sector when their expected wages there are higher than those in the rural sector. It is assumed in the HT model that the urban wage is institutionally and legally fixed, so that as a result of the migration of workers, if there are more workers than the number of new jobs, some workers would necessarily be unemployed. They have to enter the urban informal sector and be unemployed or underemployed there.
The movement of migrants from developing countries to developed countries, shouldn’t necessarily be seen as detrimental to the plight of developing countries, as proponents of “brain drain” theory suggest. Remittances sent by migrants to their families at home amount to $328bn, this can help developing countries provide education, health and give them a vital source of foreign exchange for the purchase of capital which can help them get out of poverty and low income traps.
Furthermore, the fact that a significant proportion of migrants are not economic, but asylum seekers on humanitarian grounds would suggest that the Harris-Todaro model isn’t particularly useful in explaining world migration patterns.
Migration restrictions are imposed both in an international sense and sometimes internally – for example, see China, where nationals have to get permits (hukou) to reside in urban areas. The effect of this is to keep workers in rural areas to prevent a large source of unemployed workers in urban areas. The main reason for this is to prevent the social issues associated with overcrowding and the development of slums in urban areas. If deployed successfully – whilst being normatively unfair and ethically wrong – this could be quite successful at solving the issues associated with a swelling of urban populations and would maintain an equitable distribution of labour in rural areas. However this can be achieved, perhaps more effectively, and certainly more humanely, by increasing the benefits to staying in rural areas. For example by increase agricultural non-farm jobs. On the other hand wage subsidies are ineffective. A wage subsidy would increase the rural-urban expected wage differential (by either initially reducing unemployment, or through a higher urban wage) and thus encourage even more workers to migrate from farms to the city – in hope for a better life – creating even greater unemployment and would thereby fail in attempting to achieve an equitable labour distribution across sectors.
APPLICATIONS OF THESE MODELS IN NIGERIA
These models can be applied to the economy of Nigeria as Nigeria can be said to be classified into rural and urban sectors.And it is often noticed that individuals travel from rural sector to the urban sector for employment purposes not considering the amount of unemployment in the urban sector and this leads to fall in expectations.However a point of equilibrium is what Nigeria needs as government should ensure equitable development between both the rural and urban sector.
INTRODUCTION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
Lewis (1954) proposed a theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector.
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
COMPARISON OF THE MODELS
Dualistic models gained popularity over the single-commodity or single-sector theories in the 1950’s. A typical dualistic model in development economics contains two sectors, a traditional or agricultural sector in the rural area and a modern or manufacturing sector in the urban area. The most familiar single-sector model is the growth theory of Harrod-Domar (Harrod 1939 and 1948, Domar 1946).
The most representative and influential dualistic framework is that of Lewis (1954). The ideas of surplus labor, subsistence wages, and turning points in the development of a dualistic economy in Lewis were later rigorously and diagrammatically formalized by Ranis and Fei (1961). Ranis and Fei also showed how agricultural surplus could lead to the growth of industries. The production relations of a dual economy, according to Jorgenson (1961), was characterized by asymmetry. More precisely, he assumed that output in the agricultural sector was a function of land and labor alone (there is no capital accumulation in this sector), and was characterized by diminishing return to scale.
MAIN ARGUMENT OF THE MODELS
Citing the case of increasing gap between urban and agricultural earnings in Puerto Rico, Reynolds (1965) argues that minimum urban wages are politically determined, that is through legislation. Harberger (1971) distinguishes urban wages into the “protected-sector wages” and the “unprotected urban wages.” The former is above the market-clearing level and is believed to be held high by minimum wage laws, by collective bargaining agreements, or by the policy of the hiring company itself. It was the observation of a curious economic phenomenon in tropical Africa that led to the pioneering work of Harris-Todaro. The phenomenon was the continual and accelerating rural-urban labor migration despite the existence of positive marginal products in agriculture.
Todaro’s main contribution is the introduction of the probability of employment as an element in the decision making process of a potential migrant. He proposed what he called “a more realistic picture of labor migration in less developed countries .Todaro later on some others did not consider the informal urban sector explicitly, its employees (usually underemployed) not being distinguished from those who are not employed at all. The probability of landing a job, according to Todaro, depends on the number of newly created jobs in the modern sector, the size of the population of the urban unemployed, and the length of time a migrant has been in the urban area. At any time, jobs were allocated as if by lottery. An important extension in this direction was done by Harris- Todaro, where they formulated the idea that the rural wage is equated to the expected urban wage, into the now famous Harris-Todaro equation, or
wa =/3wm
where wa is the flexible wage in the agricultural sector which is equated to the value of the marginal product in that sector, /3 is the probability of employment, depending on the number of newly created jobs and the size of the population of the urban unemployed and wm is the wage in the manufacturing sector and is assumed to be fixed institutionally (either because of union activities or a friendly government towards to the workers in the modern sector) above the competitive level.
The Lewis (1954) theory of dualistic economic development provides the
contribution to theories of economic development particularly for labour-surplus and
resource-poor developing countries. In the Lewis theory, the economy is assumed to
comprise the agricultural and non-agricultural sectors. The agricultural sector is
assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow
the sharing rule and be equal to average productivity, which is also known as the
institutional wage. The non-agricultural sector has an abundance capital and resources
relative to labour. It pursues profit and employs labour at a wage rate higher than the
agricultural institutional wage by approximately 30 percent. The non-agricultural sector accumulates capital by drawing surplus labour out of the agricultural sector. The expansion of the non-agricultural sector takes advantage of the infinitely elastic supply of labour from the agricultural sector due to its labour surplus.
Ranis and Fei (1961) formalized Lewis’s theory by combining it with Rostow’s
(1956) three “linear-stages-of-growth” theory.
ASSUMPTIONS OF THE MODELS
Despite its popularity among economists, some of the assumptions of the HT and Lewis-Fei-Ranis models have been subjected to criticism and gone under revision ever since it was developed. Some of the assumptions are:
Migration is a primarily economic decision.
There is no unemployment in the rural sector and it is perfectly competitive such that wage is equal to marginal product.
The lottery style job allocation excludes investment in job search on the part of the immigrants
The informal sector is not explicitly modelled.
There is not enough evidence to support the assumption of a rigid wage in the modern sector. Moreover, besides trade union pressure or minimum wage legislation, the wage differentials among sectors could be explained as well by, say, firm- specific training costs.
The issue of discount rates and rational migrants is ignored.
Members of the labour force rationally compare the expected value potential wages to current wages to make the decision to migrate or not.
The influence on decision making of risk and risk attitudes on the part of the potential immigrants is not included.
Differentials in skill levels among the migrants are not accounted for.
Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector.
CONCLUSION
It should be noted that all the wage incomes are in real terms. In Harris-Todaro, the urban output served as numeraire.
Capital and labor, both employed in both sectors. Capital is assumed to flow freely intersectorally. We find that in this two-sector-two-input model, an Harris-Todaro economy should tax its import competing manufacturing sector or subsidize its agricultural sector and no import tariff should be levied on the imports of manufactured goods.
We consider the risk of unemployment in the urban sector and risk aversion on the part of the jobseekers. It is clear that employment risk and risk aversion should deter migration and the urban unemployment rates so predicted should be closer to what was reported. An interesting result is that the optimal tariff is necessarily positive if the job-seekers are risk averse and no production subsidy is used.
References
Harris, John R. and Michael P. Todaro, “Migration, Unemployment and Development: A
Two-Sector Analysis” American Economic Review 60 (1970), 126-42.
Hazari, B. R. and P. M. Sgro, “Urban-Rural Structural Adjustment, Urban
Unemployment with Traded and Non-traded Goods,” Journal of Development
Economics 35 (1991), 187-196.
Marjit, Sugata, “Agro-based Industry and Rural-Urban Migration: the Case for an Urban
Employment Subsidy,” Journal of Development Economics 35 (1991), 393-398.
THE LEWIS-FEI RANIS MODEL(SURPLUS LABOUR THEORY)
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.[ According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector.Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries. one of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development.In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
Assumptions of the Lewis Model:
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion.
Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector.
Some of the objections against Lewis’s model are as follows:
1) The assumption that disguised unemployment exists in the agriculture sector has not been accepted by many economists. Schultz, Viner, Heberler and Hopper are a few of such economists. According to them, the production in the subsistence sector will be affected when labour is withdrawn from it.
(2) Lewis ignored the cost involved in training the unskilled worker transferred from the subsistence sector. Even if it is obtained at a constant wage rate, so for as its transfer from the subsistence sector is concerned, the supply curve may slope upwards so far as the capitalist, sector is concerned if the cost of training rises as more and more labour is transferred.
(3) When labour is transferred from the subsistence sector share of agricultural output falling to each one left in the agricultural sector will go a rising. This means the institutional wage will go on rising with every transfer and so will be the wages paid in the capitalist sector.
(4) The model assumes that, besides labour, there is unlimited supply of entrepreneurs in the capitalist sector. This is not true in the case of many of the underdeveloped countries.
(5) It is wrong to assume that a capitalist will always re-invest their profits. They to can indulge in un-productive pursuits. They can use their profits for speculative purposes.
(6) It is also wrong to assume that landlords always squander away their savings. The role of landlords of Japan in industrialisation of the country is well known.
THE HARRIS-TODARO MODEL OF MIGRATION.
The Harris-Todaro model of the rural-urban migration process is revisited under an agent-based approach. The migration of the workers is interpreted as a process of social learning by imitation, formalized by a computational model. By simulating this model, we observe a transitional dynamics with continuous growth of the urban fraction of overall population toward an equilibrium. Such an equilibrium is characterized by stabilization of rural-urban expected wages differential (generalized Harris-Todaro equilibrium condition), urban concentration and urban unemployment. These classic results obtained originally by Harris and Todaro are emergent properties of our model.
Assumptions
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 0 are a parametric constants. g is the elasticity of p with respect to the ratio Ym/Ya.
The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified:
B. Temporary Equilibrium
Given a parametric constant vector (Aa,Am,f,a,r,g), an initial urban population Nu, and a minimum wage wm one can calculate the temporary equilibrium of the economic system by using eqs.
From eq. ne can find the employment level at the manufacturing sector
Replacing eq. in eq. we get the production level of the manufacturing sector
From eq. one can obtain the relation
which is used with eq. to obtain the agricultural production
By using eqs. the terms of trade are determined
Finally, by using eqs. the rural wage in units of manufacturated good is obtained
In sum, the vector (Nm,Ym,Na,Ya,p,wa) configures a temporary equilibrium that might be altered whether occurs a migration of workers, induced by the differential of sectorial wages, which changes the sectorial distribution of overall population.
C. The Long Run Equilibrium
Harris and Todaro, in determining the long run equilibrium, i.e., the absence of a net rural-urban migratory flow, argue that the rural workers, in their decision on migrating to the urban area, estimate the expected urban wage, , defined as:
The ratio Nm/Nu, which is the employment rate, is an estimative of the probability that a worker living at urban sector gets a job in this sector.
As mentioned before, the key assumption of the model of Harris and Todaro is that there will be a migratory flow from the rural to the urban sector while the expected urban wage is higher than the rural wage. Thus, the long run equilibrium is attained when the urban worker population reaches a level such that the expected urban wage equates the rural wage:
This equality is known in the economic literature as the Harris-Todaro condition. Harris and Todaro argue that the differential of expected wages in eq. can be a constant value d ¹ 0. When this differential reaches d, the net migration ceases. This generalized Harris-Todaro condition can be expressed as follows:
The level of the urban population that satisfies the eq. i.e., the equilibrium urban share = /N, is determined from the solution of the equation resulting from substitution of equations in eq. :
The solution of eq. is parametrized by the vector (Aa,Am,r,g,a,f,wm).
Harris and Todaro, in order to evaluate the stability of the long run equilibrium, postulate a mechanism of adjustment that is based on the following function of sign preservation
RELATING THE HARRIS-TODARO MODEL OF MIGRATION TO NIGERIAN ECONOMY.
Using ikpoba-oha community in Edo state as case study.
Migration and remittances have a strong, significant impact on the socio-economic development on the family in particular and society in general like in Ikpoba-Okha, it has uplifted the socio-economic level of the people as several household members have benefited immensely from the remittances received. This is a clear indication that remittances are responsible for some of the evolutionary changes in Ikpoba–Okha, not only on the satisfying of the basic needs which include food, clothing, housing and education but also touching the socio-economic life of the people, by transforming many families from tenant-hood to house owner, making many unemployed to be business owners by virtue of the money received, etc.
Name:chiedozie Stephanie chizoba
Reg no:2017/251644
Dept:Economics/political science (CSS)
Answer
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector.[3] Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development.In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
So, the three fundamental ideas used in this model are:Agricultural growth and industrial growth are both equally important;
Agricultural growth and industrial growth are balanced;
Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap.
THE HARRIS–TODARO MODEL OF MIGRATION (HT MODEL)
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration,significant hypothesis of Harris and Todaro are that migrants react more to economic incentives, wage differentials, and the probability of finding work at the destination have great influence on the migraton decision. Which also means thatt rural-urban migration will occur which will make the urban expected wage surpass the rural wage.,Pritchett points out that migration can benefit developing countries and their population much more significantly than any aid attempts.
The model expect that unemployment is non-existent in the rural agricultural sector, it is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income is equal to the expected urban income.
Firstly, the main assumption of Harris and Todaro, the principle that rural-urban migration will occur while the urban expected wage exceed the rural wage, comes out as spontaneous upshot of interaction among adaptative agents.
Secondly, the migrating vigor created by agents that seek to adaptate to the economic environment that they co-makee leads the economy toward a long run equilibrium characterized by urban concentration with urban unemployment. When this long run equilibrium is reached, the generalized Harris-Todaro condition is satisfied, i.e., there is a stabilization of the rural-urban expected wage differential.
Also migration from rural areas to urban areas will increase if:
Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model.
In conclusion
In the HT model, workers determine migration between the sectors based on their expected wages. Thus, the workers decide to migrate to the urban sector when their expected wages there are higher than those in the rural sector. It is assumed in the HT model that the urban wage is institutionally and legally fixed, so that as a result of the migration of workers, if there are more workers than the number of new jobs, some workers would necessarily be unemployed. They have to enter the urban informal sector and be unemployed or underemployed there.
The movement of migrants from developing countries to developed countries, shouldn’t necessarily be seen as detrimental to the plight of developing countries, as proponents of “brain drain” theory suggest. Remittances sent by migrants to their families at home amount to $328bn, this can help developing countries provide education, health and give them a vital source of foreign exchange for the purchase of capital which can help them get out of poverty and low income traps.
Furthermore, the fact that a significant proportion of migrants are not economic, but asylum seekers on humanitarian grounds would suggest that the Harris-Todaro model isn’t particularly useful in explaining world migration patterns.
Migration restrictions are imposed both in an international sense and sometimes internally – for example, see China, where nationals have to get permits (hukou) to reside in urban areas. The effect of this is to keep workers in rural areas to prevent a large source of unemployed workers in urban areas. The main reason for this is to prevent the social issues associated with overcrowding and the development of slums in urban areas. If deployed successfully – whilst being normatively unfair and ethically wrong – this could be quite successful at solving the issues associated with a swelling of urban populations and would maintain an equitable distribution of labour in rural areas. However this can be achieved, perhaps more effectively, and certainly more humanely, by increasing the benefits to staying in rural areas. For example by increase agricultural non-farm jobs. On the other hand wage subsidies are ineffective. A wage subsidy would increase the rural-urban expected wage differential (by either initially reducing unemployment, or through a higher urban wage) and thus encourage even more workers to migrate from farms to the city – in hope for a better life – creating even greater unemployment and would thereby fail in attempting to achieve an equitable labour distribution across sectors.
APPLICATIONS OF THESE MODELS IN NIGERIA
These models can be applied to the economy of Nigeria as Nigeria can be said to be classified into rural and urban sectors.And it is often noticed that individuals travel from rural sector to the urban sector for employment purposes not considering the amount of unemployment in the urban sector and this leads to fall in expectations.However a point of equilibrium is what Nigeria needs as government should ensure equitable development between both the rural and urban sector.
THE LEWIS-FEI RANIS MODEL(SURPLUS LABOUR THEORY)
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.[ According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector.Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries. one of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development.In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
Assumptions of the Lewis Model:
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion.
Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector.
Some of the objections against Lewis’s model are as follows:
1) The assumption that disguised unemployment exists in the agriculture sector has not been accepted by many economists. Schultz, Viner, Heberler and Hopper are a few of such economists. According to them, the production in the subsistence sector will be affected when labour is withdrawn from it.
(2) Lewis ignored the cost involved in training the unskilled worker transferred from the subsistence sector. Even if it is obtained at a constant wage rate, so for as its transfer from the subsistence sector is concerned, the supply curve may slope upwards so far as the capitalist, sector is concerned if the cost of training rises as more and more labour is transferred.
(3) When labour is transferred from the subsistence sector share of agricultural output falling to each one left in the agricultural sector will go a rising. This means the institutional wage will go on rising with every transfer and so will be the wages paid in the capitalist sector.
(4) The model assumes that, besides labour, there is unlimited supply of entrepreneurs in the capitalist sector. This is not true in the case of many of the underdeveloped countries.
(5) It is wrong to assume that a capitalist will always re-invest their profits. They to can indulge in un-productive pursuits. They can use their profits for speculative purposes.
(6) It is also wrong to assume that landlords always squander away their savings. The role of landlords of Japan in industrialisation of the country is well known.
THE HARRIS-TODARO MODEL OF MIGRATION.
The Harris-Todaro model of the rural-urban migration process is revisited under an agent-based approach. The migration of the workers is interpreted as a process of social learning by imitation, formalized by a computational model. By simulating this model, we observe a transitional dynamics with continuous growth of the urban fraction of overall population toward an equilibrium. Such an equilibrium is characterized by stabilization of rural-urban expected wages differential (generalized Harris-Todaro equilibrium condition), urban concentration and urban unemployment. These classic results obtained originally by Harris and Todaro are emergent properties of our model.
Assumptions
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a 0 and g > 0 are a parametric constants. g is the elasticity of p with respect to the ratio Ym/Ya.
The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified:
B. Temporary Equilibrium
Given a parametric constant vector (Aa,Am,f,a,r,g), an initial urban population Nu, and a minimum wage wm one can calculate the temporary equilibrium of the economic system by using eqs.
From eq. ne can find the employment level at the manufacturing sector
Replacing eq. in eq. we get the production level of the manufacturing sector
From eq. one can obtain the relation
which is used with eq. to obtain the agricultural production
By using eqs. the terms of trade are determined
Finally, by using eqs. the rural wage in units of manufacturated good is obtained
In sum, the vector (Nm,Ym,Na,Ya,p,wa) configures a temporary equilibrium that might be altered whether occurs a migration of workers, induced by the differential of sectorial wages, which changes the sectorial distribution of overall population.
C. The Long Run Equilibrium
Harris and Todaro, in determining the long run equilibrium, i.e., the absence of a net rural-urban migratory flow, argue that the rural workers, in their decision on migrating to the urban area, estimate the expected urban wage, , defined as:
The ratio Nm/Nu, which is the employment rate, is an estimative of the probability that a worker living at urban sector gets a job in this sector.
As mentioned before, the key assumption of the model of Harris and Todaro is that there will be a migratory flow from the rural to the urban sector while the expected urban wage is higher than the rural wage. Thus, the long run equilibrium is attained when the urban worker population reaches a level such that the expected urban wage equates the rural wage:
This equality is known in the economic literature as the Harris-Todaro condition. Harris and Todaro argue that the differential of expected wages in eq. can be a constant value d ¹ 0. When this differential reaches d, the net migration ceases. This generalized Harris-Todaro condition can be expressed as follows:
The level of the urban population that satisfies the eq. i.e., the equilibrium urban share = /N, is determined from the solution of the equation resulting from substitution of equations in eq. :
The solution of eq. is parametrized by the vector (Aa,Am,r,g,a,f,wm).
Harris and Todaro, in order to evaluate the stability of the long run equilibrium, postulate a mechanism of adjustment that is based on the following function of sign preservation
RELATING THE HARRIS-TODARO MODEL OF MIGRATION TO NIGERIAN ECONOMY.
Using ikpoba-oha community in Edo state as case study.
Migration and remittances have a strong, significant impact on the socio-economic development on the family in particular and society in general like in Ikpoba-Okha, it has uplifted the socio-economic level of the people as several household members have benefited immensely from the remittances received. This is a clear indication that remittances are responsible for some of the evolutionary changes in Ikpoba–Okha, not only on the satisfying of the basic needs which include food, clothing, housing and education but also touching the socio-economic life of the people, by transforming many families from tenant-hood to house owner, making many unemployed to be business owners by virtue of the money received, etc.
REG NO: 2017/249347
DEPARTMENT: COMBINED SOCIAL SCIENCES(ECONOMICS/POLITICAL SCIENCE)
NAME: ABRAHAM KINGSLEY UBONG
REG NUM: 2017/249294
ECONOMICS / POLITICAL SCIENCE
EMAIL: kingsleyabraams@gmail.com
FEI-RANIS MODEL
The Fei-Ranis model assumed a closed economy and from my perspective this hinders growth especially in the industrial sector. And my opinion the economy should be opened is based on the fact that exports would improve the country’s terms of trade. The Fei-Ranis model also doesn’t take capital into account and does not indicate that the supply of land could be increased in the long run.
HARRIS-TODARO MODEL OF MIGRATION
The Harris-Todaro model of migration believes that the migration decision is based on expected income differentials between rural and urban areas. In my opinion, this model is flawed in that it assumes potential migrants are indifferent between a certain expected rural income and an uncertain expected urban income of the same magnitude and this
THE SURPLUS VALUE THEORY
The surplus labour theory show a dual system of economy; traditional sector (agricultural sector) and the modern sector (industrial sector). In this model the agricultural sector dominates in the developing countries and the industrial sector dominates in the developed country. The theory was initiated by Arthus Lewis and later modified by Fei and Ranis. In the model there exist surplus unproductive labour which are absorped by the industrial sector, as a result the increase in the employment of labour by the industrial sector the industrial sector expands until all the excess labour is absorped. All this processes bring the economy to a state whereby the industrial sector dominates, hence, the economy (country or nation) is said to be or assumed to be developed. The model argued that an economy transits from the stage of excess labour (first stage) to a stage of scarce labour (second stage) of economic development/advancement.
Using Nigeria as a Case Studies to Analyze the Model:
From the model, if excess labour in the Nigeria’s agricultural sector is moved from traditional sector (agricultural sector) to the modern sector (industrial sector), Nigeria as a developing country would advance to develop country where the higher percentage of the labour force is found in the modern sector (industrial sector). And at this stage of development the labour force in agricultural sector would not be excess or surplus.
But the question is, is this model really applicable in Nigeria? The answer is NO, because Nigeria government has shown zero or little interest in the development of industries, even our so called oil sectors is being neocolonized by the higher powers (industrialized countries). Therefore the excess labour in the traditional sectors have little or zero provisional employment in the modern sectors (industrial sectors). Hence traditional sector (agricultural sector) continues to have dominance in Nigeria economy, with less commercialized (export) product and majorly the one of subsistence agricultures.
B. HARRIS TODARO MODEL
The Harris-Todaro model is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The model was named after John R. Harris and Michael Todaro. The major assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. Therefore, rural migration in a context of high urban unemployment can be economically rational if expected urban income exceed expected rural income. The main position of the model analyzes that labour migration in underdeveloped countries is due to rural-urban differences in average expected wages rather than the actual wage.
The major assumption of Harris Todaro.
1. Migration flow exist when the expected urban wage is higher than the rural wage.
2. Long run equilibrium is attained when the urban worker population reaches a level such that the expected urban wage equates the rural wage.
3. There is fixed amount of capital and labour factor input.
4. Labour unemployment exist in urban sector because the fixed urban wage is higher than the flexible rural wage but in the side of capital, it is fully employed
5. All the urban Labour force has equal chance of getting job available for them
6. The model assumed a small economy where urban outputs is imported and rural output (agricultural outputs is exported.
Using Nigeria as a Case Study to Analyze the Model:
Nigerian government could decide to enhance industrial development, in urban areas employment would increase and this facilitate increase in getting urban employment in for rural dwellers. Let say because of the increase in employment a place like Abuja with a reasonably expected higher wage rate, many rural dwellers would migrate to Abuja to make more money since the wage rate is expected to be higher there. The outcome becomes, unemployment level in Abuja will increase more than it was before the industrial development took place, as a result, labour migrants would chose to accept the wage in urban sector than going back to the rural area to wait for vacancy that might take long run to come. When the wage rate in urban area equates the wage rate in rural area equilibrium level occurs.
Now the question is, is this model really applicable in Nigeria? YES. This is because rural dweller will always go to urban cities to look for greener pasture.
Name:okeke Mercy Adaugo.
Reg. No.: 2017/241449
(1) THE HARRIS-TODARO MODEL OF MIGRATION
In 1970, John R. Harris and Michael Todaro prostulated the Harris–Todaro model used in development and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the decision of migrating from the rural to the urban areas is based on expected income differentials between both areas rather than just wage differentials. This implies that rural-urban migration in the condition of high urban unemployment can be economically rational if expected urban income exceeds expected rural income. The difference between these sectors are the type of goods produced, the technology of production and the wage determination. The rural sector is specialized in the production of agricultural goods.
The Basic Assumptions of the Model
Todaro accepts the logistics of Lewis-Fei-Ranis model of rural-urban migration but only with reservations. According to him, this theory may correspond to the historical scenario of migration in the western socio-economic milieu but does not explain the trends of rural-urban migration in less developed countries
The Lewis model assumes that there would be faster capital accumulation, which will be invested in modern industry causing new jobs in abundance. It implies that there would be labour transfer at the rate proportional to capital accumulation.
But Lewis and his followers could not foresee that it could be possible only when technology would remain the same. But capital accumulation leads to capital-intensive industrial expansion based on advanced technologies, which yield high economic growth but there would be lesser labour absorption. The modern industry has limited labour absorption capacity.
Besides, Lewis’ assertion that rural sector has surplus labour and urban areas have full employment, does not hold true necessarily. Urban areas in less developed countries in particular do not provide full employment. According to the Planning Commission, in 1978, India had 5 per cent of the labour force in the urban areas unemployed whereas it was less than one per cent in rural areas.
Lastly, Todaro rejects Lewis-Fei-Ranis model for its assumption that there would exist constant real urban wages until the rural surplus labour exhausts. Todaro finds that in almost all less developed countries the urban wages have been on the rise.
Todaro’s model does not advocate simply the rural-urban wage differentials as the basis of migration as is claimed in all migration theories. According to him, the migrant is much rational and calculative in his decision to shift to a particular city.
He also takes into consideration not only the wage differentials but also the probability of getting a job in the urban area. Migration, thus, is determined more by rural-urban differences in expected earnings, rather than in actual earnings.
The formal statement of the equilibrium condition of the Harris–Todaro model is as follows:
Let wr be the wage rate (marginal productivity of labor) in the rural agricultural sector.
Let le be the total number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
Let lus be the total number of job seekers, employed and unemployed, in the urban sector.
Let wu be the wage rate in the urban sector, which could possibly be set by government with a minimum wage law.
Rural to urban migration will take place if:
W_r (L_e÷L_us)W_u …(ii)
At equilibrium,
W_r = (L_e÷L_us)W_u …(iii)
With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the possibility that any person moving from the rural area characterised by the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, as in equarion (iii), the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.
Therefore, migration from rural areas to urban areas will increase if Urban wages (wu) increase in the urban sector (le), increasing the expected urban income. Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
Relation of the model to the Nigerian Economy:
Harris-Todaro rural-urban migration model was able to (to an extent) describe the nature of underdeveloped nations like Nigeria which Lewis failed to consider in his model of surplus labour.
The model recognized that though there are developed or urbanised areas in Nigeria truly characterized by high wages and standard of living as compared to the rural areas, the extent of development cannot still be compared to that of the developed countries like the United States. Also, with the large population fluxing into the urban areas which is still not as developed as that of the western world, it creates unemployment, decrease in exports of our natural resources and increase in the prices of agricultural produce.
The evident way to solve this issue is to allow for equity in development. That is, simultaneously triggering development in all the areas or sectors of the Nigerian economy, rather than just the industrial sector so that everyone in the economy would have direct benefit from it instead of trying to migrate to places like Lagos State, Port-Harcourt,etc because of perceived greener pastures.
(2)Lewis-Fei-Ranis Model (Surplus labour theory)
Introduction
The Fei–Ranis model of economic growth is an extension of Lewis model and is also known as surplus labour model. It was developed by John C. H. Fei and Gustav Ranis. It is a structural change model which emphasizes on how economic development can be reached in an underdeveloped economy. It recognises that a dualistic economic system comprising of the primitive/subsistence agricultural sector and the industrial sector will together bring about economic growth.
The authors are of the opinion that development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is expansion of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, since there is assumed to be surplus labour, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Basics of the model
The Fei-Ranis growth model is a direct improvement on the perceived drawbacks of Lewis model. Some of which are:
* undermining of the role of agriculture in boosting the growth of the industrial sector
* not acknowledging that the increase in productivity of labor should take place prior to the labor shift between the two sectors
*lacks in the proper application of concentrated analysis to the change that takes place with agricultural development
Fei and Ranis brought about a concept known as the dual economy model of three growth stages where the development process was divided into 3phases.
In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
Phase 1:AL=MP=0 and AB=AP
Phase2:AP>MP
MP=Real wages=AB=Constant institutional wages (CIW)
Phase3:MP>CIW
So, the three fundamental ideas used in this model are:
*Agricultural growth and industrial growth are both equally important;
*Agricultural growth and industrial growth are balanced;
*Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap.
This shifting of labor can take place by the landlords’ investment activities and by the government’s fiscal measures. However, the cost of shifting labor in terms of both private and social cost may be high, for example transportation cost or the cost of carrying out construction of buildings. In addition to that, per capita agricultural consumption can increase, or there can exist a wide gap between the wages of the urban and the rural people.
CRITICISM OF THE MODEL
Fei–Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.
It has been asserted that Fei and Ranis did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed.
Fei and Ranis say, “It has been argued that money is not a simple substitute for physical capital in an aggregate production function. There are reasons to believe that the relationship between money and physical capital could be complementary to one another at some stage of economic development, to the extent that credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry.” This indicates that in the process of development they neglect the role of money and prices. They fail to differ between wage labor and household labor, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
Real life Application of the model
The Lewis-Ranis-Fei theory of dualistic economic development was employed as a framework to investigate China’s rapid growth over 1965-2002. It was discovered that China’s economic growth is mainly attributable to the development of the non-agricultural (industrial and service) sector, driven by rapid labour migration and capital accumulation. The estimates of the sectoral marginal productivity of labour indicate that China’s 1978 Economic Reform coincided with moving from phase one to phase two growth, as defined in the Lewis-Ranis-Fei model. This implies that phase three growth could be achieved by the commercialisation of the Chinese agricultural labour market.
This model can be applied to the Nigerian economy as it is characterized by abundance of agricultural activities. The emergence and popularization of industrialization in the economy has encouraged rapid movement of surplus labour from the agricultural sector to the industrial sector which has over the years brought about economic growth in the nation. But of recent, it has been discovered that it has only done more harm than good to the economy because it has led to over concentration on industrialization leading to reduction in agricultural produce and it’s exports. Which is a deviation from the major aim of the model.
FEI-RANIS MODEL OF ECONOMIC GROWTH
The Fei–Ranis model of economic growth is a dualism model in developmental economics that was developed by JOHN.C.H and GUSTAV RANIS and can be understood as an extension of the Lewis model which is also known as the surplus model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod-Domar model. saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors.
However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development
In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model.
In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared.
The decrease in the real wage level decreases the level of profits, and the size of surplus that could have been re-invested for more industrialization. However, as long as surplus exists, growth rate can still be increased without a fall in the rate of industrialization.
Phase 3 begins from the point of commercialization . This is the point where the economy becomes completely commercialized in the absence of disguised unemployment. The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor.
HARRIS-TODARO MODEL OF MIGRATION
The Harris-Todaro model, named after John R. Harris and Micheal Todaro is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
John Harris and Michael Todaro formulated the Harris-Todaro model to explain the puzzle. Harris-Todaro model had the following features listed below:
• First, real wages (adjusted for cost-of-living differences) are higher in urban formal-sector jobs than in rural traditional-sector jobs
• Second, to be hired for a formal-sector job, one has to be physically present in the urban areas where the formal-sector jobs are located.
• Third, as a consequence of the first two features, more workers search for formal-sector jobs than are hired, employers hire some of the job seekers but not all of them, and those not hired end up unemployed.
• Fourth, for equality to be maintained between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting is characterized by urban unemployment.
• fifth, any temporary difference in the expected wages between one sector and another is eroded as workers migrate from the low-expected-wage labor market to the high-expected-wage labor market.
Conclusion
Harris Todaro model explains some issues of rural-urban migration. That migration happens in case when expected rural income is higher than rural wages. In this case economy may have high inflation rates of unemployment and the equilibrium condition of this model is when expected rural wage is equal to rural wage.If government subsidize manufacturing sector Harris Todaro paradox may happen. According to the contributors, job creation instead of dealing with unemployment problem actually may cause increase of unemployment. This happens when urban-rural wage differential is high enough so rural workers move to the cities hoping to find a job with high wage. Obviously, not all these workers succeed in finding jobs which leads to unemployment.Another issue is inducing minimum wage which creates labor market distortions. Therefore, policy makers should not set the minimum wage rates.
In summary, simulations showed that different policies’ outcomes depend on elasticity of labor demand in different sectors and on marginal product of labor.As Harris and Todaro suggested the first-best policy would be subsidizing manufacturing along with restrictions of rural migration.
Uzoma Chinelo Maryann
2017/249470
chinelo.uzoma.249470@unn.edu.ng
ECONOMICS/PHILOSOPHY
THE HARRIS-TODARO MODEL OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration.
In the 1960s the government of newly independent Kenya faced a difficult situation: Unemployment in Nairobi and other major cities was high and apparently rising. To cope with this problem, Tripartite Agreements were reached in which both private-sector and public-sector employers agreed to increase employment in exchange for unions agreeing to hold wages at their current levels. Larger number of jobs was expected to reduce unemployment. However, in the event, urban unemployment appeared to have increased following the Tripartite Agreements rather than decreased, as far as anyone could tell.
POLICY IMPLICATIONS OF THE MODEL
The H-T model has far-reaching implications from the policy point of view. For example, if the government of the country concerned were successful in fostering industrial development in an urban area, employment would increase there.
The effect would be to increase the subjective productivity of getting urban employment in the minds of rural inhabitants. Migration would increase and the eventual effect of the new industrial development could be that urban unem¬ployment becomes higher that the level prevailing before the new development took place.
There will be some level of urban employment which ensures equilibrium in the sense that no further migration takes place. Potential migrants may take a long-term view in arriving at a decision. They may consider that their desire of obtaining an urban job will be higher after a waiting period of some months. Thus they will compare the present value of the sum of expected urban earnings with that of expected rural earnings.
They may be content to accept a low wage in the urban informal sector for some time. This might be a rational decision on a long-term basis. The root of the problem is the large difference between earnings in the modern industrial sector and those in the rural areas.
Often the former are well above the market clear¬ing levels for various reasons. The long-term solution to the problem lies in adopting policies for both urban and rural areas which reduces the real income differences between the two areas.
ASSUMPTIONS OF THE HARRIS-TODARO MODEL
1. Migration is stimulated primarily by rational economic consideration.
2. Migration is decided on the basis of expected, rather than actual, urban-rural wage differentials.
3. Probability of obtaining urban job is inversely related to the urban unemployment rate.
Francis Cherunilam, commenting on Todaro’s migration model, writes that while the model is correct in holding that there is no possibility of full employment in urban areas, it is not correct to assert that the act of migration is always rational and well-calculated. Todaro is also wrong in not giving any impor¬tance to non-economic factors in the migration process.
CONCLUSION
Lastly, Todaro rejects Lewis-Fei-Ranis model for its assumption that there would exist constant real urban wages until the rural surplus labour exhausts. Todaro finds that in almost all less developed countries the urban wages have been on the rise.
Todaro’s model does not advocate simply the rural-urban wage differentials as the basis of migration as is claimed in all migration theories. According to him, the migrant is much rational and calculative in his decision to shift to a particular city.
The Harris-Todaro’s model cited in real life can occur if adopted especially in a country like Nigeria where the rate of unemployment is really alarming mostly in our urban areas like the city of Lagos where we have different persons from different states and rural environments seeking better greener pasture thereby catalizing unemployment. Unemployment is increased here because the jobs available is way lower than the population. By exaggerations, the ratio of available jobs to population or man power is 1:15.
THE LEWIS-FEI-RANIS MODEL
The Fei–Ranis Model of Economic Growth is a dualism model in developmental economics or welfare economics . It was developed by John C. H. Fei and Gustav Ranis. It can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labour from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labour supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labour should take place prior to the labour shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development. In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
Fei and Ranis emphasized strongly on the industry-agriculture interdependency and said that a robust connectivity between the two would encourage and speedup development. If agricultural laborers look for industrial employment, and industrialists employ more workers by use of larger capital good stock and labor-intensive technology, this connectivity can work between the industrial and agricultural sector. Also, if the surplus owner invests in that section of industrial sector that is close to soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized. They took the example of Japan’s dualistic economy in the 19th century and said that connectivity between the two sectors of Japan was heightened due to the presence of a decentralized rural industry which was often linked to urban production. According to them, economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision-making powers and use industrial capital and consumer goods for agricultural practices.
ASSUMPTIONS OF THE MODEL
Fei–Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.
• It has been asserted that Fei and Ranis did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed.
• Fei and Ranis say, “It has been argued that money is not a simple substitute for physical capital in an aggregate production function. There are reasons to believe that the relationship between money and physical capital could be complementary to one another at some stage of economic development, to the extent that credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry.” This indicates that in the process of development they neglect the role of money and prices. They fail to differ between wage labour and household labour, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
• Fei and Ranis assume that MPPL is zero during the early phases of economic development, which has been criticized by Harry T. Oshima and some others on the grounds that MPPL of labour is zero only if the agricultural population is very large, and if it is very large, some of that labour will shift to cities in search of jobs. In the short run, this section of labour that has shifted to the cities remains unemployed, but over the long run it is either absorbed by the informal sector, or it returns to the villages and attempts to bring more marginal land into cultivation. They have also neglected seasonal unemployment, which occurs due to seasonal change in labour demand and is not permanent.
• Fei and Ranis assume a close model and hence there is no presence of foreign trade in the economy, which is very unrealistic as food or raw materials can not be imported. If we take the example of Japan again, the country imported cheap farm products from other countries and this made better the country’s terms of trade. Later they relaxed the assumption and said that the presence of a foreign sector was allowed as long as it was a “facilitator” and not the main driving force.
• The reluctant expansionary growth in the industrial sector of underdeveloped countries can be attributed to the lagging growth in the productivity of subsistence agriculture. This suggests that increase in surplus becomes more important a determinant as compared to re-investment of surplus, an idea that was utilized by Jorgenson in his 1961 model that centered around the necessity of surplus generation and surplus persistence.
• Stagnation has not been taken into consideration, and no distinction is made between labour through family and labour through wages. There is also no explanation of the process of self-sustained growth, or of the investment function. There is complete negligence of terms of trade between agriculture and industry, foreign exchange, money and price.
CONCLUSION
The Lewis-Fei Ranis Model grouped underdeveloped economy into two sectors which is the subsistence sector and the Capitalist sector. The subsistence sector(rural area) deals majorly with the agricultural sector which is based on the production of raw materials while the Capitalist sector(urban) deals majorly on manufacturing goods using the raw materials produced by the agricultural sector.
If the subsistence sector employs more workers to help in the production of raw material for the capitalist sector, it will help to reduce rural-urban migration which has been a major problem in most economy like Nigeria using Lagos state as an example.
Name: Ike Godswill Chinedu
Reg no: 2017/249515
Answer
1 The Lewis Fei-Ranis Model of (Surplus Labour Theory)
The Fei-Ranis model of economic growth was developed by John C. H. Fei and Gustar Ranis, and can also be regarded as the surplus labour model. It has also been understood to be a dualism model in development economics. It is an extension of the Lewis model. The model takes into consideration the presence of a dual economy, which comprises of the modern and primitive sectors and takes into account an economic situation of unemployment and underemployment. According to this theory, the primitive sector comprises of existing agricultural sector and considers the modern sector as rapidly growing but small industrial sector. The both sector exist together in the economy, such that there is augmentation of the industrial output. This was done through the transfer of labour supplied. And at the same stance, growth in agricultural sector must not be ignored or neglected and its output must be sufficient enough to support the whole economy with food and raw materials.
The assumptions of the model was rooted on the falls of the Lewis model in which; one, he underestimated the role of agriculture in boosting the growth of the industrial sector. It also did not acknowledge the fact that an increase in productivity of labour should take place as regards to the shift in labour between the two sectors. These two ideas were taken into considerations in the Fei-Ranis dual economy model of three growth stages. They further propose that the model lacks in their application of concentrated analysis to the changes that takes place with agricultural development. In phase one of the Fei-Ranis model, the elasticity of the agricultural labour force is infinite and thus suffers from a disguised unemployment. The marginal product of labour (MPL) is zero. This phase is therefore similar to the Lewis model. In the phase two of the model, there is a rise in agricultural productivity which leads to industrial growth such that it prepares the base for the next stage. In this stage there may be agricultural surplus, as average product (AP) increases, higher than marginal product and not also equal to the subsistence level of wages. Note that in phase one; MPL = 0 and thus, an actual amount of labour can be shifted from the agricultural sector without any fall in output. This therefore shows the surplus labour. While in the phase two, AP>MP and industrial labour rises to a value greater than zero and APL begins to fall. This fall in the APL is due to the agricultural labourers shift to the industrial sector, the real wage of the industrial labourers’ decreases due to shortage of food supply, since less labourers are now working in the food sector. The real wage decreases the level of profit and the size of surplus that could have been reinvested for more industrialization. Phase three, is the point of commercialization. This is where the economy becomes completely commercialized in the absence of disguised unemployment. Here the supply curve becomes steeper and both sectors starts equally for labour. In this phase, the amount of labour shifted and the time it takes, depends on; the growth surplus generated within the agricultural sector, and the growth of the industrial capital stock dependent on the growth of industrial profit and; the nature of the industry’s technical progress and its associated bias and; finally the growth rate of population.
The assumptions or fundamental ideas behind the model thus becomes;
Agricultural growth and industrial growth are both important
Agricultural growth and industrial growth are necessarily balanced
Only if the rate at which labour is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself from the Malthusian population trap. This shifting can take place through the landlord’s investment activities and through the government fiscal measures. Moreover, the cost of shifting of labour in terms of both private and social cost may be higher. Also the per capita agricultural consumption can increase, rather there could exist a wide gap between the wages of urban and rural workers. These three scenarios could be referred to as leakages, which prevent the creation of agricultural surplus.
Fei and Ranis laid a strong emphasis on the industry-agriculture relationship and suggested that a healthy relationship between the two would enhance development. They made reference to the japan dualistic economy in the 19th century and argued that connectivity between the two sectors of Japan was promoted by the decentralized rural industry which was linked to urban production. They further posit that economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision making powers and use industrial capital and consumer goods for agricultural practises. They developed a concept they labour utilization ratio R, which they defined as the unit of labour that can be productively employed (without redundancy) per unit of land.
Thus labour utilization is calculated as; R=ts/ot.
They also developed the concept of endowment ratio S, which is a measure of the relative availability of the two factors of production. It is given by; S=te/ot.
Where te is agricultural labour and; ot represents agricultural land. They finally developed the concept of non-redundancy coefficient T, being measured as; T= ts/te
These concepts together forms a relationship between T, R and S. therefore T can then be said to be calculated as; T=ts or ot/te or ot= R/S thus, T = R/S.
The mathematical relation shows that non-redundancy coefficient T, is directly related to labour utilization and inversely related to the endowment ratio. The Fei and Ranis model assumes constant returns to scale in the industrial sector like in the agricultural sector. They assumed the main factors of production to be capital and labour, the expansion path of the industrial sector thus given by a line OA0 A1, A2. As capital increases from K0 to K1 to K2 and labour increases from L0 to L1 to L2, the industrial output thus increases accordingly. According to the model, the main source of labour supply of the industrial sector is the agricultural sector, due to the redundancy in the agricultural labour force. Total industrial activity rises due to increase in the total supply of investment funds, leading increased industrial employment.
Agricultural surplus is seen as the produce from agriculture which surpasses the needs of the society for which it was produced, and may either be exported for income or stored for future use. Fei and Ranis in their model hypothesized that if this agricultural surplus is equivalent to the real wage, it is therefore known as the constant institutional wage hypothesis. It is also equal in value to the ratio of total agricultural output to the total agricultural population. If a section of the redundant agricultural labour force is removed from the total agricultural labour force and absorbed into the industrial sector, now the difference in the output produced by the remaining labour force and the real income of the labour force produces the total agricultural surplus of the economy. This surplus is produced by the reallocation of labour such that it is absorbed by the industrial sector. Thus, it could be seen as the use of hidden rural savings for the expansion of the industrial sector. We can therefore say that, the agricultural sector plays a crucial role of a wage fund. The unproductive labour force from the agricultural sector turns productive once it absorbed by the industrial sector simultaneously and produces an output, earning a total wage income. The agricultural surplus created is needed for consumption by the same workers who left for the industrial sector. The agricultural sector thus provides successfully not only the manpower for the production activities but also the wage funds required to run the process.
Importance of Agriculture in the Fei-Ranis model of Surplus Labour.
The model goes beyond, stating that agriculture plays a vital role in the development of the industrial sector unlike the Lewis model. They argued that the rate of growth of the industrial sector depends on the amount of total agricultural surplus and on the amount of profit that are earned in the industrial sector. The model focuses on the shifting of the focal point of the progress from the agricultural to the industrial sector. Fei and Ranis believed that this shifting takes place when investment fund from surplus and industrial profit are sufficiently large so as to purchase industrial capital goods like plants and machinery. Thus, the condition for a successful transformation by Fei and Ranis is that; the rate of increase of capital stock and rate of employment opportunities > Rate of population growth.
The Necessity of Labour Reallocation.
The essence of labour reallocation lies in the Engel’s law which posits that the part of income being spent on food decreases with an increase in the income level of an individual, even if there’s a rise in the actual expenditure on food. As underdeveloped country passes through development processes, labour is reallocated from the agricultural to the industrial sector. This labour reallocation becomes a necessity over time as consumers begin to want more of industrial good than agricultural good on relative terms. Although the Fei-Ranis model noted the importance of labour reallocation being linked to the need to need to produce more capital goods as opposed to the thought of industrial consumer goods following the theory of the Engel’s law. This is due to the fact that the assumption that the demand for industrial good is high seems to be unrealistic, as the real wage in the agricultural sector is very low and this prevents the demand for industrial goods. As the growth process observes a slow-increase in the consumer purchasing power, the dualistic economies follow the path of natural austerity, being characterised by more demand and thus, importance of capital goods industries when juxtaposed to the industrial goods industries.
In the Fei-Ranis model, it’s quite possible that technological progress takes place and there’s a shift to labour-saving production techniques, growth of the economy takes place with increases in profit but no economic development takes place. Since growth takes place with increases in profits but development is at a standstill and since employment and wages of labourers remain the same.
Weaknesses of the Fei and Ranis model.
The Fei and Ranis model failed to take into account the sluggish economic situation prevailing in the developing countries. If not, they would have noticed the backwardness existing in the agricultural sector was due to the institutional structure, primarily the system of feudalism that prevailed.
They assumed that MPPL is zero (I.e. MPPL = 0) during, the early phases of economic development, this has been criticized by Harry T. Oshima and some other economists that MPPL of labour is zero only if the agricultural population is very large and if it is very large, some of that labour will be shift to cities in search of jobs.
In the Fei-Ranis the question of whether MPL = 0 is that of an empirical one. The underdeveloped countries mostly exhibit seasonality in food production, which suggests that especially during favourable climatic conditions, for instance, that of harvesting or sowing, MPL would definitely be greater than zero (i.e. MPL > 0).
Application of the model in the real world.
The Lewis Fei-Ranis model of dualistic economic development was employed in china as a framework to investigate the rapid growth in china in 1965-2002. It discovered that the economic growth of china can be mainly attributed to the development of the non-agricultural sector which was the industrial and service sector, being driven rapid labour migration and capital accumulation.
Conclusion.
We can therefore conclude that since the Lewis Fei-Ranis model was not successful when applied to the study of the success of the rapid growth in China, thus is not applicable in the real world.
2 Harris-Todaro Model of Migration
The Harris-Todaro model, was named after John R. Harris and Michael Todaro. The model was developed in 1970. It was used in development and welfare economics to explain issues relating to rural-urrban migration. The primary assumption of this model is that, the decision to migrate is based the expected income differentials between rural and urban areas other than just wage differentials alone. This in essence means that rural-urban migration in acontext of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
In the model, equilibrium could be reached if the expected wage or actual wage adjusted for unemployment rate in urban areas is equal to the marginal product of an agricultural worker. It assumes that there’s no unemployment in the rural agricultural sector.it further assumes that rural agricultural production and subsequent labour market is perfectly competitive. Therefore, the agricultural rural wage is equal to agricultural marginal productivity. To be in equilibrium, the rural-urban migration rate will have to be equal to zero, since the expected rural income equals the expected urban income. Thus, in this equilibrium there will be a positive unemployment in the urban sector.
The equilibrium conditions is thus stated as follows;
Let Wr be the wage rate (i.e. marginal productivity of labour) in the rural agricultural sector.
Let Le be the total number of jobs available in the urban sector, which should be equal to the number of employed workers.
Let Lus be the total number of job seekers, both employed and unemployed, in the urban sector.
Let Wn be the wage rate in the urban sector which could possibly be set by government with a minimum wage law.
Therefore, rural to urban migration will take place if:
Wr Le/Lus Wu
And at equilibrium if:
Wr = Le/Lus Wu
Matching workers randomly to the available jobs, the ratio of the available jobs to the overall job seekers thus gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job therefore in equilibrium, the agricultural wage is equal to the expected urban wage rate, which can be calculated as the urban wage multiplied by the employment rate.
In conclusions, migration from rural to urban areas will only increase if:
Urban wages increase the urban sectors, leading to an increase in the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector, leading to a decrease in the expected rural income.
Therefore, though this migration might create unemployment, causing growth in the informal sector, this behaviour is economically rational and maximizes utility in the Harris-Todaro model. Therefore, for the fact that the economic agents migrating are well informed or have complete information about rural and urban wage rates and probabilities of being employed, they will make an expected income maximizing decision
Application to the Real World
The model was successful in explaining the internal migration within China as the regional income gap has been proved to be a primary drive to rural-urban drift. While urban unemployment is local government main concern in many cities.
Uzoma Chinelo Maryann
2017/249470
chinelo.uzoma.249470@unn.edu.ng
THE HARRIS-TODARO MODEL OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration.
In the 1960s the government of newly independent Kenya faced a difficult situation: Unemployment in Nairobi and other major cities was high and apparently rising. To cope with this problem, Tripartite Agreements were reached in which both private-sector and public-sector employers agreed to increase employment in exchange for unions agreeing to hold wages at their current levels. Larger number of jobs was expected to reduce unemployment. However, in the event, urban unemployment appeared to have increased following the Tripartite Agreements rather than decreased, as far as anyone could tell.
POLICY IMPLICATIONS OF THE MODEL
The H-T model has far-reaching implications from the policy point of view. For example, if the government of the country concerned were successful in fostering industrial development in an urban area, employment would increase there.
The effect would be to increase the subjective productivity of getting urban employment in the minds of rural inhabitants. Migration would increase and the eventual effect of the new industrial development could be that urban unem¬ployment becomes higher that the level prevailing before the new development took place.
There will be some level of urban employment which ensures equilibrium in the sense that no further migration takes place. Potential migrants may take a long-term view in arriving at a decision. They may consider that their desire of obtaining an urban job will be higher after a waiting period of some months. Thus they will compare the present value of the sum of expected urban earnings with that of expected rural earnings.
They may be content to accept a low wage in the urban informal sector for some time. This might be a rational decision on a long-term basis. The root of the problem is the large difference between earnings in the modern industrial sector and those in the rural areas.
Often the former are well above the market clear¬ing levels for various reasons. The long-term solution to the problem lies in adopting policies for both urban and rural areas which reduces the real income differences between the two areas.
ASSUMPTIONS OF THE HARRIS-TODARO MODEL
1. Migration is stimulated primarily by rational economic consideration.
2. Migration is decided on the basis of expected, rather than actual, urban-rural wage differentials.
3. Probability of obtaining urban job is inversely related to the urban unemployment rate.
Francis Cherunilam, commenting on Todaro’s migration model, writes that while the model is correct in holding that there is no possibility of full employment in urban areas, it is not correct to assert that the act of migration is always rational and well-calculated. Todaro is also wrong in not giving any impor¬tance to non-economic factors in the migration process.
CONCLUSION
Lastly, Todaro rejects Lewis-Fei-Ranis model for its assumption that there would exist constant real urban wages until the rural surplus labour exhausts. Todaro finds that in almost all less developed countries the urban wages have been on the rise.
Todaro’s model does not advocate simply the rural-urban wage differentials as the basis of migration as is claimed in all migration theories. According to him, the migrant is much rational and calculative in his decision to shift to a particular city.
The Harris-Todaro’s model cited in real life can occur if adopted especially in a country like Nigeria where the rate of unemployment is really alarming mostly in our urban areas like the city of Lagos where we have different persons from different states and rural environments seeking better greener pasture thereby catalizing unemployment. Unemployment is increased here because the jobs available is way lower than the population. By exaggerations, the ratio of available jobs to population or man power is 1:15.
THE LEWIS-FEI-RANIS MODEL
The Fei–Ranis Model of Economic Growth is a dualism model in developmental economics or welfare economics . It was developed by John C. H. Fei and Gustav Ranis. It can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labour from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labour supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labour should take place prior to the labour shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development. In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
Fei and Ranis emphasized strongly on the industry-agriculture interdependency and said that a robust connectivity between the two would encourage and speedup development. If agricultural laborers look for industrial employment, and industrialists employ more workers by use of larger capital good stock and labor-intensive technology, this connectivity can work between the industrial and agricultural sector. Also, if the surplus owner invests in that section of industrial sector that is close to soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized. They took the example of Japan’s dualistic economy in the 19th century and said that connectivity between the two sectors of Japan was heightened due to the presence of a decentralized rural industry which was often linked to urban production. According to them, economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision-making powers and use industrial capital and consumer goods for agricultural practices.
ASSUMPTIONS OF THE MODEL
Fei–Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.
• It has been asserted that Fei and Ranis did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed.
• Fei and Ranis say, “It has been argued that money is not a simple substitute for physical capital in an aggregate production function. There are reasons to believe that the relationship between money and physical capital could be complementary to one another at some stage of economic development, to the extent that credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry.” This indicates that in the process of development they neglect the role of money and prices. They fail to differ between wage labour and household labour, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
• Fei and Ranis assume that MPPL is zero during the early phases of economic development, which has been criticized by Harry T. Oshima and some others on the grounds that MPPL of labour is zero only if the agricultural population is very large, and if it is very large, some of that labour will shift to cities in search of jobs. In the short run, this section of labour that has shifted to the cities remains unemployed, but over the long run it is either absorbed by the informal sector, or it returns to the villages and attempts to bring more marginal land into cultivation. They have also neglected seasonal unemployment, which occurs due to seasonal change in labour demand and is not permanent.
• Fei and Ranis assume a close model and hence there is no presence of foreign trade in the economy, which is very unrealistic as food or raw materials can not be imported. If we take the example of Japan again, the country imported cheap farm products from other countries and this made better the country’s terms of trade. Later they relaxed the assumption and said that the presence of a foreign sector was allowed as long as it was a “facilitator” and not the main driving force.
• The reluctant expansionary growth in the industrial sector of underdeveloped countries can be attributed to the lagging growth in the productivity of subsistence agriculture. This suggests that increase in surplus becomes more important a determinant as compared to re-investment of surplus, an idea that was utilized by Jorgenson in his 1961 model that centered around the necessity of surplus generation and surplus persistence.
• Stagnation has not been taken into consideration, and no distinction is made between labour through family and labour through wages. There is also no explanation of the process of self-sustained growth, or of the investment function. There is complete negligence of terms of trade between agriculture and industry, foreign exchange, money and price.
CONCLUSION
The Lewis-Fei Ranis Model grouped underdeveloped economy into two sectors which is the subsistence sector and the Capitalist sector. The subsistence sector(rural area) deals majorly with the agricultural sector which is based on the production of raw materials while the Capitalist sector(urban) deals majorly on manufacturing goods using the raw materials produced by the agricultural sector.
If the subsistence sector employs more workers to help in the production of raw material for the capitalist sector, it will help to reduce rural-urban migration which has been a major problem in most economy like Nigeria using Lagos state as an example.
Name:Ezeogo Denis Onyekachi
Reg number:2017/249337
Department:ECONOMICS/POLITICAL SCIENCE (CSS)
THE HARRIS TODARO MODEL
The Harris-Todaro model was an academic investigation to throw light on the events following ‘Tripartite Agreement’ in Kenya. The newly independent Kenya in the 1960s was increasingly facing a serious situation of unemployment in the major urban cities. To cope with the situation of unemployment, Tripartite Agreement was signed between the government public sector and the private sector. The agreement increased employment in the industrial jobs in exchange for unions agreeing to hold wages at their current levels. The larger number of employment was expected to reduce unemployment, but it appeared that the urban unemployment had increased following the government’s agreement.
Harris and Todaro subsequently formulated a model to explain rural-urban economic preferences to migrate. The distinctive concept in the model is that the rate of migration flow from rural (agricultural) areas to urban (industrial) areas is determined by the difference between expected urban wages and rural wages.This is an equilibrium version of the Todaro migration model that predicts that expected incomes will be equated across rural and urban sectors when taking into account informal-sector activities and outright unemployment.The classical theory is used in development economics and is an economic illustration of migrants’ decision on expected income differentials between rural (agriculture) and urban (manufacturing) areas.
CORE ARGUMENTS
The assumptions can basically be summed up to:
1. Migration is stimulated primarily by rational economic considerations of relative benefits and costs—mostly financial but also psychological.
2. The decision to migrate depends on expected rather than actual urban-rural real-wage differentials, where the expected differential is determined by the interaction of two variables, the actual urban-rural wage differential and the probability of successfully obtaining employment in the urban sector.
3. The probability of obtaining an urban job is directly related to the urban employment rate and thus inversely related to the urban unemployment rate.
4. Migration rates in excess of urban job opportunity growth rates are not only possible but also rational and even likely in the face of wide urban- rural expected income differentials. High rates of urban unemployment are therefore inevitable outcomes of the serious imbalance of economic opportunities between urban and rural areas in most underdeveloped countries.
CONCLUSION
The Todaro model postulates that migration proceeds in response to urban-rural differences in expected income rather than actual earnings. The fundamental premise is that migrants consider the various labor market opportunities available to them in the rural and urban sectors and choose the one that maximizes their expected gains from migration.
In countries with developing economies such as Nigeria,the gap in development and better job opportunities between the rural and urban areas are too vast making the urban areas the main target of migration for most people in the labour force.The most disturbing part about migration in developing countries is that,there are far more rural areas than urban,making it much more difficult to find employment there and making the few urban areas overpopulated.
THE LEWIS FEI RANIS MODEL
Lewis (1954) proposed a seminal theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second,labour-scarce “stage” of development.
Later, Ranis and Fei (1961) formalised the Lewis theory and defined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model. These three phases,are distinguished by the marginal productivity of agricultural labour. The entry into each phase is marked three turning points:
• The breakout point leads to phase one growth with redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural unemployment.
• The commercialisation point leads to phase three of self-sustaining economicgrowth with the commercialisation of the agricultural sector.
The Lewis-Ranis-Fei theory of dualistic economic development therefore provides a suitable theoretical framework for studying the growth path of labour-surplus developing economies such as China and Nigeria
China’s 1.3 billion inhabitants account for a fifth of the world’s population. Over 50 percent of the Chinese population is engaged in the rural agricultural sector. China’s agricultural labour productivity is very low due to the presence of surplus labour relative to other scarce resources. The agricultural wage rate is lower than the non-agricultural one. The 1978 Economic Reform propelled the Chinese economy into a path of rapid economic growth, at the rate of approximately eight percent per annum. This remarkable economic growth, particularly in the urban non-agricultural sector, requires a great inflow of labour (Knight, 2007). The gradual relaxation of the stringent Hukou registration system has further facilitated the temporary rural to urban migration of over 100 million workers.
CONCLUSION
Most growth models classify developing economies such as Nigeria as homogeneous but this isn’t true.Most developing economies can be classified into the prunitive and modern sectors.The primitive sector consists of the existing agricultural sector in the economy and the modern sector as the Rapidly emerging but small industrial sector.Both sectors co exist in the economy,where in lies the crux of development problem.Development can be brought about in thIs case only by a complete shift in the focal point of progress from the agricultural economy or in the case of Nigeria dependency on oil,to the industrial economy,such that the more is augmentation of industrial output.This is done by transfer of labour from the agricultural sector to the industrial one,showing that underdeveloped countries do not suffer from constraints of labour supply.At the same time,growth in the agricultural sector must not be negligible and it’s output should be sufficient to support the whole economy with food and raw materials.
Omeke Anslem Francisco
2017/249564
assurance081@gmail.com
HARRIS-TODARO MODEL OF MIGRATION AND UNEMPLOYMENT
In recent years, the urban areas in less developed countries have grown very rapidly. Between 1950 and 1960, urban areas in Africa grew by 69%, in Latin America by 67%, and in Asia by 51%, while rural areas grew by only 20% over the same period. Since biological growth rates rarely exceed 3% per annum, much of the urban growth is due to rural-urban migration. There is a growing consensus on a number of aspects of the migration question. Both economist and non-economist agree that rural-urban migration can be explained primarily by economic factors: the “push” from agriculture and the “pull” of relatively high urban wages. There is such migration is quite rational despite the existence of urban unemployment. The essence of this relationship is summarized clearly in perhaps the best-known article on the subject, that of Harris and Todaro: “…migration proceeds in response to urban-rural differences in exoected earnings (defined below) with the urban employment rate acting as an equilibrating force on such migration”
The Harris-Todaro model, named after John R. Harris and Michael Todaro is an Economic model developed in 1970 used to explain some issues concerning rural-urban migration in development economics. Todaro migration model seeks to explain rural-urban migration as an economically rational process despite high urban unemployment. Migrants calculate (present value of) urban expected income (or its equivalent) and move if this exceeds average rural income. The Todaro migration model has four(4) basic characteristics:
1. Migration is stimulated primarily by rational economic considerations of relative benefits and costs, mostly financial but also psychological.
2. The decision to migrate depends on expected rather than actual urban-rural real-wage differentials where the expected differential is determined by the interaction of two variables, the actual urban-rural wage differential and the probability of successfully obtaining employment in the urban sector.
3. The probability of obtaining an urban job is directly related to the urban employment rate and thus inversely related to the urban unemployment rate.
4. Migration rates in excess of urban job opportunity growth rates are not only possible but also rational and even likely in the face of wide urban-rural expected income differentials .High rates of urban unemployment are therefore inevitable outcomes of the serious imbalance of economic opportunities between urban and rural areas in most underdeveloped countries.
On the other hand, Harris-Todaro model shows equilibrium version of the Todaro migration model which predicts that expected incomes will be across rural and urban sectors when taking into account informal sector activities and outright unemployment. Its main assumption is that migration decision are based on expected income differentials between rural and urban areas rather than wage differentials.
The Harris-Todaro model produced two powerful policy results. The first concerns the policy of formal-sector job creation to employ the unemployed. Secondly, there (Harris and Todaro) considered a policy of rural development. If such a program could increase the rural traditional-sector wage, unemployment would then fall. Thus, in the Harris-Todaro model, the solution to urban unemployment is rural development.
The Harris-Todaro model is also based on the following assumptions:
1. There are two sectors in the economy; the rural or agricultural sector (A) and the urban or manufacturing sector (M).
2. The rural sector produces XA units of agricultural goods and the urban sector produces XM units of manufactured goods. Each sector produces only one unit.
3.The model operates in the short run and capital is available in fixed quantities (K ) in the two sectors
4. The number of urban jobs available (NM ) is exogenously fixed. In the rural sector some work is always available. Therefore, the total urban labor force comprises N–NA along with an available supply of rural migrants. In other words, the total urban labor force equals N–NA with (N–NA ) – NM unemployed.
5. The urban wage is fixed at WM and the rural wage at WA , WM > WA .
6. The rural wage equals the rural marginal product of labour and the urban wage is exogenously determined.
7. Rural-urban migration continues so long as the expected urban real income is more than the real agricultural income.
8. The expected urban real income is equal to the proportion of urban labour force actually employed multiplied by the fixed minimum urban wage.
THE HARRIS-TODARO MIGRATION MODEL
Assume only two sectors, rural agriculture and urban manufacturing. The demand for labor (the marginal product of labor curve) in agriculture is given by the negatively sloped line AA’. Labor demand in manufacturing is given by MM’. The total labor force is given by line OA OM . In a neoclassical, flexible-wage, full-employment market economy, the equilibrium wage would be established at W*A = W*M, with OA LA workers in agriculture and OM LM workers employed in urban manufacturing. All available workers are therefore employed. But what if urban wages are institutionally determined (inflexible downward) as assumed by Todaro at a level WM , which is at a considerable distance above W*A. If for the moment we continue to assume that there is no unemployment, OMLM workers would get urban jobs, and the rest OALM , would have to settle for rural employment at OAWA** wages (below the free-market level of ). So now we have an urban-rural real wage gap of WM – WA**, with WM institutionally fixed. If rural workers were free to migrate (as they are almost everywhere except China), then despite the availability of only OMLM jobs, they are willing to take their chances in the urban job lottery. If their chance (probability) of securing one of these favored jobs is expressed by the ratio of employment in manufacturing, LM, to the total urban labor pool, LUS, then the expression
WA = LM/LUS (WM)
shows the probability of urban job success necessary to equate agricultural income WA with urban expected income (), thus causing a potential migrant to be indifferent between job locations. The locus of such points of indifference is given by the qq’ curve.
POLICY IMPLICATIONS
MR is the production possibility curve of the manufacturing (urban) and rural sectors. Given the initial minimum wage in the urban sector. The initial equilibrium at point B where OXM output is produced in the rural sector. The rural-urban migration is not possible at point B due to the expected wage differentials. Point E on the production possibility curve is the wage differential point at which OXM output is produced in the urban sector and OXA output in the rural sector.
1. Imbalances in urban-rural employment opportunities caused by the urban bias, particularly first-city bias, of development strategies must be reduced. Because migrants are assumed to respond to differentials in expected incomes, it is vitally important that imbalances between economic opportunities in rural and urban sectors should be minimized. When urban wage rates rise faster than average rural incomes, they stimulate further rural-urban migration in spite of rising levels of urban unemployment.
2. Urban job creation is an insufficient solution for the urban unemployment problem; This follows that for any given positive urban-rural wage differential, higher urban employment rates will widen the expected differential and induce even higher rates of rural-urban migration. For every new job created, two or three migrants who were productively occupied in rural areas may come to the city. Thus if 100 new jobs are created, there may be as many as 300 new migrants and therefore 200 more urban unemployed. Hence a policy designed to reduce urban unemployment may lead not only to higher levels of urban unemployment but also to lower levels of agricultural output due to induced migration.
3. Indiscriminate educational expansion will lead to further migration and unemployment; The heavy influx of rural migrants into urban areas at rates much in excess of new employment opportunities necessitates rationing in the selection of new employees. Although within each educational group such selection may be largely random, many observers have noted that employers tend to use educational attainment or number of years of completed schooling as the typical rationing device. For the same wage, they will hire people with more education in preference to those with less, even though extra education may not contribute to better job performance. Jobs that could formerly be filled by those with a primary education (sweepers, messengers, clerks, etc.) now require secondary training; those formerly requiring a secondary certificate (clerks, typists, bookkeepers, etc.) must now have a university degree. It follows that for any given urban wage, if the probability of success in securing a modern-sector job is higher for people with more education, their expected income differential will also be higher, and they will be more likely to migrate to the urban (cities).
4. Wage subsidies and traditional scarcity factor pricing can be counterproductive; A standard economic policy prescription for generating urban employment opportunities is to eliminate factor price distortions by using “correct” prices, perhaps implemented by wage subsidies (fixed government subsidies to employers for each worker employed) or directs government hiring.
CRITICISM;
The Harris-Todaro model suggest non-distortionary lump sum tax to finance subsidy.
Harris-Todaro model does not take into considerations the generation of saving as a source of financing subsidy. Savings are low in LDCs.
This model does not incorporate the cost of rural-urban migration or the relatively higher cost of urban living which the migrants have to incur in the urban sector.
The model does not specify alternate policy prescriptions such as giving a wage subsidy to the urban sector and the same time restricting the migration of those rural workers.
SUMMARY AND CONCLUSIONS;
With a summary of what appears to be the consensus of most economists on the shape of migration and employment strategy. This would appear to have the following key elements:
1. Creating an appropriate rural-urban economic balance; A more appropriate balance between rural and urban economic opportunities appears to be indispensable to ameliorating both urban and rural unemployment problems and to slowing the pace of rural-urban migration. The main thrust of this activity should be in the integrated development of the rural sector, the spread of rural nonfarm employment opportunities, improved credit access, better agricultural training, the re-orientation of social investments toward rural areas, improving rural infrastructure, and addressing shortcomings of rural institutions (including corruption, discrimination, and stratification), the presence of which has the effect of raising the cost of delaying out-migration.
2. Expansion of small-scale, labor-intensive industries. The composition or “product mix” of output has obvious effects on the magnitude (and in many cases the location) of employment opportunities because some products (often basic consumer goods) require more labor per unit of output and per unit of capital than others. Expansion of these mostly small-scale and labor-intensive industries in both urban and rural areas can be accomplished in two ways: directly, through government investment and incentives and improved access to credit, particularly for activities in the urban informal sector, and indirectly, through income redistribution (either directly or from future growth) to the rural poor, whose structure of consumer demand is both less import-intensive and more labor-intensive than that of the rich.
3. Eliminating factor price distortions; There is ample evidence to demonstrate that correcting factor price distortions primarily by eliminating various capital subsidies and curtailing the growth of urban wages through market-based pricing would increase employment opportunities and make better use of scarce capital resources.
4. Choosing appropriate labor-intensive technologies of production; One of the principal factors inhibiting the success of any long-run program of employment creation in both urban industry and rural agriculture is the almost complete technological dependence on (typically laborsaving) machinery and equipment from the developed countries. Domestic and international efforts can help reduce this dependence by developing technological research and adaptation capacities in developing countries.
5. Modifying the linkage between education and employment; The emergence of the phenomenon of the educated unemployed is calling into question the appropriateness of the massive quantitative expansion of educational systems, especially at the higher levels. Formal education has become the rationing tunnel through which all prospective jobholders must pass.
LEWIS-FEI-RANIS MODEL OF ECONOMICS GROWTH ( DUAL SECTOR MODEL)
One of the best-known early theoretical models of development that focused on the structural transformation of a primarily subsistence economy was that formulated by Nobel laureate W. Arthur Lewis in the mid-1950s and later modified, formalized, and extended by John Fei and Gustav Ranis. The Lewis two-sector model became the general theory of the development process in surplus-labor developing nations during most of the 1960s and early 1970s. It explains the growth of a developing economy in terms of a labour transition between two sectors, the capitalist sector and the subsistence sector.
CAPITALIST SECTOR; Lewis defined this sector as “that part of the economy which uses reproducible capital and pays capitalists thereof”. The use of capital is controlled by the capitalists, who hire the services of labour. It includes manufacturing, plantations, mines etc. The capitalist sector may be private or public.
SUBSISTENCE SECTOR; This sector was defined by him as “that part of the economy which is not using reproducible capital”. It can also be adjusted as the indigenous traditional sector or the “self employed sector”. The per head output is comparatively lower in this sector and this is because it is not fructified with capital.
Lewis starts his theory with the assertion that the classical theory of perfectly elastic supply of labour at a subsistence wage holds true in the case of a number of underdeveloped countries. Such economies are over-populated relatively to capital and natural resources so that the marginal productivity of labour is negligible, zero or even negative. Since the supply of labour is unlimited, new industries can be established or existing industries expanded without limit at the current wage by drawing upon labour from the subsistence sector. The current wage is what labour earns in the subsistence sector, i.e., the subsistence wage. The main sources from which workers would be coming for employment at the subsistence wage as economic development proceeds are “the farmers, the casuals, the petty traders, the retainers (domestic and commercial), women in the household and population growth.” But the capitalist sector also needs skilled workers. Lewis argues that skilled labour is only a “quasibottleneck, a temporary bottleneck” which can be removed by providing training facilities to unskilled workers.
Lewis-Fei-Ranis model makes the following assumptions and it’s source of unlimited supply of labor in underdeveloped country (UDCs)
(i) There is a duel economy i.e., the economy is characterized by a traditional, over-populated rural subsistence sector furnished with zero MPL, and the high productivity modern urban industrial sector.
(ii) The subsistence sector does not make the use of ‘Reproducible Capital’, while the modern sector uses the produced means of capital.
(iii) The production in the advanced sector is higher than the production in traditional and backward sector.
(iv) According to Lewis, the supply of labor is perfectly elastic. In other words, the supply of labor is greater than demand for labor.
(v) The model assumes that these profits will be reinvested in the business in the form of fixed capital.
(vi) It also assumes that the wages in the manufacturing sector are more or less fixed.
(vii) Entrepreneurs in the manufacturing sector make profit because they charge a price above the fixed wage rate.
The followings are the sources of unlimited supply of labor;
(i) Because of severe increase in population more, than required number of labors are working with lands, the so called disguised unemployed.
(ii) In UDCs so many people are having temporary and part time jobs, as the shoe-shines, loaders, porters and waiters etc. There will be no fall in the production even their number are one halved.
(iii) The landlords and feudals are having an army of tenants for the sake of their influence, power and prestige. They do not make any contribution towards production, and they are prepared to work even at less than subsistence wages.
(iv) The women in UDCs do not work, but they just perform house-hold duties. Thus they also represent unemployment.
(v) The high birth rate in UDCs leads to grow unemployment.
CRITICAL APPRAISAL
1. Wage Rate not Constant in the Capitalist Sector; The theory assumes a constant wage rate in the capitalist sector until the supply of labour is exhausted from, the subsistence sector. This is unrealistic because the wage rate continues to rise over time in the industrial sector of an under developed economy even when there is open unemployment in its rural sector.
2. One sided Theory; This is a one-sided theory because Lewis does not consider the possibility of progress in the agricultural sector. As the industrial sector develops with the transfer of surplus labour, the demand for food and raw materials will rise which will, in turn, lead to the growth of the agricultural sector.
3. Neglects Total Demand; Lewis does not study the problem of aggregate demand. He assumes that whatever is produced in the capitalist sector is either consumed by itself or is exported. He does not even analyse the possibility of the capitalist sector selling its products to the subsistence sector. In case, it so happens, the growth process may come to a halt much earlier through unfavourable terms of trade or the subsistence sector adopting new techniques of production to meet the expanding raw material demand of the capitalist sector.
4. Mobility of Labour not so Easy; Higher capitalist wage will not lead to the movement of surplus labour from the subsistence sector to the capitalist sector. People are so intensely attached to their family and land that they do not like to leave their kith and kin. Moreover, differences in language and custom, the problems of congestion, housing and high cost of living in the capitalist sector stand in the way of mobility of labour to this sector. This is the main weakness of the theory.
5. Marginal Productivity of Labour not Zero; Schultz does not agree that the marginal productivity of labour in overpopulated underdeveloped countries is zero or negligible. If it were so, the subsistence wage would also be zero. The fact is that every worker receives the subsistence wage, may be in kind, if not in cash. It is, therefore, difficult to find out the exact number of surplus labourers who are to move to the capitalist sector, their number hardly exceeding 5 per cent, as is now generally accepted.
6. Productivity falls with Migration of Labour from the Subsistence Sector; Lewis assumes that when the surplus labour is withdrawn from the subsistence sector to the capitalist sector, the agricultural production remains unaffected in the subsistence sector. But the fact is that withdrawal of workers from the farms will reduce output. As pointed out by Schultz, “there is no evidence for any poor country anywhere that would suggest that a transfer of even some fraction, say 5 per cent of the existing labourforce out of agriculture, with other things being equal, could be made without reducing its production.”
7. Low Income Groups also Save; It is not correct to say that only 10 per cent of the people with the largest income save. In fact, people, with low incomes also save due to social reasons and even small farmers save for capital accumulation in underdeveloped countries, whereas high income groups save less because they spend more under the influence of the demonstration effect.
8. Inflation, not Self-Destructive; Lewis’s view that inflation for the purpose of capital formation is self-destructive is difficult to believe in the face of acute shortage of consumer goods. Production of consumer goods fails to increase rapidly due to structural rigidities. On the other hand, the marginal propensity to consume of the people is near unity, so that all increases in income lead to inflationary rise in prices.
9. Inefficient Tax Administration; Lewis’s contention that taxation will mop up increasing income cannot be accepted because the tax administration in underdeveloped countries is not so efficient and developed as to collect taxes sufficient enough for capital accumulation.
IT’S APPLICATION TO THE REAL WORLD
Having shown the main ideas behind the Lewis-Ranis-Fei model and used the consecutive analysis of the model to explain why it is important to invest in both sectors in order to remain on the balanced growth path and maintain the rate of industrialization. The existence of surplus labour in agriculture allows the industry to continue to pay the institutional wage and therefore enjoy further profits and continued investment. At the same time, as more and more people are moving away from agriculture, there will be some amount of agricultural surplus that can be used up to fuel further development. This process continues until the surplus labour is absorbed. Hence, saving and investment are a crucial part to support economic development.
The Lewis Fei-Ranis model of economic growth was proposed by Arthur Lewis and was hence changed by Fei and Ranis. The model depicts a twofold strategy of the economy.
The agric territory was seen as overarching in any non-modern country, and the Industrial business was considered. Lewis and Fei – Ranis model expected that the country business has a flood of futile work.
The advanced region absorbs this flood work due to its better compensation rate.
This extra work continually develops the mechanical territory until all the abundance work is held. Along these lines, the cutting edge region transforms into the dominating part, and the nation, as demonstrated by their model, is believed to be made.
ASSUMPTIONS OF THE FEI-RANIS MODEL OF ECONOMIC GROWTH INCLUDE
1) Supply of work is fixed.
2) Population improvement is an exogenous miracle
3) Constant re-appearance of scale with transport fills in as a variable factor.
4) No get-together of capital in the plant territory except for land recuperation
5) The yield in the rural region is a component of land and work in speaking.
6) Industrial zone is a part of the capital and works alone.
7) Land has no part as a factor of creation.
8) Marginal consequence of work gets zero in the long run. Accepting the general population outperforms the sum where MPL reaches zero, work can be moved to the advanced territory with no inadequacy of agricultural creation.
Considering the above-referred speculations, the improvement of work overabundance can be isolated into three phases;
a) In the essential stage, there are covered jobless experts who are not adding to country creation and can be easily moved to the cutting edge territory at a reliable institutional remuneration.
b) In the next stage, agricultural workers add to cultivating yield anyway produce not, by and large, the institutional compensation they get. This sort of workers can be moved to the mechanical territory.
c) The third stage is a self-upheld improvement; it starts where workers add to green yield and produce more than the institutional wages they get.
HOW THE FEI-RANIS MODEL APPLIES TO THE REAL WORLD
The Fei-Ranis model hopes to be close-by, and therefore there is no presence of new trade in the economy, which is nonsensical as food or unrefined materials can not be imported. Like in Japan, the country imported farm materials from various countries, which improved its trade terms.
In like manner, the model fails to see the lazy monetary condition winning in making countries(e.g. Nigeria). If they had inspected the current nature and purposes behind it, they would have found that the present country’s backwardness resulted from the institutional plan, basically the feudalism structure that won. While referring to country productivity for unforeseen monetary development, the model fails to indicate the prerequisite for capital.
Notwithstanding how it is essential to make an overabundance, it is correspondingly imperative to keep it up through particular r progression, which is possible through the capital collection. Regardless, the Fei-Paris model considers work and yield as creation factors. The model anticipates the MPL=0.
The juvenile countries by and considerable showcase inconsistency on food creation, especially during favourable climatic conditions, say that social events or planting, MPL would be more significant than nothing.
The model expected that land supply is fixed. Anyway, this isn’t to endeavour as land supply can be extended as time goes on.
Haris-Todaro Model of Migration
The Harris-Todaro Model was announced in 1970 by two market investigators John R. Harris and Micheal Todaro. This model is used for creating monetary issues to fathom the problems with local metropolitan development.
It has been seen that for an economy to develop; innumerable Labors should be moved from the standard region in local zones where the work productivity is low or zeroes to a front line manufacturing territory where the effectiveness of work is rising as a result of capital assembling here.
Here we consider a time shut economy that includes two-territory contrasting with country and present-day industry. The total number of people is believed to be one.
The mass of inhabitants should not be shocking; like this, the composition of progress monetary issue dualistic models has obtained universality over the essential thing or specific zone theories.
A typical dualistic model being created monetary obliges two zones, a customary zone in a nation zone and a collecting territory in a metropolitan locale.
One factor of such rural metropolitan migration is the per capita pay differential between two country and urban districts.
Todaro and Harris set up a crucial design of movement among the country and metropolitan zone.
The hypothesis that individuals move to the metro region with the measure of procuring business. The legitimate site and that flexible region work is a transitory stage during which homeless people balance the probability of occupations against the authentic compensation differentials between the metropolitan area and rural zones.
HARIS-TODARO MODEL OF MIGRATION
The Harris-Todaro model of the country metropolitan migration measure is gotten back to under an expert based technique.
Such an agreement is depicted by change of natural metropolitan expected wages differential (summarised Harris-Todaro balance condition), metropolitan obsession and metropolitan joblessness.
The model expects that joblessness is non-existent in the country’s local zone. Accordingly, the commonplace agrarian compensation is comparable to immaterial rustic productivity. In balance, the common to metropolitan development rate will be zero since the ordinary nation pay ascends to the typical metropolitan compensation.
In the Harris–Todaro model, the rising urban settlement pushes up the metro region’s usual remuneration. It urges workers to migrate from the commonplace area to the metro zone.
The model, like this, acknowledged that development from natural zones to metropolitan zones would increase if:
Metropolitan wages (wu) extension in the metro territory (le), growing the typical metropolitan compensation.
Cultivating productivity reduces, cutting down little benefit and wages in the rural territory (or) lessening the ordinary nation pay.
In any case, notwithstanding the way that this development makes joblessness and instigates easygoing region advancement, this lead is financially reasonable and utility-boosting concerning the Harris–Todaro model.
Anyway, as long as they are moving, financial experts have complete and accurate information concerning the country and metropolitan remuneration rates and pro-business probabilities, make a typical compensation enlarging decision.
How the Harris Todaro Model of Migration Applies to Nigerian Economy:
The Harris-Todaro model can be applied in Nigeria by resolving what makes people move from common to metropolitan regions. It is no longer news that the compensation rates paid to workers in metropolitan networks are higher than those brought into the world in the standard domains. This can be noted as one explanation for moving into the urban locales needing to track down a beneficial profession. The possibility of tracking down a helpful domain depends upon the size of joblessness about the number of used experts in the Nigerian economy’s mechanical zone.
Onah Peace
2017/243367
Economics
LEWIS-FEI_RANIS SURPLUS LABOUR MODEL
In the Lewis model,the underdeveloped economy is divided into two sectors of the economy, the traditional sector and the modernized sector. The traditional sector is into subsistence agriculture where we have zero marginal productivity of labour. Zero marginal productivity because labour can be withdrawn without any loss in output. The modern productive sector is where labour from the traditional sector is transferred to. Output expansion is brought about by the transfer of labour from the rural area to the modern sector and the modern sector employment growth. The speed at which output are expanded is determined by the rate of industrial investment and capital accumulation in the modern sector. These is made possible by the excess profit the modern sector gets over wages with the assumption that wage is constant and they invest all their profit. Remember the wage of the modern sector is always set above the wage in the traditional sector,and they can hire as much labour without raising their wage. The modern sector self sustaining expansion is assumed to continue until all surplus rural labour is absorbed into the industrial sector.
Lewis-fei-ranis model is the modified model of surplus labour theory. Fei and Ranis introduced three phases into lewis model of the economy,the first phase is the formation of the non-agricultural sector with low marginal productivity due to surplus labour. The labour is allocated and marginal productivity of labour starts to raise but lower than wage. In the second phase the remaining labour is gradually absorbed and the economy starts becoming commercialized. Phase three is where the agricultural labour market becomes fully commercialized.
APPLICATION OF THE MODEL IN THE NIGERIAN ECONOMY
The Lewis-fei-ranis model is not actually realistic in the Nigerian economy. Yes 70% of the Nigerian population were in rural areas but migrated into urban areas. Therefore we can see surplus labour from the rural area with low marginal productivity of labour. The creation of non agricultural sectors with wages higher the that of the traditional sectors have led to labour migrating from these areas to the urban areas. Looking at the model,Nigeria is In phase two because though the economy have started commercializing,we are yet to absorb all the labour supply We still see unemployment ravaging our economy.
Secondly, that labour is surplus and output is expanding does not mean that labour is being absorbed,labour basically deal with skill, in Nigeria when skill meet with opportunity we get job, these is when of the reason why the model is not realistic in Nigeria, because most Nigerians from the rural areas lack skills or are specialized in a different skill other than the one needed.
HARRIS TODARO MODEL OF MIGRATION AND ITS APPLICATION IN NIGERIA
The main assumption of the model is that migration is based on the expected wage difference between the rural and the urban areas. The individual goes with high hopes that the income he will make the will be higher than that of his village, unfortunately that is the truth,that’s the reason places like Lagos,Abuja,and Port Harcourt are densely populated. Unemployment is inevitable if the expected wage in the urban areas exceeds the rural income rationally,therefore these model is studied in the context of employment and unemployment in developing countries.,why unemployment is a serious problem in the urban areas. The higher the expected wage and job creation in the urban sector,the higher the rate of rural migration, meaning they is a positive relationship between the them.
These model is more realistic in the Nigerian economy, as daily people trope into the urban areas in search of green pastures, obviously the expected wages in those areas are very high. Many people are homeless,as there isn’t enough jobs to absorb them and the population is much,the is why Lagos is very populated, because people expect they will make more money there. These can only be solved when the government build key strategic sectors in the rural areas,to provide jobs with high expected wages. Port Harcourt was a rural area until the 1970s and 80s when oil was Discovered ,and it became modernized as key structures were built in the area with infrastructures and the we saw an influx of people from the rural areas to the area.
ANENE VICTORIA CHIOMA
2017/242435
ECONOMICS DEPARTMENT
Victoria.anene.242435@unn.edu.ng
toria20.simplesite.com
_LEWIS-FEI-RANIS MODEL OF ECONOMIC GROWTH.
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an advancement on the Lewis model. It is also known as the Surplus Labor model. It emphasizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials.
The central idea behind the Lewis model is fairly simple. Lewis divided labour force into two differentiated groups – “subsistence sector” and “capitalist sector” where the former is assumed to contain unlimited supply and consequently, a pool of surplus criticism sets labour-supply conditions for the latter. The concept of a dual economy is heavily criticized. As Leeson (1982) pointed out, “dual economy” models are “held to imply a false picture of the nature of the historical process of change in underdeveloped countries”. Subsequently, Ranis’ and Fei’s extension to Lewis’ model can be analyzed. They observed the model by reading it from left to right and assessed the changes in the output and wage as more and more people moved from agriculture to the industry. A new concept was added – namely, disguised unemployment, which appears in the traditional subsistence sector. The marginal product of labour, which is observed as the slope of the production function, in agricultural sector is lower than in industry.
We employ the Lewis-Ranis-Fei theory of dualistic economic development as a framework to investigate China’s rapid growth over 1965-2002. We find that China’s economic growth is mainly attributable to the development of the non-agricultural (industrial and service) sector, driven by rapid labour migration and capital accumulation. Our estimates of the sectorial marginal productivity of labour indicate that China’s 1978 Economic Reform coincided with moving from phase one to phase tow growth, as defined in the Lewis-Ranis-Fei model. This implies that phase three growth could be achieved by commercialization of the Chinese agricultural labour market.
_HARRIS-TODARO MODEL OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income. The Harris-Todaro model of the rural-urban migration process is revisited under an agent-based approach. The migration of the workers is interpreted as a process of social learning by imitation, formalized by a computational model. By simulating this model, we observe a transitional dynamics with continuous growth of the urban fraction of overall population toward an equilibrium. Such an equilibrium is characterized by stabilization of rural-urban expected wages differential (generalized Harris-Todaro equilibrium condition), urban concentration and urban unemployment. These classic results obtained originally by Harris and Todaro are emergent properties of our model. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity.
In the 1960s the government of newly independent kenya faced a trying situation, unemployment in Nairobi and other major cities was high and apparently rising. To checkmate this problem, Tripartite Agreements were reached in which private-sector and public-sector employers agreed to increase employment in exchange for unions agreeing to hold wages at their current levels. The larger number of jobs was expected to reduce unemployment. However, in the event, urban unemployment appeared to have increased following the Tripartite Agreements rather than decreased, as far as anyone could tell. In light of these events, John Harris and Michael Todaro formulated the Harris-Todaro model to explain the puzzle.
Furthermore, in Nigeria a recent governmental survey noted employment as the top explanatory factor behind migration in Nigeria (National Population Commission 2010). The survey shows the structural transformation of Nigeria’s society in the form of changing employment markets between 1970 and 2010. During this time, the share of agricultural employment fell drastically by 19%, with the service industry experiencing a substantial growth of 21%. Growing employment opportunities in the service industry,
Which is predominantly found in urban areas, serves as a strong pull factor attracting migrants in search of higher wages (Ogun 2010). During this time, the share of employment opportunities in heavy industry experienced a modest boost of 4%, with a subsequent decline of 5% in the manufacturing sector. Another explanation for Nigeria’s accelerating rural to urban migration is rural push factors, resulting from growing unemployment in certain regions of the country. Unemployment has risen drastically from 1.7% in 1970 to over 21.4% by 2010. According to the World Bank (2016), the effects of Nigeria’s unemployment have been felt the hardest in the northern parts of the Country where the majority of the population is engaged in agricultural activities. Increasing insecurity in the northeast, due to the emergence of Boko Haram, has also been linked to the intensification of rural to urban migration in recent years (The Economist 2015).
NAME: EBERE CHIBUNIEM EZEBO
REG. NO: 2017/249503
EMAIL: eberezebo@gmail.com
ANSWERS:
1. LEWIS FEI RANIS MODEL
Introduction to the model.
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
The dual explains the existence of two separate economic sectors within one country, divided by different levels of development, technology, and different patterns of demand. The concept was originally created by Julius Herman Boeke to describe the coexistence of modern and traditional economic sectors in a colonial economy.
Dual economies are common in less developed countries, where one sector is geared to local needs and another to the global export market. Dual economies may exist within the same sector, for example a modern plantation or other commercial agricultural entity operating in the midst of traditional cropping systems. Sir Arthur Lewis used the concept of a dualistic economy as the basis of his labor supply theory of rural-urban migration. Lewis distinguished between a rural low-income subsistence sector with surplus population, and an expanding urban capitalist sector. The urban economy absorbed labor from rural areas (holding down urban wages) until the rural surplus was exhausted.
According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem.
Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Arguments and core basics of the model.
The three fundamental ideas used in this model are;
• Agricultural growth and industrial growth are both equally important;
• Agricultural growth and industrial growth are balanced;
• Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap
Assumptions of the model
• The model assumes that a developing economy has a surplus of unproductive labor in the agricultural sector.
• These workers are attracted to the growing manufacturing sector where higher wages are offered.
• It also assumes that the wages in the manufacturing sector are more or less fixed.
• Entrepreneurs in the manufacturing sector make profit because they charge a price above the fixed wage rate.
• The model assumes that these profits will be reinvested in the business in the form of fixed capital. The model assumes that a developing economy has a surplus of unproductive labor in the agricultural sector
• An advanced manufacturing sector means an economy has moved from a traditional to an industrialized one.
2. HARRIS TODARO MODEL
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The Harris-Todaro model of the rural-urban migration process is revisited under an agent-based approach. Such an equilibrium is characterized by stabilization of rural-urban expected wages differential (generalized Harris-Todaro equilibrium condition), urban concentration and urban unemployment .Todaro have developed a new model of economic development which is relevant for labour surplus countries like India. It is the best known model of internal migration in the context of present-day developing countries. The model has focused on migration of labour from rural to urban areas induced by certain incentives.
In the Harris–Todaro model, the rising urban wage pushes up the expected wage in the urban sector and consequently encourages workers to migrate from the rural sector to the urban sector. This phenomenon is referred to as Todaro paradox. This is seen as the impact of the model on migration
ASSUMPTION
The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity.
Name: Nduaguba chiagozie Christopher
Reg no: 2017/249362
Department: economics/political science
Email: chiagozie.nduaguba.249362@unn.edu.ng
Lewis-fei-ranis
Lewis-fei-ranis theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour1 for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development. Later, Ranis and Fei (1961) formalised the Lewis theory anddefined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model.
The entry into each phase is marked three turning points:
•The breakout point leads to phase one growth with redundant agricultural labour.
•The shortage point leads to phase two growth with disguised agricultural unemployment.
•The commercialisation point leads to phase three of self-sustaining economic growth with the commercialisation of the agricultural sector. The Lewis-Ranis-Fei theory of dualistic economic development therefore provides a suitable theoretical framework for studying the growth path of labour-surplus developing economies such as China. China’s 1.3 billion inhabitants account for a fifth of the world’s population. Over 50 percent of the Chinese population is engaged in the rural agricultural sector. China’s 1 Throughout the paper we refer to the two sectors as agricultural and non-agricultural. Various authors have used different terms interchangeably for these two sectors. Lewis (1954) originally named the two sectors as the subsistence and the capitalistic sectors and later on in Lewis (1979) referred to them as the traditional and modern sectors. Jorgenson (1967) elaborates further on the distinction between the two sectors and narrows this down to the stylised fact that the two sectors do not share the same production technology, particularly when it comes to capital accumulation. for agricultural labour productivity is very low due to the presence of surplus labour relative to other scarce resources. The agricultural wage rate is lower than the non-agricultural one. The 1978 Economic Reform propelled the Chinese economy into a path of rapid economic growth, at the rate of approximately eight percent per annum.
This remarkable economic growth, particularly in the urban non-agricultural sector, requires a great inflow of labour (Knight, 2007). The gradual relaxation of the stringent Hukou registration system has further facilitated the temporary rural to urban migration of over 100 million workers.
There are very few recent studies discussing China’s economic growth and labour reallocation within the framework of the Lewis theory. Both Cai (2007) and Knight (2007), focus more on examining the Lewis turning point than testing the Lewis theory. according to Wikipedia, this article is first to systematically assess the Lewis (1954) theory and its formalization by Ranis and Fei (1961) for China. We address the three core questions: (1) Is the main source of economic growth non-agricultural capital accumulation? (2) What is the net effect of agricultural to non-agricultural labour reallocation? (3) What phase of economic development is the Chinese economy in? In other words, has China passed the commercialisation point signified by the exhaustion of surplus labour, as discussed by Cai (2007) and Knight (2007)? To answer these questions we estimate Cobb-Douglas production functions for China’s agricultural and non-agricultural sectors, using time-series national-level data over 1965-2002. Our results show that China’s overall economic growth is driven by the rapid development of the non-agricultural sector, which results from the fast accumulation of non-agricultural capital. As capital accumulates, employment expands and contributes almost as much as capital to economic growth in the non-agricultural sector. This confirms the answer to our first question that capital accumulation is the main source of economic growth in the non-agricultural sector. Secondly, we evaluate the effect of labour reallocation away from agriculture to non-agriculture by comparing the labour productivities of the two sectors. In addition, we repeat the exercise by applying the Labour Reallocation Effects (LRE) equation specified by the World Bank (1996). Both approaches suggest that labour reallocation 5has a positive impact on China’s economic growth, accounting for 1 to 2 percent per annum of GDP growth. We find the effect of labour reallocation has declined since the mid-1990s because of less absorption of the surplus rural labour in the non-agricultural sector, particularly in industry. Our result coincides with the findings of Kuijs and Wang (2005), Woo (1998), and World Bank (1996).
Thirdly, we identify the phase of China’s economic development by examining the evolution of labour productivities over time as indicated in the Lewis-Ranis-Fei model. We find that the Chinese economy has fully absorbed the redundant agricultural labour, as shown by the rising marginal productivity of labour since the 1978 Economic Reform, but has not yet completely reallocated the disguised unemployment, as shown by the marginal labour productivity being still lower than the institutional wage defined by the initial low average productivity of labour. All this indicates that, following the 1978 Economic Reform, China entered phase two of economic development defined in the Lewis-Ranis-Fei model. However, it has not reached phase three marked by the exhaustion of the disguisedagricultural unemployment.
Furthermore, we find that the gap of labour productivities between the two sectors is widening, which is at odds with the theoretical expectation. This reflects the effects of market imperfections and government intervention. A “critical minimum effort” is required for China to release the remaining disguised agricultural unemployment and enter phase three of economic development.
Nduaguba chiagozie Christopher
2017/249362
Economics/political science
Lewis-fei-ranis
Lewis-fei-ranis theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour1 for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development. Later, Ranis and Fei (1961) formalised the Lewis theory anddefined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model.
The entry into each phase is marked three turning points:
•The breakout point leads to phase one growth with redundant agricultural labour.
•The shortage point leads to phase two growth with disguised agricultural unemployment.
•The commercialisation point leads to phase three of self-sustaining economic growth with the commercialisation of the agricultural sector. The Lewis-Ranis-Fei theory of dualistic economic development therefore provides a suitable theoretical framework for studying the growth path of labour-surplus developing economies such as China. China’s 1.3 billion inhabitants account for a fifth of the world’s population. Over 50 percent of the Chinese population is engaged in the rural agricultural sector. China’s 1 Throughout the paper we refer to the two sectors as agricultural and non-agricultural. Various authors have used different terms interchangeably for these two sectors. Lewis (1954) originally named the two sectors as the subsistence and the capitalistic sectors and later on in Lewis (1979) referred to them as the traditional and modern sectors. Jorgenson (1967) elaborates further on the distinction between the two sectors and narrows this down to the stylised fact that the two sectors do not share the same production technology, particularly when it comes to capital accumulation. for agricultural labour productivity is very low due to the presence of surplus labour relative to other scarce resources. The agricultural wage rate is lower than the non-agricultural one. The 1978 Economic Reform propelled the Chinese economy into a path of rapid economic growth, at the rate of approximately eight percent per annum.
This remarkable economic growth, particularly in the urban non-agricultural sector, requires a great inflow of labour (Knight, 2007). The gradual relaxation of the stringent Hukou registration system has further facilitated the temporary rural to urban migration of over 100 million workers.
There are very few recent studies discussing China’s economic growth and labour reallocation within the framework of the Lewis theory. Both Cai (2007) and Knight (2007), focus more on examining the Lewis turning point than testing the Lewis theory. according to Wikipedia, this article is first to systematically assess the Lewis (1954) theory and its formalization by Ranis and Fei (1961) for China. We address the three core questions: (1) Is the main source of economic growth non-agricultural capital accumulation? (2) What is the net effect of agricultural to non-agricultural labour reallocation? (3) What phase of economic development is the Chinese economy in? In other words, has China passed the commercialisation point signified by the exhaustion of surplus labour, as discussed by Cai (2007) and Knight (2007)? To answer these questions we estimate Cobb-Douglas production functions for China’s agricultural and non-agricultural sectors, using time-series national-level data over 1965-2002. Our results show that China’s overall economic growth is driven by the rapid development of the non-agricultural sector, which results from the fast accumulation of non-agricultural capital. As capital accumulates, employment expands and contributes almost as much as capital to economic growth in the non-agricultural sector. This confirms the answer to our first question that capital accumulation is the main source of economic growth in the non-agricultural sector. Secondly, we evaluate the effect of labour reallocation away from agriculture to non-agriculture by comparing the labour productivities of the two sectors. In addition, we repeat the exercise by applying the Labour Reallocation Effects (LRE) equation specified by the World Bank (1996). Both approaches suggest that labour reallocation 5has a positive impact on China’s economic growth, accounting for 1 to 2 percent per annum of GDP growth. We find the effect of labour reallocation has declined since the mid-1990s because of less absorption of the surplus rural labour in the non-agricultural sector, particularly in industry. Our result coincides with the findings of Kuijs and Wang (2005), Woo (1998), and World Bank (1996).
Thirdly, we identify the phase of China’s economic development by examining the evolution of labour productivities over time as indicated in the Lewis-Ranis-Fei model. We find that the Chinese economy has fully absorbed the redundant agricultural labour, as shown by the rising marginal productivity of labour since the 1978 Economic Reform, but has not yet completely reallocated the disguised unemployment, as shown by the marginal labour productivity being still lower than the institutional wage defined by the initial low average productivity of labour. All this indicates that, following the 1978 Economic Reform, China entered phase two of economic development defined in the Lewis-Ranis-Fei model. However, it has not reached phase three marked by the exhaustion of the disguisedagricultural unemployment.
Furthermore, we find that the gap of labour productivities between the two sectors is widening, which is at odds with the theoretical expectation. This reflects the effects of market imperfections and government intervention. A “critical minimum effort” is required for China to release the remaining disguised agricultural unemployment and enter phase three of economic development.
Ogba ifeanyi favour
2017/243369
Economics
LEWIS FEI RANIS MODEL
Developmental economist rejected the Solow model as not being a proper standard for development prospect and they brought in place the Lewis model, the development economics emerge during the early post war era Lewis school is based on the classical school foundation with various asymmetric behavior for each other.
The model laid emphasis on the structural transformation of the primitive economy and Its was formulated May, 1954 by a Nobel prize winner, W. Arthur Lewis and its was first called the Lewis theory of development, which explain the phrase of developing nation in view with the movement of labor between the two sectors in their economy. In 1960 and 1970 its became the General theory of development process of surplus labor in developing nation ,in recent times it’s still applicable in the study of under developed nation . The economy is divided into agriculture (subsistence) sector and capitalist sector or industrial .The aim of the Lewis model deal with process of labor transfer and the improvement of output and employment in the industrial sector which can be seen as a modern sector ,the Lewis model emphasis on the organizational dualism and much lesser on product dualism .The main focus was on the reallocation of labor until the turning point has been attained ,His reason for anticipation an initial worsening of national income redistribution was that labor shift from an equally distributed agricultural sector to a less equal distributed industrial sector.
CRITICISM OF THE LEWIS MODEL
Agriculture role in the active participation in the economy growth was under rated, the model laid more emphasis in the industrial sector of the economy .
The model fail to account on the various changes that take place with development of agriculture it also didnt account that growth in labor productivity should be place before the shift in labor between agricultural and industrial sector .
The model was criticize because of the classical assumption which is not necessary which state that all profit made are saved and all wage has been retained which was consumed .
Contemporary development economist, working in line with the neoclassical paradigm didnt accept the place of an exogenous unqualified real wage to the one that is determined by the endogenous force of invisible hand
The Lewis model was criticized because it assumed capital was a major determinant to long run growth which it not truth because improved in government policies can increased growth
The model assume all the profit made should be re invested which is untrue
The Lewis model also assume that there are many unproductive agricultural laborer but the number of laborer varies seasonally moving laborer to the industrial sector may lead to fall in agricultural output
EXTENTION OF THE LEWIS MODEL
It was extended by two economists John C.H. Fei and Gustav Ranis because of Lewis model limitation who named the model Fei-Ranis. Fei-Rani’s model explain how increase in productivity in the agricultural sector will foster growth in industrial sector .it is an improved version of the Lewis model, its a dualism model in the aspect of both development and welfare economics. The Fei-Ranis model assume, that there is abundant of labor and resource is not available in undeveloped country, there is high population growth rate leading to mass unemployment ,the agricultural sector is not developed making the marginal productivity zero which can be transfer to the industrial sector. The model give account of the two economy which is the modern /capitalist and the traditional economy putting in place the economic condition of how they make use of the available resource. Development occur when there is a shift in progress from the agricultural sector to industrial sector which brings about output increase to the industrial sector than the agricultural sector. This output increase are brought as a result of labor transfer and industrial sector employment growth , the rate of the output expansion depend on the industrial investment and capital accumulation
The connectivity nature that is in place between the industry and agriculture was emphasis in the model and there was a great connection between the two sector that will speed development, the model highlight a balanced growth that existence among both sectors.
The above diagram it divided into three phrases , phrase one (AL=MP=0) of the model has some similarity with Lewis model they exist an infinite elasticity of working labor force of the agricultural sector ,there exist zero marginal productivity the available working labor force there also suffer from unemployment moving to the second phrase of the Fei-Ranis model(AP > MP) there exist surplus in agriculture as a result of increase in their average product which is shown above to higher than the marginal product on a different level to the subsistence level of wage .Phrase3 above start from the standard point of commercialization the supply curve above is steeper the two sectors start alerting for labor there is a shift in labor which depend on population rate of growth, the industrial structure of technical progress (Phrase3; MP > CIW).
AGRICULTURAL SECTOR (LABOUR AND LAND FUNCTION)
The point (B) Show the total physical productivity of labor in the curve ,the curve raise at a decreasing level and more unit of labor is added to an input factor which is land ( known to be fixed )at point N the curve shapes horizontally and the point at N intersect to the angle at G (which indicate the marginal productivity of labor) curve.
THE INDUSTRIAL SECTOR OF THE ECONOMY
However the industry sector capital and labor is a major factor of production and like the agricultural sector they exist a constant return to scale which has a positive relationship between input (capital and labor )and output ,increased in capital (ko to k1 and k2 ) in the above graph will lead to an increase in labor (from lo to l2) and the industrial output will also increase from Ao to A3.The model highlight the main source of labor in the industrial sector is from the agricultural sector (B) in the graph indicate the supply curve of labor for the industrial sector as a result of redundant agricultural force the real wage remain the same on the curve. The marginal physical productivity labor rise alongside with the capital stock above ,there is a rise in the industrial employment owing to the rise in the overall industrial activity which indicate there is a progressive supply of fund meant for investment.
AGRICULTURE SURPLUS
This are goods harvested in the agricultural sector at a particular time that is more than the needed in the society which is kept for future uses or send out the country based on demand for it .It is shown in the diagram below.
AGRICULTURAL SURPLUS FOR DUAL ECONOMY OF FEI AND RANIS
Graph (B) help us to actualize the agricultural surplus, there is need to get the average physical productivity of the total agriculture labor force (APPl). There exist a constant institutional wage hypothesis according to Ranis and Fei if real wage is equal to average physical productivity ie APPL=MP/OP, YZ above represent output produced by the working labor while XY indicate the real income of the labor force. Therefore the agricultural surplus is gotten from the difference between the both term above.
AGRICULTURAL SURPLUS AS A WAGE FUND
The composition of agricultural and industrial sectors is use to illustrate wage fund of agricultural surplus in a dualistic economy of the model.
The place of agricultural surplus is irreplaceable in wage fund in the economy . Its vital roles can be analysis with the aid of diagram in the right side of the graph above, which is the combination of the industrial sector graph together with the inverted agricultural sector graph, in a way that the start point of the agricultural sector comes on the right corner on top. The start point of the inversion has an impact on the graph. The value of the labor force is been analysis from left side of zero, while the possible output are view from a down sloped vertically from zero. The major purpose of the inversion is for convenience area of commercialization as explained earlier ,is noticed at point R, where the tangent to the line ORX move toward parallel to OX in the diagram .
The whole labor OA is shown in the agricultural sector before the portion of the redundant labor is taken into the industrial economy. When AG amount of labor force is taken, it is show along OG’ in the industrial sector, and the labor force available in the agricultural sector is the OG. (A) indicate the supply curve of labor force in the sector SS’ and various demand curves for labor df, d’f’ and d”f”. The point G above shows the point of intersection of supply and demand , when the demand for labor is df, OG shows the amount of labor employed into the industrial sector. The labor for agricultural sector that is still available there is OG. There is an output of GF produces as a result of the OG amount of labor, from which GJ amount of labor is consumed by the agricultural sector and JF shows the agricultural surplus for that each level of employment. The inactive labor force from the agricultural sector make productive once it is taken by the industrial sector, and there is an output of OG’Pd as indicated in the graph, getting a wage income in total of OG’PS.
JF which is the agricultural surplus and there is demand for consumption by the particular laborer who left for the industrial sector. Agriculture sector has made not only made the worker for production process, but in addition wage fund necessary available in the cycle.
COMPARISON OF LEWIS FEI RANIS WITH OTHER MODEL
The Lewis-Fei-Rani’s model account for an economic situation of unemployment and the under employment of the available resources into consideration not like the other growth model like Harrod-domar model, Exogenous growth model , Endogenous growth model and Harris-Todaro model of migration which consider developing countries to be homogeneous in structure.
Lewis-Fei-Rani’s model underlying factor for development is structural transformation while in Harrod-Domar model saving and investment is an underlying factor for development .
Harrod-Domar model focused on the steady state properties of the developed countries while Lewis- Fei-Ranis model focused on the search for application of known theory to the various problem of developing countries.
Harris-Todaro accepted the position of institutional intervention as a factor that act in the level of urban unskilled real wage for industrial sector due to the result of minimum wage ,and they advocated for neoclassical agricultural competitive wage which was against the view of Lewis- Fei -Ranis model .
COMPARISON OF LEWIS FEI RANIS MODEL TO REAL WORLD
Lewis model was used to explain the breakdown of the movement of surplus labor from the Maghreb countries of northern Africa and the turkey down to Europe in the era of the after world war boom in the European nations .
“Labor surplus which is interpreted with zero marginal labor productivity in agriculture the event in India show that withdrawal of a greater number of agricultural population will not lead to a fall in agricultural output.
In 1982, it’s was discovered that in Indonesia that wage wont adjust on ground with labor marginal product but in conjunction with subsistence nature of time and various social program”
For the Lewis model, there was a historical event in country like England between 1780 to 1840,Taiwan from 1950-1970 and Japan between 1870-1920 which the abundant labor for agriculture showing a great rise in the average agricultural labor productivity while that of the agricultural and real wage for non agricultural raise slowly until Lewis turning point is attained in the economy.
The Lewis model has been recorded and satisfied fully efficacious in Singapore.
Harris – Todaro
The Harris-Todaro Model it can be seen as the H – T Model ,it assume the difference in wage is the underlined factor for the migration from the rural to the urban areas depends primarily on the between the rural and urban sector of the markets (which is the difference in wage in the market). That is the assume wage of urban is the actual urban wage multiplied by the certainty of getting a paid job, calculated as
PWu=WEU
Which ,
Weu = wage Expected in Urban setting
P = certainty of getting a paid job where P is indicated
as: P = where,
Eu = available Employment at the urban setting
Uu = the rate of Unemployment of urban setting
and L = sum Labour force.
Second assumption of the Harris-Todaro is that all the members of the urban labour force have equal chances of obtaining or getting the jobs available for them. So Weu = Urban Wage multiplied by the Urban Employment Rate.
In Nigeria it can this can be seen that there is migration from rural areas llike the village to urban areas like the industrialized part like people move from nsukka a village to Lagos in search of greener pastures which occur as a result of differences in wage in the different zone .
Let’s picture it from this viewpoint , if the government of a country is concerned with promoting industrial development in an urban area, employment would increase and this would lead to an increase in productive of getting urban employment in the minds of the rural inhabitants. The movement from the urban area would have a mutliper effect and the result would can be seen in the urban areas can cause an increase more than how it was before the improvement in industry happens. At this moment labour migrants would like to accept the payment for services in the informal urban sector rather than returning to wait for a longer period of time for work that will be delay as employmen in urban setting is now in a state of balance .
Ugwu Amaechi Jude
2017/242434
amaechi.ugwu.242434@unn.edu.ng
HARRIS-TODARO MODEL
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used to explain some of the issues concerning rural-urban migration. The model assumes that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. It was the observation of “a curious economic phenomenon” in tropical Africa that led to the pioneering work of Harris and Todaro. The phenomenon was the continual and accelerating rural-urban labor migration despite the existence of positive marginal products in agriculture. Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural products while the urban sector is the manufacturing sector . In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector.
The probability of landing a job, according to Todaro, depends on the number of newly created jobs in the modern sector, the size of the population of the urban unemployed, and the length of time a migrant has been in the urban area. At any time, jobs were allocated as if by lottery.
Understandably, the longer one has been in the urban area, the more likely he will find a job in the manufacturing sector. The criterion used in making the decision to migrate or not is the expected relative present real values of the two choices.
LEWIS-FEI–RANIS MODEL OF ECONOMIC GROWTH
Lewis-Fei-Ranis model is similar to the Harris-Todaro model in the sense that it is based on the assumption of a two-sector economic system. In the case of Lewis-Fei-Ranis model, the economy is divided into two ; the “primitive sector“ and the “modern sector”. The primitive sector is agricultural inclined while the modern sector is an industrial economy.
The model postulated that countries especially the developing ones should shift from agriculture to industrial economy for them to attain a degree of development. The model advised the shift of labour from agriculture to industry in order to achieve this.
One the main critiques of this model is that it does not recognise the importance of agriculture in an economy. Agriculture is the main source of food and raw materials for industries and a shift of labour from agriculture to industry will cause a decline in food and raw materials supplies.
SURPLUS LABOUR THEORY
Surplus labour theory is a theory that explains the concepts of unpaid labour supplied by the workers in an economy. The theory was postulated by Karl Marx who was against capitalism and viewed surplus labour as one of the ills associated with capitalism. Surplus labour theory posits that workers offer more labour beyond what they need to survive and that most times the surplus or excess value offered are likely not to be rewarded. Karl Marx traced the concept of surplus labour theory to the emergence of trade and commerce. To Karl Marx, this is one of the ills of capitalism as employers of labour uses it to create class system.
COMPARISON TO NIGERIAN ECONOMY .
The three models/theories summarized above could be compared to the Nigerian economy. From what is going on in the country, it could be seen that the three models are obtainable in the Nigerian economy.
From the first two models which assumed a two-sector economic system. It could also be seen that Nigerian economy could be likened to a two-sector economic system where the rural/primitive sector is agrarian and the urban/modern sector is manufacturing/industrial inclined. In Nigeria, this is true in the sense that most rural communities engage in agriculture and the urban sector engages in manufacturing. The rural sector supplies the surplus agricultural products to the urban sector while the urban sector supplies their surplus to the rural sector.
The third theory is also witnessed in Nigerian economy. Almost all the time workers are not fully rewarded for the total labour they supplied. A critical example of this is the never ending battle between the Academic Staff Union of Universities (ASUU) and the Federal Government of Nigeria. This is a clear case of unrewarded labour supplied by the union.
Department : Economics/philosophy
Reg no: 2017/251702
LEWIS FEI RANIS MODEL (SURPLUS LABOUR THEORY)
INTRODUCTION:
Lewis (1954) proposed a seminal theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development. Later, Ranis and Fei (1961) formalised the Lewis theory and defined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model.
Subsequently, Ranis’ and Fei’s extension to Lewis’ model can be analysed. They observed the model by reading it from left to right and assessed the changes in the output and wage as more and more people moved from agriculture to the industry. A new concept was added – namely, disguised unemployment, which appears in the traditional subsistence sector. The marginal product of labour, which is observed as the slope of the production function, in agricultural sector is lower than in industry – in fact, it is zero before point B on Figure 1.3. Under competitive assumptions, the real wage rate would fall to zero, but due to the presence of institutional or non-market forces, the institutional wages are sustained. Therefore, there are gains to be had by switching resources away to the industrial sector. Nevertheless, it is generally not likely to happen because the market, left on its own, does not change. If the industrial sector does pay according to marginal product, then, as noted by Ray (1998), there would be efficiency gains available as long as the marginal product of the agricultural labour is less than the wage, whether it is zero or not. By decreasing the labour force in agriculture by a small amount (whilst still remaining in the surplus labour area), the total wage bill in agriculture falls along the diagonal straight line in FigureFigure6provided that the wage in agriculture does not rise. Since output does not fall, the reduction in the total wage bill gives an economy an agricultural surplus. Only at point C will this process come to an end because there is no more disguised unemployment – it only appears at points at which the marginal product of labour is less than the institutional wage. Hence, condition for the existence of disguised unemployment is:
W > MPL
Ranis and Fei subsequently claimed that the average wage bill in agricultural sector is no longer measured as a straight line. At point C, the slope of the production function is parallel to the wage bill line, yielding that the disguised unemployment is no longer observed. Furthermore, beyond point C the slope of the production function is parallel to the wage bill line, yielding that the disguised unemployment is no longer observed. Furthermore, beyond point C (when the disguisedly unemployed have been absorbed) the marginal product of labour exceeds the traditionally given wage rate (Ranis and Fei, 1961). The wage in agriculture begins to rise, because it becomes profitable to bid for labour[2]. As a result, wage bill falls more slowly.
LEWIS- FEI- RANIS MODEL
The Lewis (1954) theory of dualistic economic development provides the seminal contribution to theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150). The non-agricultural sector accumulates capital by drawing surplus labour out of the agricultural sector. The expansion of the non-agricultural sector takes advantage of the infinitely elastic supply of labour from the agricultural sector due to its labour surplus. When the surplus labour is exhausted, the labour supply curve in the non-agricultural sector becomes upward-sloping.
Ranis and Fei (1961) formalised Lewis’s theory by combining it with Rostow’s (1956) three “linear-stages-of-growth” theory. They disassembled Lewis’s two-stage economic development into three phases, defined by the marginal productivity of agricultural labour. They assume the economy to be stagnant in its pre-conditioning stage. The breakout point marks the creation of an infant non-agricultural sector and the entry into phase one. Agricultural labour starts to be reallocated to the non-agricultural sector. Due to the abundance of surplus agricultural labour, its marginal productivity is extremely low and average labour productivity defines the agricultural institutional wage. When the redundant agricultural labour force has been reallocated, the agricultural marginal productivity of labour starts to rise but is still lower than the institutional wage. This marks the shortage point at which the economy enters phase two of development. During phase two the remaining agricultural unemployment is gradually absorbed. At the end of this process the economy reaches the commercialisation point and enters phase three where the agricultural labour market is fully commercialised. Diagram 1 below illustrates the three phases defined by Ranis-Fei (1961, diagram 1.3):
Diagram 1. Agricultural output (QA), labour input (LA) and Lewis-Rains-Fei phases of economic development
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector.
BASICS OF THE MODEL
Depiction of Phase 1, Phase 2 and Phase 3 of the dual economy model using average output.
One of the biggest drawbacks of theLewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.
They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development. In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
Using the help of the figure on the left, we see that
PHASE ONE : AL (FROM FIGURE)=
According to Fei and Ranis, AD amount of labor (see figure) can be shifted from the agricultural sector without any fall in output. Hence, it represents surplus labor.
PHASE TWO: AP>MP
After AD, MP begins to rise, and industrial labor rises from zero to a value equal to AD. AP of agricultural labor is shown by BYZ and we see that this curve falls downward after AD. This fall in AP can be attributed to the fact that as agricultural laborers shift to the industrial sector, the real wage of industrial laborers decreases due to shortage of food supply, since less laborers are now working in the food sector. The decrease in the real wage level decreases the level of profits, and the size of surplus that could have been re-invested for more industrialization. However, as long as surplus exists, growth rate can still be increased without a fall in the rate of industrialization. This re-investment of surplus can be graphically visualized as the shifting of MP curve outwards. In Phase2 the level of disguised unemployment is given by AK. This allows the agricultural sector to give up a part of its labor-force until
MP=REAL WAGES=AB
Phase 3 begins from the point of commercialization which is at K in the Figure. This is the point where the economy becomes completely commercialized in the absence of disguised unemployment. The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor.
PHASE THREE : MP>CIW
The amount of labor that is shifted and the time that this shifting takes depends upon:
1. The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits;
2. The nature of the industry’s technical progress and its associated bias;
3. Growth rate of population.
So, the three fundamental ideas used in this model are:
1. Agricultural growth and industrial growth are both equally important;
2. Agricultural growth and industrial growth are balanced;
3. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the
Malthusian population trap .
CONCLUSION
below, are distinguished by the marginal productivity of agricultural labour. The entry into each phase is marked three turning points:
• The breakout point leads to phase one growth with redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural unemployment.
• The commercialisation point leads to phase three of self-sustaining economic growth with the commercialisation of the agricultural sector. The Lewis-Ranis-Fei theory of dualistic economic development therefore provides a suitable theoretical framework for studying the growth path of labour-surplus developing economies.
This shifting of labor can take place by the landlords’ investment activities and by the government’s fiscal measures. However, the cost of shifting labor in terms of both private and social cost may be high, for example transportation cost or the cost of carrying out construction of buildings. In addition to that, per capita agricultural consumption can increase, or there can exist a wide gap between the wages of the urban and the rural people. These three occurrences- high cost, high consumption and high gap in wages, are called as leakages , and leakages prevent the creation of agricultural surplus. In fact, surplus generation might be prevented due to a backward-sloping supply curve of labor as well, which happens when high income-levels are not consumed. This would mean that the productivity of laborers with rise in income will not rise. However, the case of backward-sloping curves is mostly unpractical.
Harris-Todaro model
INTRODUCTION OF HARRIS-TODARO MODEL :
The Harris–Todaro model, named after John R. Harris and Michael Todaro , is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income. John R. Harris and Michael P. Todaro presented the seminal ‘Two sector model’ in American Economic Association, 1970. This model is a pioneering study in the field encompassing rural-urban migration. The classical theory is used in development economics and is an economic illustration of migrants’ decision on expected income differentials between rural (agriculture) and urban (manufacturing) areas. The model of rural-urban migration is typically studied in the context of employment and unemployment situation in developing countries. The purpose of the model is to explain the critical urban unemployment problem in developing countries. The key hypothesis of Harris and Todaro’s model is that economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migration decision. In other words, this theory put forward that rural-urban migration will occur when the urban expected wage exceeds the rural obtain wage.
THE ASSUMPTIONS
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the types of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
Ya=AaN (1)
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a < 1 are parametric constants.
Both goods and labor markets are perfectly competitive. Nevertheless, there is segmentation in the labor market due to a high minimum urban wage politically determined.
In the rural sector, the real wage, perfectly flexible, is equal to the marginal productivity of labor in this sector:
Wa=AaN p, (3)
where wa is the real wage and p is the price of the agricultural good, both expressed in units of manufactured good. In the urban sector, a minimum wage, wm, is assumed fixed institutionally at a level above equilibrium in this labor market. It can be formalized as
Wa=AaN , such that Nm 0 and g > 0 are a parametric constants. g is the elasticity of p with respect to the ratio Ym/Ya.
The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified:
Na+Nu=N (6)
EQUILIBRIUM CONDITION OF THE HARRIS–TODARO MODEL
The formal statement of the equilibrium condition of the Harris–Todaro model is as follows:
Let wr be the wage rate (marginal productivity of labor) in the rural agricultural sector.
Let le be the total number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
Let lus be the total number of job seekers, employed and unemployed, in the urban sector.
Let wu be the wage rate in the urban sector, which could possibly be set by government with a minimum wage law.
Rural to urban migration will take place if:
wr Wu
At equilibrium,
wr = Wu
With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.
Therefore, migration from rural areas to urban areas will increase if:
Urban wages (w u ) increase in the urban sector (l e ), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (w r), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
CONCLUSION
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
Name: Ibegbunam chinelo ijeoma Reg No: 2017/249341
Department: economics/ political science Email: ibegbunamchinelo@gmail.comBlog: Chineloibegbunam @blogspot.com
1. LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
Mr President ,
From my comprehension, The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that was developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also called the surplus labor model . Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is enrichment and enhancement nt of industrial output by transferring labor from agricultural sector to industry.
Application in the Nigerian economy:
1. It promotes the economic growth of the country.
2. Provides equity distribution of infrastructure in both the rural and urban areas .
3. Increases the nation’s GDP
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income. According to Todaro, the probability or tendency of getting a job depends on the size of the urban population that is employed, number of newly created jobs in the urban sector, as well as the length or duration a labour migrant has been in that sector.
COMPARISON OF HARRIS- TODARO MODEL OF MIGRATION TO THE REAL WORLD AND IN NIGERIA
Despite the criticisms, the Harris-Todaro model is more realistic than the other dual economy models because it tries to tackle the problem of rural-urban migration that actually exists in LDCs. For instance the Lewis model assumes that there is no unemployment in the urban sector and when rural-urban migration takes place, the number of new jobs created in the urban sector exactly equals the number of migrants. the point of equilibrium is necessary in Nigeria for equal growth .
LEWIS FEI RANIS MODEL (SURPLUS LABOUR THEORY)
INTRODUCTION:
Lewis (1954) proposed a seminal theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labor-scarce “stage” of development. Later, Ranis and Fei (1961) formalised the Lewis theory and defined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model.
Subsequently, Ranis’ and Fei’s extension to Lewis’ model can be analyzed. They observed the model by reading it from left to right and assessed the changes in the output and wage as more and more people moved from agriculture to the industry. A new concept was added – namely, disguised unemployment, which appears in the traditional subsistence sector. The marginal product of labour, which is observed as the slope of the production function, in the agricultural sector is lower than in industry – in fact, it is zero before point B in Figure 1.3. Under competitive assumptions, the real wage rate would fall to zero, but due to the presence of institutional or non-market forces, the institutional wages are sustained. Therefore, there are gains to be had by switching resources away to the industrial sector. Nevertheless, it is generally not likely to happen because the market, left on its own, does not change. If the industrial sector does pay according to marginal product, then, as noted by Ray (1998), there would be efficiency gains available as long as the marginal product of the agricultural labour is less than the wage, whether it is zero or not. By decreasing the labour force in agriculture by a small amount (whilst still remaining in the surplus-labor area), the total wage bill in agriculture falls along the diagonal straight line in FigureFigure6provided that the wage in agriculture does not rise. Since output does not fall, the reduction in the total wage bill gives an economy an agricultural surplus. Only at point C will this process come to an end because there is no more disguised unemployment – it only appears at points at which the marginal product of labour is less than the institutional wage. Hence, the condition for the existence of disguised unemployment is:
W > MPL
Ranis and Fei subsequently claimed that the average wage bill in the agricultural sector is no longer measured as a straight line. At point C, the slope of the production function is parallel to the wage bill line, yielding that the disguised unemployment is no longer observed. Furthermore, beyond point C the slope of the production function is parallel to the wage bill line, yielding that the disguised unemployment is no longer observed. Furthermore, beyond point C (when the disguisedly unemployed have been absorbed) the marginal product of labour exceeds the traditionally given wage rate (Ranis and Fei, 1961). The wage in agriculture begins to rise because it becomes profitable to bid for labour[2]. As a result, the wage bill falls more slowly.
LEWIS- FEI- RANIS MODEL
The Lewis (1954) theory of dualistic economic development provides the seminal contribution to theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150). The non-agricultural sector accumulates capital by drawing surplus labour out of the agricultural sector. The expansion of the non-agricultural sector takes advantage of the infinitely elastic supply of labour from the agricultural sector due to its labour surplus. When the surplus labour is exhausted, the labour supply curve in the non-agricultural sector becomes upward-sloping.
Ranis and Fei (1961) formalised Lewis’s theory by combining it with Rostow’s (1956) three “linear-stages-of-growth” theory. They disassembled Lewis’s two-stage economic development into three phases, defined by the marginal productivity of agricultural labour. They assume the economy to be stagnant in its pre-conditioning stage. The breakout point marks the creation of an infant non-agricultural sector and the entry into phase one. Agricultural labour starts to be reallocated to the non-agricultural sector. Due to the abundance of surplus agricultural labour, its marginal productivity is extremely low and average labour productivity defines the agricultural institutional wage. When the redundant agricultural labour force has been reallocated, the agricultural marginal productivity of labour starts to rise but is still lower than the institutional wage. This marks the shortage point at which the economy enters phase two of development. During phase two the remaining agricultural unemployment is gradually absorbed. At the end of this process the economy reaches the commercialisation point and enters phase three where the agricultural labour market is fully commercialised. Diagram 1 below illustrates the three phases defined by Ranis-Fei (1961, diagram 1.3):
Diagram 1. Agricultural output (QA), labour input (LA) and Lewis-Rains-Fei phases of economic development
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector.
BASICS OF THE MODEL
Depiction of Phase 1, Phase 2 and Phase 3 of the dual economy model using average output.
One of the biggest drawbacks of theLewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.
They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development. In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
Using the help of the figure on the left, we see that
PHASE ONE : AL (FROM FIGURE)=
According to Fei and Ranis, AD amount of labor (see figure) can be shifted from the agricultural sector without any fall in output. Hence, it represents surplus labor.
PHASE TWO: AP>MP
After AD, MP begins to rise, and industrial labor rises from zero to a value equal to AD. AP of agricultural labor is shown by BYZ and we see that this curve falls downward after AD. This fall in AP can be attributed to the fact that as agricultural laborers shift to the industrial sector, the real wage of industrial laborers decreases due to shortage of food supply, since less laborers are now working in the food sector. The decrease in the real wage level decreases the level of profits, and the size of surplus that could have been re-invested for more industrialization. However, as long as surplus exists, growth rate can still be increased without a fall in the rate of industrialization. This re-investment of surplus can be graphically visualized as the shifting of MP curve outwards. In Phase2 the level of disguised unemployment is given by AK. This allows the agricultural sector to give up a part of its labor-force until
MP=REAL WAGES=AB
Phase 3 begins from the point of commercialization which is at K in the Figure. This is the point where the economy becomes completely commercialized in the absence of disguised unemployment. The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor.
PHASE THREE : MP>CIW
The amount of labor that is shifted and the time that this shifting takes depends upon:
1. The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits;
2. The nature of the industry’s technical progress and its associated bias;
3. Growth rate of population.
So, the three fundamental ideas used in this model are:
1. Agricultural growth and industrial growth are both equally important;
2. Agricultural growth and industrial growth are balanced;
3. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the
Malthusian population trap .
CONCLUSION
below, are distinguished by the marginal productivity of agricultural labour. The entry into each phase is marked three turning points:
• The breakout point leads to phase one growth with redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural unemployment.
• The commercialisation point leads to phase three of self-sustaining economic growth with the commercialisation of the agricultural sector. The Lewis-Ranis-Fei theory of dualistic economic development therefore provides a suitable theoretical framework for studying the growth path of labour-surplus developing economies.
This shifting of labor can take place by the landlords’ investment activities and by the government’s fiscal measures. However, the cost of shifting labor in terms of both private and social cost may be high, for example transportation cost or the cost of carrying out construction of buildings. In addition to that, per capita agricultural consumption can increase, or there can exist a wide gap between the wages of the urban and the rural people. These three occurrences- high cost, high consumption and high gap in wages, are called as leakages , and leakages prevent the creation of agricultural surplus. In fact, surplus generation might be prevented due to a backward-sloping supply curve of labor as well, which happens when high income-levels are not consumed. This would mean that the productivity of laborers with rise in income will not rise. However, the case of backward-sloping curves is mostly unpractical.
Harris-Todaro model
INTRODUCTION OF HARRIS-TODARO MODEL :
The Harris–Todaro model, named after John R. Harris and Michael Todaro , is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income. John R. Harris and Michael P. Todaro presented the seminal ‘Two sector model’ in American Economic Association, 1970. This model is a pioneering study in the field encompassing rural-urban migration. The classical theory is used in development economics and is an economic illustration of migrants’ decision on expected income differentials between rural (agriculture) and urban (manufacturing) areas. The model of rural-urban migration is typically studied in the context of employment and unemployment situation in developing countries. The purpose of the model is to explain the critical urban unemployment problem in developing countries. The key hypothesis of Harris and Todaro’s model is that economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migration decision. In other words, this theory put forward that rural-urban migration will occur when the urban expected wage exceeds the rural obtain wage.
THE ASSUMPTIONS
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the types of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
Ya=AaN (1)
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a < 1 are parametric constants.
Both goods and labor markets are perfectly competitive. Nevertheless, there is segmentation in the labor market due to a high minimum urban wage politically determined.
In the rural sector, the real wage, perfectly flexible, is equal to the marginal productivity of labor in this sector:
Wa=AaN p, (3)
where wa is the real wage and p is the price of the agricultural good, both expressed in units of manufactured good. In the urban sector, a minimum wage, wm, is assumed fixed institutionally at a level above equilibrium in this labor market. It can be formalized as
Wa=AaN , such that Nm 0 and g > 0 are a parametric constants. g is the elasticity of p with respect to the ratio Ym/Ya.
The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified:
Na+Nu=N (6)
EQUILIBRIUM CONDITION OF THE HARRIS–TODARO MODEL
The formal statement of the equilibrium condition of the Harris–Todaro model is as follows:
Let wr be the wage rate (marginal productivity of labor) in the rural agricultural sector.
Let le be the total number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
Let lus be the total number of job seekers, employed and unemployed, in the urban sector.
Let wu be the wage rate in the urban sector, which could possibly be set by government with a minimum wage law.
Rural to urban migration will take place if:
wr Wu
At equilibrium,
wr = Wu
With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.
Therefore, migration from rural areas to urban areas will increase if:
Urban wages (w u ) increase in the urban sector (l e ), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (w r), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
CONCLUSION
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
My name :Samari Emomotimi Akpobulou
Department : Econonmics/philosophy
Reg no : 2017/251702
Introduction
From time in memorial many economist have come up with different approachs and models of economics growth in other to explain a possible solution to the patterns of different types of economics growth model which includes the following: Harris Todaro, Fei-Ranisi, solow, neoclassical, endogenous, exogenous, lewis etc. However this models have it’s criticisms and limitations.
Harris-Todaro Model Of Migration:
Two Economist, Prof. J.R. Harris and P. M. Todaro came up with an article named “Migration, Unemployment and Development: wrote on a Two-SectorAnalysis” in 1970 presented a model on rural-urban migration in underdeveloped countries.
According to them, the main idea is that labour migration in underdeveloped countries is because of rural-urban differences in average expected wages rather than actual wages. The migrants consider the various opportunities of employment available to them in rural and urban sectors and choose the one that maximises their expected wages from migration.
The minimum urban wage is substantially higher than the rural wage. If more employment opportunities are created in the urban sector at the minimum wage, the expected will rise and rural-urban migration will increase. Expected wages are measured by the difference in real urban income and rural agricultural income and the probability of a migrant’s getting an urban job.
The following assumptions are based on Harris Todaro model:
1. There are two sectors in the economy – the rural or agricultural sector (A) and the urban or manufacturing sector (M).
2. The model operates in the short run.
3. The marginal production of labour in agriculture (MPLA) and of industry (MPLM) are determined by their respective technologies.
4. Capital is available in fixed quantities in the two sectors.
5. There are L workers in economy with LA and LM numbers employed in the rural and urban sectors respectively.
Conclusion:
The main drawback of this model is that it does not incorporate the costs of rural-urban migration or the relatively higher costs of urban living which the migrants have to incur in the urban sector.
Policy implications and conclusion
Therefore it is applicable to the real world, using Nigeria as a case study many leaves the rural areas to live in the city like Abuja, lagos, pH, etc. where they have higher expected wage rates as a result of high concentration of many industries thereby leaving the rural areas i.e the village for elderly people who only depends on agriculture products.
Lewis ranis supply model
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H.
Fei and Gustav Ranis and can be understood as an extension of the Lewis model.
It can also be called Surplus Labor model. It acknowledge the presence of a dual economy constitute both the modern and the radical sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
According to this theory, the radical sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem.
Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials.
Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Conclusion: Lewis’ main focus was on the reallocation of labor in the economy until the turning point is reached, that is the time when labor reallocation has surpassed population growth long enough for dualism to reduction in functionality and the economy to become fully commercialized.
The primitive sector consists of agricultural sector while the modern consists of industrial sector but both exist and work togethert in the economy for a better substantial food and raw material in the economy.
Introduction
From time in memorial many economist have come up with different approachs and models of economics growth in other to explain a possible solution to the patterns of different types of economics growth model which includes the following: Harris Todaro, Fei-Ranisi, solow, neoclassical, endogenous, exogenous, lewis etc. However this models have it’s criticisms and limitations.
Harris-Todaro Model Of Migration:
Two Economist, Prof. J.R. Harris and P. M. Todaro came up with an article named “Migration, Unemployment and Development: wrote on a Two-SectorAnalysis” in 1970 presented a model on rural-urban migration in underdeveloped countries.
According to them, the main idea is that labour migration in underdeveloped countries is because of rural-urban differences in average expected wages rather than actual wages. The migrants consider the various opportunities of employment available to them in rural and urban sectors and choose the one that maximises their expected wages from migration.
The minimum urban wage is substantially higher than the rural wage. If more employment opportunities are created in the urban sector at the minimum wage, the expected will rise and rural-urban migration will increase. Expected wages are measured by the difference in real urban income and rural agricultural income and the probability of a migrant’s getting an urban job.
The following assumptions are based on Harris Todaro model:
1. There are two sectors in the economy – the rural or agricultural sector (A) and the urban or manufacturing sector (M).
2. The model operates in the short run.
3. The marginal production of labour in agriculture (MPLA) and of industry (MPLM) are determined by their respective technologies.
4. Capital is available in fixed quantities in the two sectors.
5. There are L workers in economy with LA and LM numbers employed in the rural and urban sectors respectively.
Conclusion:
The main drawback of this model is that it does not incorporate the costs of rural-urban migration or the relatively higher costs of urban living which the migrants have to incur in the urban sector.
Policy implications and conclusion
Therefore it is applicable to the real world, using Nigeria as a case study many leaves the rural areas to live in the city like Abuja, lagos, pH, etc. where they have higher expected wage rates as a result of high concentration of many industries thereby leaving the rural areas i.e the village for elderly people who only depends on agriculture products.
Lewis ranis supply model
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H.
Fei and Gustav Ranis and can be understood as an extension of the Lewis model.
It can also be called Surplus Labor model. It acknowledge the presence of a dual economy constitute both the modern and the radical sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
According to this theory, the radical sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem.
Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials.
Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Conclusion: Lewis’ main focus was on the reallocation of labor in the economy until the turning point is reached, that is the time when labor reallocation has surpassed population growth long enough for dualism to reduction in functionality and the economy to become fully commercialized.
The primitive sector consists of agricultural sector while the modern consists of industrial sector but both exist and work togethert in the economy for a better substantial food and raw material in the economy.
NAME: IGWILO UGOCHUKWU HENRY
REG NO: 2017/249345
EMAIL: igwilougochukwu0@gmail.com
SUMMARY OF THE LEWIS FEI-RANIS MODEL (surplus labour theory).
Arthur Lewis provided one of the best-known and optimistic models of economic development in developing countries. Although sixty years old in its earliest iteration, the model remains relevant today to developing countries. Since Lewis’s original work on the labour transition between sectors, much literature has been concerned with various extensions of the model.
GENERAL ASSUMPTION
1 A dual economy The dual model provides an ideal type, in the Weberian sense or as a heuristic device, for thinking about structural transformation and economic development with an emphasis on labour, the factor of production that dominates most developing countries. Lewis noted the ‘wide range of specifications’ to which his dual economy model had been characterized, which led him to reiterate the core elements as his saw them: First, there are two sectors, hereinafter called ‘modern’ and ‘traditional’, such that the modern sector grows by recruiting labor from the traditional.
2. unskilled labour is paid more in the modern sector than in the traditional sector for the same quantity and quality of work.
3. unskilled labour is initially abundant in the sense that at the current wage much more labour is offered to the modern sector than that sector wishes to hire.
Lewis argued that the driver of capital accumulation was a sectorial movement of the factor of production abundant in developing countries, labour, from the ‘traditional’ or ‘non-capitalist’ sector (of low productivity, low wage, priced to average product not marginal product, and thus with widespread disguised unemployment) to the ‘modern’ or ‘capitalist’ sector (of higher productivity and where wages are set by productivity in the ‘subsistence sector’). Crucial is the existence of surplus labour in the traditional or non-capitalist sector.
Because of this, wages are set just above subsistence across the whole economy, leading to the transfer of labour over time from traditional or non-capitalist to modern or capitalist sectors and the capture of labour productivity gains to capitalists as profits as these are the source of growth via reinvestment. The floor for wages is institutionally set at subsistence. When the surplus labour disappears an integrated labour market and economy emerge and wages will then start to rise. Lewis posited that the transition of labour from the traditional to the modern sector was to be understood as follows:
To them, Economic growth in an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector.
In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development.
Ranis and Fei later formalized the Lewis theory of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model.
• The breakout point leads to phase one growth with
redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural unemployment.
• The commercialization point leads to phase three of self-sustaining economic growth with the commercialization of the agricultural sector.
The Lewis-Ranis-Fei theory of dualistic economic development therefore provides a suitable theoretical framework for studying the growth path of labour-surplus developing economies.
The key to the process is the use which is made of the capitalist surplus. In so far as this is reinvested in creating new capital, the capitalist sector expands, taking more people into capitalist employment out of the subsistence sector. The surplus is then larger still, capital formation is still greater, and so the process continues until the surplus labour disappears.
When the surplus labour disappears, an integrated labour market and economy emerge. The Lewis model was intended as a critique of the neoclassical approach in that labour is available to the modern or capitalist sector of an economy not in a perfectly elastic supply but upward sloping rather than flat, and with a distinction between surplus-producing labour and subsistence labour. Lewis also rejected the assumptions of neoclassical economists of perfect competition, market clearing and full employment and Lewis made the distinction, noted above, between productive labour, which produced a surplus, and unproductive labour, which did not.
In short, in the Lewis model, growth is sustained by the transition of labour from traditional to modern sectors and this from low productivity to higher productivity sectors. The sectors are not necessarily unified geographically. As Lewis puts it: What we have is not one island of expanding capitalist employment, surrounded by a vast sea of subsistence workers, but rather a number of such tiny islands . . . We find a few industries highly capitalized, such as mining or electric power, side by side with the most primitive techniques; a few high class shops, surrounded by masses of old style traders; a few highly capitalized plantations, surrounded by a sea of Lewisian.
The production functions and growth decompositions We assume a dualistic economic framework with the agricultural and non-agricultural Sectors representing the traditional and modern sectors in the Lewis theory. Accordingly, Agricultural output (QA) is a function of cultivated hectares (HA), labour input (LA) and Agricultural capital (KA). Output of the non-agricultural sector (QN) depends on Employed labour (LN) and capital stock (KN). Both production functions feature Hicks Neutral technological progress (fA(T), fN (T)) where T denotes time; the exact functional Form of these contains trends that reflect socio-economic events and possibly dummies For structural shifts.
LIMITATIONS/CRITIQUES
There have been various critiques of the Lewis model, many of which are of a ‘red herring’ variety as Ranis puts it, meaning they are easily responded to or actually criticisms of Lewisians rather than the writing of Lewis himself. Many relate to the assumption of labour abundance in the subsistence sector (and thus the dominance of the wage from that sector across the economy), and the emergence of the urban informal sector, although Lewis’s conception of surplus labour explicitly included the urban informal sector.2 Lewis did not ignore the urban informal sector in the unlimited supply of labour concept:
The phenomenon is not, however, by any means confined to the countryside. Another large sector to which it applies is the whole range of casual jobs—the workers on the docks, the young men who rush forward asking to carry your bag as you appear, the jobbing gardener, and the like. These occupations usually have a multiple of the number they need, each of them earning very small sums from occasional employment; frequently their number could be halved without reducing output in this sector.
Informality was taken a step further in Ranis and Stewart (1999) who developed a model of dualism within the urban informal sector between a dynamic sub-sector linked to the formal sector and a less dynamic ‘sponge’ (meaning highly labour absorbing) sub-sector. There are other critiques of the Lewis model. There has been an incorrect view that the Lewis model takes little account of open economies and thus contemporary globalization and global economic integration. This point is absolutely a misperception. The role of external trade, and investment and finance are discussed in the 1954 paper and are highly evident in many other writings of Lewis, given his interest in primary commodity-exporting countries. The closed economy versions of the Lewis model (the first and the second) were building blocks to get to the third model (the open economy model), which Lewis believed represented most developing countries. It is the third model, the one that explains the tendency for declining factorial terms of trade, which was a major concern for Lewis.
CONCLUSON AND OPINION
it is evident that as more and more agricultural workers are withdrawn and no longer demand a portion of the agricultural goods, the surplus of agricultural goods begins to appear. It must be noted that each individual that moves from agricultural sector to the industry carries their own subsistence bundle together with them, meaning that they must be compensated for the transfer. This is because Ranis and Fei named the portion of total agricultural output in excess of the consumption requirements of the agricultural labour force at the institutional wage as the total agricultural surplus.
In order to find out the required minimum industrial wage, the average wage must be multiplied by the relative price between agriculture and industry. In the surplus phase, it remains constant, because the average agricultural surplus is not changing.
At this point, an expansion in the industrial sector would not drive up the wage rate. If an individual that moves from agriculture to the industry when labour in agriculture is at the surplus phase, there will be no compensation needed for that particular individual, as he carries his own food basket to the industry. In fact, industrial wage is constant and this individual is not worse off as a result.
HARRIS TODARO MODEL OF MIGRATION
The fundamental contribution of Harris and Todaro’s rural-urban two sector migration model was to build a model that fit the stylized facts of the labour market. On the lines of the theory, developing countries adopted program on integrated rural development which encouraged an increase in the rural traditional sector wage. The theory proves that the higher the unemployment rate, the lower is the probability of new migrants from the countryside actively seeking formal sector employment who are unable to find it. The significant findings of the theory are: first, if the expected urban wage equals rural income, there is no incentive to migrate. Second, if the expected urban wage is greater than rural income, there is a great incentive to move from rural to urban area. Third, if the expected urban wage is less than rural incomes, there would be an incentive to move in other direction.
GENERAL ASSUMPTIONS
• Two sectors: urban (manufacture) and rural (agriculture)
• Rural-urban migration condition: when urban real wage exceeds real agricultural product
• No migration cost
• Perfect competition
• Cobb-Douglas production function
• Static approach
• Low risk aversion
VARIABLES AND PARAMETERS
Exogenous variables
– total labour force (workers)
– minimum wage rate in manufacturing (dollars)
Endogenous variables
– urban labour in manufacturing (workers)
– unemployed labour force (workers)
– rural labour force in agriculture (workers)
– wage rate in agriculture (dollars)
– expected wage rate in manufacturing (dollars)
THE TODARO MIGRATION MODEL.
Starting from the assumption that migration is based primarily on privately rational economic calculations despite the existence of high urban unemployment, the Todaro model postulates that migration proceeds in response to urban-rural differences in expected rather than actual earnings.
The fundamental premise is that as decision-makers migrants consider the various labor-market opportunities available to them as, say, between the rural and urban sectors, choosing the one that maximizes their “expected” gains from migration.
Expected gains are measured by the difference in real incomes between rural and urban work opportunities and the probability of a new migrant’s obtaining urban job.
The “thought process” of the Todaro model can be explained as follows. Suppose the average unskilled or semiskilled rural worker has a choice between being a farm labourer for an annual average real income of, say, 50 units per year, and migrating to the city where a worker with his skill or educational background can obtain wage employment yielding an annual real income of, say, 100 units.
The more traditional economic models of migration that place exclusive emphasis on the income differential factor as the determinant of the decision to migrate would indicate a clear choice in this situation. Higher-paying urban job is aimed.
These migration models were developed largely in the context of advanced industrial economies and, as such, implicitly assumed the existence of full or near-full employment in urban areas. In a full-employment environment the decision to migrate can in fact be predicated solely on securing the highest-paying job wherever it becomes available, other factors being held constant. Simple economic theory would then indicate that such migration should lead to a reduction in wage differentials through geographic changes in supply and demand, both in areas of out-migration (where incomes rise) and in points of in-migration (where they fall).
LIMITATIONS/CRITIQUES
Some of the assumptions of the Harris-Todaro’s model were judged to be too restrictive. The model also assumes that potential migrants are risk neutral where the poor migrants will likely be risk averse, as in they are indifferent between a certain expected rural income and an uncertain expected urban income of the same magnitude.
CONCLUSION/OPINION
Unemployment is non-existent in the rural agricultural sector because rural agricultural production and the subsequent labour market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity.
NAME: IGWILO UGOCHUKWU HENRY
REG NO: 2017/249345
EMAIL: igwilougochukwu.com
SUMMARY OF THE LEWIS FEI-RANIS MODEL (surplus labour theory).
Arthur Lewis provided one of the best-known and optimistic models of economic development in developing countries. Although sixty years old in its earliest iteration, the model remains relevant today to developing countries. Since Lewis’s original work on the labour transition between sectors, much literature has been concerned with various extensions of the model.
GENERAL ASSUMPTION
1 A dual economy The dual model provides an ideal type, in the Weberian sense or as a heuristic device, for thinking about structural transformation and economic development with an emphasis on labour, the factor of production that dominates most developing countries. Lewis noted the ‘wide range of specifications’ to which his dual economy model had been characterized, which led him to reiterate the core elements as his saw them: First, there are two sectors, hereinafter called ‘modern’ and ‘traditional’, such that the modern sector grows by recruiting labor from the traditional.
2. unskilled labour is paid more in the modern sector than in the traditional sector for the same quantity and quality of work.
3. unskilled labour is initially abundant in the sense that at the current wage much more labour is offered to the modern sector than that sector wishes to hire.
Lewis argued that the driver of capital accumulation was a sectorial movement of the factor of production abundant in developing countries, labour, from the ‘traditional’ or ‘non-capitalist’ sector (of low productivity, low wage, priced to average product not marginal product, and thus with widespread disguised unemployment) to the ‘modern’ or ‘capitalist’ sector (of higher productivity and where wages are set by productivity in the ‘subsistence sector’). Crucial is the existence of surplus labour in the traditional or non-capitalist sector. Because of this, wages are set just above subsistence across the whole economy, leading to the transfer of labour over time from traditional or non-capitalist to modern or capitalist sectors and the capture of labour productivity gains to capitalists as profits as these are the source of growth via reinvestment. The floor for wages is institutionally set at subsistence. When the surplus labour disappears an integrated labour market and economy emerge and wages will then start to rise. Lewis posited that the transition of labour from the traditional to the modern sector was to be understood as follows:
To them, Economic growth in an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development.
Ranis and Fei later formalized the Lewis theory of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model.
• The breakout point leads to phase one growth with
redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural unemployment.
• The commercialization point leads to phase three of self-sustaining economic growth with the commercialization of the agricultural sector.
The Lewis-Ranis-Fei theory of dualistic economic development therefore provides a suitable theoretical framework for studying the growth path of labour-surplus developing economies.
The key to the process is the use which is made of the capitalist surplus. In so far as this is reinvested in creating new capital, the capitalist sector expands, taking more people into capitalist employment out of the subsistence sector. The surplus is then larger still, capital formation is still greater, and so the process continues until the surplus labour disappears.
When the surplus labour disappears, an integrated labour market and economy emerge. The Lewis model was intended as a critique of the neoclassical approach in that labour is available to the modern or capitalist sector of an economy not in a perfectly elastic supply but upward sloping rather than flat, and with a distinction between surplus-producing labour and subsistence labour. Lewis also rejected the assumptions of neoclassical economists of perfect competition, market clearing and full employment and Lewis made the distinction, noted above, between productive labour, which produced a surplus, and unproductive labour, which did not.
In short, in the Lewis model, growth is sustained by the transition of labour from traditional to modern sectors and this from low productivity to higher productivity sectors. The sectors are not necessarily unified geographically. As Lewis (1954, p. 147) puts it: What we have is not one island of expanding capitalist employment, surrounded by a vast sea of subsistence workers, but rather a number of such tiny islands . . . We find a few industries highly capitalized, such as mining or electric power, side by side with the most primitive techniques; a few high class shops, surrounded by masses of old style traders; a few highly capitalized plantations, surrounded by a sea of Lewisian
.
The production functions and growth decompositions We assume a dualistic economic framework with the agricultural and non-agricultural Sectors representing the traditional and modern sectors in the Lewis theory. Accordingly, Agricultural output (QA) is a function of cultivated hectares (HA), labour input (LA) and Agricultural capital (KA). Output of the non-agricultural sector (QN) depends on Employed labour (LN) and capital stock (KN). Both production functions feature Hicks Neutral technological progress (fA(T), fN (T)) where T denotes time; the exact functional Form of these contains trends that reflect socio-economic events and possibly dummies For structural shifts.
LIMITATIONS/CRITIQUES
There have been various critiques of the Lewis model, many of which are of a ‘red herring’ variety as Ranis puts it, meaning they are easily responded to or actually criticisms of Lewisians rather than the writing of Lewis himself. Many relate to the assumption of labour abundance in the subsistence sector (and thus the dominance of the wage from that sector across the economy), and the emergence of the urban informal sector, although Lewis’s conception of surplus labour explicitly included the urban informal sector.2 Lewis did not ignore the urban informal sector in the unlimited supply of labour concept:
The phenomenon is not, however, by any means confined to the countryside. Another large sector to which it applies is the whole range of casual jobs—the workers on the docks, the young men who rush forward asking to carry your bag as you appear, the jobbing gardener, and the like. These occupations usually have a multiple of the number they need, each of them earning very small sums from occasional employment; frequently their number could be halved without reducing output in this sector.
Informality was taken a step further in Ranis and Stewart (1999) who developed a model of dualism within the urban informal sector between a dynamic sub-sector linked to the formal sector and a less dynamic ‘sponge’ (meaning highly labour absorbing) sub-sector. There are other critiques of the Lewis model. There has been an incorrect view that the Lewis model takes little account of open economies and thus contemporary globalization and global economic integration. This point is absolutely a misperception. The role of external trade, and investment and finance are discussed in the 1954 paper and are highly evident in many other writings of Lewis, given his interest in primary commodity-exporting countries. The closed economy versions of the Lewis model (the first and the second) were building blocks to get to the third model (the open economy model), which Lewis believed represented most developing countries. It is the third model, the one that explains the tendency for declining factorial terms of trade, which was a major concern for Lewis.
CONCLUSON AND OPINION
it is evident that as more and more agricultural workers are withdrawn and no longer demand a portion of the agricultural goods, the surplus of agricultural goods begins to appear. It must be noted that each individual that moves from agricultural sector to the industry carries their own subsistence bundle together with them, meaning that they must be compensated for the transfer. This is because Ranis and Fei named the portion of total agricultural output in excess of the consumption requirements of the agricultural labour force at the institutional wage as the total agricultural surplus.
In order to find out the required minimum industrial wage, the average wage must be multiplied by the relative price between agriculture and industry. In the surplus phase, it remains constant, because the average agricultural surplus is not changing.
At this point, an expansion in the industrial sector would not drive up the wage rate. If an individual that moves from agriculture to the industry when labour in agriculture is at the surplus phase, there will be no compensation needed for that particular individual, as he carries his own food basket to the industry. In fact, industrial wage is constant and this individual is not worse off as a result.
HARRIS TODARO MODEL OF MIGRATION
DISCUSSION
.
The fundamental contribution of Harris and Todaro’s rural-urban two sector migration model was to build a model that fit the stylized facts of the labour market. On the lines of the theory, developing countries adopted program on integrated rural development which encouraged an increase in the rural traditional sector wage. The theory proves that the higher the unemployment rate, the lower is the probability of new migrants from the countryside actively seeking formal sector employment who are unable to find it. The significant findings of the theory are: first, if the expected urban wage equals rural income, there is no incentive to migrate. Second, if the expected urban wage is greater than rural income, there is a great incentive to move from rural to urban area. Third, if the expected urban wage is less than rural incomes, there would be an incentive to move in other direction.
GENERAL ASSUMPTIONS
• Two sectors: urban (manufacture) and rural (agriculture)
• Rural-urban migration condition: when urban real wage exceeds real agricultural product
• No migration cost
• Perfect competition
• Cobb-Douglas production function
• Static approach
• Low risk aversion
VARIABLES AND PARAMETERS
Exogenous variables
– total labour force (workers)
– minimum wage rate in manufacturing (dollars)
Endogenous variables
– urban labour in manufacturing (workers)
– unemployed labour force (workers)
– rural labour force in agriculture (workers)
– wage rate in agriculture (dollars)
– expected wage rate in manufacturing (dollars)
THE TODARO MIGRATION MODEL.
Starting from the assumption that migration is based primarily on privately rational economic calculations despite the existence of high urban unemployment, the Todaro model postulates that migration proceeds in response to urban-rural differences in expected rather than actual earnings.
The fundamental premise is that as decision-makers migrants consider the various labor-market opportunities available to them as, say, between the rural and urban sectors, choosing the one that maximizes their “expected” gains from migration. Expected gains are measured by the difference in real incomes between rural and urban work opportunities and the probability of a new migrant’s obtaining urban job.
The “thought process” of the Todaro model can be explained as follows. Suppose the average unskilled or semiskilled rural worker has a choice between being a farm labourer for an annual average real income of, say, 50 units per year, and migrating to the city where a worker with his skill or educational background can obtain wage employment yielding an annual real income of, say, 100 units. The more traditional economic models of migration that place exclusive emphasis on the income differential factor as the determinant of the decision to migrate would indicate a clear choice in this situation. Higher-paying urban job is aimed.
These migration models were developed largely in the context of advanced industrial economies and, as such, implicitly assumed the existence of full or near-full employment in urban areas. In a full-employment environment the decision to migrate can in fact be predicated solely on securing the highest-paying job wherever it becomes available, other factors being held constant. Simple economic theory would then indicate that such migration should lead to a reduction in wage differentials through geographic changes in supply and demand, both in areas of out-migration (where incomes rise) and in points of in-migration (where they fall).
LIMITATIONS/CRITIQUES
Some of the assumptions of the Harris-Todaro’s model were judged to be too restrictive. The model also assumes that potential migrants are risk neutral where the poor migrants will likely be risk averse, as in they are indifferent between a certain expected rural income and an uncertain expected urban income of the same magnitude.
CONCLUSION/OPINION
.
Unemployment is non-existent in the rural agricultural sector because rural agricultural production and the subsequent labour market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity.
Eze udoka chidiebube
2017/242428
ezeudoka99@gmail .com
Dept of Economics
LEWIS-FEI-RANIS MODEL OF SURPLUS LABOR
The models of Lewis,Ranis and Fei depict economic development as essentially a process of reallocation of labour from the overpopulated agricultural sector to the growing industrial sector.It recognizes the presence of a dual economy comprising both the economic situation of unemployment and underemployment of resources into account.According to this theory,the primitive sector consists of the existing agricultural sector in the economy and the modern sector is rapidly emerging but small industrial sector. Development can be brought about only by a complete shift in the focal point of progress.
SIGNIFICANCE OF THE MODEL
It shows the rate of growth of the industrial ssctor depends on the amount of total agricultural surplus and on the amount of profits that are earned in the industrial sector.Therefore, the greater the amount of surplus and the amount of surplus put into productive investment and greater the amount of industrial profits earned, the greater the rate of growth of the industrial economy.
ASSUMPTIONS OF THE MODEL.
It is assumed that it is a close model and thus,there is no presence of foreign trade in the economy, which is highly unrealistic as food and raw materials cannot be imported.
The reluctant expansionary growth in the industrial sector of underdeveloped countries can be attributed to the lagging growth in the productivity of subsistence agriculture.
Application of the model to Nigerian Economy
In a country like Nigeria, it is obvious that the agricultural sector has been on neglect by the government, Nigeria is only concerned with her oil reserves .In this Case.Nigeria should improve on its agricultural sector and industrial sector, so that there will b reduction in surplus labor.
HARRRIS-TODARO MODEL OF MIGRATION
The Harris-Todaro model is an economic model developed in 1970 and used in development economics. The main assumption of the model is that migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials.This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
In the model,an equilibrium is reached when the expected wage in urban areas is equal to the marginal product of an agricultural worker.The model assumes that unemployment is nonexistent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income However, in the equilibrium, there will be positive unemployment in the urban sector.
Wr=wage rate in the rural sector
Ie=total number of jobs available in the urban sector
Iu=total number of job seekers
Wu=wage rate of urban sector
Rural-Urban migration will take place if Wele/lu
At equilibrium, Wr=le/lu.
CONCLUSION
Migration from rural areas to urban areas will increase if
Urban wages increase with urban sector increasing the expected rural income.
Agricultural productivity decreases,lowering marginal productivity and wages in the agricultural sector decreasing the expected rural income.However, even though this migration creates unemployment, and induces informal sector growth, this behavior is economically rational and utility maximizing in the Harris Todaro model.THE IMPLICATION OF THIS MODEL IN NIGERIAN ECONOMY
Reduction of rural population, this implies that the number of people living in the rural areas are reduced and when this happens, it impedes the development of such rural areas,this is because, if there no human beings are small in a rural area,there will be neglect by the government, and thus,there is no development.
Overpopulation of the urban areas,this implies that there is congestion of people in the urban area,and when this happens, it causes a lot of social vices and unemployment.
Therefore in order to address this issue of rural to urban migration, government should provide those things that attract people to the city such as good health care facilities, good roads,better working conditions, electricity etc.
Nane: Aniagba Onyekachukwu Anthony
Reg.No:2017/249310
Department:Combined Social Sciences (Economics/Political Science).
Gmail:Anthoniocysaro@gmail.com
Briefly discuss each of the following models and how they apply to the Nigerian Economy
Lewis-Fei-Ranis Model of Economic Growth
Haris-Todaro Model of Migration
Lewis-Fei-Ranis Model of Economic Growth
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labour model. This model came as a result of flaw in the Lewis model. It recognizes the presence of a dual economy comprising of both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is rapidly emerging but mostly small industrial sectors. Development can be brought about only by a complete shift in the point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labour from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labour supply. At the same time, growth in the agricultural sector must not be neglected and its output should be sufficient to support the whole populace with adequate/sufficient food and raw materials. According Harrod Domar, saving and investment become the driving forces when it comes to economic development of underdeveloped countries. Rei-Fanis model has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development.
Like in the agricultural sector, Fei and Ranis assume constant returns to scale in the industrial sector. However, the main factors of production are capital and labour. In the graph (A) right hand side, the have been plotted taking labour on the horizontal axis and capital on the vertical axis. The expansion path of the industrial sector is given by the line OAoA1A2. As capital increases from Ko to K1 to K2 and labour increases from Lo to L1 and L2, the industrial output represented by the production contour Ao, A1 and A3 increases accordingly.
According to this model, the prime labour supply source of the industrial sector is the agricultural sector, due to redundancy in the agricultural labour force. (B) shows the labour supply curve for the industrial sector S. PP2 represents the straight line part of the curve and is a measure of the redundant agricultural labour force on a graph with industrial labour force on the horizontal axis and output on the vertical axis. Due to the redundant agricultural labour force, the remain constant but once the curve starts sloping upwards from point P2, the upward sloping indicates that additional labour would be supplied only with a corresponding rise in the level.
MPPL curves corresponding to their respective capital and labour levels have been drawn as Mo, M1, M2 and M3. When capital stock rises from Ko to K1, the rises from Mo to M1. When capital stock is Ko, the MPPL curve cuts the labour supply curve at equilibrium point Po. At this point, the total income is Wo and is represented by the shaded area POLoPo. λ is the equilibrium profit and is represented by the shaded area qPPo. Since the labourers have extremely low income-levels, they barely save from that income and hence industrial profits (πo) become the prime source of investment funds in the industrial sector.
Here, gives the total supply of investment funds (given that rural savings are represented )
Total industrial activity rises due to increase in the total supply of investment funds, leading to increased industrial employment.
Consider a case where a labourer shifts from the agricultural to the industrial sector. In that case, the land left behind would be divided between the remaining labourers and as a result, the transformation curve shift from SAG to RTG. Like at point A, MPL at point T would be 0 and APL would continue to be the same as that at A (assuming constant returns to scale). If we consider MPL = 0 as the point where agriculturalists live on the subsistence level, then the curve RTG must be flat at point T in order to maintain the same level of output. However, that would imply leisure satiation or leisure as an inferior good, which are two extreme cases. It can be surmised then that under normal cases, the output would decline with shift of labour to industrial sector, although the per capita output would remain the same. This is because, a fall in the per capita output would mean fall in consumption in a way that it would be lesser than the subsistence level, and the level of labour input per head would either rise or fall. The reluctant expansionary growth in the industrial sector of underdeveloped countries can be attributed to the lagging growth in the productivity of subsistence agriculture. This suggests that increase in surplus becomes more important a determinant as compared to re-investment of surplus, an idea that was utilized by Jorgenson in his 1961 model that centred around the necessity of surplus generation and surplus persistence one Of The Main Arguments of The Lewi Fei Model is the fact that the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. According to Fei and Ranis, Aggregate demand amount of labour can be shifted from the agricultural sector without any fall in output. Hence, it represents surplus labour. The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in the productivity of labour should take place prior to the labour shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. the three fundamental ideas used in this model are:
1)Agricultural growth and industrial growth are both equally important.
2)Agricultural growth and industrial growth are balanced.
3)Only if the rate at which labour is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up.
As an underdeveloped country goes through its development process, labour is reallocated from the agricultural to the industrial sector. More the rate of reallocation, faster is the growth of that economy. The economic rationale behind this idea of labour reallocation is that of faster economic development.
In real life comparism it is important to note that to a developing country like Nigeria,Lei-Fani says that Developing countries should move from Agricultural based income generated system to I industrial generated income system in order to foster economic growth and also they when changing to an industrial system that it should be balanced, meaning that there should be no defects in the other sectors so that it doesn’t affect the workers in the other sectors. The model really stated the fact that both the economy can drive on a dual economic system.
Like in the agricultural sector, Fei and Ranis assume constant returns to scale in the industrial sector. However, the main factors of production are capital and labour. In the graph (A) right hand side, the have been plotted taking labour on the horizontal axis and capital on the vertical axis. The expansion path of the industrial sector is given by the line OAoA1A2. As capital increases from Ko to K1 to K2 and labour increases from Lo to L1 and L2, the industrial output represented by the production contour Ao, A1 and A3 increases accordingly.
According to this model, the prime labour supply source of the industrial sector is the agricultural sector, due to redundancy in the agricultural labour force. (B) shows the labour supply curve for the industrial sector S. PP2 represents the straight line part of the curve and is a measure of the redundant agricultural labour force on a graph with industrial labour force on the horizontal axis and output on the vertical axis. Due to the redundant agricultural labour force, the remain constant but once the curve starts sloping upwards from point P2, the upward sloping indicates that additional labour would be supplied only with a corresponding rise in the level.
MPPL curves corresponding to their respective capital and labour levels have been drawn as Mo, M1, M2 and M3. When capital stock rises from Ko to K1, the rises from Mo to M1. When capital stock is Ko, the MPPL curve cuts the labour supply curve at equilibrium point Po. At this point, the total income is Wo and is represented by the shaded area POLoPo. λ is the equilibrium profit and is represented by the shaded area qPPo. Since the labourers have extremely low income-levels, they barely save from that income and hence industrial profits (πo) become the prime source of investment funds in the industrial sector.
Here, gives the total supply of investment funds (given that rural savings are represented )
Total industrial activity rises due to increase in the total supply of investment funds, leading to increased industrial employment.
Consider a case where a labourer shifts from the agricultural to the industrial sector. In that case, the land left behind would be divided between the remaining labourers and as a result, the transformation curve shift from SAG to RTG. Like at point A, MPL at point T would be 0 and APL would continue to be the same as that at A (assuming constant returns to scale). If we consider MPL = 0 as the point where agriculturalists live on the subsistence level, then the curve RTG must be flat at point T in order to maintain the same level of output. However, that would imply leisure satiation or leisure as an inferior good, which are two extreme cases. It can be surmised then that under normal cases, the output would decline with shift of labour to industrial sector, although the per capita output would remain the same. This is because, a fall in the per capita output would mean fall in consumption in a way that it would be lesser than the subsistence level, and the level of labour input per head would either rise or fall. The reluctant expansionary growth in the industrial sector of underdeveloped countries can be attributed to the lagging growth in the productivity of subsistence agriculture. This suggests that increase in surplus becomes more important a determinant as compared to re-investment of surplus, an idea that was utilized by Jorgenson in his 1961 model that centred around the necessity of surplus generation and surplus persistence one Of The Main Arguments of The Lewi Fei Model is the fact that the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. According to Fei and Ranis, Aggregate demand amount of labour can be shifted from the agricultural sector without any fall in output. Hence, it represents surplus labour. The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in the productivity of labour should take place prior to the labour shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. the three fundamental ideas used in this model are:
1)Agricultural growth and industrial growth are both equally important.
2)Agricultural growth and industrial growth are balanced.
3)Only if the rate at which labour is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up.
As an underdeveloped country goes through its development process, labour is reallocated from the agricultural to the industrial sector. More the rate of reallocation, faster is the growth of that economy. The economic rationale behind this idea of labour reallocation is that of faster economic development.
In real life comparism it is important to note that to a developing country like Nigeria,Lei-Fani says that Developing countries should move from Agricultural based income generated system to I industrial generated income system in order to foster economic growth and also they when changing to an industrial system that it should be balanced, meaning that there should be no defects in the other sectors so that it doesn’t affect the workers in the other sectors. The model really stated the fact that both the economy can drive on a dual economic system.
How this can be applied in Nugerian Economy is when our Nigerian Government try as much as to balance both the Industrial Petroleum sector with The Agricultural sector instead of mainly focusing on the Petroleum sector. Because in doing this,it generates quite alot of income for the Country and also brings about Economic growth and Development.
2)Haris-Todaro Model of Migration
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
Therefore, migration from rural areas to urban areas will increase if:
Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
This can be applied in a country like Nigeria when the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income,so the Nigerian Government should and can try to balance this so that the height continuous Rural-Urban migration will reduce.
Nnadi Chinwe Monica
2017/241532
Education Economics
chinwe.nnadi.241532@unn.edu.ng
Chiebest.blogspot.com
Harris todaro model of migration
The distinctive concept in the model is that the rate of migration flow from rural (agricultural) areas to
urban (industrial) areas is determined by the difference between expected urban wages and rural wages.
The rural-urban two-sector model centrally holds the following futures:
Real wages (adjusted for cost-of-living differences) were higher in urban formal sector jobs than in rural traditional sector jobs.
To be hired for a formal sector job, it was necessary to be physically present in the urban areas where the formal sector jobs were located.
Consequently, from the first two features, more workers searched for formal sector jobs than wereactually hired. Employers hired some of the searchers but not all of them.
To maintain equality between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting would be characterized by urban unemployment.
Any temporary difference in the expected wages between one sector and another would be eroded as workers migrate from the low expected wage labour market to the high expected wage one.
Functional Model
There are two regions: rural (agricultural) and urban (industrial) in two sector economic model. The crucial assumption of the Harris and Todaro’s model is that workers base their migration decision on their expected incomes at urban (industrial) areas. As the basic model is static, the expected income is just the weighted average of the urban wage and the unemployment benefit, the weights being the probabilities to find and not to find an urban job. The model assumes that the rate of rural-urban (m= M/LR) is a function of:
i)The probability that an urban labour can successfully find a modern sector job, which can be expressed as a positive function of the current urban employment rate EU/LU,or LU-EU/LU, a negative function of urban unemployment rate.
ii) The urban-rural real income differentialis expressed asYU/YR= W (W greater than 1),
Besides, migration will also be related to,
iii) Other factors (Z), such as distance, personal conduct, urban amenities.
Where
m= Rate of migration from rural to urban areas
M= Actual volume of rural-urban migration
LR= Rural labour force
EU= Level of urban employment
LU= Urban labour force
YU= Urban real income
YR=Rural real income
W= Ratio between rural/urban real income
Therefore, the basic rural-migration migration model is expressed as:
(rural-urban migration) m = function of (current urbanemployment rate, urban-rural real income differential, and personal factors).
Thus, (rural-urban migration rate) m= f (EU /LU, W,Z) …. 1.1
= f (EU /LU) (holding W and Z constant)
= Function of theratio between the level of urban employment and urban labour force.
Where
f (EU /LU) is greater than Zero;
f (W) is greater than Zero, and
f (Z) may have +ve or – ve values;
(here fis the time derivative of three elements)
That is, migration rate is a function of theratio between the level of urban employment and urbanlabourforce, or the probability to find a job in anurban industrial sector.
Besides, urban labour force growth can be expressed as:
lU/LU=r + LR/LU(m)= r + LR/LU f (EU/LU) ..1.2
r= natural growth rate of rural/urban labour force
lU= time derivative of LU (urban labour force)
That is, time derivative of urban labourforce growth rate isafunction of urban labour force growth rate and the probability of finding ajob in a modern urban sector (as derived from equation 1.1 above)
The model, then tried to compare the live path of equation (1.1) or (1.2) with the growth rate of urban employment, and discussed rural-urban migration and urban employment under thedifferentassumption of population and employment growthrates.
Discussion
The fundamental contribution of Harris and Todaro’s rural-urban two sector migration model was to build a model that fit the stylized facts of the labour market. On the lines of the theory, developing countries adopted program on integrated rural development which encouraged anincrease in the rural traditional sector wage. The theory proves that the higher the unemployment rate, the lower is the probability of new migrants from the countryside actively seeking formal sector employment who are unable to find it. The significant findings of the theory are: first,if the expected urban wage equals rural income, there is no incentive to migrate. Second, if the expected urban wage is greater than rural income, there is a great incentive to move from rural to urban area. Third, if the expected urban wage is less than rural incomes, there would be an incentive to move in other direction. Fourth, the expected urban wage depends on what type of job migrant is engaged in. Therefore,the Haris Todaro’smodel helps policy-makers to avoid two mistakes. One is to assume that development efforts should necessarily be channeled to the sectors where the poor are. The other is to assume that efforts should necessarily be focused on getting the poor out of the sectors in which they presently are.
The Todaro Migration Model Explained:
Starting from the assumption that migration is based primarily on privately rational economic calculations despite the existence of high urban unemployment, the Todaro model postulates that migration proceeds in response to urban-rural differences in expected rather than actual earnings. The fundamental premise is that as decision-makers migrants consider the various labor-market opportunities available to them as, say, between the rural and urban sectors, choosing the one that maximizes their “expected” gains from migration. Expected gains are measured by the difference in real incomes between rural and urban work opportunities and the probability of a new migrant’s obtaining urban job. A schematic framework describing the multiplicity of factors affecting the migration decision is portrayed in figure 34.4. While the factors illustrated in figure 34.4 include both economic and noneconomic variables, the economic ones are assumed to predominate.
The “thought process” of the Todaro model can be explained as follows. Suppose the average unskilled or semiskilled rural worker has a choice between being a farm laborer (or working his own land) for an annual average real income of, say, 50 units per year, and migrating to the city where a worker with his skill or educational background can obtain wage employment yielding an annual real income of, say, 100 units. The more traditional economic models of migration that place exclusive emphasis on the income differential factor as the determinant of the decision to migrate would indicate a clear choice in this situation. The worker should seek the higher-paying urban job. It is important to recognize, however, that these migration models were developed largely in the context of advanced industrial economies and, as such, implicitly assumed the existence of full or near-full employment in urban areas. In a full-employment environment the decision to migrate can in fact be predicated solely on securing the highest-paying job wherever it becomes available, other factors being held constant. Simple economic theory would then indicate that such migration should lead to a reduction in wage differentials through geographic changes in supply and demand, both in areas of out-migration (where incomes rise) and in points of in-migration (where they fall).
Unfortunately, such an analysis is not very realistic in the context of the institutional and economic framework of most Third World nations. First of all, these countries are beset by a chronic and serious problem of urban surplus labor, so that many migrants cannot expect to secure high-paying urban jobs immediately upon arrival. In fact, it is much more likely that upon entering the urban labor market many migrants will either become totally unemployed or will seek casual and part time employment in the urban traditional sector for some time.
Consequently, in his decision to migrate the individual must in effect balance the probabilities and risks of being unemployed or underemployed for a considerable period of time against the positive urban-rural real-income differential. That it is possible for our hypothetical migrant to earn twice as much annual real income in an urban area as in his rural environment may be of little consequence if his actual probability of securing the higher-paying job within a year is one chance in five. In such a situation the migrant’s actual probability of being successful in securing the higherpaying urban job is 20%, so that his “expected” urban income for the one-year period is in fact 20 units, not the 100 units that a migrant in a full-employment urban environment might expect to receive. Thus, with a one-period time horizon and a probability of success of 20% it would be irrational for this migrant to seek an urban job even though the differential between urban and rural earnings capacity is 100%. On the other hand, if the probability of success were, say, 60%, so that the expected urban income is 60 units, it would be entirely rational for such a migrant with his one-period time horizon to try his luck in the urban job “lottery” even though urban unemployment may be extremely high.
Returning now to the more realistic situation of longer time horizons for potential migrants, especially considering that the vast majority are between the ages of 15 and 24, It is argued that the decision to migrate should be represented on the basis of a “permanent income” calculation. If the migrant anticipates a relatively low probability of finding regular wage employment in the initial period but expects this probability to increase over time as he is able to broaden his urban contacts, then it would still be rational for him to migrate even though expected urban income during the initial period or periods might be lower than expected rural income. As long as the present value of the net stream of expected urban income over the migrant’s planning horizon exceeds that of the expected rural income, the decision to migrate is economically justified. This, in essence, is the “thought process” that is schematically depicted in figure 34.4.
Rather than wage adjustments bringing about an equilibrium between urban and rural incomes, as would be the case in a competitive model, it is further argued that rural-urban migration itself must act as the ultimate equilibrating force. With urban wages assumed to be inflexible in a downward direction, rural and urban “expected” incomes can be equalized only by falling urban job probabilities resulting from rising urban unemployment. For example, if average rural wages are 60 units and urban wages are institutionally set at a level of 120 units, then in a one-period model a 50% urban unemployment rate would be necessary to vitiate the private profitability of further migration. Since expected incomes are defined in terms of both wages and employment probabilities, argument is that it is not only possible but likely to have continued migration in spite of the existence of sizable rates of urban unemployment. In the above numerical example, migration would continue even if the urban unemployment rate were 30 or 40% .
Limitation
1. Some of the assumptions of the Harris-Todaro’s model were judged to be too restrictive.
2. The model also assumes that potential migrants are risk neutral where the poor migrants will likely be risk averse, as in they are indifferent between a certain expected rural income and an uncertain expected urban income of the same magnitude.
3. The assumption that there exists a perfect competition in rural agriculture sector is not realistic.
Relating this model to Nigeria economy:
The urban cities are filled with people both those working and those not working, those with shelther and those without shelther. Those who are not employed can’t contribute to the growth of the economy instead there should be a development in the rural sector both in infrastructure and industries so that there will be growth.
Name: Ugwu Sandra Ogechukwu
Reg no: 2017/241433
Email: sandra.ugwu.241433@unn.edu.ng
Answer:
LEWIS-FEI-RANIS MODEL
(SURPLUS LABOUR THEORY)
INTRODUCTIONS
Lewis theory was one of the early theoretical models of development that focused on the structural transformation of subsistence economy. The theory was formulated by Nobel laureate W. Arthur Lewis in the 1950s and later modified, formalized and extended by John Fei and Gustav Ranis. It became the general theory of development process in surplus labour developing nations during the 1960s and early 1970s.
ARGUMENTS OF THE MODEL
In the Lewis model, the underdeveloped economy consists of two sectors; the traditional and the industrial sector. The traditional sector which is the overpopulated rural subsistence sector is characterized by zero marginal productivity; a situation that permits Lewis to classify this as ‘surplus labour’ in the sense that it can be withdrawn from the traditional agricultural sector without any loss of output. On the other hand, the industrial sector is characterized by high productivity which results from gradual transfer of labour from the subsistence (traditional) sector to the modern urban industrialized sector.
The primary focus of the Lewis model is on both the process of labour transfer and the growth of output and employment in the modern (industrial) sector which is brought about by output expansion in the sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern (industrial) sector. Such investment is made possible by the excess of modern sector profits over wages on the assumption that capitalist reinvest all their profits. Lewis also assumed that the level of wages in the industrial sector was constant and determined as a given premium over a fixed average subsistence level of wages in the traditional agricultural sector. At the constant urban wage, the supply curve of rural labour to modern sector labour supply is considered perfectly elastic.
APPLICATION OF MODEL TO THE NIGERIAN ECONOMY
Although the Lewis two-sector development model is simple and roughly reflects the historical experience of economic growth in the West, four of its key assumptions do not fit the institutional and economic realities of Nigeria.
First, the model implicitly assumes that the rate of labour transfer and employment creation in the modern sector is proportional to the rate of modern sector capital accumulation. The faster the rate of capital accumulation the higher the growth rates of the modern sector and the faster the rate of new job creation. This is not always the case in Nigeria as capitalists in most cases choose to invest in more sophisticated laboursaving capital equipment which makes production capital intensive and hence less demand for labour in the modern sector (which means reduction in job creation). It is also worthy to note that the capitalist profit is not always reinvested as we can consider a scenario of ‘capital flight’. Capital flight is a situation where the profits made by capitalists are sent abroad (either saved or invested abroad) hence leading to zero growth of capital in the local economy. It has become a norm for Nigerian capitalist to invest or save profit abroad as they assume high security of investment and more returns (profit) on investment.
The second questionable assumption of the Lewis model is the notion that surplus labour exists in rural areas while there is full employment in the urban areas. This assumption however gives room to zero marginal productivity assumption in the rural area. This is not valid as contemporary research indicates that there is little surplus labour in the rural areas in Nigeria; which is to say that marginal product of labour is not zero but rather subject to diminishing marginal returns. Hence, surplus labour can be said to be little since addition of labour in the rural area to a certain extent can lead to zero or negative productivity.
The third controversial assumption is the notion of a competitive modern sector labour market that guarantees the continued existence of constant real urban wages up to the point where the supply of rural surplus labour is exhausted. This assumption has been nullified in Nigeria as it has been observed that wages tend to increase overtime due to factors like union bargaining power, civil service wage scales and multinational corporations hiring practices.
A final concern with the Lewis model is its assumption of diminishing returns in the modern industrial sector. Yet there is much evidence that increasing returns prevail in that sector, posing special problems for development policymaking.
In summary, when we take into account the laboursaving bias of most modern technological transfer, the existence of substantial capital flight, the widespread nonexistence of rural surplus labour, the growing prevalence of urban surplus labour, and the tendency for modern sector wages to rise rapidly even where substantial open unemployment exist; it could be concluded that the Lewis model is not applicable in Nigeria.
HARRIS-TODARO MODEL
(THEORY OF MIGRATION)
INTRODUCTION
Harris-Todaro model also known as the theory of migration is an economic model developed in 1970 by John R.Harris and Michael Todaro. It is an economic model used in development economics to explain some of the issues concerning rural urban migration.
ARGUMENTS OF THE MODEL
The main argument of the model is that migration decision is based on the difference between expected income in the urban areas and rural wages (rather than just differences in wages). When the difference between expected income in urban areas and rural wage is high, there is a higher rate of migration and otherwise when low. Hence, equilibrium is attained in the model when the expected wage in the urban area is equal to the marginal product of labour in the rural area.
The model also argues that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labour market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income.
However, even though this migration creates unemployment and induces informal sector growth, this behaviour is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
APPLICATION OF THE MODEL IN THE NIGERIAN ECONOMY
The Harris-Todaro model can be said to be a more realistic and applicable model of growth in the Nigerian economy. Over the years there has been a high rate of migration from rural to urban areas due to information on expected income. Thus, labour tends to leave the rural (agricultural sector) to the urban areas in search of ‘greener pasture’. ‘Greener pasture’ here means that expected income in urban areas should be higher than present rural wage.
This migration has led to unemployment in the urban area but can still be considered rational since the individual expects to earn more than what he earns in the rural area. However, there is always a fall in expectation as there is a pressure on urban areas to accommodate and provide jobs for more than its capacity.
Hence, the point of equilibrium is important in Nigeria. The point of equilibrium is attained where the expected rural income equals the expected urban income. To attain this point the Nigerian government should not only concentrate on the development of urban areas but rather should ensure an equitable development between the two sectors (rural and urban). An equitable development will ensure that expected rural wage will be equal to expected urban income.
Name: Agbedo Chibuzo Frances
Reg no: 2017/249296
Department: Combined Social Science(Economics/Political Science)
Email: francesagbedo@gmail.com
Lewis-Fei-Ranis Model
The Fei–Ranis model of economic growth is a dualism model in developmental economics developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries. Fei and Ranis emphasized strongly on the industry-agriculture interdependency and said that a robust connectivity between the two would encourage and speedup development.
Assumptions
The first assumption of the model was that the modern sector employment creation and labour transfer rate is proportional to the rate of capital accumulation in the modern sector. Marginal productivity of labour, henceforth MPL, is positive in the modern sector. Labour could be transferred from the agricultural sector to the modern sector at zero cost, yielding net profits in the industry leading to a higher rate of investment: countries can thus develop rapidly (Todaro and Smith, 2009 pp 118).
The second was the notion that surplus labour exists in the rural areas, while the urban areas were said to have full employment. This, Todaro said, was because there was over-population in the rural area where MPL is zero. Actual output of labour was used to determine their wages (Todaro and Smith, 2009, pp 118).
Thirdly was an assumption of diminishing returns in the modern sector, mostly in the industrial areas. But, there is evidence that there is a prevalent increase in returns. Finally, there was an unreal assumption that if a modern labour sector was competitive, it guaranteed a continuous existence of real urban wages to a point that surplus labour is exhausted in the rural sector (Todaro and Smith, 2009, pp 119)
The three fundamental ideas used in this model are:
1. Agricultural growth and industrial growth are both equally important
2. Agricultural growth and industrial growth are balanced
The indispensability of labor
As an underdeveloped country goes through its development process, labor is reallocated from the agricultural to the industrial sector. More the rate of reallocation, faster is the growth of that economy. The economic rationale behind this idea of labor reallocation is that of faster economic development. The essence of labor reallocation lies in Engel’s Law, which states that the proportion of income being spent on food decreases with increase in the income level of an individual, even if there is a rise in the actual expenditure on food. For reallocation
example, if 90 per cent of the entire population of the concerned economy is involved in agriculture, that leaves just 10 per cent of the population in the industrial sector. As the productivity of agriculture increases, it becomes possible for just 35 per cent of population to maintain a satisfactory food supply for the rest of the population. As a result, the industrial sector now has 65 per cent of the population under it. This is extremely desirable for the economy, as the growth of industrial goods is subject to the rate of per capita income, while the growth of agricultural goods is subject only to the rate of population growth, and so a bigger
labor supply to the industrial sector would be welcome under the given conditions. In fact, this labor reallocation becomes necessary with time since consumers begin to want more of industrial goods than agricultural goods in relative terms.
However, Fei and Ranis were quick to mention that the necessity of labor reallocation must be linked more to the need to produce more capital investment goods as opposed to the thought of industrial consumer goods following the discourse of Engel’s Law. This is because the assumption that the demand for industrial goods is high seems unrealistic, since the real wage in the agricultural sector is extremely low and that hinders the demand for industrial goods. In addition to that, low and mostly constant wage rates will render the wage rates in the industrial sector low and constant. This implies that demand for industrial goods will not rise at a rate as suggested by the use of Engel’s Law. Since the growth process will observes a slow-paced increase in the consumer purchasing power, the dualistic economies follow the path of natural austerity, which is characterized by more demand and hence importance of capital good industries as compared to consumer good ones. However, investment in capital goods comes with a long gestation period, which drives the private entrepreneurs away. This suggests that in order to enable growth, the government must step in and play a major role, especially in the initial few stages of growth. Additionally, the government also works on the social and economic overheads by the construction of roads, railways, bridges, educational institutions, health care facilities and so on.
Limitations/Criticisms
Lewis’ central problem was identifying the major causes of growth and their constraints. According to Lewis, the most important growth constraint in output was the lack of productive capital accumulation. The Lewis model is criticised on the grounds that it neglects agriculture. Fei–Ranis model goes a step beyond and states that agriculture has a very major role to play in the expansion of the industrial sector. In fact, it says that the rate of growth of the industrial sector depends on the amount of total agricultural surplus and on the amount of profits that are earned in the industrial sector. So, larger the amount of surplus and the amount of surplus put into productive investment and larger the amount of industrial profits earned, the larger will be the rate of growth of the industrial economy. As the model focuses on the shifting of the focal point of progress from the agricultural to the industrial sector, Fei and Ranis believe that the ideal shifting takes place when the investment funds from surplus and industrial profits are sufficiently large so as to purchase industrial capital goods like plants and machinery. These capital goods are needed for the creation of employment opportunities. Hence, the condition put by Fei and Ranis for a successful transformation is that Rate of increase of capital stock & rate of employment opportunities > Rate of population growth
Berry and Soligo in their 1968 paper have criticized this model for its MPL=0 assumption, and for the assumption that the transfer of labor from the agricultural sector leaves the output in that sector unchanged in Phase 1. They show that the output changes, and may fall under various land tenure systems, unless the following situations arise:
1. Leisure falls under the inferior good category
2. Leisure satiation is present.
3. There is perfect substitutability between food and leisure, and the marginal rate of substitution is constant for all real income levels.
Now if MPL>0 then leisure satiation option becomes invalid, and if MPL=0 then the option of food and leisure as perfect substitutes becomes invalid. Therefore, the only remaining viable option is leisure as an inferior good.
• While mentioning the important role of high agricultural productivity and the creation of surplus for economic development, they have failed to mention the need for capital as well. Although it is important to create surplus, it is equally important to maintain it through technical progress, which is possible through capital accumulation, but the Fei-Ranis model considers only labor and output as factors of production.
• The question of whether MPL = 0 is that of an empirical one. The underdeveloped countries mostly exhibit seasonality in food production, which suggests that especially during favorable climatic conditions, say that of harvesting or sowing, MPL would definitely be greater than zero.
• Fei and Ranis assume a close model and hence there is no presence of foreign trade in the economy, which is very unrealistic as food or raw materials cannot be imported. If we take the example of Japan again, the country imported cheap farm products from other countries and this made better the country’s terms of trade. Later they relaxed the assumption and said that the presence of a foreign sector was allowed as long as it was a “facilitator” and not the main driving force.
• The reluctant expansionary growth in the industrial sector of underdeveloped countries can be attributed to the lagging growth in the productivity of subsistence agriculture.
• Stagnation has not been taken into consideration, and no distinction is made between labor through family and labor through wages. There is also no explanation of the process of self-sustained growth, or of the investment function.
Harris Todaro Model of Migration
A typical dualistic model in development economics contains two sectors, a traditional or agricultural
sector in the rural area and a modern or manufacturing sector in the urban area. The most familiar single-sector model is the growth theory of Harrod-Domar (Harrod 1939 and 1948, Domar 1946). The most representative and influential dualistic framework is that of Lewis (1954). The ideas of surplus labor, subsistence wages, and turning points in the development of a dualistic economy in Lewis (1954) were later rigorously and diagrammatically
formalized by Ranis and Fei (1961). Ranis and Fei also showed how agricultural surplus could lead to the growth of industries. The production relations of a dual economy, according to Jorgenson (1961), was characterized by asymmetry. More precisely, he assumed that output in the agricultural sector was a function of land and labor alone (there is no capital accumulation in this sector), and was characterized by diminishing return to scale. On the other hand, the output of the urban sector depended on capital and labor alone (no land was required), and the production function displayed constant return to scale. Since the amount of land and capital in the economy was assumed fixed, the only problem was to allocate labor between the two sectors.
The common features of the dualistic theories discussed so far and some other models of that nature are that
1). there is no unemployment in the modern sector, and
2). the sectoral wage differential is assumed fixed or proportional to the wage level in the urban sector. These models were later labeled as “orthodox” by Corden and Findlay (1971). The unorthodox thinking was first and independently introduced by several economists, notably among whom were Michael Todaro (1969) and John Harris (Harris and Todaro 1970). The essence of the new thinking, which has to be reminiscent of the Keynesian revolution, is that there can be an equilibrium with the existence of a chronic large amount of urban unemployment.
The most important factor that causes urban population explosion has been the migration of labor from the rural areas into the cities throughout the less developed world.
Population growth also contributes to this phenomenon but in a much less scale, since it rarely exceeds 3%. In the context of a dualistic model, the rural sector is discharging labor too rapidly and the urban sector is hiring labor too slowly because it is too highly capital intensive (Lewis 1965). As a result, the “urban manifestations of the employment problem” becomes the most visible feature of poverty and underdevelopment of the Third World countries (Lubell 1988). It has been pointed out by many that economic considerations, or urban-rural wage differentials, play an important role in determining the extent of labor migration. The higher than competitive urban wage is due to a combination of trade-union pressure, nationalistic government pressure on foreign enterprises, and the new social conscience of big entrepreneurs (Lewis 1965).
Todaro’s main contribution is the introduction of the probability of employment as an element in the decision making process of a potential migrant. He proposed what he called “a more realistic picture of labor migration in less developed countries”, i.e, a two-stage process. The first stage is where the rural migrant enters the urban area and settles down in the so called “traditional urban sector” (or more popularly, the informal sector) for a certain period of time. The second stage is reached when the migrant finds a more permanent job in the modern sector. Note that Todaro and later on some others did not consider the informal urban sector explicitly, its employees (usually underemployed) not being distinguished from those who are not employed at all.
They make no income on their own and were supposed to live out of the support of their relatives in their origins or in the cities (for a vivid description of the informal sector, see Lewis (1954)) .
Harris and Todaro (1970), formulated the idea that the rural wage is equated to the expected urban wage, into the now famous Harris-Todaro equation, or where w^ is the flexible wage in the agricultural sector which is equated to the value of the marginal product in that sector, /3 is the probability of employment, depending on the number of newly created jobs and the size of the population of the urban unemployed, and w„ is the wage in the manufacturing sector and is assumed to be fixed institutionally (either because of union activities or a friendly government towards to the workers in the modern sector) above the competitive level. Unlike in the orthodox models, the urban wage, not the sectoral wage differential, is assumed to be fixed. A very effective illustration of what we will refer to as the Harris-Todaro model was given by Corden and Findlay (1975). Their geometric presentation of the model was straightforward and elucidating. The major contribution, however, is the introduction of the intersectoral capital mobility into the original Harris-Todaro model. They also treated the economy as small and open, enabling the prices of the products from both sectors to be fixed.
The policy implications of the Harris-Todaro model are understandably different from those of the orthodox models. When there is a wage differential with no urban unemployment, wage subsidy in the manufacturing sector is clearly the first best policy, which restores the output of the modern sector to its level under no labor market distortion. With urban unemployment, a wage subsidy alone may not be optimal. Harris and Todaro (1970) suggested a wage subsidy to the manufacturing sector, combined with a restriction on migration. Here it is worth giving more attention to the work of Corden and Findlay (1975) since it is from their framework where we extend the line of research. Given sectoral capital mobility and small country assumptions, and using the net change in the value of total outputs as criterion, they also concluded that output subsidies, especially a subsidy on the manufactures, were even less desirable than wage subsidies. A output subsidy on the agricultural sector, they noted, could be beneficial if capital is sector specific. A tariff on imports of manufactures, which raises the urban output but lowers the agricultural output and is equivalent to a subsidy to the manufacturing sector financed by taxing the agricultural sector, was considered undesirable since it may cause other distortions (eg. distortion in consumption).
Despite its popularity among economists, some of the assumptions of the HT model have been subjected to criticism and gone under revision ever since it was developed. The main critiques are
summarized by Williamson (1988) as:
1. The lottery style job allocation excludes investment in job search on the part of the immigrants;
2. The informal sector is not explicitly modelled;
3. There is not enough evidence to support the assumption of a rigid wage in the modern sector. Moreover, besides trade union pressure or minimum wage legislation, the wage differentials among
sectors could be explained as well by specific training costs;
4. The issue of discount rates and rational migrants is ignored;
5. The influence on decision making of risk and risk attitudes on the part of the potential immigrants is
not included; and
6. Differentials in skill levels among the migrants are
not accounted for.
A modified Harris-Todaro equation was proposed to allow for the consideration of risk attitude. The equation took the following form:
w„ = w,,
where w, = crjSw^ is the expected urban wage and 0 s a s 1 was the measurement of risk aversion. The immediate implication of incorporating risk aversion into the HT model is a higher urban employment rate (jS) . We will later express this idea in terms of utility functions. It is worth mentioning the two
special cases imbedded in the above equation.
If a = 1, or if workers are risk neutral, it reduces to the original HT model;
if a = 0, or the expected wage is zero, either because manufacturing jobs are not available to the unemployed or
workers are extremely risk averse, it becomes the orthodox wage differential model where there is no unemployment in the urban area. Therefore, wage subsidies are more effective when a is lower than when it is higher. As pointed out by Corden and Findlay, the constant wage assumption is very easy to handle. It should be pointed out that the constant service wage assumption makes CD’s three-sector model no different
from the original HT model as far as the properties of model and its policy implications are concerned. To see this, one only needs to examine and compare the HT condition for the two models. CD’s assumption would lead to the following Harris Todaro condition:
w = |3w+ {l-/3)e,
where e is the constant and positive service wage. The above can be written as
w’ = jSw ,
where w’ = w – e, and W = W – e. Mathematically, it is exactly the same as in the Harris Todaro model.
The most important critique to the HT model, as noted by Williamson (1988), is the failure to address the relationship between risk and migration, which was discussed by Stark and Levhari (1982), Karz and Stark (1986), etc. These authors discussed production and employment risk (due to natural disasters, for instance), which exacerbates poverty and misery in the rural sector and is considered an incentive for migration. Thus risk aversion on the part of the potential immigrants will raise the urban unemployment.
NAME: ANACHUNAM DABERECHI MARYJANE
REG NO: 2017/241448
EMAIL: daberechi.anachunam.241448@unn.edu.ng
BLOG: maryjaneanachunam.wordpress.com
AN ESSAY ON LEWIS-FEI-RANIS MODEL ( SURPLUS LABOUR THEORY) AND HARRIS-TODARO MODEL OF MIGRATION.
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
W. A Lewis was the first to write about this theory of surplus labour but it his findings were developed by Ranis and Fei who wrote about the changes in the agricultural and industrial sector extensively.
Lewis, in his work, divided the labour force into two groups.
The subsistence sector
Capitalist sector
The subsistence sector according to Lewis had unlimited supply of Labour (surplus labour) and this sets labour supply conditions for the capitalist sector.
Later on, Ranis and Fei added more to the Lewis model. They added new concepts like
Disguised unemployment: this is observed in the subsistence sector
The marginal product of labour: this happeps when the slope of the production function in the subsistence sector is lower than in the capital sector.
The Lewis-Ranis-Fei model
The Lewis theory provides the a major contribution to theories of economic development particularly for labour-surplus and countries poor in resources. In the Lewis theory, the economy is assumed to
comprise the subsistence and capital sectors. The subsistence sector is
assumed to have alot of surplus labour that result in a very low, close to
zero, marginal productivity of labour. The subsistence wage rate is believed to follow
the sharing rule and be equal to average productivity, which is also known as the
institutional wage. The capital sector has abundant capital and resources
relative to labour.
The capital sector accumulates capital by drawing surplus labour out of the
Subsistence sector. The expansion of the capital sector takes advantage of the
infinitely elastic supply of labour from the subsistence sector due to its labour surplus.
When this surplus labour is exhausted, the labour supply curve in the capital
sector becomes upward-sloping.
Ranis and Fei improved Lewis’s theory by combining it with Rostow’s
(1956) three “linear-stages-of-growth” theory. They rearranged Lewis’s two-stage
economic development into three phases, defined by the marginal productivity of
agricultural labour. They assume the economy to be stagnant in its pre-conditioning
stage. The breakout point marks the creation of an infant capital sector and the
entry into phase one. Agricultural labour starts to be reallocated to the non-agricultural
sector. Due to the abundance of surplus subsistent labour, its marginal productivity is
extremely low and average labour productivity defines the subsistent institutional
wage. When the redundant subsistent labour force has been reallocated, the subsistent marginal productivity of labour starts to rise but is still lower than the
institutional wage. This marks the shortage point at which the economy enters phase two of development. During phase two the remaining subsistence unemployment is
gradually absorbed. At the end of this process the economy reaches the
commercialisation point and enters phase three where the subsistence labour market is
fully commercialised
CONCLUSION
Having shown the main ideas behind the Lewis-Ranis-Fei model . Using Nigeria as a case study, it is important to invest in both sectors in order to remain on the balanced growth path and maintain the rate of industrialization. The existence of surplus labour in the subsistence sector (eg agricultural sector) will allows the capital sector (more industrialized sector) in Nigeria to continue to pay the institutional wage and therefore enjoy more profits and continued investment. At the same time, as more and more people are moving away from the subsistence sector (agricultural sector), there will be some amount of surplus capital that can be used up to fuel further development in this sector. This process continues until the surplus labour is absorbed. Hence, saving and investment are a crucial part in the Lewis-Ranis-Fei to support economic development.
HARRIS-TODARO MODEL OF MIGRATION
John R. Harris and Michael P. Todaro developed this Economic model in 1970, used in Economics to discuss problems related to rural urban migration.
The Harris-Todaro model majorly tries to explain that labour migration in underdeveloped countries is due to rural-urban differences in average expected wages rather than actual wages. The migrants consider the various opportunities of employment available to them in rural and urban sectors and choose the one where they get maximum expected wages from migration.
The minimum urban wage is mostly higher than the rural wage. If there are more employment opportunities created in the urban sector at the minimum wage, the expected wage rate will rise and rural-urban migration will increase. Expected wages are measured by the difference in real urban income and real rural income and the probability of a migrants getting an urban job.
In fact, a migrant compares his expected income for a given time horizon in the urban sector with his prevailing average rural income and migrates if the urban sector income in the given time horizon is more than his average rural income.
Thus migration in the Harris-Todaro modal is seen as the wage or income gap between the urban and the rural sectors. But not all migrants can be absorbed in the urban sector at high wages. Many may not find a job and could end up getting employment in the informal urban sector at wages which are even lower than in the rural sector. Thus they join the line of the underemployed or disguised unemployed in the urban sector.
Assumptions of the Model:
The Harris-Todaro model is based on the following assumptions (from Divisha , S. 2017 ) :
1. There are two sectors in the economy – the rural or agricultural sector (A) and the urban or manufacturing sector (M).
2. The model operates in the short run.
3. The marginal production of labour in agriculture (MPLA) and of industry (MPLM) are determined by their respective technologies.
4. Capital is available in fixed quantities in the two sectors.
5. There are L workers in economy with LA and LM numbers employed in the rural and urban sectors respectively.
6. The number of urban jobs available (LM) is exogenously fixed. In the rural sector some work is always available. Therefore, the total urban labour force LM comprises L-LAalong with an available supply of rural migrants.
7. The urban wage is fixed at WM and the rural wage at WA, WM>WA.
8. The rural wage equals the rural marginal product of labour and the urban wage is exogenously determined.
9. Rural-urban migration continues so long as the expected urban real income is more that the real agricultural income.
The Harris-Todaro model also has the following features:
Real wages (adjusted for cost-of-living differences) are higher in urban formal-sector jobs than in rural traditional-sector jobs.
To be employed for a formal-sector job, one has to be physically present urban areas where the formal-sector jobs are located.
Because of the above, more people search for formal-sector jobs than are hired, employers hire some of them but not all of them, and those not hired end up unemployed.
For there to be equality between the expected wage associated with looking for an urban job and
the expected wage associated with taking up a lower-paying rural job, it leads to equilibrium arising characterized by urban unemployment.
Any temporary difference in the expected wages between one sector and another is eroded as workers migrate from the low-expected-wage labor market to the high-expected-wage labor market.
From the assumption that migration is based majorly on privately rational economic calculations despite the fact that there is high urban unemployment, People still choose to risk it and migrate . For example, an average unskilled or semiskilled rural worker has a choice between being a farm laborer for an annual average real income of, say, 600 naira per year, and migrating to the city where a worker with his skill or educational background can obtain wage employment yielding an annual real income of, say, 1200 naira . The worker should seek the higher-paying urban job.
But as he decides to travel, he must balance the probabilities and risks of being unemployed or underemployed for a considerable period of time against the positive urban-rural real-income differential. The fact that it is possible for the supposed migrant to earn twice as much annual real income in an urban area as in his rural environment may be of little value if his actual probability of securing the higher-paying job within a year is one chance in five. In such a situation the migrant’s actual probability of being successful in securing the higherpaying urban job is 20%, so that his “expected” urban income for the one-year period is in fact 240 naira, not the 1200 that a migrant in a full-employment urban environment might expect to receive. Thus, with a one-period time horizon and a probability of success of 20% it would be irrational for this migrant to seek an urban job even though the differential between urban and rural earnings capacity is 100%. On the other hand, if the probability of success were, say, 60%, so that the expected urban income is 720, it would be entirely rational for such a migrant with his one-period time horizon to try his luck in the urban job even though urban unemployment may be extremely high. But in normal time situations there are longer time horizons for potential migrants, especially considering that the majority of the population are between the ages of 15 and 24, It is better that the decision to migrate should be represented on the basis of a “permanent income” calculation. If the migrant expects a relatively low probability of finding regular wage employment in the initial period but expects this probability to increase over time as he is able to broaden his urban contacts, then it would still be rational for him to migrate even though expected urban income during the initial period or periods might be lower than expected rural income. As long as the present value of the net stream of expected urban income over the migrant’s planning horizon exceeds that of the expected rural income, the decision to migrate is economically rational. Also, rather than wage adjustments bringing about an equilibrium between urban and rural incomes, as in the case in a competitive model, it is also argued that rural-urban migration itself must act as the ultimate equilibrating force. If urban wages are assumed to be inflexible in a downward direction, rural and urban “expected” incomes can be equalized only by falling urban job probabilities resulting from rising urban unemployment.
Conclusion
In the Harris–Todaro model, the rising urban wage pushes up the expected wage in the urban sector and consequently encourages workers to migrate from the rural sector to the urban sector. If, in the resulting migration, there are more workers than the number of job opportunities created in the urban sector, some will necessarily be unemployed which is the case in Nigeria when people leave rural areas to go to bigger cities like Lagos and end up being unemployed. Occasionally, the increase in unemployment lowers the per-capita income level before the capital is accumulated. This phenomenon is referred to as Todaro paradox.
If there is a necessary and sufficient condition under which the increase in capital stock does not increase unemployment in the urban area. This condition concerns the relationship between the institutionally and legally set minimum wage in the urban area and increased agricultural productivity in the rural area, that is there is an institutionally set minimum wage in urban areas (eg Lagos) that can’t be manipulated while the government works harder to develop the agricultural sector. Unsurprisingly, if agricultural productivity rises and income in the rural area increases, rural workers have no need to migrate to the urban sector to find jobs and face the risk of unemployment.
References
Bhende, A.A. and Kanitkar, T. (2013).Principles of population study. Bombay: Himalayan Publishing House.
Divisha, S. (2017). Top 3 Models of Migration. Sociology Discussion. Retrieved from https://www.sociologydiscussion.com/demography/migration-demography/top-3-models-of-migration/3160
Harris, J. R., & Todaro, M. P. (1970). Migration, unemployment and development: A two sector analysis. The American economic review, 60(1), 126-142
Jhingan, M. L., B. K. Bhatt, and J. N. Desai (2003). Demography. New Delhi: Vrinda Publications.
Marco G. Ercolani & Zheng Wei, 2010. “An Empirical Analysis of the Lewis-Ranis-FEi Theory of Dualistic Economic Development for China,” Discussion Papers 10-06, Department of Economics, University of Birmingham. Handle: RePEc:bir:birmec:10-06
Oberai, A.S. (1987). Migration, urbanization and development, International Labour Office, Geneva.
Shryock, Henry S., Jacob S. Siegel and Associate. (1980). The methods and materials of demography Vol.1 U.S. Bureau of the Census, Washington D.C.
Todaro, M. (1980). Internal migration in developing countries: a survey. In Population and economic change in developing countries (pp. 361-402). University of Chicago Press.
Robinson, V., et al., (1996). The international library of studies on migration. R. Cohen (Ed.). E. Elgar. Publisher details??
UKEssays. (November 2018). Lewis Ranis-Fei Model of Economic Development. Retrieved from https://www.ukessays.com/essays/economics/describing-the-lewis-ranis-fei-model.php?vref=1
Name:OBIOMA GOD’SWILL NNAEMEKA
Reh no:2017/251914
E-mail: mantesawft23@gmail.com
Dept:Economics
INTRODUCTION
It is an age long known secret that in order for an economy to develop or grow, a large amount of labour has to be transferred from the traditional (or backward) agricultural sector in rural areas, where the productivity of labour is low to the modern manufacturing sector where the productivity of labour is higher and rising due to capital accumulation in that sector, building on this popular economics assumption we will carry out an in depth analysis of Labour migration, specifically we look at the Lewis-Fei-Ranis model (surplus labour theory).
Lewis Model of Unlimited Supply of Labour
The Nobel Laureate, Arthur, W. Lewis in the mid 1950s presented his model of unlimited supply of labour or of surplus labour economy. By surplus labour that even if manpower is withdrawn from the process of production there will be no fall in the amount of output.
Assumptions of the Lewis Model
(i) There is a dual economy i.e., the economy is characterized by a traditional, over-populated rural subsistence sector furnished with zero marginal productivity of labour, and the high productivity modern urban industrial sector.
(ii) The subsistence sector does not make the use of ‘Reproducible Capital’, while the modern sector uses the produced means of capital, the subsistence sector doesn’t make use of the reproducible capital
(iii) The production in the advanced sector is higher than the production in traditional and backward sector: The productivity of the traditional sector is low compared to the productivity of the modern/advanced sector .
(iv)Supply of labour is perfectly inelastic. In other words, the supply of labour is greater than demand for labour meaning that changes in wage rate will have zero effect on the supply of labour services
Basic Thesis of the Lewis Model
Lewis model is a classical type model which states that the unlimited supply of labour can be had at the prevailing subsistence wages. The industrial and advanced modern sector can be developed on the basis of agriculture to traditional sector. This can be done by transferring the labour from traditional sector and modern sector.
This is the behaviour of a UDC where 80% to 90% of population lives and works in rural areas.
Fig A
Lewis makes two assumptions regarding traditional sector
(i) There is surplus labour because MPL = 0 (as MPLF curve cuts x-axis).
(ii) All rural workers share equally in the output so that rural real wage is determined by the APL, and not by MPL. Thus it is OA, which has been attained by dividing OT by OLF labour in subsistence sector.
Fig(b), the upper segment we have the production functions regarding modern industrial sector. In case OL, labour are employed, having the production function TPM(K1), TP1 is being produced. In the lower segment of fig., the demand for labour is D1(K1) at the constant wages (OW) which are 30% higher than the average rural wages.
In the Lewis model, the modern sector capital stock is allowed to increase from K1 to K2 and K3 as a result of reinvestment of profits by capitalist industrialists. This causes the TP curve in the upper part of fig., to shift upward from TPM(K1) to TPM(K2) and to TPM(K3). The process that will generate these capitalistic profits for reinvestment and growth is illustrated in the lower part of fig. (b). The modern sector MPL curves have been derived from the TPM curves of the upper part of the fig. (b). These curves are demand for labour curve because of assumption of perfect competition.
The OA in both lower parts of fig (a) and (b) represents the average level of real subsistence income in the traditional rural sector. But in the modern sector the real wages have been represented by OW (the 30% higher than rural wages).
The balance of output shown by the shaded area WD1F would be the total profits (surplus) that accrue to the capitalists. Now the new equilibrium in the modern sector takes place at point G where OL2 labour are being employed. The total output rises to OTP2 or OD2GL2 while total wages and profits increase to OWGL2 and WD2G, respectively. This process of modern self sustaining growth and employment expansion will remain continue till all the surplus rural labour is absorbed in the new industrial sector. There after, additional workers can be withdrawn from agricultural sector only at a higher cost of lost food production because this will decrease the labour to land ratios. In this way, the MPL will be no more zero
Criticism on the Lewis Model
(i) Proportionality Between Employment Creation and Capital Accumulation: Lewis model assumes that there exists a proportionality in the labour transfer and employment creation in modern sector and rate of capital accumulation in the modern sector. The faster the rate of capital accumulation, the higher the growth rate of the modern sector and faster the rate of new job creation.
(ii) Peak Harvesting and Sowing Season: Lewis did not pay attention to the pattern of seasonality of labour demand in traditional agricultural sector.
(iii) Rise in Urban Wages: the absorption of surplus labour itself may end pre-maturely because competitors (producers) may alter wage rates and lower the share of profit as could be seen in the Egyptian economy in 2012.
iv) Full Impact of Growing Population: Lewis model underestimates the full impact on the poor economy of a rapidly growing population, i.e., its effects on agricultural surplus, the capitalist profit share, wage rates and overall employment opportunities.
Other criticisms of Lewis model includes ;
I.Negleience the fact that the process of migration is neither smooth not costless.
ii. Ignorance to the idea of balanced growth which is the aim of development.
Iii. Ignoring the role of leakages.
It is on this basis(criticisms) that the modified theory known as the Lewis-Fei-Ranis model of migration was developed.
Fei-Ranis (FR) Model of Dual Economy
This model was developed by two economists John Fei and Gustav Ranis as they presented their dual economy model due to the flaws in Lewis model that it did not pay enough attention to the importance of agricultural sector in promoting industrial growth.
Basic assumptions of the Model
(i) There is an abundance of labour in such UDC and shortage of natural resources.
(ii) The population growth rate is very high which results in mass unemployment in the economy.
(iii) The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labour is zero and negative in agriculture sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy.
Stages of Fei-Ranis Model:
The first stage of FR model is very similar to Lewis. Disguised unemployment comes into being because the supply of labour is perfectly elastic and MPL = 0. Therefore, such disguised unemployed are to be transferred to industrial sector at the constant institutional wage.
In the second stage of FR model (phase) agricultural workers add to agricultural output but they produce less than institutional wage they get. In other words, in the second stage the labour surplus exists where APL > MPL, but it is not equal to subsistence (institutional) wages.
In the third stage of FR model the take-off situation comes to an end and there begins the era of self-sustained growth where the farm workers produce more than the institutional wage they get. In this stage of economic growth the surplus labour comes to an end and the agri. sector becomes commercialized sector.
After point T the turn which occurs in the SZ curve is known as “Lewis Turning Point”. In the 3rd phase the agricultural labourers produce more than CIW. (As here MPL > CIW shown in (c) part of Fig). In this phase the take off comes to an end and self-sustained growth starts. This is also known as point of commercialization of agricultural in FR model.
In summary, The theory has three major points as highlighted in the FR mode:
(i) Growth of agricultural is as important as the growth of industry.
(ii) There should be a balanced growth of agriculture and industrial sectors.
(iii) The rate of labour absorption must be higher than the rate of population growth to get out of the “Malthusian Nightmare”.
In the (a) part of the Fig., the labour supply curve is perfectly elastic, as between S and T. In phase (I) as shown in (c) part of Fig., the MPL = 0. But here APL = AB, Following Lewis the FR model.. In phase (II) APL > MPL, but after AD, MPL begins to rise (c part of Fig). The growth of labour force in industrial sector increases from zero to OG, a part of Fig A after AD as migration takes place from agri. sector to industrial sector MP, > 0, but AP[_ falls.
The investment in industrial sector (with the surplus earned) will shift the MP curve outward right as from aa to bb and then to cc. In this way agri. sector will be able to get rid of labour until the MPL = real wages = AB =
constant institutional wage (CIW) which is obtained by dividing the total agri. output ORX (b part of Fig) by AD amount of labour .In the second phase DK amount of labour were employed. But still MPL MPL..
Diagram/Figure
The amount and time to re-allocate labour will depend upon;
(i) The rate of growth of industrial capital which depends upon the growth of profits in industrial sector and growth of surplus generated within the agri. sector.
(ii) The nature and bias of technical progress in industry.
(iii) The rate of growth of population. It means that the rate of labour transfer must be in excess of the rate of growth of population.
The three phases of labour transfer are summarized as:
In phase I: MPL = 0 and there exists the surplus labour equal to AD.
In phase II: CIW > MPL > 0 and there exists the open and disguised unemployment equal to AK.
In phase III: MPL > CIW and the economy is fully commercialized and disguised unemployment is exhausted. The supply of labour curve becomes steeper and both agri. and industrial sector compete with each other to get labour.
Thus we find that whereas Lewis had failed to offer a satisfactory explanation of this subsistence sector and ignored the real impact of population growth on the choice of capital intensity on the process of surplus labour absorption. Moreover, FR model emphasized upon the simultaneous growth of agri. and industrial sectors. Thus FR model believes in ‘Balanced Growth’ in the take-off stage.
Criticisms of the model
The FR model is considered to be an improvement over Lewis. Despite this fact, this model has following shortcomings:
(i) Marginal Productivity of Labour in Phase I: The FR model is of the view that MFL = 0 in the first phase of growth, and the transfer of labour from agriculture would not reduce output in the agricultural sector in phase I. But some economists are of the view that agricultural output in phase I of FR model will not remain constant and may fell under different systems of land tenure.
(ii) Marginal Productivity of Labour is Not Zero: Marginal productivity of labour is rarely zero in economics and different tests has been conducted and has not been found to vary from zero.
(iii) Ignoring The Role of Capital: The FR model concentrated upon land and labour as the determinants of output, ignoring the role of capital.
(iv) Open Economy: FR model ignored the role of foreign trade as it assumed a closed economy model. In the 2nd phase when agri. product decreases the TOT goes against industrial sector. This would occur in the presence of closed economy
(v) Supply of Land in Long Run: FR model assumed that in the process of economic development the supply of land remained fixed. But it is not true. The supply of land can be increased in case of long run.
(vi) Commercialization Of Agriculture And Inflation: According to FR model when 3rd phase starts the agri. sector becomes commercialized. But it is criticized by saying that this phase does not start so easily The shifting of labour to industrial sector will create labour shortage in agri. sector. This will create shortage of food stuff leading to increase their prices. In this way, the inflation will generate which may obstruct the process of development.
(vii) Low Productivity in Agricultural Sector: According to Jorgenson it has been observed that there has been a very slow rise in the productivity of agri. sector. Consequently, the surplus will hardly be created in agri. sector. Accordingly, agri. sector will not contribute to development Thus the growth requires that the surplus must be generated and it should persist.
CONCLUSION
Although the Fei-Ranis model have been criticized on numerous grounds, it found to useful although not utmostly accurate in most developing countries taking Nigeria as a case study as thousands of citizens migrates from their rural areas to urban cities like Abuja, Lagos, Calabar etc .
The HarrisTodaro model
This was named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration .The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker.
Assumptions of the Model
(i) The migration is assumed to be an economic phenomenon.
(ii) The migrants make migration to cities on economic grounds, even if they know that heavy unemployment exists in cities.
(iii) The migrants are well aware of with the employment opportunities in rural and urban labor markets.
(iv) The expected gains are measured by; (a) the difference in real incomes between rural and urban work, and (b) the probability of a new migrant obtaining an urban job.
Diagram/Figure of Schematic Framework
The members of labor force, both actual and potential, compare their expected incomes for a given time horizon in the urban sector with the prevailing average rural incomes, and they migrate if the former exceeds the latter”.
Todaro assumes the case of labor who is unskilled or semi skilled and he has to face a trade-off between working at farms where his average per day wage is $50/- or he should migrate to city where he can earn $100/- on the basis of his skill or education. In case of tradition models of migration it will be more attractive for the labor to move to city. But such mobility from rural areas to urban areas will lead to reduce the wage differentials. This may happen in case of DCs, However, the UDCs having different economic and institutional framework may not experience such situation, it is because of the reasons:
(i) That UDCs are having mass unemployment and a labor who is migrating to city can not hope to get higher wages as well as employment in the developed industrial cities.
(ii) When a labor migrates from rural areas to urban areas he will have to make a comparison between those risks and possibilities which may arise due to unemployment and under-employment in the city, in addition to wage differentials.
(iii) If we increase the time element, keeping in view that majority of migrants in the age of 15 to 24 years. In such circumstances the decision to migrate would not depend upon expectations of short run, rather long term factors will affect it.
According to Todaro, how long the present value of the expected urban incomes exceeds the rural incomes the migrant will prefer to migrate. Thus, on the basis difference in rural and urban wages the migration will go on taking place.
Characteristics of the Model:
(i) Migration is stimulated primarily by rational economic considerations of relative benefits and costs, financial as well as psychological.
(ii) The decision to migrate depend on expected rather than actual urban-rural wage differentials.
(iii) The probability of obtaining an urban job is inversely related to the urban unemployment rate.
Evaluation of the Model:
(i) If the wage and employment differential in rural and urban areas continue the migration from villages to cities will continue taking place.
(ii) Along with increasing job opportunities in urban areas, there is a need to devise an integrated rural development program whereby the incomes of rural workers could be increased. This will reduce the migration from rural to urban are as the most beneficial advice for the UDCs.
The Nigeria perspective
The rural-urban migration in developing countries taking Nigeria as a case study, it is evident that the theory put forward by Todaro and Harris is a reliable and consistent one as there is a constant and never ending migration from the rural areas to the the urban areas.
More specifically, the migration of rural working age/class individuals to urban cities Lagos ,Abuja, Calabar etc with the expectation of higher income than that earned in the rural villages even with the knowledge of the high level of unemployment ravaging the urban cities.
Name: Okorie Judith
Reg number: 2017/241450
Dept: Economics
THE HARRIS-TODARO MODEL
According to the Harris Todaro model, it assumes that the possibility of getting a job in urban areas by people who live in rural area is seen as highly not possible. This is gotten by dividing the number of urban jobs by the urban labour force.
Harris-Todaro specification implies a higher equilibrium unemployment rate than would be predicted by a more generalized formulation of the job search process.
Nevertheless less, the possibility of people from rural place from getting a job is not ruled out as there are other several mean. Much urban hiring is done through channels which do not exclude rural residents. Some jobs are placed up for advert and filled informally by word of speech. A person living in urban area may get knowledge of available jobs and inform relatives or friends in rural areas who applies for them. Other jobs or vacancies are filled through the usual central labor exchange with which rural residents can apply for or be enrolled in.
A typical dualistic model in development economics contains two sectors, a traditional or agricultural sector in the rural area and a modern or manufacturing sector in the urban area
The following are the Assumptions of the model:
1) There is two sectors: urban (manufacture sector) and rural (agriculture sector).
2) It is assumed that the Rural-urban migration is conditioned when urban real wage exceeds real agricultural product.
3) It is assumed that there is no migration cost, that is to say, there is little to no cost of migrating from one sector to another and there is the presence of Perfect competition in the two sectors. Where the agricultural and manufacturing sectors compete perfectly with each other.
4) There is the application of the Cobb-Douglas production function and it uses Static approach.
5) There is Low risk aversion: the Migrants are not risk averse. That is, they are risk takers
The first stage of the model is settlement of rural migrant from the rural area to the urban area also called the informal sector for a period of time.
The second stage: this occurs where a migrant is able to find a sustainable and permanent job. They usually live on the support of their relative in their origins or in the cities. They do not make incomes on their own.
According to the model, the probability of getting a job, is dependant on the amount of jobs created in the modern sector, the size of the population of the urban unemployed, and the length of time a migrant has been in the urban area.
Critiques of the model.
Here are the main critiques:
1. The lottery style job allocation excludes investment in job search on the part of the immigrants;
2. The informal sector is not explicitly modelled and the absence of enough evidence to support the assumption of a rigid wage in the modern sector. Moreover, besides trade union pressure or minimum wage legislation, the wage differentials among sectors could be explained as well by, say, firm-specific training costs;
3. The influence on decision making of risk and risk attitudes on the part of the potential immigrants is not included;
4. The difference in levels of skill between the migrants are not accounted for.
5. The issue of discount rates and rational migrants is ignored;
In conclusion, the Harris-Todaro model explains that migration decisions by migrants are a result of analyzing the expected rural wage. This model still holds water in recent times both in explaining intra-national and international migration patterns.
LEWIS-FEI-RANIS MODEL
The lewis fei Ranis model is a systematic theory of economic development with unlimited supplies of labour founded by Prof Lewis. The theory focuses on structural transformation of a subsistence economy into an industrial modern economy. The theory was modified by John Fei and Gustar Ranis in the 1950s. The model believe that in many undeveloped countries, there is an unlimited supply of labour is available at a subsistence age. The model of two-sector model became the general theory of development process in surplus labour. Economic development takes place when capital accumulates as a result of migration of surplus labour from the subsistence sector to the modern sector (capitalist sector). In the Lewis Model theory, the underdeveloped economy consist of two sectors: the industrial sector and the subsistence sector.
The theory is related to labor surplus in the under Developed areas and limited resources; Mass population engaging mostly in agricultural farming related with unemployment and increased population growth.
The Assumptions of the model
1) There is high population growth rate. This as a result leads to unemployment in the economy as a whole.
2) There is huge concern about the effect of the rate of diminishing marginal returns in the industrial sector.
3) The model assumes that land is fixed and the output of the agricultural sector is a function of land that is fixed with no other factors in consideration.
4) Another assumptions of the model is that there is abundant Labour in the under Developing areas and limit resources.
CRITICISMS OF FEI-RANIS MODEL
1. Wages in the agricultural sector is not constant. The model states that the Institutional wage is constant as agricultural production activities increases rapidily. It is regarded as unrealistic because wages tends to rise when there is increase in production activities.
2. The model states that the Supply of land is fixed, but on the long run, the amount of land supplied is not as revealed.
These two models are important in development economics, especially in the case of Nigeria and it has been revitalized in policy debates even with the various criticism.
IN THE LEWIS-FEl-RANIS MODEL, the underdeveloped economy consists of two sectors:
(1) A traditional, overpopulated rural subsistence sector characterized by zero
marginal labour productivity (a situation that permits Lewis to classify this as surplus labour in the sense that it can be withdrawn from the traditional agricultural sector without any loss of output).
(2) A high-productivity modern
urban industrial sector, in which labour from the subsistence sector is gradually transferred. The primary focus of the model is on both the process of labour transfer and the growth of output and employment in the modern sector. Both labour transfer and modern-sector employment growth are brought about by output expansion in that sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector. For example: During the precolonial era, Nigerian development policies were centered on agricultural sector development to provide raw materials for export to the more developed countries, but with independence and the help of World Bank policies, focus were shifted to state-led industrialization. The extra labour needed in this new industrial sector was to be gotten from the excess labour that was in the agricultural sector. One of the major idea of the model is that there should be a simultaneous investment in both the agricultural and the industrial sector, so that even if there’s a transfer of attention to the industrial sector, the agricultural sector will not suffer lack of the much needed attention for the smooth production of food and raw materials to be used by the industrial sector. So therefore, from this model there ought to be a balanced growth in both the agricultural and the industrial sector.
THE HARRIS-TODARO model is used in development economics to study urban unemployment and migration. According to the model, migration decisions are based on expected cost -benefits analysis calculated through expected difference between urban and rural income. This implied that rural Migrants move to urban areas to improve their economic opportunities increasing labour supply in these urban areas while demand for labour remained fixed. Consequentially, this model aims at explaining the urban unemployment conundrum.
In recent years, our country (Nigeria) has recorded a high influx of immigrants from neighbouring less developed countries, this is because these immigrants expects a higher job opportunity in Nigeria, this model posited that a steady rise in the availability of jobs in Nigeria will not reduce unemployment rate, hence the suggestion that the mitigation to the influx of immigrants from our neighbors (less developed countries), would be to increase the level of development in these countries, so the citizens of these countries (less developed neighbors) will not really need to migrate to Nigeria.
Name: Judith Okorie
Reg numbers: 2017/241450
Dept : Economics
Judith.okorie.241450@unn.edu.ng
THE HARRIS-TODARO MODEL
According to the Harris Todaro model, it assumes that the possibility of getting a job in urban areas by people who live in rural area is seen as highly not possible. This is gotten by dividing the number of urban jobs by the urban labour force.
Harris-Todaro specification implies a higher equilibrium unemployment rate than would be predicted by a more generalized formulation of the job search process.
Nevertheless less, the possibility of people from rural place from getting a job is not ruled out as there are other several mean. Much urban hiring is done through channels which do not exclude rural residents. Some jobs are placed up for advert and filled informally by word of speech. A person living in urban area may get knowledge of available jobs and inform relatives or friends in rural areas who applies for them. Other jobs or vacancies are filled through the usual central labor exchange with which rural residents can apply for or be enrolled in.
A typical dualistic model in development economics contains two sectors, a traditional or agricultural sector in the rural area and a modern or manufacturing sector in the urban area
The following are the Assumptions of the model:
1) There is two sectors: urban (manufacture sector) and rural (agriculture sector).
2) It is assumed that the Rural-urban migration is conditioned when urban real wage exceeds real agricultural product.
3) It is assumed that there is no migration cost, that is to say, there is little to no cost of migrating from one sector to another and there is the presence of Perfect competition in the two sectors. Where the agricultural and manufacturing sectors compete perfectly with each other.
4) There is the application of the Cobb-Douglas production function and it uses Static approach.
5) There is Low risk aversion: the Migrants are not risk averse. That is, they are risk takers
The first stage of the model is settlement of rural migrant from the rural area to the urban area also called the informal sector for a period of time.
The second stage: this occurs where a migrant is able to find a sustainable and permanent job. They usually live on the support of their relative in their origins or in the cities. They do not make incomes on their own.
According to the model, the probability of getting a job, is dependant on the amount of jobs created in the modern sector, the size of the population of the urban unemployed, and the length of time a migrant has been in the urban area.
Critiques of the model.
Here are the main critiques:
1. The lottery style job allocation excludes investment in job search on the part of the immigrants;
2. The informal sector is not explicitly modelled and the absence of enough evidence to support the assumption of a rigid wage in the modern sector. Moreover, besides trade union pressure or minimum wage legislation, the wage differentials among sectors could be explained as well by, say, firm-specific training costs;
3. The influence on decision making of risk and risk attitudes on the part of the potential immigrants is not included;
4. The difference in levels of skill between the migrants are not accounted for.
5. The issue of discount rates and rational migrants is ignored;
In conclusion, the Harris-Todaro model explains that migration decisions by migrants are a result of analyzing the expected rural wage. This model still holds water in recent times both in explaining intra-national and international migration patterns.
LEWIS-FEI-RANIS MODEL
The lewis fei Ranis model is a systematic theory of economic development with unlimited supplies of labour founded by Prof Lewis. The theory focuses on structural transformation of a subsistence economy into an industrial modern economy. The theory was modified by John Fei and Gustar Ranis in the 1950s. The model believe that in many undeveloped countries, there is an unlimited supply of labour is available at a subsistence age. The model of two-sector model became the general theory of development process in surplus labour. Economic development takes place when capital accumulates as a result of migration of surplus labour from the subsistence sector to the modern sector (capitalist sector). In the Lewis Model theory, the underdeveloped economy consist of two sectors: the industrial sector and the subsistence sector.
The theory is related to labor surplus in the under Developed areas and limited resources; Mass population engaging mostly in agricultural farming related with unemployment and increased population growth.
The Assumptions of the model
1) There is high population growth rate. This as a result leads to unemployment in the economy as a whole.
2) There is huge concern about the effect of the rate of diminishing marginal returns in the industrial sector.
3) The model assumes that land is fixed and the output of the agricultural sector is a function of land that is fixed with no other factors in consideration.
4) Another assumptions of the model is that there is abundant Labour in the under Developing areas and limit resources.
CRITICISMS OF FEI-RANIS MODEL
1. Wages in the agricultural sector is not constant. The model states that the Institutional wage is constant as agricultural production activities increases rapidily. It is regarded as unrealistic because wages tends to rise when there is increase in production activities.
2. The model states that the Supply of land is fixed, but on the long run, the amount of land supplied is not as revealed.
These two models are important in development economics, especially in the case of Nigeria and it has been revitalized in policy debates even with the various criticism.
NAME: UZUAGU OBINNA OSITA
REG. NO: 2017/251934
DEPT.: COMBINED SOCIAL SCIENCES (ECONOMICS/SOCIOLOGY)
FEI-RANIS MODEL OF ECONOMIC GROWTH
Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.[1] It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.[2] According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector.[3] Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. If this model is applied in a country like Nigeria, there will be economic growth, because it will strike a balance between agricultural production and industrial manufacturing and it will reduce the rate at which we export raw materials and import finished goods. Fei–Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.[8]
CRITICISM
It has been asserted that Fei and Ranis did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed.[9]
Fei and Ranis say, “It has been argued that money is not a simple substitute for physical capital in an aggregate production function. There are reasons to believe that the relationship between money and physical capital could be complementary to one another at some stage of economic development, to the extent that credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry.” This indicates that in the process of development they neglect the role of money and prices. They fail to differ between wage labor and household labor, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.[9]
Fei and Ranis assume that MPPL is zero during the early phases of economic development, which has been criticized by Harry T.Oshima and some others on the grounds that MPPL of labor is zero only if the agricultural population is very large, and if it is very large, some of that labor will shift to cities in search of jobs. In the short run, this section of labor that has shifted to the cities remains unemployed, but over the long run it is either absorbed by the informal sector, or it returns to the villages and attempts to bring more marginal land into cultivation. They have also neglected seasonal unemployment, which occurs due to seasonal change in labor demand and is not permanent.[9]
HARRIS-TODARO MODEL OF MIGRATION
Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many.
Rural-urban migration is prevalent in Nigeria. People believe that there are more opportunities in the cities because it is industrialised but when you visit the city you find out that many people there are unemployed because number of people looking for job is greater than the available job. This is as a result of massive migration from rural to urban areas. This has led to reduction of wages to the same level as that of agricultural workers
NAME: IGWILO UGOCHUKWU HENRY
REG NO: 2017/249345
DEPT: CSS(ECONOMICS/SOCIOLOGY) (ECO/SOC)
EMAIL: igwilougochukwu0@gmail.com
SUMMARY OF THE LEWIS FEI-RANIS MODEL (surplus labour theory).
Arthur Lewis provided one of the best-known and optimistic models of economic development in developing countries. Although sixty years old in its earliest iteration, the model remains relevant today to developing countries. Since Lewis’s original work on the labour transition between sectors, much literature has been concerned with various extensions of the model.
GENERAL ASSUMPTION
1 A dual economy The dual model provides an ideal type, in the Weberian sense or as a heuristic device, for thinking about structural transformation and economic development with an emphasis on labour, the factor of production that dominates most developing countries. Lewis noted the ‘wide range of specifications’ to which his dual economy model had been characterized, which led him to reiterate the core elements as his saw them: First, there are two sectors, hereinafter called ‘modern’ and ‘traditional’, such that the modern sector grows by recruiting labor from the traditional.
2. unskilled labour is paid more in the modern sector than in the traditional sector for the same quantity and quality of work.
3. unskilled labour is initially abundant in the sense that at the current wage much more labour is offered to the modern sector than that sector wishes to hire.
Lewis argued that the driver of capital accumulation was a sectorial movement of the factor of production abundant in developing countries, labour, from the ‘traditional’ or ‘non-capitalist’ sector (of low productivity, low wage, priced to average product not marginal product, and thus with widespread disguised unemployment) to the ‘modern’ or ‘capitalist’ sector (of higher productivity and where wages are set by productivity in the ‘subsistence sector’). Crucial is the existence of surplus labour in the traditional or non-capitalist sector. Because of this, wages are set just above subsistence across the whole economy, leading to the transfer of labour over time from traditional or non-capitalist to modern or capitalist sectors and the capture of labour productivity gains to capitalists as profits as these are the source of growth via reinvestment. The floor for wages is institutionally set at subsistence. When the surplus labour disappears an integrated labour market and economy emerge and wages will then start to rise. Lewis posited that the transition of labour from the traditional to the modern sector was to be understood as follows:
To them, Economic growth in an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development.
Ranis and Fei later formalized the Lewis theory of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model.
• The breakout point leads to phase one growth with redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural unemployment.
• The commercialization point leads to phase three of self-sustaining economic growth with the commercialization of the agricultural sector.
The Lewis-Ranis-Fei theory of dualistic economic development therefore provides a suitable theoretical framework for studying the growth path of labour-surplus developing economies.
The key to the process is the use which is made of the capitalist surplus. In so far as this is reinvested in creating new capital, the capitalist sector expands, taking more people into capitalist employment out of the subsistence sector. The surplus is then larger still, capital formation is still greater, and so the process continues until the surplus labour disappears.
When the surplus labour disappears, an integrated labour market and economy emerge. The Lewis model was intended as a critique of the neoclassical approach in that labour is available to the modern or capitalist sector of an economy not in a perfectly elastic supply but upward sloping rather than flat, and with a distinction between surplus-producing labour and subsistence labour. Lewis also rejected the assumptions of neoclassical economists of perfect competition, market clearing and full employment and Lewis made the distinction, noted above, between productive labour, which produced a surplus, and unproductive labour, which did not.
In short, in the Lewis model, growth is sustained by the transition of labour from traditional to modern sectors and this from low productivity to higher productivity sectors. The sectors are not necessarily unified geographically. As Lewis (1954, p. 147) puts it: What we have is not one island of expanding capitalist employment, surrounded by a vast sea of subsistence workers, but rather a number of such tiny islands . . . We find a few industries highly capitalized, such as mining or electric power, side by side with the most primitive techniques; a few high class shops, surrounded by masses of old style traders; a few highly capitalized plantations, surrounded by a sea of peLewisian
The production functions and growth decompositions We assume a dualistic economic framework with the agricultural and non-agricultural Sectors representing the traditional and modern sectors in the Lewis theory. Accordingly, Agricultural output (QA) is a function of cultivated hectares (HA), labour input (LA) and Agricultural capital (KA). Output of the non-agricultural sector (QN) depends on Employed labour (LN) and capital stock (KN). Both production functions feature Hicks Neutral technological progress (fA(T), fN (T)) where T denotes time; the exact functional Form of these contains trends that reflect socio-economic events and possibly dummies For structural shifts.
LIMITATIONS/CRITIQUES
There have been various critiques of the Lewis model, many of which are of a ‘red herring’ variety as Ranis puts it, meaning they are easily responded to or actually criticisms of Lewisians rather than the writing of Lewis himself. Many relate to the assumption of labour abundance in the subsistence sector (and thus the dominance of the wage from that sector across the economy), and the emergence of the urban informal sector, although Lewis’s conception of surplus labour explicitly included the urban informal sector.2 Lewis did not ignore the urban informal sector in the unlimited supply of labour concept:
The phenomenon is not, however, by any means confined to the countryside. Another large sector to which it applies is the whole range of casual jobs—the workers on the docks, the young men who rush forward asking to carry your bag as you appear, the jobbing gardener, and the like. These occupations usually have a multiple of the number they need, each of them earning very small sums from occasional employment; frequently their number could be halved without reducing output in this sector.
Informality was taken a step further in Ranis and Stewart (1999) who developed a model of dualism within the urban informal sector between a dynamic sub-sector linked to the formal sector and a less dynamic ‘sponge’ (meaning highly labour absorbing) sub-sector. There are other critiques of the Lewis model. There has been an incorrect view that the Lewis model takes little account of open economies and thus contemporary globalization and global economic integration. This point is absolutely a misperception. The role of external trade, and investment and finance are discussed in the 1954 paper and are highly evident in many other writings of Lewis, given his interest in primary commodity-exporting countries. The closed economy versions of the Lewis model (the first and the second) were building blocks to get to the third model (the open economy model), which Lewis believed represented most developing countries. It is the third model, the one that explains the tendency for declining factorial terms of trade, which was a major concern for Lewis.
CONCLUSON AND OPINION
it is evident that as more and more agricultural workers are withdrawn and no longer demand a portion of the agricultural goods, the surplus of agricultural goods begins to appear. It must be noted that each individual that moves from agricultural sector to the industry carries their own subsistence bundle together with them, meaning that they must be compensated for the transfer. This is because Ranis and Fei named the portion of total agricultural output in excess of the consumption requirements of the agricultural labour force at the institutional wage as the total agricultural surplus.
In order to find out the required minimum industrial wage, the average wage must be multiplied by the relative price between agriculture and industry. In the surplus phase, it remains constant, because the average agricultural surplus is not changing.
At this point, an expansion in the industrial sector would not drive up the wage rate. If an individual that moves from agriculture to the industry when labour in agriculture is at the surplus phase, there will be no compensation needed for that particular individual, as he carries his own food basket to the industry. In fact, industrial wage is constant and this individual is not worse off as a rresult
HARRIS TODARO MODEL OF MIGRATION
DISCUSSION
The fundamental contribution of Harris and Todaro’s rural-urban two sector migration model was to build a model that fit the stylized facts of the labour market. On the lines of the theory, developing countries adopted program on integrated rural development which encouraged an increase in the rural traditional sector wage. The theory proves that the higher the unemployment rate, the lower is the probability of new migrants from the countryside actively seeking formal sector employment who are unable to find it. The significant findings of the theory are: first, if the expected urban wage equals rural income, there is no incentive to migrate. Second, if the expected urban wage is greater than rural income, there is a great incentive to move from rural to urban area. Third, if the expected urban wage is less than rural incomes, there would be an incentive to move in other direction.
GENERAL ASSUMPTIONS
• Two sectors: urban (manufacture) and rural (agriculture)
• Rural-urban migration condition: when urban real wage exceeds real agricultural product
• No migration cost
• Perfect competition
• Cobb-Douglas production function
• Static approach
• Low risk aversion
VARIABLES AND PARAMETERS
Exogenous variables
̅ – total labour force (workers)
– minimum wage rate in manufacturing (dollars)
Endogenous variables
– urban labour in manufacturing (workers)
– unemployed labour force (workers)
– rural labour force in agriculture (workers)
– wage rate in agriculture (dollars)
– expected wage rate in manufacturing (dollars)
THE TODARO MIGRATION MODEL EXPLAINED
Starting from the assumption that migration is based primarily on privately rational economic calculations despite the existence of high urban unemployment, the Todaro model postulates that migration proceeds in response to urban-rural differences in expected rather than actual earnings.
The fundamental premise is that as decision-makers migrants consider the various labor-market opportunities available to them as, say, between the rural and urban sectors, choosing the one that maximizes their “expected” gains from migration. Expected gains are measured by the difference in real incomes between rural and urban work opportunities and the probability of a new migrant’s obtaining urban job.
The “thought process” of the Todaro model can be explained as follows. Suppose the average unskilled or semiskilled rural worker has a choice between being a farm labourer for an annual average real income of, say, 50 units per year, and migrating to the city where a worker with his skill or educational background can obtain wage employment yielding an annual real income of, say, 100 units. The more traditional economic models of migration that place exclusive emphasis on the income differential factor as the determinant of the decision to migrate would indicate a clear choice in this situation. Higher-paying urban job is aimed.
These migration models were developed largely in the context of advanced industrial economies and, as such, implicitly assumed the existence of full or near-full employment in urban areas. In a full-employment environment the decision to migrate can in fact be predicated solely on securing the highest-paying job wherever it becomes available, other factors being held constant. Simple economic theory would then indicate that such migration should lead to a reduction in wage differentials through geographic changes in supply and demand, both in areas of out-migration (where incomes rise) and in points of in-migration (where they fall).
LIMITATIONS/CRITIQUES
Some of the assumptions of the Harris-Todaro’s model were judged to be too restrictive. The model also assumes that potential migrants are risk neutral where the poor migrants will likely be risk averse, as in they are indifferent between a certain expected rural income and an uncertain expected urban income of the same magnitude.
CONCLUSION/OPINION
Unemployment is non-existent in the rural agricultural sector because rural agricultural production and the subsequent labour market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity.
NAME: IWUALA CHIOMA FAVOUR
REG NO: 2017/249520
DEPT: ECONOMICS
EMAIL: iwualafavour573@gmail.com
THE LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
Lewis in his book “Economic Development with Unlimited Supplies of Labour” (1954) proposed a theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus stage to the second, labour-scarce stage of development. One of the drawbacks of the Lewis model was undermining of the role of agricultural sector in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labour should take place prior to the labour shift between the two sectors.
`Later John C.H. Fei and Gustav Ranis (1961) formalised the Lewis theory by combining it with Rostow’s (1956) three linear-stages of growth theory and defined three phases of dualistic economic development by sub-dividing the first stage of Lewis model into two phases. They assume the economy to be stagnant in its pre-conditioning stage. The breakout point marks the creation of infant non-agricultural sector and the entry into phase one. Agricultural labour starts to be reallocated to the non-agricultural sector. Due to the abundance of surplus agricultural labour, its marginal productivity is extremely low and average labour productivity defines the agricultural institutional wage. When the redundant agricultural labour force has been reallocated, the agricultural marginal productivity of labour starts to rise but is still lower than the institutional wage. This marks the shortage point at which the economy enters the second phase of development. During phase two the remaining agricultural unemployment is gradually absorbed. At the end of this process the economy reaches the commercialisation point and enters third stage where the agricultural labour market is fully commercialised.
Comparing to the real-world using Nigeria as a case study since Nigeria is a developing country. Using the Fei-Ranis theory of dualistic economic development as a framework to investigate Nigeria’s rapid growth over the years. It is notable that Nigeria’s economic growth is mainly attributable to the development of the agricultural sector. Agriculture remains the predominant activity in the rural African economy, with up to 90 percent of the region’s total population working in agriculture, and with youth accounting for 65 percent of that agricultural labour force. Some African countries have been able to harness their agricultural potential and lead the world in exporting certain crops, while more countries are still developing the technologies, skills, and infrastructure that will allow them to both feed their domestic populations and also introduce their goods to regional and international markets. But many of the Nigerian’s youth who work in the agricultural sector face obstacles that prevent their farms from being fully productive. They do not use enhancing materials such as fertilizers that could increase agricultural output. In examining the initial role of the agricultural sector in Nigeria, the sector is seen to be an indispensable sector in establishing the framework for the nation’s economic growth. It is advisable that Nigeria should improve her agricultural sector. First and foremost, more effort should be put in promoting employment of more labour force for higher productivity to promote economic growth and development. This will not only help facilitate employment of rural migrants but also satisfy the increasing demand for labour in the growing agricultural sector. Agriculture could be promoted by tax breaks, direct subsidies and most importantly, by removing price controls on agricultural products.
THE HARRIS-TODARO MODEL OF MIGRATION
The Harris-Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income. In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labour market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the sector.
The formal statement of the equilibrium condition of the Harris-Todaro model is as follows:
Let wr be the wage rate (marginal productivity of labour) in the rural agricultural sector.
Let le be the total number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
Let ls be the total number of job seekers, employed and unemployed, in the urban sector.
Let wu be the wage rate in the urban sector, which could possibly be set by government with minimum wage law.
Rural to urban migration will take place if:
Wr > le/ls wu
Urban to rural migration will occur if:
Wr < le/ls wu
At equilibrium:
Wr = le/ls wu
Therefore, migration from rural areas to urban areas will increase if:
Urban wages (wu) increase in the urban sectors (le), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and includes informal sector growth, this behaviour is economically rational and utility-maximizing in the context of the Harris-Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
OGUMBA JOY CHIDINMA
2017/242028
EDUCATION ECONOMICS
williamsjoy77@gmail.com
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY
CONTRIBUTIONS OF THE MODEL
• Fei – Ranis model enables the economy to move smoothly into self-sustained growth.
• Fei and Ranis have further shown that their model satisfies the conditions of balanced growth during the take-off process. Balanced growth requires simultaneous investment in both the agricultural and industrial sectors of the economy.
CRITICISM OF THE MODEL
Amartya Sen critically appraised that, Fei and Ranis do not distinguish between units of labour hours and units of number of men, which is crucial for peasant agriculture.
Amartya Sen further said that following W. A. Lewis, Fei and Ranis assume a horizontal supply curve for labour in the initial phase.
They develop Nurske’s analysis of “hidden rural savings” in disguised unemployment. What the transferred labourers were consuming prior to their shift from disguised unemployment in the rural sector is now saved and used to provide the wage bill in the industrial sector.
The commercialisation of Agriculture leads to inflationary pressures in the economy.
Berry and Solingo in their 1968 paper have criticized this model for its MPL = 0 assumption, and for the assumption that the transfer of labour from the agricultural sector leaves the output in that sector unchanged Phase 1.
Fei and Ranis assume a close model hence there is no presence of foreign trade in the economy, which is very unrealistic as food or raw materials can not be imported. If we take example of Japan, the country imported cheap farm products from other countries and this made better the country’s term of trade.
CONCLUSION
Having studied the Lewis-Fei-Ranis Model (Surplus Labour) it can be said surplus labour can be gotten when the Agricultural sector is not overlooked or undermined. A country can have surplus labour when the available labour force in its large proportion contributes less input in the economy without any significant increase in the output. A country as this suffers from underdevelopment as it citizens would overtime suffer from underemployment and unemployment thereby affecting the standard of living of the citizens.
A country such as Nigeria is experiencing surplus labour as the number of willing labour force is greater than the available Industries for production of goods with the available raw materials which has declined over the years as a result of the Rural to Urban Migration over the years and also the Insurgencies in most part of the country is limiting her agricultural production in the rural areas as the farmers are being chased and killed out of their farms with their crops being destroyed by cattle, thereby reducing its agricultural surplus causing inflation and denying the country the ability to export its produce but rather, import goods at higher rate.
OGUMBA JOY CHIDINMA
2017/242028
EDUCATION ECONOMICS
williamsjoy77@gmail.com
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY
The Fei–Ranis model of economic growth is a developmental or welfare economics dualism model developed by John C. H. Fei and Gustav Ranis (1961, 1964, 1997), and can be thought of as an extension of the Lewis model (1954). The Surplus Labour model is another name for it.
Unlike several other growth models that consider underdeveloped countries to be homogeneous in nature, it recognizes the existence of a dual economy that involves both the industrial and primitive markets, as well as the economic situation of unemployment and underemployment of resources. The primitive sector, according to this theory, is the economy’s current agricultural sector, while the modern sector is the rapidly developing yet limited industrial sector. In the economy, all sectors coexist, which is the crux of the development crisis. Only a complete change in the focus of progress from the agricultural to the industrial economy, with an increase in industrial production, will bring about growth. This is accomplished by transferring labour from the agricultural to the manufacturing sectors, demonstrating that developing countries do not face labour shortages. At the same time, agricultural sector growth must not be marginal, and its production must be adequate to provide food and raw materials to the entire economy. When it comes to the economic growth of underdeveloped countries, saving and spending become the guiding forces, just as they do in the Harrod–Domar model.
Basic Arguments of the Lewis-Fei-Ranis Model:
Lewis model is a classical type model which states that the unlimited supplies of labour can be had at the prevailing subsistence wages. The industrial and advanced modern sector can be developed on the basis of agriculture to traditional sector. This can be done by transferring the labour from traditional sector and modern sector.
Lewis says that the wages in industrial sector remain constant. Consequently, the capitalists will earn ‘surplus’. Such surplus will be re-invested in the modern sector leading to absorb the labour which are migrated from subsistence sector. In this way, the surplus labour or the labour which were prey to disguised unemployment will get the employment. Thus, both the labour transfer and modern sector employment growth are brought about by output expansion in that sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector. Though the wages have been assumed constant, yet Lewis says that the urban wages are at least 30% higher than average rural income to induce the workers to migrate from their home areas.
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labour should take place prior to the labour shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. They also say that the model fails to apply concentrated analysis to the changes that occur as a result of agricultural growth.
AGRICULTURAL SURPLUS
The produce from agriculture that exceeds the needs of the society for which it is being produced, and may be exported or stored for future use in its general term can be understood as Agricultural surplus.
CONTRIBUTIONS OF THE MODEL
• Fei – Ranis model enables the economy to move smoothly into self-sustained growth.
• Fei and Ranis have further shown that their model satisfies the conditions of balanced growth during the take-off process. Balanced growth requires simultaneous investment in both the agricultural and industrial sectors of the economy.
CRITICISM OF THE MODEL
Amartya Sen critically appraised that, Fei and Ranis do not distinguish between units of labour hours and units of number of men, which is crucial for peasant agriculture.
Amartya Sen further said that following W. A. Lewis, Fei and Ranis assume a horizontal supply curve for labour in the initial phase.
They develop Nurske’s analysis of “hidden rural savings” in disguised unemployment. What the transferred labourers were consuming prior to their shift from disguised unemployment in the rural sector is now saved and used to provide the wage bill in the industrial sector.
The commercialisation of Agriculture leads to inflationary pressures in the economy.
Berry and Solingo in their 1968 paper have criticized this model for its MPL = 0 assumption, and for the assumption that the transfer of labour from the agricultural sector leaves the output in that sector unchanged Phase 1.
Fei and Ranis assume a close model hence there is no presence of foreign trade in the economy, which is very unrealistic as food or raw materials can not be imported. If we take example of Japan, the country imported cheap farm products from other countries and this made better the country’s term of trade.
CONCLUSION
Having studied the Lewis-Fei-Ranis Model (Surplus Labour) it can be said surplus labour can be gotten when the Agricultural sector is not overlooked or undermined. A country can have surplus labour when the available labour force in its large proportion contributes less input in the economy without any significant increase in the output. A country as this suffers from underdevelopment as it citizens would overtime suffer from underemployment and unemployment thereby affecting the standard of living of the citizens.
A country such as Nigeria is experiencing surplus labour as the number of willing labour force is greater than the available Industries for production of goods with the available raw materials which has declined over the years as a result of the Rural to Urban Migration over the years and also the Insurgencies in most part of the country is limiting her agricultural production in the rural areas as the farmers are being chased and killed out of their farms with their crops being destroyed by cattle, thereby reducing its agricultural surplus causing inflation and denying the country the ability to export its produce but rather, import goods at higher rate.
UDEH RITA EZINNE
2017/249578
ECONOMICS DEPARTMENT
ritaudeh563@gmail.com
1. HARRIS TODARO MODEL OF MIGRATION
The Harris–Todaro model , propounded and named after John R. Harris and Michael Todaro, is an economic model developed in 1970. The Model is based on the experiences of tropical Africa, (in the 1960-70s) facing the problems of rural-urban Migration and urban unemployment and used in Development economics and welfare economics to explain some of the issues relating to rural-urban migration . The key theory of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the likelihood of getting a job at the destination have influence on the migration decision. In other words, these authors put forward that rural-urban migration will occur while the urban expected wage exceed the rural wage. From this fundamental assumption, as denominated by Harris-Todaro, is deduced that the migratory dynamics leads the economic system toward an equilibrium with urban concentration and high urban joblessness.
In the model, equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model presumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity.
In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector.
GENERAL ASSUMPTIONS
1. Two sectors: urban (manufacture) and rural (agriculture)
2. Rural-urban migration condition: when urban real wage exceeds real agricultural product
3. No migration cost
4. Perfect competition
5. Cobb-Douglas production function
6. Static approach
7. Low risk aversion
IMPLICATIONS OF THE MODEL
1. The opportunity cost of labour in the two sectors differs. The creation of an additional job in the urban sector reduces agricultural output through induced migration.
2. Substituting the minimum wage in the urban sector does not provide optimal employment and output in the urban sector. It reduces unemployment and output in the agricultural sector.
3. The payment of subsidized urban minimum wage to additional workers shall increase total consumption thereby reducing resources available for investment in the economy.
4. Harris and Todaro favor costless lumpsum taxes in order to finance wage subsidy. But this will reduce the amount of job creation in the industrial sector.
CRITICISIM OF THE MODEL
1. The Model does not specify alternate policy prescriptions such as giving a wage subsidy to the urban sector and at the same time restricting the migration of those rural workers who are not able to find jobs in the urban sector.
2. Harris and Todaro suggest non distortionary lumpsum tax to finance subsidy. But a lumpsum tax is seldom non- distortionary.
3. The H-T model does not take into consideration the generation of savings as a source of financing subsidy. Though savings are low in Less Developed Countries, yet they are an important source of non- distortionary finance to subsidize wage
4. The model does not incorporate the costs of rural-urban migration or the relatively higher costs of urban living which the migrants have to incur in the urban sector
CONCLUSION
H – T model explains some issues of rural-urban migration. This migration occurs when expected rural income is higher than rural wages. In this case economy may have high rates of unemployment. The equilibrium condition of this model is when expected rural wage is equal to rural wage. When government subsidize manufacturing sector Harris Todaro paradox may happen. According to the authors job creation instead of dealing with unemployment problem actually may cause increase of unemployment. This happens when urban-rural wage differential is high enough, so rural workers move to the cities hoping to find a job with high wage. Obviously, not all these workers succeed in finding jobs which leads to unemployment.e.g In Nigeria people move from rural area to urban area because of the differences in wage rate causing high growth rate of labour supply they by making the urban area to be more populated thereby causing urban unemployment.
Another issue is that inducing minimum wages creates labor market distortions. Therefore, policy makers should not set the minimum wage rates. In addition, simulations showed that different policies’ outcomes depend on elasticity of labor demand in different sectors and on marginal product of labor. As Harris and Todaro suggested the first-best policy would be subsidizing manufacturing along with restrictions of rural migration.
2. LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an expansion of the Lewis model. It is also known as the Surplus Labor model. It identifies the presence of a dual economy including both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike other growth models that regard underdeveloped countries to be homogenous in nature.
According to Lewis-Fei-Ranis Model, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdevelop
Lewis argued that, economic growth in a less-developed or under-developed economy could only be achieved by capital accumulation in the modern industrial sector, which is done by taking or shifting excess or surplus labour from the traditional agricultural sector to the modern industrial sector. So, Lewis advocated that an economy like that transits or moves from the first stage (excess labour) to the second stage (scarce labour) of economic development.
Later on, Fei and Ranis formalized the three stages of dualistic economic development by dividing the first two stages of Lewis Model into the first two stages of the Fei – Ranis Growth Model and the second stage of Lewis Model forming the third stage of the Fei – Ranis Growth Model
Name: Judith Okorie
Reg numbers: 2017/241450
Dept : Economics
Judith.okorie.241450@unn.edu.ng
THE HARRIS-TODARO MODEL
In the Harris-Todaro model, the probability of obtaining an urban job is defined as the number of urban jobs divided by the urban labor force. This specification assumes that persons who live in rural areas have no chance whatever of finding urban job.
Harris-Todaro specification implies a higher equilibrium unemployment rate than would be predicted by a more generalized formulation of the job search process. There are several reasons why rural residents would be expected to have a positive chance of obtaining urban jobs. Much urban hiring is done through channels which do not exclude rural residents. Some jobs are “advertised” and filled informally by word of mouth. An urban resident may locate a job for a friend or relative and then send word (and money) for him to come to the city. Other jobs are filled by a central labor exchange with which rural residents are able to register. Finally, those persons in rural areas proximate to cities may on occasion be able to look actively for an urban job.
There are various assumptions that these model rests upon but before that it is important to look at the history and theoretical literature and similar models in development economics. The literature of development economics, dualistic models gained popularity over the single-commodity or single-sector theories in the 1950’s. A typical dualistic model in development economics contains two sectors, a traditional or agricultural sector in the rural area and a modern or manufacturing sector in the urban area
The following are the Assumptions of the model:
1) It has two sectors: urban (manufacture) and rural (agriculture).
2) Rural-urban migration condition: when urban real wage exceeds real agricultural product.
3) There is no migration cost: there is little to no cost on migrating from one sector to another.
4) The presence of Perfect competition in the two sectors: Both the agricultural and manufacturing sectors are perfectly competitive in nature and the application of the Cobb-Douglas production function.
5) It uses Static approach and there is Low risk aversion: the Migrants are not risk averse. That is, they are risk takers
The first stage of the model is where the rural migrant enters the urban area and settles down in the so called “traditional urban sector” (the informal sector) for a certain period of time.
The second stage is occurs when the migrant finds a more sustainable and permanent job in the modern sector. They make no income on their own and were supposed to live out of the support of their relatives in their origins or in the cities.
The probability of landing a job, according to the model, depends on the number of newly created jobs in the modern sector, the size of the population of the urban unemployed, and the length of time a migrant has been in the urban area.
The model however faced a lot of criticisms, as some of its Assumptions was criticized and gone under revision ever since it was developed.
Here are the main critiques:
1. The lottery style job allocation excludes investment in job search on the part of the immigrants;
2. The informal sector is not explicitly modelled;
3. There is not enough evidence to support the assumption of a rigid wage in the modern sector. Moreover, besides trade union pressure or minimum wage legislation, the wage differentials among sectors could be explained as well by, say, firm-specific training costs;
4. The influence on decision making of risk and risk attitudes on the part of the potential immigrants is not included; and Differentials in skill levels among the migrants are not accounted for.
5. The issue of discount rates and rational migrants is ignored;
In conclusion, the Harris-Todaro model explains some issues of rural-urban migration. This migration results from rational decision makers who compare the Urban expected income with wages or salaries in rural wages. The equilibrium condition of this model is when expected rural wage is equal to rural wage. The policy for governance to take is dealing with the problem of unemployment, not just simply job creation as this makes rural labourers to overestimate the economic opportunities in Urban areas. The model advocate and advises against government setting the minimum wage as this further increases unemployment especially if minimum wage is set above the equilibrium wage rate. As the model suggested the first-best policy would be subsidizing manufacturing along with restrictions of rural migration.
LEWIS-FEI-RANIS MODEL
The lewis fei Ranis model is a systematic theory of economic development with unlimited supplies of labour founded by Prof Lewis. The theory focuses on structural transformation of a subsistence economy into an industrial modern economy. The theory was modified by John Fei and Gustar Ranis in the 1950s. The model believe that in many undeveloped countries, there is an unlimited supply of labour is available at a subsistence age. The model of two-sector model became the general theory of development process in surplus labour. Economic development takes place when capital accumulates as a result of migration of surplus labour from the subsistence sector to the modern sector (capitalist sector). In the Lewis Model theory, the underdeveloped economy consist of two sectors: the industrial sector and the subsistence sector.
The theory is related to labor surplus in the under Developed areas and limited resources; Mass population engaging mostly in agricultural farming related with unemployment and increased population growth.
The Assumptions of the model
1) There is high population growth rate. This as a result leads to unemployment in the economy as a whole.
2) There is huge concern about the effect of the rate of diminishing marginal returns in the industrial sector.
3) The model assumes that land is fixed and the output of the agricultural sector is a function of land that is fixed with no other factors in consideration.
4) Another assumptions of the model is that there is abundant Labour in the under Developing areas and limit resources.
CRITICISMS OF FEI-RANIS MODEL
1. Wages in the agricultural sector is not constant. The model states that the Institutional wage is constant as agricultural production activities increases rapidily. It is regarded as unrealistic because wages tends to rise when there is increase in production activities.
2. The model states that the Supply of land is fixed, but on the long run, the amount of land supplied is not as revealed.
These two models are important in development economics, especially in the case of Nigeria and it has been revitalized in policy debates even with the various criticism.
Ogu Mercy Akudo
2017/249545
mercyogu46@gmail.com
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
INTRODUCTION
This model focuses on structural transformation of the basic subsistence of economy and was formed by Nobel Laureate W. Arthur Lewis which was changed and extended by John C. H. Fei and Gustav Ranis. Later generalized for the developing process of surplus labour of developing nations in the 1970s and sometimes applied to study recent growth of the labour markets of the developing countries. The Lewis model theory in development which is surplus labor from the traditional agricultural sector, has been transferred into the modern industrial sector that is to say the growth from surplus labour promotes industrialization and works towards sustaining development. It recognizes dual economies which are a modern and primitive sector, and takes unemployment and underemployment resources into account. Development can be brought about by a complete shift in the center point of progress from the agricultural to the industrial economy.
Fei and Ranis made strong emphasis on industry-agriculture and the relationship between them, which encourages and speeds up development. In case agricultural laborers look for industrial employment, and industrialists employ more workers by use of larger capital good stock and labor-intensive technology, this connectivity can work between the industrial and agricultural sector. Also, if the surplus owner invests in that section of industrial sector that is close to soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized. They took the example of Japan’s dualistic economy in the 19th century and said that connectivity between the two sectors of Japan was heightened due to the presence of a decentralized rural industry which was often linked to urban production. According to them, economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision-making powers and use industrial capital and consumer goods for agricultural practices. In the Fei-Ranis model, it is possible that as technological progress takes place and there is a shift to labor-saving production techniques, growth of the economy takes place with increase in profits but no economic development takes place
The problem Lewis model had was the weak role of agriculture in helping boost the growth of the industrial sector and, he did not acknowledge that the increase in production of labour should take place primary to the labor shift between the two sectors and this change( shift) depends on the growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits, the nature of the industry’s technical progress and its associated bias, growth rate of population.
Basic Thesis of the Model:
This theory is concerned with a poor economy which has following properties:
(i) There is an abundance of labor in such UDC and shortage of natural resources.
(ii) The population growth rate is very high which results in mass unemployment in the economy.
(iii) The major share of the population is engaged in agriculture. But the agriculture sector is stagnant. Hence, the marginal productivity of labor is zero and negative in the agriculture sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy
CRITICISMS OF THE MODEL
Fei–Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.
It has been asserted that Fei and Ranis did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, basically the system of feudalism that prevailed.
Fei and Ranis say, “It has been argued that money is not a simple substitute for capital in an aggregate production function. There are reasons to believe that the relationship between money and capital could be complementary to one another at some stage of economic development, to the extent that credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry.” This indicates that in the process of development they neglect the role of money and prices. They fail to differ between wage labor and household labor, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
Marginal Productivity of labour in the early growth stage: the model is of the view that MPL=0 in the first stage of economic growth, and the transfer of labour from the agricultural sector will not reduce output in the agricultural sector. But economists like Berry and Soligo are of the view that agricultural output in the early stage of economic growth will not remain constant and may fall under different systems of land tenure, i.e. the peasant proprietorship and sharecropping, etc.
Fei and Ranis assume that MPPL is zero during the early phases of economic development, which has been criticized by Harry T. Oshima and some others on the grounds that MPPL of labor is zero only if the agricultural population is very large, and if it is very large, some of that labor will shift to cities in search of jobs. In the short run, this section of labor that has shifted to the cities remains unemployed, but over the long run it is either absorbed by the informal sector, or it returns to the villages and attempts to bring more marginal land into cultivation. They have also neglected seasonal unemployment, which occurs due to seasonal change in labor demand and is not permanent.
The model ignored the role of foreign trade as it assumed a closed economy model. In the second stage when agricultural products decrease the Terms of Trade goes against the industrial sector. This would occur in the presence of a closed economy, but if the model is made open such a situation will not occur as the goods could be imported in the presence of current-scarcity. This was especially observed in the case of Japan that imported cheap farm products to improve her Terms of Trade.
In the Lewis model, the underdeveloped economy sectors that is the traditional, overpopulated rural subsistence sector characterized by zero marginal labor productivity a situation that permits Lewis to classify this as surplus labor in the sense that it can be withdrawn from the traditional agricultural sector without any loss of output—and a high-productivity modern urban industrial sector into which labor from the subsistence sector is gradually transferred. The primary focus of the model is on both the process of labor transfer and the growth of output and employment in the modern sector. Both labor transfer and modern-sector employment growth are brought about by output expansion in that sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector made possible by the excess of modern-sector profits over wages on the assumption that capitalists reinvest all their profits. Lewis assumed that the level of wages in the urban industrial sector was constant, determined as a given premium over a fixed average subsistence level of wages in the traditional agricultural sector. At the constant urban wage, the supply curve of rural labor to the modern sector is considered to be perfectly elastic. Surplus labor. The excess supply of labor over and above the quantity demanded at the going free-market wage rate. In the Lewis two-sector model of economic development, surplus labour refers to the portion of the rural labor force whose marginal productivity is zero or negative.
The criticism of this model is that the Lewis-fei-Ranis model is simple and roughly reflects the historical experience of economic growth, four of its key assumptions do not fit the institutional and economic realities of most contemporary developing countries.
However, the model implied that the rate of labor transfer and employment creation in the modern sector is proportional to the rate of modern sector capital accumulation. The faster the rate of capital accumulation, the higher the growth rate of the modern sector and the faster the rate of new job creation.
Self-sustaining growth
Economic growth that continues over the long run based on saving, investment, and complementary private and public activities. We study the Lewis model because, as many development specialists still think about development in this way either explicitly or implicitly, it helps students participate in the debates. Moreover, the model is widely considered relevant to recent experiences in China, where labor has been steadily absorbed from farming to manufacturing and a few other countries with similar growth patterns. The Lewis turning point at which wages in manufacturing started to rise was widely identified with China’s wage increases of 2010.
However, when we take into account the labor saving bias of most modern technological transfer, the existence of substantial capital flight, the widespread nonexistence of rural surplus labor, the growing prevalence of urban surplus labor, and the tendency for modern-sector wages to rise rapidly even where substantial open unemployment exists, we must acknowledge that the Lewis two-sector model—though valuable as an early conceptual portrayal of the development process of sectoral interaction and structural change and a description of some historical experiences including some recent ones such as China—requires considerable modification in assumptions and analysis to fit the reality of most contemporary developing nations.
COMPARISONS BETWEEN THE LEWIS-FEI-RANIS GROWTH MODEL AND OTHER MODELS
Like most other growth models the Fei- Ranis model also adopted its own stages of development. For instance, the Fei-Ranis model adopted three stages of growth when compared to the Rostow’s model that adopted five stages of growth to achieve economic development.
The Fei-Ranis model like other growth models towed in the same line of direction in explaining economic development, i.e. they all assumed for any economy to be developed that the population must be fully engaged in all sectors of production, population growth rate must be checked and government have to intervene in the economy for faster economic and structural development.
Like all growth theories the Fei-Ranis model was also criticized for being too simplistic in its thinking and for not taking into account some of the situations that had caused many countries to remain underdeveloped.
The Fei-Ranis model only took into account land and labour as factors of production, when compared to other growth models such as Harrod-domar growth model that took into account other factors such as technological change, interest rates, amount of money in circulation in the economy, currency value in the International market, as factors that also affect economic development of a country.
HARRIS-TODARO OF MIGRATION THEORY
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is a 1970s economic model used in development economics and welfare economics to describe some of the problems surrounding rural-urban migration. The model’s main assumption is that migration decisions are based on projected income differences between rural and urban areas rather than simply wage differences. This implies that rural-urban migration can be economically acceptable in a context of high urban unemployment if projected urban income exceeds expected rural income. The model focuses on labor migration from rural to urban areas, which is caused by certain incentives. Under this model, migrant employees are mainly involved in a lottery of high-paid jobs in cities. For each job created, more than one worker may migrate, which would result in a loss of output if migrants take some family members into the urban areas. The migration of labor is because of rural-urban differences in average expected wages. The minimal urban wage is substantially higher than the rural wages.
ASSUMPTIONS OF THE MODEL
The formal statement of the equilibrium condition of the Harris–Todaro model is as follows:
✓ Let wR be the real wage rate (also marginal productivity of labor) in the rural agricultural sector.
✓ Let wM be the actual real wage rate in the urban manufacturing sector of the economy.
✓ Let Le be the number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
✓ Let LU, be the total number of job seekers in the urban sector- both employed and unemployed.
✓ Let Wu be the wage rate in the urban sector that is set by the government, using a minimum wage law (it should be noted that wu is expected to be greater than wu)
Base on the Harris Todaro model, rural-urban migration will occur except if
Wr (Le /LU) × Wu
This means that when the expected rural wage rate is equal to the employment rate multiplied by the actual real urban wage rate, then the equilibrium condition in the economy has been reached. That is, there is no incentive for workers to move from urban-rural areas or from rural-urban areas.
CRITICISM OF THE HARRIS-TODARO MODEL
This model overlooked the cost of rural-urban migration or the relatively higher costs of urban living which the migrants have to incur in the urban sector.
The model ignored the generation of savings as a source of financing subsidy.
The model does not specify alternate policy prescriptions such as giving a wage subsidy to the urban sector.
The model indicate non-distortionary lump sum tax to finance subsidy, but a lump sum tax is not usually non-distortionary
Conclusion
The Harris-Todaro model can be applicable in Nigeria economy by determining the reason people migrate from rural to urban areas. It is no longer news that the salaries paid to workers in cities are higher than the ones paid in the rural areas, and this can be noted as one the reasons making people to migrate into the urban areas hoping to get a lucrative job. The potential of getting a lucrative job depends on the size of unemployment in relation to the number of employed workers in the industrial sector of the Nigerian economy.
Ogu Mercy Akudo
2017/249545
mercyogu46@gmail.com
LEWIS -FEI- RANIS MODEL (SURPLUS LABOUR THEORY)
INTRODUCTION
This model focuses on structural transformation of the basic subsistence of economy and was formed by Nobel Laureate W. Arthur Lewis which was changed and extended by John C. H. Fei and Gustav Ranis. Later generalized for the developing process of surplus labour of developing nations in the 1970s and sometimes applied to study recent growth of the labour markets of the developing countries. The Lewis model theory in development which is surplus labor from the traditional agricultural sector, has been transferred into the modern industrial sector that is to say the growth from surplus labour promotes industrialization and works towards sustaining development. It recognizes dual economies which are a modern and primitive sector, and takes unemployment and underemployment resources into account. Development can be brought about by a complete shift in the center point of progress from the agricultural to the industrial economy.
Fei and Ranis made strong emphasis on industry-agriculture and the relationship between them, which encourages and speeds up development. In case agricultural laborers look for industrial employment, and industrialists employ more workers by use of larger capital good stock and labor-intensive technology, this connectivity can work between the industrial and agricultural sector. Also, if the surplus owner invests in that section of industrial sector that is close to soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized. They took the example of Japan’s dualistic economy in the 19th century and said that connectivity between the two sectors of Japan was heightened due to the presence of a decentralized rural industry which was often linked to urban production. According to them, economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision-making powers and use industrial capital and consumer goods for agricultural practices. In the Fei-Ranis model, it is possible that as technological progress takes place and there is a shift to labor-saving production techniques, growth of the economy takes place with increase in profits but no economic development takes place
The problem Lewis model had was the weak role of agriculture in helping boost the growth of the industrial sector and, he did not acknowledge that the increase in production of labour should take place primary to the labor shift between the two sectors and this change( shift) depends on the growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits, the nature of the industry’s technical progress and its associated bias, growth rate of population.
Basic Thesis of the Model:
This theory is concerned with a poor economy which has following properties:
(i) There is an abundance of labor in such UDC and shortage of natural resources.
(ii) The population growth rate is very high which results in mass unemployment in the economy.
(iii) The major share of the population is engaged in agriculture. But the agriculture sector is stagnant. Hence, the marginal productivity of labor is zero and negative in the agriculture sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy
CRITICISMS OF THE MODEL
Fei–Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.
It has been asserted that Fei and Ranis did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, basically the system of feudalism that prevailed.
Fei and Ranis say, “It has been argued that money is not a simple substitute for capital in an aggregate production function. There are reasons to believe that the relationship between money and capital could be complementary to one another at some stage of economic development, to the extent that credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry.” This indicates that in the process of development they neglect the role of money and prices. They fail to differ between wage labor and household labor, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
Marginal Productivity of labour in the early growth stage: the model is of the view that MPL=0 in the first stage of economic growth, and the transfer of labour from the agricultural sector will not reduce output in the agricultural sector. But economists like Berry and Soligo are of the view that agricultural output in the early stage of economic growth will not remain constant and may fall under different systems of land tenure, i.e. the peasant proprietorship and sharecropping, etc.
Fei and Ranis assume that MPPL is zero during the early phases of economic development, which has been criticized by Harry T. Oshima and some others on the grounds that MPPL of labor is zero only if the agricultural population is very large, and if it is very large, some of that labor will shift to cities in search of jobs. In the short run, this section of labor that has shifted to the cities remains unemployed, but over the long run it is either absorbed by the informal sector, or it returns to the villages and attempts to bring more marginal land into cultivation. They have also neglected seasonal unemployment, which occurs due to seasonal change in labor demand and is not permanent.
The model ignored the role of foreign trade as it assumed a closed economy model. In the second stage when agricultural products decrease the Terms of Trade goes against the industrial sector. This would occur in the presence of a closed economy, but if the model is made open such a situation will not occur as the goods could be imported in the presence of current-scarcity. This was especially observed in the case of Japan that imported cheap farm products to improve her Terms of Trade.
In the Lewis model, the underdeveloped economy sectors that is the traditional, overpopulated rural subsistence sector characterized by zero marginal labor productivity a situation that permits Lewis to classify this as surplus labor in the sense that it can be withdrawn from the traditional agricultural sector without any loss of output—and a high-productivity modern urban industrial sector into which labor from the subsistence sector is gradually transferred. The primary focus of the model is on both the process of labor transfer and the growth of output and employment in the modern sector. Both labor transfer and modern-sector employment growth are brought about by output expansion in that sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector made possible by the excess of modern-sector profits over wages on the assumption that capitalists reinvest all their profits. Lewis assumed that the level of wages in the urban industrial sector was constant, determined as a given premium over a fixed average subsistence level of wages in the traditional agricultural sector. At the constant urban wage, the supply curve of rural labor to the modern sector is considered to be perfectly elastic. Surplus labor. The excess supply of labor over and above the quantity demanded at the going free-market wage rate. In the Lewis two-sector model of economic development, surplus labour refers to the portion of the rural labor force whose marginal productivity is zero or negative.
The criticism of this model is that the Lewis-fei-Ranis model is simple and roughly reflects the historical experience of economic growth, four of its key assumptions do not fit the institutional and economic realities of most contemporary developing countries.
However, the model implied that the rate of labor transfer and employment creation in the modern sector is proportional to the rate of modern sector capital accumulation. The faster the rate of capital accumulation, the higher the growth rate of the modern sector and the faster the rate of new job creation.
Self-sustaining growth
Economic growth that continues over the long run based on saving, investment, and complementary private and public activities. We study the Lewis model because, as many development specialists still think about development in this way either explicitly or implicitly, it helps students participate in the debates. Moreover, the model is widely considered relevant to recent experiences in China, where labor has been steadily absorbed from farming to manufacturing and a few other countries with similar growth patterns. The Lewis turning point at which wages in manufacturing started to rise was widely identified with China’s wage increases of 2010.
However, when we take into account the labor saving bias of most modern technological transfer, the existence of substantial capital flight, the widespread nonexistence of rural surplus labor, the growing prevalence of urban surplus labor, and the tendency for modern-sector wages to rise rapidly even where substantial open unemployment exists, we must acknowledge that the Lewis two-sector model—though valuable as an early conceptual portrayal of the development process of sectoral interaction and structural change and a description of some historical experiences including some recent ones such as China—requires considerable modification in assumptions and analysis to fit the reality of most contemporary developing nations.
COMPARISONS BETWEEN THE LEWIS-FEI-RANIS GROWTH MODEL AND OTHER MODELS
Like most other growth models the Fei- Ranis model also adopted its own stages of development. For instance, the Fei-Ranis model adopted three stages of growth when compared to the Rostow’s model that adopted five stages of growth to achieve economic development.
The Fei-Ranis model like other growth models towed in the same line of direction in explaining economic development, i.e. they all assumed for any economy to be developed that the population must be fully engaged in all sectors of production, population growth rate must be checked and government have to intervene in the economy for faster economic and structural development.
Like all growth theories the Fei-Ranis model was also criticized for being too simplistic in its thinking and for not taking into account some of the situations that had caused many countries to remain underdeveloped.
The Fei-Ranis model only took into account land and labour as factors of production, when compared to other growth models such as Harrod-domar growth model that took into account other factors such as technological change, interest rates, amount of money in circulation in the economy, currency value in the International market, as factors that also affect economic development of a country.
HARRIS-TODARO OF MIGRATION THEORY
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is a 1970s economic model used in development economics and welfare economics to describe some of the problems surrounding rural-urban migration. The model’s main assumption is that migration decisions are based on projected income differences between rural and urban areas rather than simply wage differences. This implies that rural-urban migration can be economically acceptable in a context of high urban unemployment if projected urban income exceeds expected rural income. The model focuses on labor migration from rural to urban areas, which is caused by certain incentives. Under this model, migrant employees are mainly involved in a lottery of high-paid jobs in cities. For each job created, more than one worker may migrate, which would result in a loss of output if migrants take some family members into the urban areas. The migration of labor is because of rural-urban differences in average expected wages. The minimal urban wage is substantially higher than the rural wages.
ASSUMPTIONS OF THE MODEL
The formal statement of the equilibrium condition of the Harris–Todaro model is as follows:
✓ Let wR be the real wage rate (also marginal productivity of labor) in the rural agricultural sector.
✓ Let wM be the actual real wage rate in the urban manufacturing sector of the economy.
✓ Let Le be the number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
✓ Let LU, be the total number of job seekers in the urban sector- both employed and unemployed.
✓ Let Wu be the wage rate in the urban sector that is set by the government, using a minimum wage law (it should be noted that wu is expected to be greater than wu)
Base on the Harris Todaro model, rural-urban migration will occur except if
Wr (Le /LU) × Wu
This means that when the expected rural wage rate is equal to the employment rate multiplied by the actual real urban wage rate, then the equilibrium condition in the economy has been reached. That is, there is no incentive for workers to move from urban-rural areas or from rural-urban areas.
CRITICISM OF THE HARRIS-TODARO MODEL
This model overlooked the cost of rural-urban migration or the relatively higher costs of urban living which the migrants have to incur in the urban sector.
The model ignored the generation of savings as a source of financing subsidy.
The model does not specify alternate policy prescriptions such as giving a wage subsidy to the urban sector.
The model indicate non-distortionary lump sum tax to finance subsidy, but a lump sum tax is not usually non-distortionary
Conclusion
The Harris-Todaro model can be applicable in Nigeria economy by determining the reason people migrate from rural to urban areas. It is no longer news that the salaries paid to workers in cities are higher than the ones paid in the rural areas, and this can be noted as one the reasons making people to migrate into the urban areas hoping to get a lucrative job. The potential of getting a lucrative job depends on the size of unemployment in relation to the number of employed workers in the industrial sector of the Nigerian economy.
1. Lewis-Fei-Ranis Model of Economic Growth
The central idea behind the Lewis model is fairly simple. Lewis divided labour force into two differentiated groups – “subsistence sector” and “capitalist sector” where the former is assumed to contain unlimited supply and consequently, a pool of surplus labour[1] that sets labour-supply conditions for the latter. The concept of a dual economy is heavily criticised. As Leeson (1982) pointed out, “dual economy” models are “held to imply a false picture of the nature of the historical process of change in underdeveloped countries”. In this paper, I will not assess the strengths or weaknesses of the model, but instead, for the sake of simplicity and clarity, assume that the sectors are agricultural and industrial, respectively.
Subsequently, Ranis’ and Fei’s extension to Lewis’ model can be analysed. They observed the model by reading it from left to right and assessed the changes in the output and wage as more and more people moved from agriculture to the industry. A new concept was added – namely, disguised unemployment, which appears in the traditional subsistence sector. The marginal product of labour, which is observed as the slope of the production function, in agricultural sector is lower than in industry
HARRIS-TODARO’S THEORY OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is a development economics model developed in 1970. The model is used in development economics and welfare economics to justify a number of the problems regarding rural-urban migrations. The model assumes that migration decisions depends on expected financial benefits between the urban and rural areas instead of simply wage differentials. This means that rural-urban migration in an exceedingly context of high urban state may be economically rational if expected urban financial gain exceeds expected rural financial gain.
Todaro accepts the Lewis-Fei-Ranis model of rural-urban migration however solely with reservations. To him, this theory might correspond to the historical situation of migration within the western socio-economic surroundings however doesn’t justify the trends of rural-urban migration in less developed countries.
The Lewis model assumes that there would be increase in capital accumulation, which is able to be invested in trendy businesses inflicting new jobs in abundance. It implies that there would be labour transfer at a speed proportional to capital accumulation.
But Lewis and his followers couldn’t foresee that it may be doable only if technology would stay constant. However capital accumulation results in capital-intensive industrial development supported by advanced technologies, which yield high economic boom however there would be lesser labour absorption. The trendy business has advanced labour absorption capability.
Lewis assumption that rural areas have surplus labour while urban areas have increase in employment level is not necessarily correct . Urban areas in less developed countries necessarily don’t give full employment. Data from the planning Commission, in 1978, five percent of the labour force within the urban areas of Republic of India was unemployed whereas only one percent of its rural area.
Lastly, Todaro rejects Lewis-Fei-Ranis model for its assumption that there would exist constant real urban wages till the agricultural surplus labour exhausts. Todaro finds that in the majority of less developed countries the urban wages are on the increase.
Todaro’s model doesn’t advocate merely the rural-urban wage differentials because the basis of migration as is claimed altogether migration theories. To him, the migrant is far rational and conniving in his call to shift to a selected town.
He additionally takes into thought not solely the wage differen¬tials however additionally the chance of obtaining employment within the geographical region. Migration, thus, is set additional by rural-urban variations in expected earnings, instead of in actual earnings.
GENERAL ASSUMPTIONS OF HARRIS-TODARO’S THEORY OF MIGRATION
• Two sectors: The model assumes that there are only two sectors which are urban (manufacture) and rural (agriculture)
• Rural-urban migration condition: The model assumes that migration occurs when urban real wage exceeds the real wage of the rural areas
• No migration cost
• Perfect competition
• Cobb-Douglas production function
• Static approach
• Low risk aversion
•
The Harris-Todaro model of rural-urban migration is sometimes studied within the context of employment and state in developing countries. Within the model, the aim is to clarify the intense urban state downside in developing countries.
The relevance of this model depends on the event stage and economic success within the developing country.
The distinctive thought within the model is that the speed of migration flow is set by the distinction between expected urban wages and rural wages. The model is applicable to less fortunate developing countries or to countries at the sooner stages of development.
Name: Onah George Chiedozie
Reg. No. 2017/241453
Economics
LEWIS FEI RANIS MODEL
A prominent Economist Lewis was well known with his model “Economic Development with unlimited supplies of Labour”. This model pictured the capital accumulation in the modern industrial sector with the aim of getting labour from the subsistence agricultural sector. The model was further modified by Fei and Ranis, but the essence of the two models is the same. The Lewis model and that of Fei-Ranis assume the existence of surplus labour in the economy, the main component of which is the enormous disguised unemployment in agriculture. Further they visualize ‘dual economic structure’ with manufacturing, mines and plantations representing the modern sector, the salient features of which are the use of reproducible capital, production for market and for the profit, employing labour on wage payment basis and modern methods of industrial organization. Furthermore, agriculture represents the subsistence sector using non-reproductive land on self-employment basis and producing mainly for self-consumption with inferior techniques of production and containing surplus labour in the form of disguised unemployment. Hence, the productivity or output per head in the modern sector is much longer than that in agriculture. Though the marginal productivity in agriculture over a wide range is taken to be zero, the average productivity is assumed to be positive and equal to the bare subsistence level.
ANALYSIS OF THE LEWIS MODEL
The authenticity of the Labour-surplus model of Lewis for developing countries like Nigeria; depend of course on the extent to which their underlying assumptions, explicitly or implicitly, made in this model. In our views the basic premise of this model is wrong and that it unrealistic and irrelevant for framing a suitably development strategy to solve the problem of surplus labour and unemployment. The basic premise of the model is that industrial growth can generate adequate employment opportunities so as to draw away all the surplus labour from agriculture in an overpopulated developing country like Nigeria where population is currently increasing at the annual rate of around 1.6%. This premise has been proved to be a myth in the light of generation of little employment opportunities in the organized industrial sector during over sixty years of economic development in India, Latin American and African countries.
Putting India into consideration, for instance, in the 30 years (1951-81) of industrial development in India during which fairly good rates of industrial production had been achieved, the organized industrial employment increased by any 3 million which was too meager to make any significant impact on the urban unemployment situation far from providing a southern to rate labour-surplus problem in agriculture. Thus the generation of adequate employment opportunities and as a result the absorption of surplus labour from agriculture in the expanding industrial sector has not proceeded as predicted by the Lewis model.
One can notice that the migration of workers for example in Nigeria has occurred as a result of urbanization in the various censuses but these immigrants to the urban area has not been absorbed into modern high productivity employment, as pictured by Lewis Fei Rranis. These immigrants to urban areas have been mainly employed in petty trade and domestic services in the country.
THE MODEL WITH SURPLUS LABOUR
In the model, the wage rate is put into consideration; such wage in the modern industrial sector is determined by the average productivity in the agriculture. To this average productivity is added a margin, According to Lewis this margin is fixed at 30% which is required for furnishing an incentive for labourers to transfer themselves from the countryside to the urban industries as well as for melting the higher cost of urban living. In this setting, the model shows how the expansion in the industrial investment and production or, in other words, capital accumulation outside agriculture will generate sufficient employment opportunities so as to absorb all the surplus labour from agriculture and elsewhere.
Furthermore, profit in the Lewis ‘unlimited supply of labour constitutes the main source of capital formation. The greater the share of profits in national income,the greater the rate of savings and capital accumulation. Thus with the expansion of the modern or capitalist sector, the rate of saving and investments as percentage of national income will continuously rise. As a result rate of capital accumulation will also increase relative to national income. It is of course assumed that all proofs or a greater part of the profits is saved and automatically invested. It will be important to note that as the capitalist expands, the share of profits in national product will rise. The rise in the share of profits in national product is due to the assumption of the model that wage rate remains constant and prices of the products produced by the capitalist sector do not fall with the expansion in output. To quote Lewis himself, “If unlimited supplies of labour are available at constant real wage rate, and if any part of the profits is reinvested in productive capacity, profits will grow continuous relative to the national income.”
ASSUMPTIONS AND CRITICISM OF THE MODEL
Labour-absorptive capacity of the modern industrial sector: Lewis Fei and Ranis assumed that the growth of industrial employment will be greater than the growth in labour force. This is one of their shortcomings, they believed only then the organized industrial sector can absorb surplus labour from agriculture. The employment far from withdrawing labour currently employed in the organized industries and services, in the basis to absorb the new entrants to the labour force.
One of the important setbacks of the Lewis model is that it has neglected the important of agricultural growth in sustaining capital formation in the modern industrial sector. When as a result of the expansion of capitalist modern sector, transfer of labour form agriculture to industry takes place, the demand for food grains will rise. If the output of food grains does not increase through agricultural development to meet the additional demand for food grains wages of industrial labour will slow down or even choke off the process of capital accumulation and economic development. Thus, if no allowance is made for agricultural growth, the expansion of modern sector and capital accumulation is bound to be halted.
Lewis model neglects the importance of Labour Absorption in Agriculture: We can find weaknesses in the models of Lewis and Fei-Ranis in the scenario that they have ignored the generation of productive employment in agriculture. No doubt, Lewis is this later writings and Fei-ranis in their modified and extended version of Lewis model have pictured and important role for agricultural development so as to sustain industrial growth and capital accumulation. But they visualize such an agricultural development strategy that will release labour force form agriculture rather than absorbing them in agriculture. Thus, to quote Fei and Ranis: “In such a dualistic setting the heart of the development problem lies in the gradual shifting of the economy’s centre of gravity from the agricultural to the industrial sector through labour reallocation.” In this process each sector is call upon to perform a special role: productivity in the agricultural sector must rise sufficiently so that “smaller fraction of the total population can support the entire economy” with food and raw materials, thus enabling agricultural workers to released; simultaneously, the industrial sector must expand sufficiently to provide employed opportunities for the released workers….labour reallocation must be rapid enough to swamp massive population increase if the economy’s centre of gravity is to be shifted over time.”
The above shows that employment potential of organized industrial sector is so little that labour reallocation between agriculture and industry and “smaller fraction of the total population being employed in agriculture” is just not possible in labour-surplus developing countries like India. Indeed, a good amount of employment opportunities can be generated in agriculture itself by capital accumulation in agriculture, adoptive proper agricultural technologies and making appropriate institutional reforms in the pattern of land ownership. Even about the African countries most of which do not suffer from the Malthusian problem of overpopulation but are currently faced with acute urban unemployment (especially of what is known as “UNEMPLOYMENT OF SCHOOL LEAVERS” majority of which have migrated from the villages to the urban areas) the expert opinion was veered round to the view of seeking solution of labour-surplus problem within agriculture.
CONCLUSIONS
In the above explanations, we could figure out difference lapses of the model, other than that, the model still maintains high degree of analytical value. It clearly points out the role of capital accumulative in raising the level of output and employment in labour-surplus developing countries. The model stipulates the systematic analysis of the growth problem of dual economies and brings out some of crucial importance of such factors as profits and wages rate of capital accumulation and economic growth. It also stipulates relationship in growth process most
TODARO MODEL OF MIGRATION .
Prominent men behind this model are John R. Harris and Michael Todaro, this model was developed in 1970 and used in development economics and welfare economics to undertand issues con.cerning rural-urban migration. Major assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. In the model, an equilibrium is attained when the expected wage in urban areas is equal to the marginal product of an agricultural worker. Partially like the classical, the model assumes that unemployment does not exist in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labour market is perfectly competitive, because of this the wage equals the marginal productivity.In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban inomes.
ASSUMPTIONS OF THE MODEL, TOGETHER WITH IT’S APPLICATION TO REAL LIFE SITUATIONS
Here, we discuss the assumptions together with the equations that describes them. The structure of the model is based on the assumption that a fixed wage leads to an outbreak of distortion and urban unemployment. In the model, we have two sectors , Sector one Agricultural rural sector, sector two manufacturing urban sector.There are three kinds of production factors, specific production factor in sector 1, K1, specific production factor in sector 2, K2, and labor, L, which is employed in both sectors and mobile between sectors.The specific production factor in the urban sector, K2, includes not only equipment and facilities for production but also social infrastructure, such as airports, roads, and industrial parks, which are related to production. Therefore, an improvement of the social infrastructure means an increase in K2.
Quoting Harris Todaro,”In the Harris–Todaro model, the necessary and sufficient condition for the increase in the specific production factor in the urban sector to decrease urban unemployment is that the slope of the marginal product curve of labor in the rural sector exceeds the per-capita wage difference between the institutional minimum wage and the expected wage in the urban sector”.
Putting agricultural productivity into consideration, if the productivity of Agricultural products rises together with the income of the individual,invariably, there would be no need for the rural workers to migrate to the urban area. Mostly in some of the Asian countries developing infrastructurrs such as industrial parks, roads e.t.c gives rise to the model. In the case of metro cebu, in Philippines, the Todaro paradox occurred in 1990s. As the Metro Cebu economy developed with ODA projects supported by the Japanese Government, workers from surrounding areas migrated to the region and increased urban unemployment.
CONCLUSIONS
Talking about the economy of the less developed country, the capital accumulation is very important, The accumulated capital forms many production bases and creates job opportunities in the urban sector.At the same time, the increase in employment raises the wage level in the urban sector. In the Harris–Todaro model, the rising urban wage pushes up the expected wage in the urban sector and consequently encourages workers to migrate from the rural sector to the urban sector.
INTRODUCTION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues relating rural-urban migration. In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
Harris-Todaro model is considered one of the starting points of the classic rural-urban migration theory. The hypothesis and predictions of Harris-Todaro model have been subjected to econometric evaluation and have been corroborated by several studies. The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination and have influence on the migration decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage. From this crucial assumption, as denominated by Harris-Todaro is deduced that the migratory dynamics leads the economic system toward an equilibrium with urban concentration and high urban unemployment.
They analyzed the rural-urban migration by means of an agent-based computational model taking into account the influence of the neighborhood in the migration decision. The inclusion of the influence of neighbors was done via an Ising like model. The economic analogous to the external field in the Ising Hamiltonian was the differential of expected wages between urban and rural sectors. Therefore, in these works the crucial assumption of Harris and Todaro were taken for granted.
Assumption;
Harris and Todaro looked into migration of workers in a two-sector economic system, namely, (urban sector and rural sector. The difference between these sectors are the difference in production of goods, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods.
Lewis fie ranis model;
This model of economic growth is a dualistic model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model.
It shows the existence of a bi-economy which comprises both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, which many other growth models that consider underdeveloped countries to be homogenous in nature. According to this model the primitive sector covers the existing agricultural sector in the economy. The two sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials
ASSUMPTIONS
Fie assumed as if the wages to the transferred labour will be paid in agricultural products and as the institutional wages fixed in terms of agricultural produce, the labour transferred to the industrial sector will continue to be available at the constant wage rate i.e. that institutional wage.
Ranis and Fei, on the other hand assumed that the labour in the industrial sector will be paid, in terms of the industrial products and they had to bring the hanging terms of trade into the picture.
Name: Onah George Chiedozie
Reg. No. 2017/241453
Economics
LEWIS FEI RANIS MODEL
A prominent Economist Lewis was well known with his model “Economic Development with unlimited supplies of Labour”. This model pictured the capital accumulation in the modern industrial sector with the aim of getting labour from the subsistence agricultural sector. The model was further modified by Fei and Ranis, but the essence of the two models is the same. The Lewis model and that of Fei-Ranis assume the existence of surplus labour in the economy, the main component of which is the enormous disguised unemployment in agriculture. Further they visualize ‘dual economic structure’ with manufacturing, mines and plantations representing the modern sector, the salient features of which are the use of reproducible capital, production for market and for the profit, employing labour on wage payment basis and modern methods of industrial organization. Furthermore, agriculture represents the subsistence sector using non-reproductive land on self-employment basis and producing mainly for self-consumption with inferior techniques of production and containing surplus labour in the form of disguised unemployment. Hence, the productivity or output per head in the modern sector is much longer than that in agriculture. Though the marginal productivity in agriculture over a wide range is taken to be zero, the average productivity is assumed to be positive and equal to the bare subsistence level.
ANALYSIS OF THE LEWIS MODEL
The authenticity of the Labour-surplus model of Lewis for developing countries like Nigeria; depend of course on the extent to which their underlying assumptions, explicitly or implicitly, made in this model. In our views the basic premise of this model is wrong and that it unrealistic and irrelevant for framing a suitably development strategy to solve the problem of surplus labour and unemployment. The basic premise of the model is that industrial growth can generate adequate employment opportunities so as to draw away all the surplus labour from agriculture in an overpopulated developing country like Nigeria where population is currently increasing at the annual rate of around 1.6%. This premise has been proved to be a myth in the light of generation of little employment opportunities in the organized industrial sector during over sixty years of economic development in India, Latin American and African countries.
Putting India into consideration, for instance, in the 30 years (1951-81) of industrial development in India during which fairly good rates of industrial production had been achieved, the organized industrial employment increased by any 3 million which was too meager to make any significant impact on the urban unemployment situation far from providing a southern to rate labour-surplus problem in agriculture. Thus the generation of adequate employment opportunities and as a result the absorption of surplus labour from agriculture in the expanding industrial sector has not proceeded as predicted by the Lewis model.
One can notice that the migration of workers for example in Nigeria has occurred as a result of urbanization in the various censuses but these immigrants to the urban area has not been absorbed into modern high productivity employment, as pictured by Lewis Fei Rranis. These immigrants to urban areas have been mainly employed in petty trade and domestic services in the country.
THE MODEL WITH SURPLUS LABOUR
In the model, the wage rate is put into consideration; such wage in the modern industrial sector is determined by the average productivity in the agriculture. To this average productivity is added a margin, According to Lewis this margin is fixed at 30% which is required for furnishing an incentive for labourers to transfer themselves from the countryside to the urban industries as well as for melting the higher cost of urban living. In this setting, the model shows how the expansion in the industrial investment and production or, in other words, capital accumulation outside agriculture will generate sufficient employment opportunities so as to absorb all the surplus labour from agriculture and elsewhere.
Furthermore, profit in the Lewis ‘unlimited supply of labour constitutes the main source of capital formation. The greater the share of profits in national income,the greater the rate of savings and capital accumulation. Thus with the expansion of the modern or capitalist sector, the rate of saving and investments as percentage of national income will continuously rise. As a result rate of capital accumulation will also increase relative to national income. It is of course assumed that all proofs or a greater part of the profits is saved and automatically invested. It will be important to note that as the capitalist expands, the share of profits in national product will rise. The rise in the share of profits in national product is due to the assumption of the model that wage rate remains constant and prices of the products produced by the capitalist sector do not fall with the expansion in output. To quote Lewis himself, “If unlimited supplies of labour are available at constant real wage rate, and if any part of the profits is reinvested in productive capacity, profits will grow continuous relative to the national income.”
ASSUMPTIONS AND CRITICISM OF THE MODEL
Labour-absorptive capacity of the modern industrial sector: Lewis Fei and Ranis assumed that the growth of industrial employment will be greater than the growth in labour force. This is one of their shortcomings, they believed only then the organized industrial sector can absorb surplus labour from agriculture. The employment far from withdrawing labour currently employed in the organized industries and services, in the basis to absorb the new entrants to the labour force.
One of the important setbacks of the Lewis model is that it has neglected the important of agricultural growth in sustaining capital formation in the modern industrial sector. When as a result of the expansion of capitalist modern sector, transfer of labour form agriculture to industry takes place, the demand for food grains will rise. If the output of food grains does not increase through agricultural development to meet the additional demand for food grains wages of industrial labour will slow down or even choke off the process of capital accumulation and economic development. Thus, if no allowance is made for agricultural growth, the expansion of modern sector and capital accumulation is bound to be halted.
Lewis model neglects the importance of Labour Absorption in Agriculture: We can find weaknesses in the models of Lewis and Fei-Ranis in the scenario that they have ignored the generation of productive employment in agriculture. No doubt, Lewis is this later writings and Fei-ranis in their modified and extended version of Lewis model have pictured and important role for agricultural development so as to sustain industrial growth and capital accumulation. But they visualize such an agricultural development strategy that will release labour force form agriculture rather than absorbing them in agriculture. Thus, to quote Fei and Ranis: “In such a dualistic setting the heart of the development problem lies in the gradual shifting of the economy’s centre of gravity from the agricultural to the industrial sector through labour reallocation.” In this process each sector is call upon to perform a special role: productivity in the agricultural sector must rise sufficiently so that “smaller fraction of the total population can support the entire economy” with food and raw materials, thus enabling agricultural workers to released; simultaneously, the industrial sector must expand sufficiently to provide employed opportunities for the released workers….labour reallocation must be rapid enough to swamp massive population increase if the economy’s centre of gravity is to be shifted over time.”
The above shows that employment potential of organized industrial sector is so little that labour reallocation between agriculture and industry and “smaller fraction of the total population being employed in agriculture” is just not possible in labour-surplus developing countries like India. Indeed, a good amount of employment opportunities can be generated in agriculture itself by capital accumulation in agriculture, adoptive proper agricultural technologies and making appropriate institutional reforms in the pattern of land ownership. Even about the African countries most of which do not suffer from the Malthusian problem of overpopulation but are currently faced with acute urban unemployment (especially of what is known as “UNEMPLOYMENT OF SCHOOL LEAVERS” majority of which have migrated from the villages to the urban areas) the expert opinion was veered round to the view of seeking solution of labour-surplus problem within agriculture.
CONCLUSIONS
In the above explanations, we could figure out difference lapses of the model, other than that, the model still maintains high degree of analytical value. It clearly points out the role of capital accumulative in raising the level of output and employment in labour-surplus developing countries. The model stipulates the systematic analysis of the growth problem of dual economies and brings out some of crucial importance of such factors as profits and wages rate of capital accumulation and economic growth. It also stipulates relationship in growth process most
TODARO MODEL OF MIGRATION .
Prominent men behind this model are John R. Harris and Michael Todaro, this model was developed in 1970 and used in development economics and welfare economics to undertand issues con.cerning rural-urban migration. Major assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. In the model, an equilibrium is attained when the expected wage in urban areas is equal to the marginal product of an agricultural worker. Partially like the classical, the model assumes that unemployment does not exist in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labour market is perfectly competitive, because of this the wage equals the marginal productivity.In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban inomes.
ASSUMPTIONS OF THE MODEL, TOGETHER WITH IT’S APPLICATION TO REAL LIFE SITUATIONS
Here, we discuss the assumptions together with the equations that describes them. The structure of the model is based on the assumption that a fixed wage leads to an outbreak of distortion and urban unemployment. In the model, we have two sectors , Sector one Agricultural rural sector, sector two manufacturing urban sector.There are three kinds of production factors, specific production factor in sector 1, K1, specific production factor in sector 2, K2, and labor, L, which is employed in both sectors and mobile between sectors.The specific production factor in the urban sector, K2, includes not only equipment and facilities for production but also social infrastructure, such as airports, roads, and industrial parks, which are related to production. Therefore, an improvement of the social infrastructure means an increase in K2.
Quoting Harris Todaro,”In the Harris–Todaro model, the necessary and sufficient condition for the increase in the specific production factor in the urban sector to decrease urban unemployment is that the slope of the marginal product curve of labor in the rural sector exceeds the per-capita wage difference between the institutional minimum wage and the expected wage in the urban sector”.
Putting agricultural productivity into consideration, if the productivity of Agricultural products rises together with the income of the individual,invariably, there would be no need for the rural workers to migrate to the urban area. Mostly in some of the Asian countries developing infrastructurrs such as industrial parks, roads e.t.c gives rise to the model. In the case of metro cebu, in Philippines, the Todaro paradox occurred in 1990s. As the Metro Cebu economy developed with ODA projects supported by the Japanese Government, workers from surrounding areas migrated to the region and increased urban unemployment.
CONCLUSIONS
Talking about the economy of the less developed country, the capital accumulation is very important, The accumulated capital forms many production bases and creates job opportunities in the urban sector.At the same time, the increase in employment raises the wage level in the urban sector. In the Harris–Todaro model, the rising urban wage pushes up the expected wage in the urban sector and consequently encourages workers to migrate from the rural sector to the urban sector.
Ezeorah chukwuebuka Emmanuel
2017/249508
Economics
emmanuellescot32@gmail.com
Harris – todaro model of migration was founded by John R. Harris and Micheal Todaro is an economic model which came place in 1970, it was used to explain some of the pressing issues concerning rural-urban migration
The model assumes that migration from rural to urban areas depends primarily on the difference in wages between the rural and urban labour markets that is M upt =F(Wu-Wr) where Mt is the number of rural to urban migrants in time, t is response function, Wu is the urban wage and W is the rural wage, since there is unemployment in the town (and it is assumed that there is no unemployment in rural areas) and every migrant cannot expect to find a job there
LEWIS-FEI-MODEL OF ECONOMIC GROWTH
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Basics of the model
Depiction of Phase1, Phase2 and Phase3 of the dual economy model using average output.
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages
The amount of labor that is shifted and the time that this shifting takes depends upon:
1. The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits;
2. The nature of the industry’s technical progress and its associated bias;
3. Growth rate of population.
So, the three fundamental ideas used in this model are:
1. Agricultural growth and industrial growth are both equally important;
2. Agricultural growth and industrial growth are balanced;
3. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap.
This shifting of labor can take place by the landlords’ investment activities and by the government’s fiscal measures. However, the cost of shifting labor in terms of both private and social cost may be high, for example transportation cost or the cost of carrying out construction of buildings
Connectivity between sectors
Fei and Ranis emphasized strongly on the industry-agriculture interdependency and said that a robust connectivity between the two would encourage and speedup development. If agricultural laborers look for industrial employment, and industrialists employ more workers by use of larger capital good stock and labor-intensive technology, this connectivity can work between the industrial and agricultural sector.
criticizms of the model
Fei–Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.
• It has been asserted that Fei and Ranis did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed.
• Fei and Ranis say, “It has been argued that money is not a simple substitute for physical capital in an aggregate production function. There are reasons to believe that the relationship between money and physical capital could be complementary to one another at some stage of economic development, to the extent that credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry.” This indicates that in the process of development they neglect the role of money and prices. They fail to differ between wage labor and household labor, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
HARRIS- TODARO MODEL OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
ASSUMPTIONS OF HARRIS TODARO MODEL
Starting from the assumption that migration is primarily an economic phenomenon, which for the individual migrant can be a quite rational decision despite the existence of urban unemployment, the Todaro model postulates that migration proceeds in response to urban-rural differences in expected income rather than actual earnings. The fundamental premise is that migrants consider the various labor market opportunities available to them in the rural and urban sectors and choose the one that maximizes their expected gains from migration. A schematic framework showing how the varying factors affecting the migration decision interact is given in Figure below. In essence, the theory assumes that members of the labor force, both actual and potential, compare their expected incomes for a given time horizon in the urban sector (the difference between returns and costs of migration) with prevailing average rural incomes and migrate if the former exceeds the latter.
Consider the following illustration. Suppose that the average unskilled or semiskilled rural worker has a choice between being a farm laborer (or working his own land) for an annual average real income of, say, 50 units or migrating to the city, where a worker with his skill or educational background can obtain wage employment yielding an annual real income of 100 units. The more commonly used economic models of migration, which place exclusive emphasis on the income differential factor as the determinant of the decision to migrate, would indicate a clear choice in this situation. The worker should seek the higher paying urban job. It is important to recognize, however that these migration models were developed largely in the context of advanced industrial economies and hence implicitly assume the existence of full or near-full employment. In a full-employment environment, the decision to migrate can be based solely on the desire to secure the highest-paid job wherever it becomes available. Simple economic theory would then indicate that such migration should lead to a reduction in wage differentials through the interaction of the forces of supply and demand, in areas of both emigration and immigration. Unfortunately, such an analysis is not realistic in the context of the institutional and economic framework of most developing nations. First, these countries are beset by a chronic unemployment problem, which means that a typical migrant cannot expect to secure a high-paying urban job immediately. In fact, it is much more likely that on entering the urban labor market, many uneducated, unskilled migrants will either become totally unemployed or will seek casual and part-time employment as vendors, hawkers, repairmen, and itinerant day laborers in the urban traditional or informal sector, where ease of entry, small scale of operation, and relatively competitive price and wage determination prevail. In the case of migrants with considerable human capital in the form of a secondary or university certificate, opportunities are much better, and many will find formal-sector jobs relatively quickly. But they constitute only a small proportion of the total migration stream.
SUMMARY OF THE ASSUMPTIONS OF THIS MODEL
• Migration is a primarily economic decision.
• There is no unemployment in the rural sector and it is perfectly competitive such that wage is equal to marginal product
• Members of the labor force rationally compare the expected value of potential wages to current wages to make the decision to migrate or not.
LIMITATIONS AND CRITICIZM
• The model results in an ex ante equilibrium but not ex post, since those who migrate and are unemployed or employed at a lower wage in the informal sector are not better off.
• Assumes subjects are risk-neutral when in reality, most people are risk-averse. However, the model can be easily adjusted to reflect this. In a risk-averse version of the Todaro Model, less migration occurs, causing the agricultural sector to be larger. The level of risk aversion is reflected in the difference between the informal sector wage and the formal sector wage.
RELEVANCE OF THE MODEL
The Harris-Todaro model of rural-urban migration is usually studied in the context of employment and unemployment in developing countries. In the model, the purpose is to explain the serious urban unemployment problem in developing countries. The applicability of this model depends on the development stage and economic success in the developing country. In the Harris–Todaro model, the rising urban wage pushes up the expected wage in the urban sector and consequently encourages workers to migrate from the rural sector to the urban sector. This phenomenon is referred to as Todaro paradox.
Name:MGBA CLARA CHINECHEREM
Dept: Economics
Reg no: 2017/249527
Email address: clara.mgba.249527@unn.edu.ng
LEWIS-RANIS-FEI MODEL
The central idea behind the Lewis model is fairly simple. Lewis divided labour force into two differentiated groups – “subsistence sector” and “capitalist sector” where the former is assumed to contain unlimited supply and consequently, a pool of surplus labour[1] that sets labour-supply conditions for the latter. The concept of a dual economy is heavily criticised. As Leeson (1982) pointed out, “dual economy” models are “held to imply a false picture of the nature of the historical process of change in underdeveloped countries”.
Subsequently, Ranis’ and Fei’s extension to Lewis’ model can be analysed. They observed the model by reading it from left to right and assessed the changes in the output and wage as more and more people moved from agriculture to the industry. A new concept was added – namely, disguised unemployment, which appears in the traditional subsistence sector. The marginal product of labour, which is observed as the slope of the production function, in agricultural sector is lower than in industry . Under competitive assumptions, the real wage rate would fall to zero, but due to the presence of institutional or non-market forces, the institutional wage is sustained. Therefore, there are gains to be had by switching resources away to the industrial sector. Nevertheless, it is generally not likely to happen because the market, left on its own, does not change. If the industrial sector does pay according to marginal product, then, as noted by Ray (1998), there would be efficiency gains available as long as the marginal product of the agricultural labour is less than the wage, whether it is zero or not. By decreasing the labour force in agriculture by a small amount (whilst still remaining in the surplus labour area), the total wage bill in agriculture falls along the diagonal straight line in Figure 1.3 , provided that the wage in agriculture does not rise. Since output does not fall, the reduction in the total wage bill gives an economy an agricultural surplus. Only at point C will this process come to an end because there is no more disguised unemployment – it only appears at points at which the marginal product of labour is less than the institutional wage. Hence, condition for the existence of disguised unemployment is:
W > MPL
Ranis and Fei subsequently claimed that the average wage bill in agricultural sector is no longer measured as a straight line. At point C, the slope of the production function is parallel to the wage bill line, yielding that the disguised unemployment is no longer observed. Furthermore, beyond point C (when the disguisedly unemployed have been absorbed) the marginal product of labour exceeds the traditionally given wage rate (Ranis and Fei, 1961). The wage in agriculture begins to rise, because it becomes profitable to bid for labour. As a result, wage bill falls more slowly.This brings me to the central point of the paper capturing the “turning points” in the Lewis-Ranis-Fei model. Ranis and Fei divided the model into three phases[3]. The phase where the supply wage of labour tilts upwards is referred to as the “first turning point”. At this point, redundant labour disappears altogether (Jorgenson, 1967). Employment in the industry would have risen as far as point z’ had the turning point not occurred. However, since it did and since the wage rate began to rise as demand was pushed upwards, employment can only rise up to z where demand meets supply.
According to Chen (2005), Lewis-Ranis-Fei model should be considered a classical model because of the usage of industrial wage. However, Jorgenson claims that once the commercialization point is reached, instead of the classical approach, the neo-classical theory of growth for an advanced economy is to be observed .
Berry came to a significant conclusion of the Lewis-Ranis-Fei model. In effect, a shift in the terms of trade has a negative effect on the industry, forcing capitalist employers to pay a higher wage and thus generating less profits and less investment. However, there is a role of interdependence between the two sectors (Ranis and Fei). In fact, raising the price of goods in agriculture would give an agricultural sector an incentive to raise the output, thus encouraging investments in agriculture, leading to a decline in the terms of trade, which in turn lowers wages, increases profits and generates more investment in the industry. Consequently, there will be a balanced expansion in both, agriculture and industry. In other words, what Ranis and Fei observed was that the allocation of investment funds must be such that as to “continuously sustain investment incentives in both sectors of the economy”. The terms of trade should not deteriorate substantially against either sector. Consequently, the demand curve shifts up and there will be a new intersection point which lies on the balanced-growth path and this new equilibrium allows the economy to enjoy even further profits. After the first turning point, there will be a small proportion of profit that will be forgone because the first turning point occurs, yet the overall amount of profit increases. Nevertheless, it becomes clear that it is reasonable to have a policy to invest in both sectors as the economy will then maintain the balanced growth path.
To conclude, the existence of surplus labour in agriculture allows the industry to continue to pay the institutional wage and therefore enjoy further profits and continued investment. At the same time, as more and more people are moving away from agriculture, there will be some amount of agricultural surplus that can be used up to fuel further development. This process continues until the surplus labour is absorbed. Hence, saving and investment are a crucial part in the Lewis-Ranis-Fei to support economic development.
HARRIS -TODARO MODEL OF MIGRATION
Migration: This can be seen as the movement of persons away from their usual residence, either across an international border or within a state.
The HarrisTodaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration
The Harris-Todaro model was created to explain how internal migration occurs from rural to urban sectors through the difference in the expected wage. Pritchett points out that migration can benefit developing countries and their population much more significantly than any aid attempts. Industrial world transfer is around $70bn a year in aid, but by simply allowing a 3% rise in their labour force (taken up by migrants), the gains would be $300 billion: 4.5x greater. Fundamentally it was used to explain migration within an economy, but we attempt to expand the model to an international level. The model begins by accepting that the assumption of full employment in urban labour markets isnt particularly appropriate for developing countries which are beset by a chronic (under/) unemployment problem whereby many uneducated and unskilled rural migrants cannot find a job in the formal sector so become unemployed or join the informal sector. Thus in deciding whether to move to the city or stay at home on the farm, an individual has to weigh up the probability and risks of being unemployed for a considerable period of time against the positive urban-rural real income differential.
ASSUMPTIONS OF HARRIS-TODARO MODEL
1) The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity.
2)The most fundamental /main assumption in this model is that migration is an economic phenomenon in response to urban-rural differences in the expected income. This assumes that people only move for monetary gains, when in reality there are many other factors involved in this decision. For example, a lot of migration occurs due to humanitarian reasons as a result of conflict or disease for example, the huge influx of migrants from the Middle East to Europe in the summer of 2015 is unlikely to be as a result of economic motives, but more for a desire of safety and a better standard of living. Therefore, if we use the Harris-Todaro model to try and explain international migration (internal migration based on humanitarian/ethical grounds is perhaps unlikely, but not equal to zero: e.g. ethnic minorities may be more welcome in cities than rural areas and hence migrate) then we would be omitting a large chunk of migrants who move in order to escape persecution and death. It may seem unrealistic for manufacturing firms to pay an efficiency wage; after all they can attract labor at the equilibrium rate. But this can be thought of as a wage necessary to ensure that workers have better nutrition (and so have higher productivity); reduce staff turnover; and ensure workers dont shirk. If we try and explain the international migration process in a Harris-Todaro model, we would say that rich countries (the urban sector) offer an efficiency wage which is higher than poor countries (the rural sector) in order to encourage them to migrate. So long as this expected wage difference is great enough (i.e. it includes the possibility that migrants will be unable to find jobs, as well as the costs of moving) then individuals from poor countries should move to rich countries in search for a job. In reality, the expected wage difference would be even greater than the market rate, due to the existence of unemployment benefits which means that developing country nationals would continue to migrate to the rich world, so long as unemployment insurance was sufficiently greater than rural wages and the cost of moving. This thus leads to political motives, in the developed world, to limit the amount of assistance given to migrant workers and perhaps curtail the amount of unemployment insurance they can receive.
schematic framework for analyzing rural to urban migration decision
3)Moreover, the model assumes that costs are given in a monetary sense, whereas in reality it might be quite difficult to put a value on leaving your family in a distant country to go and work abroad. Similarly, the model assumes that individuals can rationally calculate the economic gains from migration, but by moving individuals would be imposing a cost upon themselves, and would have to include the value of living abroad (i.e. even though wages are higher they are eaten up by housing, food, clothing and other living costs) which may be quite difficult to calculate.
Other issues with the model, in both an internal and international perspective, are that it doesnt include human capital, there are no externalities and it treats workers and citizens as homogenous. Carrington, Detragiache and Vishwanath, develop a model which incorporates a positive externality associated with earlier people moving from nearby villages and the probability of a rural citizen migrating. Because this increases the social network of a migrating individual it may increase the probability that he decides to move. This is anecdotally evidence in the UK through the clustering of nationals in certain parts of the country: in order to improve their social network and chance of acquiring employment. The third issue is a more interesting point, in that cities arent homogenous: different cities develop different industrial sectors, and over time some of these sectors will boom whilst others will decline. This may mean that unemployment rates between cities vary and not only does a potential migrant have to decide whether he ought to move from agriculture to industry, but has to choose to which city he ought to move based on distance (and other costs), and returns (seeing which city is the most prosperous). This adds an even greater complex nature to such a model, especially with the large distances associated with cities in developed countries, and the different opportunities within
We see that the Harris-Todaro model is very limited in its scope in both an international and internal setting due to its narrow-mindedness assumption on economic values, which dont incorporate emotional, social and humanitarian costs/benefits. More fundamentally, it isnt an appropriate model in an international setting due to the barriers to entry which are erected by the developed world. By not incorporating human capital into our model, we are missing any migrants which may well be allowed into the developed world as high skilled workers can sometimes (but not always, even highly skilled workers can be limited to entering a country) get past the developed countries quota barriers. Todaro and Smith suggest that education for the sake of education should be restricted as a policy in developing countries, as often the urban sector can only ration jobs through education as a signaling effect. Whilst this seems like a bizarre idea, given that this would mean only the rich who are generally the ones able to afford education in developing countries would be able to attain jobs, and not poor, but clever productive individuals; it contradicts the policy prescription in an international setting, which ought to be for developing countries to increase their education so that workers become skilled and can improve their chances of migrating to developed country.
The movement of migrants from developing countries to developed countries, shouldnt necessarily be seen as detrimental to the plight of developing countries, as proponents of brain drain theory suggest. Empirically we would expect most migrants to be of working age (i.e. between 18-50) and we would expect a lot more males to migrate than females, as their job unfortunately tend to be better. Whilst this may be the case overall, there is still substantial evidence that women, children and the elderly migrate, more than the economic model would suggest.
Furthermore, the fact that a significant proportion of migrants are not economic, but asylum seekers on humanitarian grounds would suggest that the Harris-Todaro model isnt particularly useful in explaining world migration patterns. Migration restrictions are imposed both in an international sense and sometimes internally for example, see China, where nationals have to get permits (hukou) to reside in urban areas. The effect of this is to keep workers in rural areas to prevent a large source of unemployed workers in urban areas. The main reason for this is to prevent the social issues associated with overcrowding and the development of slums in urban areas. If deployed successfully whilst being normatively unfair and ethically wrong this could be quite successful at solving the issues associated with a swelling of urban populations and would maintain an equitable distribution of labor in rural areas. However, this can be achieved, perhaps more effectively, and certainly more humanely, by increasing the benefits to staying in rural areas. For example, by increase agricultural non-farm jobs. On the other hand, wage subsidies are ineffective. A wage subsidy would increase the rural-urban expected wage differential (by either initially reducing unemployment, or through a higher urban wage) and thus encourage even more workers to migrate from farms to the city in hope for a better life creating even greater unemployment and would thereby fail in attempting to achieve an equitable labour distribution across sectors.
Reducing inequality in land holdings would only promote efficiency in allocation of workers between sectors if it increased the wages in rural areas. This may be unlikely if there are increasing returns to scale, but under the assumption of constant returns to scale it may be possible if we assume that tenants are more likely to invest in their own land (and hence increase returns and rural wages) than if they were working on somebody elses land.
Arinze miracle Ozioma
2017/241428
Economics dept
arinzeozioma49@gmail
THE LEWIS FEI-RANIS MODEL OF ECONOMIC GROWTH
Lewis (1954) proposed a seminal theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour1 for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development. Fully called the Lewis-Ranis-Fei theory of dualistic economic development, the model provides a suitable theoretical framework for studying the growth path of labour-surplus in developing countries. In the theory, the economy is assumed to be divided into agricultural and industrial (also called non-agricultural) sectors. Whilst the agricultural sector is abundant in labour which leads to close to zero marginal productivity of labour, the industrial or non-agricultural sector has an abundance capital and resources relative to labour.
ASSUMPTIONS OF THE LEWIS FEI RANIS MODEL
The following are the key assumptions of the Lewis Fei Ranis model. They include:
Surplus labour in subsistence sectors
Disguised unemployment exists in the agricultural sector
The capitalist sector invests all its savings for its expansion.
Besides labour, there is unlimited supply of entrepreneurs in the capitalist sector.
Capitalists will always reinvest their profit.
Landlords will always squander their savings.
ORIGIN OF THE LEWIS FEI RANIS MODEL:
The Lewis Fei Ranis model is a pure extension of the Lewis model of 1954. Lewis in his model of “Development with Unlimited Supplies of Labour” represented a growth model of early industrialization in developing countries over the long run, which is now regarded as canonical to development economics. The model assumes a dual economy, of which there are two sectors, hereinafter called ‘modern’ and ‘traditional’, such that the modern sector grows by recruiting labour from the traditional. On a second note, unskilled labour is [aid less in the traditional sector compared to the modern sector. Additionally, unskilled labour is at inception more abundant such that at the current wage, much more labour is offered to the modern sector than that sector wishes to hire.
Lewis argued that the driver of capital accumulation was a sectoral movement of the factor of production abundant in developing countries, labour, from the ‘traditional’ or ‘noncapitalist’ sector (of low productivity, low wage, priced to average product not marginal product, and thus with widespread disguised unemployment) to the ‘modern’ or ‘capitalist’ sector (of higher productivity and where wages are set by productivity in the ‘subsistence sector’).
The Lewis model emerged as a criticism of the neoclassical approach. This is in tandem to its tenets that labour is available to the modern or capitalist sector of an economy, not in a perfectly elastic supply but upward sloping rather than flat, and with a distinction between surplus-producing labour and subsistence labour. Conversely, the neoclassicals believe that the supply of labour is inelastic. Lewis equally criticized the assumptions of neoclassical economists of perfect competition, market clearing and full employment. Generally, in the Lewis model, growth is sustained by the transition of labour from traditional to modern sectors and this from low productivity to higher productivity sectors.
It was on this ground that Ranis and Fei (1964) modified the theory by combing the famous Rostow’s (1956) three “linear-stages-of-growth” theory. They formalized Lewis’s two-stage
economic development model into three phases, defined by the marginal productivity of
agricultural labour.
LEWIS’S MAIN ARGUMENTS WERE:
In his paper in 1954, Lewis made a total of 15 propositions. According to Coskun (2016) the first proposal is related with the classical model while the rest of the 14 propositions may be grouped into three categories as follows:
Labour supply: Lewis was of the opinion that the main sources of surplus labour were subsistence agriculture, casual labour, petty trade, domestic service, wives and daughters where the marginal productivity of labour is negligible, zero or even negative. On the other hand, subsistence wage “may be determined by the conventional view” or by the average product in subsistence agriculture. The implication of this in an economy is that employment expands in the capitalist sector as capital is formed. However, these capital formation and technical progress quickly result not in rising wages but in a raising share of profits in the national income.
It is pertinent to note that surplus labour is the turning point of the Lewis model and that this this based on the traditional and modern sector formally called the subsistence and capitalist sector prior to his work in 1979. The modern sector uses reproducible
capital and pays capitalists for the use of thereof. The assumption in the model is that the
capital sector expands by absorbing unlimited labour supply in the subsistence sector. In this model surplus labour moves from the traditional to the modern sector with an infinite
elasticity of supply (Lewis, 1979). The main focus in Lewis`s model was on the reallocation
of labour until the turning point is reached, i.e., the time when labour reallocation has
outstripped population growth long enough for dualism to atrophy and the economy to
become fully commercialized (Ranis, 2004). The level of wages in the capitalist sector is
determined by that in the subsistence sector. Because if the wage in the capitalist sector is less than the consumption in the subsistence sector, no peasant leaves the land to seek a job in the capitalist sector. According to Lewis, the capitalist wage is approximately 30% more than subsistence earnings. The resultant expansion of the modern sector may benefit the traditional sector in 4 rapid ways, but each of these has its loss counterpart and they include: through provision of employment, sharing of physical facilities, rapid modernization of ideas and institutions, and through trade
Capital accumulation
The tenets of the model are such that the expansion of the capitalist sector leads to a growth in profit whilst an increasing portion of the profit is reinvested with the increase in profit. Lewis also argued that the traditional sector found it difficult to accumulate capital since they are relatively poor and small. The increase in capitalist surplus is linked to the use of more and more labour which is assumed to be in surplus in case of this model. However, this process of capital accumulation will at a point come to an end. According to Coskun (2016) this accumulation can take place in various ways:
1. If the capital accumulation is proceeding faster than population growth which causes a decline in the number of people in the agricultural or subsistence sector.
2. The increase in the size of the capitalist or industrial sector in comparison to the subsistence
sector may turn the terms of trade against the capitalist sector and therefore force the
capitalists to pay the workers/labourers a higher percentage of their product in order to keep
their real income constant.
3. The subsistence sector may adopt new and improved methods and techniques of
production; this will raise the level of subsistence wages in turn forcing an increase in the
capitalist wages. Thus both the surplus of the capitalists and the rate of capital accumulation
will then decline.
COMPARISON WITH OTHER MODELS
According to Ranis (2004) on the one hand, there was the Harrod-Domar model, focusing basically on the steady state properties of the developed economy, with little possibility for alternative technology choice and even less for the role of prices, relying heavily instead on savings-pushed growth competing with population growth. Full employment, market clearance, and perfect competition were assumed. On the other hand, there was the Keynesian (1936) model, focusing on advanced economy cyclical issues. Keynes deviated from the neoclassical mono-economics, full employment orthodoxy of the day, he focused on the temporary unemployment of both capital and labour in the advanced economy, not the secular underemployment of labour in the developing world.
COMPARING THE LEWIS MODEL WITH THE REAL WORLD
Over the past three decades, there has been rapid urbanization and industrialization all over the world, including in some parts of the underdeveloped countries. In particular, Latin American countries are challenging rapid urbanization which shows there is a large gap between urban and rural areas and intra urban areas with respect to income inequalities. According to the Lewis model, the more the rate of labour transfer to urban employment, the more the economic grows, and more jobs are created. In the study of economic development in Japan before 1920, it is pointed out that when capitalists enjoy the surplus of labour, technological innovation tends to be labour intensive to get profits by using a cheap labour force. However, nowadays, the economy in LDCs has been getting deeply involved in the global economy. More sophisticated, cheaper and labour−saving technology is easily obtainable through brisk international trade or transnational corporations. The countries instead of attracting cheap labour into their own countries, they would ideally prefer to invest to the countries where there is available cheap labour, and a better investment environment. Also some countries like China implement strict regulation in order to prevent rapid migration from rural areas. The rural labours are only allowed to work temporarily in the urban areas. This policy has successfully been carried out by the Chinese Government (Coskun, 2016).
CRITICISMS AGAINST LEWIS FEI RANIS MODEL
The following criticisms have been made against the Lewis Fei Ranis model. They include:
Some economists, like, Schultz, Viner, Herbeler and Hopper have failed to accept the assumption that disguised unemployment exists in the agriculture sector. According to their own tenets, when labour is withdrawn from the subsistence sector, it will have little or no effect on the sector.
Arthur Lewis did not take account of the cost involved in training the unskilled workers that were transferred from the subsistence sector to the industrial sector. Although it may be obtained at a constant wage rate, so long as its transfer from the subsistence sector is concerned, the supply curve of its labour may slope upwards so far as the capitalist sector is concerned, if the cost of training rises as more and more labour is transferred.
The Lewis Fei Ranis model makes the assumption that except from labour, there is unlimited supply of entrepreneurs in the capitalist sector. This is not obtainable in the rea world, especially in the case of many of the underdeveloped countries.
It is equally expressly wrong to assume that all capitalists in the economy will always re-invest their earned profits. It is important to note that even capitalists can engage in unproductive activities. Additionally, they can use their profits for some other purposes which may with time be speculative.
Lewis Fei Ranis model also assumes wrongly that landlords will always squander away their savings. This is not realistic because landlords in some countries play a key role in the development of the economy especially via agricultural output. The role of landlords of Japan in the industrialization of the country is renowned and not hidden.
CONCLUSION
Surplus labour is the central element in Lewis model which is based on a “capitalist and a “subsistence” sector which are called later as a modern and a traditional sector in his revisited work of dual economy in 1979. Lewis model can be grouped under three instruments; labour force, capital accumulation and integration to the world economy. The main focus in Lewis`s model was on the reallocation of labour until the turning point is reached, i.e., the time when labour reallocation has outstripped population growth long enough for dualism to atrophy and the economy to become fully commercialized. Lewis
implicitly showed that the traditional sector do not produce any capital accumulation as they are very small and poor. Trade between agriculture and industry as the supply or marketed food falls or the demand for it rises, or both causing the value of marginal product of labour in agriculture to rise
The Harris-Todaro model
By extending the analysis of the Lewisian model, Todaro (1969) and Harris and Todaro
(1970) o↵er a framework for understanding the phenomenon of urban unemployment (andinformal urban employment) in a dual economy even when there is rapid capital accumulationin the modern sector. The basic set-up of the Harris-Todaro model is similar to the Lewis model. The economy is composed of two sectors: an urban, modern sector characterised by capitalist relations of production; and a rural, traditional sector characterised by small scale family labour-based production units. In line with the basic assumptions of a dual economy model like that of
Lewis (1954), there is an exogenously given wage gap.
The key novelty introduced by Harris and Todaro (1970) is an explicit analysis of the decision making process of worker-peasants with regard to the sector in which they decide to work. For any worker, there is the choice between working in the traditional sector in rural areas and migrating to urban areas to work in the modern sector. If expected urban income > expected rural income, then workers in rural sector will decide to migrate to the urban sector. The only situation of migration equilibrium will arise when expected urban and rural incomes become equal. This implies unemployment, in the urban, modern sector,
either in the form of open unemployment or in the form of informal employment.
To see this, let us start with the traditional (rural) sector. The existence of surplus labour means that there is a guarantee of employment, but only at low wage (or average income). Hence the expected income in the traditional sector, which is the product of the probability of finding employment and the rural income (or wage), is the average rural income itself. This is because the probability of finding employment is unity.
The Harris-Todaro model was created to explain how internal migration occurs from rural to urban sectors through the difference in the expected wage.
Contribution by the Harris-Todaro (HT) (1970) model explains a powerful explanation of urban unemployment in less developed economies. The authors propose that rural-urban migration continues to occur till actual rural wage equals expected urban wage. Expected urban wage is the actual wage multiplied by the probability of being employed. Unemployment is thus consistent with equilibrium in this model. The hypothesis and predictions of this model have been subject to econometric evaluation and have been corroborated by several studies (Mazumdar, 1987, Willianson, 1988). The key hypothesis of HT are that migrants react mainly to economic incentives, earning differentials and the probability of getting a job at the destination have influences on the migration decision. This essay will begin with an evaluation of the HT model with an insight on the Todaro Paradox, and concluding the implications of this claim on unemployment and rural-urban migrating patterns.
key characteristics of the Harris todaro model
1.Migration is stimulated primarily by rational economic consideration.
2. Migration is decided on the basis of expected, rather than actual, urban-rural wage differentials.
3. Probability of obtaining urban job is inversely related to the urban unemployment rate.
GENERAL ASSUMPTIONS
Two sectors: urban (manufacture) and rural (agriculture)
Rural-urban migration condition: when urban real wage exceeds real agricultural product
No migration cost
Perfect competition
Cobb-Douglas production function
Static approach
Low risk aversion
The Harris-Todaro (HT) model admits the existence, in equilibrium, of a chronic large amount of urban unemployment due to the presence of urban minimum wages. The distinguishing feature of this model is that labor migration proceeds in response to urban-rural differences in expected earnings with the urban employment rate acting as an equilibrating force on such migration.
Two Implications
There are two important implications of the Harris-Todaro model that are worth noting. The first implication is that there has to be unemployment in the urban sector, i.e. the probability of finding employment in the modern sector has to be less than 1. This means that there will always be more workers in the modern sector that some of the workers will remain unemployed, hoping to find a job when the next spurt
of growth occurs. In this context we can think of unemployment broadly so that it includes two categories of workers: (a) workers in open unemployment, and (b) workers in informal employment. While open unemployment means zero income, informal employment in the urban sector can be seen as giving some positive income (that is lower than the average real wage in the formal sector). Thus, the Harris-Todaro analysis shows that some workers will always be caught in low income employment or zero income unemployment in the modern sector.
The second implication of the Harris-Todaro model is that narrowing down of the wage gap will be accompanied by lower rates of unemployment in the modern sector. To see this, let us return to the migration equilibrium captured by (1). If we denote by L and U the number of employed and unemployed workers in the modern sector, with unemployment understood broadly, then we can define the unemployment rate in the modern sector as
u = U
L + U . (2)
Using this definition of the unemployment rate, we can re-write the migration equilibrium
condition in (1) as
u = 1
The Lewis-Fei-Ranis theory of surplus labour is based on the assumption of a closed economy where growth occurs only if the rate of shift of labour from the agricultural sector to the industrial sector is greater than population growth rate, whereas the Harris-Todaro model of rural-urban migration argues that migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials.
While the Lewis-Fei-Ranis theory of surplus labour considers two sectors namely: the agricultural and industrial sectors respectively, the Harris-Todaro model considers to the reasons for the migration from rural to urban areas.
In real life, the Lewis-Fei-Ranis model is not applicable because marginal productivity of labour cannot be zero hence it is either decreasing or increasing as the case maybe. The Harris-Todaro model is quite realistic because there are numerous factors that cause human capital flight from rural to urban areas such as: poor and/ or inadequate wages and working conditions, lack of adequate social amenities that aid comfortable living etc.
Name:Ike Lucy Chinaecherem
Reg no :2017/249348
Email: ikelucy20@gmail.com
Department : CSS(Economics/philosophy )
Lewis Fei-Ranis model
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector.Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
HARRIS TODARO MODEL OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent
labourmarket is perfectly competitive.
Model and Assumptions
The economy considered in the HT model is a small open economy. This economy consists of two sectors, agricultural sector and manufacturing urban sector. There are three kinds of production factors, specific production factor (K1), specific production factor(K2) and labor, L, used in both sectors and mobile between both sectors.
If the wage in the manufacturing sector, w2, is bound by an institutional and legal lower limit at w¯¯2 such as a legal minimum wage, then: w2=w¯¯2. This assumption is usually referred to as the “wage rigidity axiom”.
Here, we assume that production functions in both sectors are neo-classical. Hence, production functions in both sectors:
X1=F1(K1,L1)∂F1∂L1>0;∂2F1∂L21.. ,(2.1.1)
X2=F2(K2,Le)∂F2∂Le>0;∂2F2∂L2e0… (2.1.2)
Since production functions are neo-classical,it is supposed that the capital, K1 and K2, increase exogenously by the financial supports from advanced countries. Therefore, K1 and K2 are exogenous variables. With Lu as unemployment in the urban sector, labor constraint is :L=L1+L2=L1+(Le+Lu).(2.1.3)
With profit maximization in both sectors: w1=∂F1∂L1(K1,L1),(2.1.4). & w2=p∂F2∂Le(K2,Le) (2.1.5)
where p = relative price of the products, that is p = P2/P. In this paper, the relative price of the products is a constant. The expected wage in the urban sector,w e2, is expressed as: we2=w¯¯2(LeL2). (2.1.6)
Migration between the rural and urban sectors will cease when the urban-expected wage is equal to the rural-expected wage. This condition is the “Harris–Todaro equilibrium” :w1=w2(LeL2).
IGWILO EBUKA VINCENT
2017/241434
ebuka.igwilo.241434@unn.edu.ng
vingist.blogspot.com
HARRIS-TODARO MODEL
The Harris-Todaro model is a model used to address issues concerning rural-urban migration by analysing income differentials. It explains that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income. Harris-Todaro model idea were Migration is stimulated primarily by rational economic considerations of relative benefits and costs, mostly financial but also psychological. The decision to migrate depends on expected rather than actual urban-rural real wage differential. Expected urban-rural real wage differential depends not only on the actual differential, but also on the probability to find jobs in the urban sector. Rural-Urban migration is an equilibrium phenomenon which equates rural real income to expected urban real income. Policies designed to reduce urban unemployment may increase it. Migration rates in excess of urban job opportunity growth rates are not only possible but also rational. The main assumption of Harris-Todaro model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income. In the case of Nigeria, rural to urban migration has been on the rise since independence. A recent governmental survey noted employment as the top explanatory factor behind migration in Nigeria (National Population Commission 2010). The survey shows the structural transformation of Nigeria’s society in the form of changing employment markets between 1970 and 2010. During this time, the share of agricultural employment fell drastically by 19%, with the service industry experiencing a substantial growth of 21%. Growing employment opportunities in the service industry,
which is predominantly found in urban areas, serves as a strong pull factor attracting migrants in search of higher wages (Ogun 2010). During this time, the share of employment opportunities in heavy industry experienced a modest boost of 4%, with a subsequent decline of 5% in the manufacturing sector. Another explanation for Nigeria’s accelerating rural to urban migration is rural push
factors, resulting from growing unemployment in certain regions of the country. Unemployment has risen drastically from 1.7% in 1970 to over 21.4% by 2010. According to the World Bank (2016), the effects of Nigeria’s unemployment have been felt the hardest in the northern parts of the
country where the majority of the population is engaged in agricultural activities. Increasing insecurity in the northeast, due to the emergence of Boko Haram, has also been linked to the intensification of rural to urban migration in recent years (The Economist 2015).
LEWIS MODEL
it is an early traditional model which seeks to explain how labour movement from one sector to another leads to economic development in a country, particularly developing ccountries. These models are similar but are based on different assumptions which shape their outcomes. I will be analysing these assumptions & outcomes and making comparisons between the two models. The Lewis model seeks to explain the growth of a developing country in terms of labour transition from a traditional agricultural sector to a modern industrial sector. This model (sometimes known as the Dual Sector Model) was initially developed by Sir Arthur Lewis in his article, ‘Economic Development with Unlimited Supplies of Llabou. Lewis model is based on a particular view of the underdeveloped economy and the development process. Lewis viewed development process as a structural change involving transformation of primarily agricultural economy to an industrial one. The engine of development is industry and development requires rapid growth of industry. The growth of industry depends on three things: Capital accumulation and investment in industry. Availability of labor to industry. Availability of food to industrial workers. The Lewis model assumption is that there is low marginal productivity in the agricultural sector because it is believed to be low priority as the hypothetical developing nation’s investment is going towards the physical capital stock in the manufacturing sector. It is evident that Nigeria is made up of both the subsistence sector and the modern capitalist sector. The unskilled persons who are mostly found in rural areas or the subsistent sector of Lewis’s two sector model, and the skilled, who are found in the modern capitalist sector. The rural areas are mostly involved in agricultural practices such as farming, fishing and livestock while manufacturing/ production takes place in urban areas. The industrial sector depends on the traditional agricultural sector for raw materials, such as, cocoa, palm produce, groundnut, corn,
cassava for its production purposes and the rural areas in turn depend on the modern sector or the state for social and economic infrastructure such as electricity, water
supply, loans, housing and institutions that uphold law and order. Therefore, there is a mutual relationship between the traditional agricultural sector and the modern industrial sector. Also, high marginal productivity is experienced in the capitalist sector of the Nigerian economy, as workers have the necessary skill, machinery and receive relatively high wages for their services. However, people who reside in the rural areas of the country are not satisfied with their output growth, incomes and their marginal products of labour. In fact, their marginal productivities have declined over the years due to poor nature of tools, erratic or no power supply, poor housing and poor networks of roads, and poor health facilities. it seems reasonable for these unproductive workers who are in the rural areas (subsistence sector) to migrate from the rural areas to the urban areas (capitalist sector) where capital intensive processes are utilized and where there are increases in the physical capital stock, high wages, greater outputs and efficiency. This will fit well with Lewis’s argument of the transfer of unlimited supplies of labour from the subsistence sector to the capitalist sector.
HARRIS-TODARO MODEL
The Harris-Todaro model is a model used to address issues concerning rural-urban migration by analysing income differentials. It explains that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income. Harris-Todaro model idea were Migration is stimulated primarily by rational economic considerations of relative benefits and costs, mostly financial but also psychological. The decision to migrate depends on expected rather than actual urban-rural real wage differential. Expected urban-rural real wage differential depends not only on the actual differential, but also on the probability to find jobs in the urban sector. Rural-Urban migration is an equilibrium phenomenon which equates rural real income to expected urban real income. Policies designed to reduce urban unemployment may increase it. Migration rates in excess of urban job opportunity growth rates are not only possible but also rational. The main assumption of Harris-Todaro model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income. In the case of Nigeria, rural to urban migration has been on the rise since independence. A recent governmental survey noted employment as the top explanatory factor behind migration in Nigeria (National Population Commission 2010). The survey shows the structural transformation of Nigeria’s society in the form of changing employment markets between 1970 and 2010. During this time, the share of agricultural employment fell drastically by 19%, with the service industry experiencing a substantial growth of 21%. Growing employment opportunities in the service industry,
which is predominantly found in urban areas, serves as a strong pull factor attracting migrants in search of higher wages (Ogun 2010). During this time, the share of employment opportunities in heavy industry experienced a modest boost of 4%, with a subsequent decline of 5% in the manufacturing sector. Another explanation for Nigeria’s accelerating rural to urban migration is rural push
factors, resulting from growing unemployment in certain regions of the country. Unemployment has risen drastically from 1.7% in 1970 to over 21.4% by 2010. According to the World Bank (2016), the effects of Nigeria’s unemployment have been felt the hardest in the northern parts of the
country where the majority of the population is engaged in agricultural activities. Increasing insecurity in the northeast, due to the emergence of Boko Haram, has also been linked to the intensification of rural to urban migration in recent years (The Economist 2015).
LEWIS MODEL
it is an early traditional model which seeks to explain how labour movement from one sector to another leads to economic development in a country, particularly developing ccountries. These models are similar but are based on different assumptions which shape their outcomes. I will be analysing these assumptions & outcomes and making comparisons between the two models. The Lewis model seeks to explain the growth of a developing country in terms of labour transition from a traditional agricultural sector to a modern industrial sector. This model (sometimes known as the Dual Sector Model) was initially developed by Sir Arthur Lewis in his article, ‘Economic Development with Unlimited Supplies of Llabou. Lewis model is based on a particular view of the underdeveloped economy and the development process. Lewis viewed development process as a structural change involving transformation of primarily agricultural economy to an industrial one. The engine of development is industry and development requires rapid growth of industry. The growth of industry depends on three things: Capital accumulation and investment in industry. Availability of labor to industry. Availability of food to industrial workers. The Lewis model assumption is that there is low marginal productivity in the agricultural sector because it is believed to be low priority as the hypothetical developing nation’s investment is going towards the physical capital stock in the manufacturing sector. It is evident that Nigeria is made up of both the subsistence sector and the modern capitalist sector. The unskilled persons who are mostly found in rural areas or the subsistent sector of Lewis’s two sector model, and the skilled, who are found in the modern capitalist sector. The rural areas are mostly involved in agricultural practices such as farming, fishing and livestock while manufacturing/ production takes place in urban areas. The industrial sector depends on the traditional agricultural sector for raw materials, such as, cocoa, palm produce, groundnut, corn,
cassava for its production purposes and the rural areas in turn depend on the modern sector or the state for social and economic infrastructure such as electricity, water
supply, loans, housing and institutions that uphold law and order. Therefore, there is a mutual relationship between the traditional agricultural sector and the modern industrial sector. Also, high marginal productivity is experienced in the capitalist sector of the Nigerian economy, as workers have the necessary skill, machinery and receive relatively high wages for their services. However, people who reside in the rural areas of the country are not satisfied with their output growth, incomes and their marginal products of labour. In fact, their marginal productivities have declined over the years due to poor nature of tools, erratic or no power supply, poor housing and poor networks of roads, and poor health facilities. it seems reasonable for these unproductive workers who are in the rural areas (subsistence sector) to migrate from the rural areas to the urban areas (capitalist sector) where capital intensive processes are utilized and where there are increases in the physical capital stock, high wages, greater outputs and efficiency. This will fit well with Lewis’s argument of the transfer of unlimited supplies of labour from the subsistence sector to the capitalist sector.
LEWIS-FEI-MODEL OF ECONOMIC GROWTH
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.[1] It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Basics of the model
Depiction of Phase1, Phase2 and Phase3 of the dual economy model using average output.
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages
The amount of labor that is shifted and the time that this shifting takes depends upon:
1. The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits;
2. The nature of the industry’s technical progress and its associated bias;
3. Growth rate of population.
So, the three fundamental ideas used in this model are:
1. Agricultural growth and industrial growth are both equally important;
2. Agricultural growth and industrial growth are balanced;
3. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap.
This shifting of labor can take place by the landlords’ investment activities and by the government’s fiscal measures. However, the cost of shifting labor in terms of both private and social cost may be high, for example transportation cost or the cost of carrying out construction of buildings
Connectivity between sectors
Fei and Ranis emphasized strongly on the industry-agriculture interdependency and said that a robust connectivity between the two would encourage and speedup development. If agricultural laborers look for industrial employment, and industrialists employ more workers by use of larger capital good stock and labor-intensive technology, this connectivity can work between the industrial and agricultural sector.
Fei–Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.
• It has been asserted that Fei and Ranis did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed.
• Fei and Ranis say, “It has been argued that money is not a simple substitute for physical capital in an aggregate production function. There are reasons to believe that the relationship between money and physical capital could be complementary to one another at some stage of economic development, to the extent that credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry.” This indicates that in the process of development they neglect the role of money and prices. They fail to differ between wage labor and household labor, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
HARRIS- TODARO MODEL OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
ASSUMPTIONS OF HARRIS TODARO MODEL
Starting from the assumption that migration is primarily an economic phenomenon, which for the individual migrant can be a quite rational decision despite the existence of urban unemployment, the Todaro model postulates that migration proceeds in response to urban-rural differences in expected income rather than actual earnings. The fundamental premise is that migrants consider the various labor market opportunities available to them in the rural and urban sectors and choose the one that maximizes their expected gains from migration. A schematic framework showing how the varying factors affecting the migration decision interact is given in Figure below. In essence, the theory assumes that members of the labor force, both actual and potential, compare their expected incomes for a given time horizon in the urban sector (the difference between returns and costs of migration) with prevailing average rural incomes and migrate if the former exceeds the latter.
Consider the following illustration. Suppose that the average unskilled or semiskilled rural worker has a choice between being a farm laborer (or working his own land) for an annual average real income of, say, 50 units or migrating to the city, where a worker with his skill or educational background can obtain wage employment yielding an annual real income of 100 units. The more commonly used economic models of migration, which place exclusive emphasis on the income differential factor as the determinant of the decision to migrate, would indicate a clear choice in this situation. The worker should seek the higher paying urban job. It is important to recognize, however that these migration models were developed largely in the context of advanced industrial economies and hence implicitly assume the existence of full or near-full employment. In a full-employment environment, the decision to migrate can be based solely on the desire to secure the highest-paid job wherever it becomes available. Simple economic theory would then indicate that such migration should lead to a reduction in wage differentials through the interaction of the forces of supply and demand, in areas of both emigration and immigration. Unfortunately, such an analysis is not realistic in the context of the institutional and economic framework of most developing nations. First, these countries are beset by a chronic unemployment problem, which means that a typical migrant cannot expect to secure a high-paying urban job immediately. In fact, it is much more likely that on entering the urban labor market, many uneducated, unskilled migrants will either become totally unemployed or will seek casual and part-time employment as vendors, hawkers, repairmen, and itinerant day laborers in the urban traditional or informal sector, where ease of entry, small scale of operation, and relatively competitive price and wage determination prevail. In the case of migrants with considerable human capital in the form of a secondary or university certificate, opportunities are much better, and many will find formal-sector jobs relatively quickly. But they constitute only a small proportion of the total migration stream.
SUMMARY OF THE ASSUMPTIONS OF THIS MODEL
• Migration is a primarily economic decision.
• There is no unemployment in the rural sector and it is perfectly competitive such that wage is equal to marginal product
• Members of the labor force rationally compare the expected value of potential wages to current wages to make the decision to migrate or not.
LIMITATIONS AND CRITICIZM
• The model results in an ex ante equilibrium but not ex post, since those who migrate and are unemployed or employed at a lower wage in the informal sector are not better off.
• Assumes subjects are risk-neutral when in reality, most people are risk-averse. However, the model can be easily adjusted to reflect this. In a risk-averse version of the Todaro Model, less migration occurs, causing the agricultural sector to be larger. The level of risk aversion is reflected in the difference between the informal sector wage and the formal sector wage.
RELEVANCE OF THE MODEL
The Harris-Todaro model of rural-urban migration is usually studied in the context of employment and unemployment in developing countries. In the model, the purpose is to explain the serious urban unemployment problem in developing countries. The applicability of this model depends on the development stage and economic success in the developing country. In the Harris–Todaro model, the rising urban wage pushes up the expected wage in the urban sector and consequently encourages workers to migrate from the rural sector to the urban sector. This phenomenon is referred to as Todaro paradox.
OKORORIE EMMANUEL KELECHI
2017/242947
manuelokororie@gmail.com
http://melchyeconomy.blogspot.com/?m=1
ASSIGNMENT
SURPLUS LABOR THEORY
There exists a dual economy consisting of both agriculture sector and the industrial sector. According to this theory, underdeveloped economies consists of agricultural sector and the modern sector which is emerging but has a small industrial sector. The agricultural and modern sectors co-exist in the economy. Development can occur only when there is a shift in the center of attention of progress from the agricultural to the industrial sector, such that there is an enhancement of industrial output. This is achieved by the transfer of labor from the agricultural sector to the industrial sector, this shows that developing countries do not suffer from deficient labor supply.
ASSUMPTIONS OF THE SURPLUS LABOR THEORY
(1) There is an abundance of labor in such under developed country.
(2) The population growth rate is very high which results in mass unemployment in the economy.
(3) The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labor is zero and negative in agriculture sector.
(4) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(5) There is a dynamic industrial sector in the economy.
PERSONAL PERSPECTIVE ON THE SURPLUS LABOR MODEL AND ITS APPLICATION TO THE NIGERIAN ECONOMY.
Development in this economic model can be brought about if agricultural laborers are transferred to the industrial sector and all the above assumptions are satisfied.
Before discussing the model application to the Nigerian economy, there are some factors that impedes economic growth and development in Nigeria that needs to be brought to light. Factors that includes but are not limited to:
Tribalism, ethnicity and nepotism.
Bribery and corruption.
Red tapism.
Insurgency.
Lack of technical know-how.
Poor educational system.
The surplus labor model assumes abundance of labor and this is true in the Nigerian economy. The model also advocates for movement of agricultural laborers to work in the industrial sector. The question here is, are these persons familiar with the technicalities of the industrial sector? Especially now, where the world is witnessing the 4th industrial revolution and its wonders. As regards, drone technology, artificial intelligence, etc. bearing in mind that our educational system is not advanced and our human capital is relatively low.
Employers in Nigeria will be reluctant to hire workers who lack the necessary skills in their firms.
A way out of this will be to improve our human capital by investing heavily in education, research and development in Nigerian universities so as to make the students competent in their respective fields of study. This way, if surplus labor is needed to be transferred to the industrial sector, the laborers will be able to perform well. The government should also create strong and independent institutions that checks the both private corporations and government bodies to ensure that they do not hire based on favoritism, nepotism, ethnicity etc. but that they hire based on merit and competence.
HARRIS TODARO THEORY OF MIGRATION
The wage in cities is higher than the one obtainable in rural areas. Given this wage differential, people rationally migrate into the cities hoping to get an urban job. But the probability of getting an urban job is not completely dependent on that rational move, rather it depends on the rate of employment in urban area. Consequentially, under-developed countries are faced with the problem of urban unemployment which is caused majorly by rural-urban migration. The Todaro Paradox occurs when job creation in urban area further leads to unemployment.
ASSUMPTIONS OF THE HARRIS –TODARO MODEL OF MIGRATION
(1) Urban wage is institutionally and legally fixed.
(2) Small open economy; the economy considered in Harris -Todaro model is a small open economy.
(3) Two sector economy; One an agricultural rural sector and the other, manufacturing urban sector economy.
(4) The capital –labor ratio and the factor reward ratio are in one to one relation with the relative price of the product.
(5) There is equality between the probability of finding a job and the existing rate of employment.
PERSONAL PERSPECTIVE ON THE SURPLUS LABOR MODEL AND ITS APPLICATION TO THE NIGERIAN ECONOMY.
The main argument of the Harris-Todaro model is that people migrate from rural areas to urban areas as a result of the perceived wage differentials. As a result of this, there will be an increase in unemployment because of more people coming into the city. If the government creates more opportunities in a bid to offset this problem in urban areas, it will not be effective as this will entice more rural dwellers to come to the urban areas. The problem of rural-urban migration is already evident in Nigeria as major cities like Lagos, Abuja and Port-Harcourt at over-populated. This is because people perceive there are more opportunities in these cities and as a result, higher wages compared to that of less developed states.
In is worthy to note that the uneven development that exists in Nigeria is due to the fact that the government has concentrated in developing some states at the expense of others. For instance, the Apapa port in Lagos that contributes a lot to the Lagos state internally generated revenue. Meanwhile, the Apapa port is not the only seaport in Nigeria. People from other parts of the country are then drawn to Lagos state because of these opportunities that are not available to them in their locale.
A major way to resolve this challenge is to allow for a more inclusive and even development that does not focus on the urban areas solely but, also considers the rural areas. If the government extends development beyond urban areas, rural dwellers will be disincentivized to move to the urban areas. The government can embark on different programs like rural electrification, women empowerment, infrastructural development, education, availability of credit, public health etc.
This practice has been carried out by China and Kenya and has proven effective. It can also be successful in Nigeria if structural impediments such as tribalism, ethnicity and nepotism, bribery and corruption, red tapism, insurgency etc. do not inhibit the process.
Ezeorah chukwuebuka Emmanuel
2017/249508
Economics department
emmanuellescot32@gmail.com
Basic Thesis of the Lewis Model:
Lewis model is a classical type model which states that the unlimited supplies of labour can be had at the prevailing subsistence wages. The industrial and advanced modern sector can be developed based on agriculture to traditional sector. This can be done by transferring the labour from traditional sector and modern sector.Lewis says that the wages in industrial sector remain constant. Consequently, the capitalists will earn ‘surplus’. Such surplus will be re-invested in the modern sector leading to absorb the labour which are migrated from subsistence sector. In this way, the surplus labour or the labour which were prey to disguised unemployment will get the employment. Thus, both the labour transfer and modern sector employment growth are brought about by output expansion in that sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector. Though the wages have been assumed constant, yet Lewis says that the urban wages are at least 30% higher than average rural income to induce the workers to migrate from their home areas.
Criticism of the Lewis Model:
Although Lewis two-sector development model is simple and roughly it is in conformity with the historical growth in the West, but it has following flaws and most of its assumptions do not fit in the institutional and economic realities of UDCs.Proportionality Between Employment Creation and Capital Accumulation: Lewis model assumes that there exists a proportionality in the labour transfer and employment creation in modern sector and rate of capital accumulation in the modern sector. The faster the rate of capital accumulation, the higher the growth rate of the modern sector and faster the rate of new job creation.
(i) Peak Harvesting and Sowing Season: Lewis did not pay attention to the pattern of seasonality of labour demand in traditional agri. Sector. According to Mehar, labour demand varies considerably, and such demand is at its peak during the sowing and harvesting season. Thus during some months of the year, the MPL may be above-zero. In such situation, the positive opportunity costs will involve in transferring the labour from agri. Sector. As a result, the labour transfer will reduce agri. Output.
(ii) Rise in Urban Wages: According to Prof. Mabro the absorption of surplus labour itself may end pre-maturely because competitors (producers) may alter wage rates and lower the share of profit. It has been shown that rural-urban migration in Egyptian economy was accompanied by increase in wage rate of 15% and a fall in profits by 12%. Moreover, the wages in industrial sector were forced up directly by unions, civil service wage scales, minimum wage laws and MNCs (multi-national corporations) hiring practices tend to negate the role of competitive forces in the modern sector labour market. Again, the wages in subsistence sector may go up indirectly through rise in productivity in this sector.
Fei-Ranis (FR) Model of Dual Economy:
The two economists John Fei and Gustav Ranis presented their dual economy model. There was a flaw in Lewis model that it did not pay enough attention to the importance of agri. Sector in promoting industrial growth. But Fei-Ranis (FR) model of dual economy explains how the increased productivity in agri. Sector would become helpful in promoting industrial sector. In this respect, it presents three stages whereby a UDC moves from stagnation to self-sustained economic growth. Thus, this model is treated as an improvement over Lewis model of unlimited supply of labour.
Basic Thesis of the Model:
This theory is concerned with a poor economy which has following properties:
(i) There is an abundance of labour in such UDC and shortage of natural resources.
(ii) The population growth rate is very high which results in mass unemployment in the economy.
(iii) The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labour is zero and negative in agriculture sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy.
Thus the model suggests that:
Economic development would be taking place if agricultural laborers are transferred to industrial sector where their productivity will increase”.
Criticism:
The FR model is considered to be an improvement over Lewis. This model presents a balanced growth of both the sectors of the economy, the most notable thing for the growth of UDCs. Despite this fact, this model has following shortcomings:
(i) Marginal Productivity of Labour in Phase I: The FR model is of the view that MFL = 0 in the first phase of growth, and the transfer of labour from agri. Would not reduce output in the agri. Sector in phase I. But the economists like Berry and Soligo are of the view that agri. Output in phase I of FR model will not remain constant and may fell under different systems of land tenure, i.e., the peasant proprietorship and share cropping etc.
(ii) Marginal Productivity of Labour is Not Basic Thesis of the Lewis Model:
Lewis model is a classical type model which states that the unlimited supplies of labour can be had at the prevailing subsistence wages. The industrial and advanced modern sector can be developed based on agriculture to traditional sector. This can be done by transferring the labour from traditional sector and modern sector.Lewis says that the wages in industrial sector remain constant. Consequently, the capitalists will earn ‘surplus’. Such surplus will be re-invested in the modern sector leading to absorb the labour which are migrated from subsistence sector. In this way, the surplus labour or the labour which were prey to disguised unemployment will get the employment. Thus, both the labour transfer and modern sector employment growth are brought about by output expansion in that sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector. Though the wages have been assumed constant, yet Lewis says that the urban wages are at least 30% higher than average rural income to induce the workers to migrate from their home areas.
Criticism of the Lewis Model:
Although Lewis two-sector development model is simple and roughly it is in conformity with the historical growth in the West, but it has following flaws and most of its assumptions do not fit in the institutional and economic realities of UDCs.Proportionality Between Employment Creation and Capital Accumulation: Lewis model assumes that there exists a proportionality in the labour transfer and employment creation in modern sector and rate of capital accumulation in the modern sector. The faster the rate of capital accumulation, the higher the growth rate of the modern sector and faster the rate of new job creation.
(i) Peak Harvesting and Sowing Season: Lewis did not pay attention to the pattern of seasonality of labour demand in traditional agri. Sector. According to Mehar, labour demand varies considerably, and such demand is at its peak during the sowing and harvesting season. Thus during some months of the year, the MPL may be above-zero. In such situation, the positive opportunity costs will involve in transferring the labour from agri. Sector. As a result, the labour transfer will reduce agri. Output.
(ii) Rise in Urban Wages: According to Prof. Mabro the absorption of surplus labour itself may end pre-maturely because competitors (producers) may alter wage rates and lower the share of profit. It has been shown that rural-urban migration in Egyptian economy was accompanied by increase in wage rate of 15% and a fall in profits by 12%. Moreover, the wages in industrial sector were forced up directly by unions, civil service wage scales, minimum wage laws and MNCs (multi-national corporations) hiring practices tend to negate the role of competitive forces in the modern sector labour market. Again, the wages in subsistence sector may go up indirectly through rise in productivity in this sector.
Fei-Ranis (FR) Model of Dual Economy:
The two economists John Fei and Gustav Ranis presented their dual economy model. There was a flaw in Lewis model that it did not pay enough attention to the importance of agri. Sector in promoting industrial growth. But Fei-Ranis (FR) model of dual economy explains how the increased productivity in agri. Sector would become helpful in promoting industrial sector. In this respect, it presents three stages whereby a UDC moves from stagnation to self-sustained economic growth. Thus, this model is treated as an improvement over Lewis model of unlimited supply of labour.
Basic Thesis of the Model:
This theory is concerned with a poor economy which has following properties:
(i) There is an abundance of labour in such UDC and shortage of natural resources.
(ii) The population growth rate is very high which results in mass unemployment in the economy.
(iii) The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labour is zero and negative in agriculture sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy.
Thus the model suggests that:
“Economic development would be taking place if agricultural laborers are transferred to industrial sector where their productivity will increase”.
Criticism:
The FR model is considered to be an improvement over Lewis. This model presents a balanced growth of both the sectors of the economy, the most notable thing for the growth of UDCs. Despite this fact, this model has following shortcomings:
(i) Marginal Productivity of Labour in Phase I: The FR model is of the view that MFL = 0 in the first phase of growth, and the transfer of labour from agri. Would not reduce output in the agri. Sector in phase I. But the economists like Berry and Soligo are of the view that agri. Output in phase I of FR model will not remain constant and may fell under different systems of land tenure, i.e., the peasant proprietorship and share cropping etc.
(ii) Marginal Productivity of Labour is Not Zero: Prof. Jorgenson who has also presented a model of ‘dual economy’ has object FR model’s contention of zero MP in phase I. He says whether MPL will be zero is an empirical issue. During the seasons of sowing and harvesting the MPL > 0. Jorgenson concluded on the basis of Japanese data even for the pre I world war period the supply of labour was not unlimited. Then how MPL can be zero.
(iii) Ignoring The Role of Capital: The FR model concentrated upon land and labour as the determinants of output, ignoring the role of capital. But Profs. Brown, Byres, Frankel, Griffen, Ghatak and Ingersent are of the view that in the UDCs there has occurred what is known as ‘Green Revolution’ in agri. Which has promoted the greater use of capital and technology on lands. Consequently, there has been a greater increase in the agri. Productivity and agri. Incomes.
CONCLUSION
In conclusion, having shown the main ideas behind the Lewis-Ranis-Fei model and used the consecutive analysis of the model to explain why it is important to invest in both sectors in order to remain on the balanced growth path and maintain the rate of industrialization. The existence of surplus labour in agriculture allows the industry to continue to pay the institutional wage and therefore enjoy further profits and continued investment. At the same time, as more and more people are moving away from agriculture, there will be some amount of agricultural surplus that can be used up to fuel further development. This process continues until the surplus labour is absorbed. Hence, saving and investment are a crucial part in the Lewis-Ranis-Fei to support economic development.
Name: Onah George Chiedozie
Reg. No: 2017/241453
Department Economics major.
Course: Eco 261
LEWIS FEI RANIS MODEL
A prominent Economist Lewis was well known with his model “Economic Development with unlimited supplies of Labour”. This model pictured the capital accumulation in the modern industrial sector with the aim of getting labour from the subsistence agricultural sector. The model was further modified by Fei and Ranis, but the essence of the two models is the same. The Lewis model and that of Fei-Ranis assume the existence of surplus labour in the economy, the main component of which is the enormous disguised unemployment in agriculture. Further they visualize ‘dual economic structure’ with manufacturing, mines and plantations representing the modern sector, the salient features of which are the use of reproducible capital, production for market and for the profit, employing labour on wage payment basis and modern methods of industrial organization. Furthermore, agriculture represents the subsistence sector using non-reproductive land on self-employment basis and producing mainly for self-consumption with inferior techniques of production and containing surplus labour in the form of disguised unemployment. Hence, the productivity or output per head in the modern sector is much longer than that in agriculture. Though the marginal productivity in agriculture over a wide range is taken to be zero, the average productivity is assumed to be positive and equal to the bare subsistence level.
ANALYSIS OF THE LEWIS MODEL
The authenticity of the Labour-surplus model of Lewis for developing countries like Nigeria; depend of course on the extent to which their underlying assumptions, explicitly or implicitly, made in this model. In our views the basic premise of this model is wrong and that it unrealistic and irrelevant for framing a suitably development strategy to solve the problem of surplus labour and unemployment. The basic premise of the model is that industrial growth can generate adequate employment opportunities so as to draw away all the surplus labour from agriculture in an overpopulated developing country like Nigeria where population is currently increasing at the annual rate of around 1.6%. This premise has been proved to be a myth in the light of generation of little employment opportunities in the organized industrial sector during over sixty years of economic development in India, Latin American and African countries.
Putting India into consideration, for instance, in the 30 years (1951-81) of industrial development in India during which fairly good rates of industrial production had been achieved, the organized industrial employment increased by any 3 million which was too meager to make any significant impact on the urban unemployment situation far from providing a southern to rate labour-surplus problem in agriculture. Thus the generation of adequate employment opportunities and as a result the absorption of surplus labour from agriculture in the expanding industrial sector has not proceeded as predicted by the Lewis model.
One can notice that the migration of workers for example in Nigeria has occurred as a result of urbanization in the various censuses but these immigrants to the urban area has not been absorbed into modern high productivity employment, as pictured by Lewis Fei Rranis. These immigrants to urban areas have been mainly employed in petty trade and domestic services in the country.
THE MODEL WITH SURPLUS LABOUR
In the model, the wage rate is put into consideration; such wage in the modern industrial sector is determined by the average productivity in the agriculture. To this average productivity is added a margin, According to Lewis this margin is fixed at 30% which is required for furnishing an incentive for labourers to transfer themselves from the countryside to the urban industries as well as for melting the higher cost of urban living. In this setting, the model shows how the expansion in the industrial investment and production or, in other words, capital accumulation outside agriculture will generate sufficient employment opportunities so as to absorb all the surplus labour from agriculture and elsewhere.
Furthermore, profit in the Lewis ‘unlimited supply of labour constitutes the main source of capital formation. The greater the share of profits in national income,the greater the rate of savings and capital accumulation. Thus with the expansion of the modern or capitalist sector, the rate of saving and investments as percentage of national income will continuously rise. As a result rate of capital accumulation will also increase relative to national income. It is of course assumed that all proofs or a greater part of the profits is saved and automatically invested. It will be important to note that as the capitalist expands, the share of profits in national product will rise. The rise in the share of profits in national product is due to the assumption of the model that wage rate remains constant and prices of the products produced by the capitalist sector do not fall with the expansion in output. To quote Lewis himself, “If unlimited supplies of labour are available at constant real wage rate, and if any part of the profits is reinvested in productive capacity, profits will grow continuous relative to the national income.”
ASSUMPTIONS AND CRITICISM OF THE MODEL
Labour-absorptive capacity of the modern industrial sector: Lewis Fei and Ranis assumed that the growth of industrial employment will be greater than the growth in labour force. This is one of their shortcomings, they believed only then the organized industrial sector can absorb surplus labour from agriculture. The employment far from withdrawing labour currently employed in the organized industries and services, in the basis to absorb the new entrants to the labour force.
One of the important setbacks of the Lewis model is that it has neglected the important of agricultural growth in sustaining capital formation in the modern industrial sector. When as a result of the expansion of capitalist modern sector, transfer of labour form agriculture to industry takes place, the demand for food grains will rise. If the output of food grains does not increase through agricultural development to meet the additional demand for food grains wages of industrial labour will slow down or even choke off the process of capital accumulation and economic development. Thus, if no allowance is made for agricultural growth, the expansion of modern sector and capital accumulation is bound to be halted.
Lewis model neglects the importance of Labour Absorption in Agriculture: We can find weaknesses in the models of Lewis and Fei-Ranis in the scenario that they have ignored the generation of productive employment in agriculture. No doubt, Lewis is this later writings and Fei-ranis in their modified and extended version of Lewis model have pictured and important role for agricultural development so as to sustain industrial growth and capital accumulation. But they visualize such an agricultural development strategy that will release labour force form agriculture rather than absorbing them in agriculture. Thus, to quote Fei and Ranis: “In such a dualistic setting the heart of the development problem lies in the gradual shifting of the economy’s centre of gravity from the agricultural to the industrial sector through labour reallocation.” In this process each sector is call upon to perform a special role: productivity in the agricultural sector must rise sufficiently so that “smaller fraction of the total population can support the entire economy” with food and raw materials, thus enabling agricultural workers to released; simultaneously, the industrial sector must expand sufficiently to provide employed opportunities for the released workers….labour reallocation must be rapid enough to swamp massive population increase if the economy’s centre of gravity is to be shifted over time.”
The above shows that employment potential of organized industrial sector is so little that labour reallocation between agriculture and industry and “smaller fraction of the total population being employed in agriculture” is just not possible in labour-surplus developing countries like India. Indeed, a good amount of employment opportunities can be generated in agriculture itself by capital accumulation in agriculture, adoptive proper agricultural technologies and making appropriate institutional reforms in the pattern of land ownership. Even about the African countries most of which do not suffer from the Malthusian problem of overpopulation but are currently faced with acute urban unemployment (especially of what is known as “UNEMPLOYMENT OF SCHOOL LEAVERS” majority of which have migrated from the villages to the urban areas) the expert opinion was veered round to the view of seeking solution of labour-surplus problem within agriculture.
CONCLUSIONS
In the above explanations, we could figure out difference lapses of the model, other than that, the model still maintains high degree of analytical value. It clearly points out the role of capital accumulative in raising the level of output and employment in labour-surplus developing countries. The model stipulates the systematic analysis of the growth problem of dual economies and brings out some of crucial importance of such factors as profits and wages rate of capital accumulation and economic growth. It also stipulates relationship in growth process most
TODARO MODEL OF MIGRATION .
Prominent men behind this model are John R. Harris and Michael Todaro, this model was developed in 1970 and used in development economics and welfare economics to undertand issues con.cerning rural-urban migration. Major assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. In the model, an equilibrium is attained when the expected wage in urban areas is equal to the marginal product of an agricultural worker. Partially like the classical, the model assumes that unemployment does not exist in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labour market is perfectly competitive, because of this the wage equals the marginal productivity.In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban inomes.
ASSUMPTIONS OF THE MODEL, TOGETHER WITH IT’S APPLICATION TO REAL LIFE SITUATIONS
Here, we discuss the assumptions together with the equations that describes them. The structure of the model is based on the assumption that a fixed wage leads to an outbreak of distortion and urban unemployment. In the model, we have two sectors , Sector one Agricultural rural sector, sector two manufacturing urban sector.There are three kinds of production factors, specific production factor in sector 1, K1, specific production factor in sector 2, K2, and labor, L, which is employed in both sectors and mobile between sectors.The specific production factor in the urban sector, K2, includes not only equipment and facilities for production but also social infrastructure, such as airports, roads, and industrial parks, which are related to production. Therefore, an improvement of the social infrastructure means an increase in K2.
Quoting Harris Todaro,”In the Harris–Todaro model, the necessary and sufficient condition for the increase in the specific production factor in the urban sector to decrease urban unemployment is that the slope of the marginal product curve of labor in the rural sector exceeds the per-capita wage difference between the institutional minimum wage and the expected wage in the urban sector”.
Putting agricultural productivity into consideration, if the productivity of Agricultural products rises together with the income of the individual,invariably, there would be no need for the rural workers to migrate to the urban area. Mostly in some of the Asian countries developing infrastructurrs such as industrial parks, roads e.t.c gives rise to the model. In the case of metro cebu, in Philippines, the Todaro paradox occurred in 1990s. As the Metro Cebu economy developed with ODA projects supported by the Japanese Government, workers from surrounding areas migrated to the region and increased urban unemployment.
CONCLUSIONS
Talking about the economy of the less developed country, the capital accumulation is very important, The accumulated capital forms many production bases and creates job opportunities in the urban sector. At the same time, the increase in employment raises the wage level in the urban sector. In the Harris–Todaro model, the rising urban wage pushes up the expected wage in the urban sector and consequently encourages workers to migrate from the rural sector to the urban sector.
HARRIS -TODARO MODEL OF MIGRATION
Migration can be seen as the movement of persons away from their usual residence, either across an international border or within a state.
The HarrisTodaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration
The Harris-Todaro model was created to explain how internal migration occurs from rural to urban sectors through the difference in the expected wage. Pritchett points out that migration can benefit developing countries and their population much more significantly than any aid attempts. Industrial world transfer is around $70bn a year in aid, but by simply allowing a 3% rise in their labour force (taken up by migrants), the gains would be $300 billion: 4.5x greater. Fundamentally it was used to explain migration within an economy, but we attempt to expand the model to an international level. The model begins by accepting that the assumption of full employment in urban labour markets isnt particularly appropriate for developing countries which are beset by a chronic (under/) unemployment problem whereby many uneducated and unskilled rural migrants cannot find a job in the formal sector so become unemployed or join the informal sector. Thus in deciding whether to move to the city or stay at home on the farm, an individual has to weigh up the probability and risks of being unemployed for a considerable period of time against the positive urban-rural real income differential.
ASSUMPTIONS OF HARRIS-TODARO MODEL
1) The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity.
2)The most fundamental /main assumption in this model is that migration is an economic phenomenon in response to urban-rural differences in the expected income. This assumes that people only move for monetary gains, when in reality there are many other factors involved in this decision. For example, a lot of migration occurs due to humanitarian reasons as a result of conflict or disease for example, the huge influx of migrants from the Middle East to Europe in the summer of 2015 is unlikely to be as a result of economic motives, but more for a desire of safety and a better standard of living. Therefore, if we use the Harris-Todaro model to try and explain international migration (internal migration based on humanitarian/ethical grounds is perhaps unlikely, but not equal to zero: e.g. ethnic minorities may be more welcome in cities than rural areas and hence migrate) then we would be omitting a large chunk of migrants who move in order to escape persecution and death. It may seem unrealistic for manufacturing firms to pay an efficiency wage; after all they can attract labor at the equilibrium rate. But this can be thought of as a wage necessary to ensure that workers have better nutrition (and so have higher productivity); reduce staff turnover; and ensure workers dont shirk. If we try and explain the international migration process in a Harris-Todaro model, we would say that rich countries (the urban sector) offer an efficiency wage which is higher than poor countries (the rural sector) in order to encourage them to migrate. So long as this expected wage difference is great enough (i.e. it includes the possibility that migrants will be unable to find jobs, as well as the costs of moving) then individuals from poor countries should move to rich countries in search for a job. In reality, the expected wage difference would be even greater than the market rate, due to the existence of unemployment benefits which means that developing country nationals would continue to migrate to the rich world, so long as unemployment insurance was sufficiently greater than rural wages and the cost of moving. This thus leads to political motives, in the developed world, to limit the amount of assistance given to migrant workers and perhaps curtail the amount of unemployment insurance they can receive.
schematic framework for analyzing rural to urban migration decision
3)Moreover, the model assumes that costs are given in a monetary sense, whereas in reality it might be quite difficult to put a value on leaving your family in a distant country to go and work abroad. Similarly, the model assumes that individuals can rationally calculate the economic gains from migration, but by moving individuals would be imposing a cost upon themselves, and would have to include the value of living abroad (i.e. even though wages are higher they are eaten up by housing, food, clothing and other living costs) which may be quite difficult to calculate.
Other issues with the model, in both an internal and international perspective, are that it doesnt include human capital, there are no externalities and it treats workers and citizens as homogenous. Carrington, Detragiache and Vishwanath, develop a model which incorporates a positive externality associated with earlier people moving from nearby villages and the probability of a rural citizen migrating. Because this increases the social network of a migrating individual it may increase the probability that he decides to move. This is anecdotally evidence in the UK through the clustering of nationals in certain parts of the country: in order to improve their social network and chance of acquiring employment. The third issue is a more interesting point, in that cities arent homogenous: different cities develop different industrial sectors, and over time some of these sectors will boom whilst others will decline. This may mean that unemployment rates between cities vary and not only does a potential migrant have to decide whether he ought to move from agriculture to industry, but has to choose to which city he ought to move based on distance (and other costs), and returns (seeing which city is the most prosperous). This adds an even greater complex nature to such a model, especially with the large distances associated with cities in developed countries, and the different opportunities within
We see that the Harris-Todaro model is very limited in its scope in both an international and internal setting due to its narrow-mindedness assumption on economic values, which dont incorporate emotional, social and humanitarian costs/benefits. More fundamentally, it isnt an appropriate model in an international setting due to the barriers to entry which are erected by the developed world. By not incorporating human capital into our model, we are missing any migrants which may well be allowed into the developed world as high skilled workers can sometimes (but not always, even highly skilled workers can be limited to entering a country) get past the developed countries quota barriers. Todaro and Smith suggest that education for the sake of education should be restricted as a policy in developing countries, as often the urban sector can only ration jobs through education as a signaling effect. Whilst this seems like a bizarre idea, given that this would mean only the rich who are generally the ones able to afford education in developing countries would be able to attain jobs, and not poor, but clever productive individuals; it contradicts the policy prescription in an international setting, which ought to be for developing countries to increase their education so that workers become skilled and can improve their chances of migrating to developed country.
The movement of migrants from developing countries to developed countries, shouldnt necessarily be seen as detrimental to the plight of developing countries, as proponents of brain drain theory suggest. Empirically we would expect most migrants to be of working age (i.e. between 18-50) and we would expect a lot more males to migrate than females, as their job unfortunately tend to be better. Whilst this may be the case overall, there is still substantial evidence that women, children and the elderly migrate, more than the economic model would suggest.
Furthermore, the fact that a significant proportion of migrants are not economic, but asylum seekers on humanitarian grounds would suggest that the Harris-Todaro model isnt particularly useful in explaining world migration patterns. Migration restrictions are imposed both in an international sense and sometimes internally for example, see China, where nationals have to get permits (hukou) to reside in urban areas. The effect of this is to keep workers in rural areas to prevent a large source of unemployed workers in urban areas. The main reason for this is to prevent the social issues associated with overcrowding and the development of slums in urban areas. If deployed successfully whilst being normatively unfair and ethically wrong this could be quite successful at solving the issues associated with a swelling of urban populations and would maintain an equitable distribution of labor in rural areas. However, this can be achieved, perhaps more effectively, and certainly more humanely, by increasing the benefits to staying in rural areas. For example, by increase agricultural non-farm jobs. On the other hand, wage subsidies are ineffective. A wage subsidy would increase the rural-urban expected wage differential (by either initially reducing unemployment, or through a higher urban wage) and thus encourage even more workers to migrate from farms to the city in hope for a better life creating even greater unemployment and would thereby fail in attempting to achieve an equitable labour distribution across sectors.
Reducing inequality in land holdings would only promote efficiency in allocation of workers between sectors if it increased the wages in rural areas. This may be unlikely if there are increasing returns to scale, but under the assumption of constant returns to scale it may be possible if we assume that tenants are more likely to invest in their own land (and hence increase returns and rural wages) than if they were working on somebody elses land.
THE LEWIS-FEI-RANIS MODEL
The Nobel Laureate, W. Arthur Lewis in the mid 1950s presented his model of supply of labor or of surplus labor economy. By surplus labor it means that part of manpower which even if is withdrawn from the process of production there will be no fall in the amount of output. It is also known as the two sector model, and the surplus labour model. It focused on the need for countries to transform their structures, away from agriculture, with low productivity of labour, towards industrial activity, with a high productivity of labour.
In the labour-surplus models of Lewis and Fei-Ranis, the wage rate in the modern industrial sector is determined by the average productivity in the agriculture. To this average productivity is added a margin (Lewis fixes this margin at 30%) which is required for furnishing an incentive for labourers to transfer themselves from the countryside to the urban industries as well as for meeting the higher cost of urban living.
Assumptions of the Lewis Model:
Lewis model makes the following assumptions;
(i) There is a dual economy i.e., the economy is characterized by a traditional, over-populated rural subsistence sector furnished with zero MPL, and the high productivity modern urban industrial sector.
(ii) The subsistence sector does not make the use of ‘Reproducible Capital’, while the modern sector uses the produced means of capital.
(iii) The production in the advanced sector is higher than the production in traditional and backward sector.
(iv) According to Lewis, the supply of labor is perfectly elastic. In other words, the supply of labor is greater than demand for labor.
The followings are the sources of supply of labor in UDCs.
(i) Because of severe increase in population more, than required number of labors are working with lands, the so called disguised unemployed.(ii) In UDCs so many people are having temporary and part time jobs, as the shoe-shines, loaders, porters and waiters etc. There will be no fall in the production even their number are one halved.
(iii) The landlords and feudals are having an army of tenants for the sake of their influence, power and prestige. They do not make any contribution towards production, and they are prepared to work even at less than subsistence wages.
(iv) The women in UDCs do not work, but they just perform house-hold duties. Thus they also represent unemployment.
(v) The high birth rate in UDCs leads to grow unemployment.
Basic Thesis of the Lewis Model:
Lewis model is a classical type model which states that the unlimited supplies of labor can be had at the prevailing subsistence wages. The industrial and advanced modern sector can be developed on the basis of agri. to traditional sector. This can be done by transferring the labor from traditional sector and modern sector.
Lewis says that the wages in industrial sector remain constant. Consequently, the capitalists will earn ‘surplus’. Such surplus will be re-invested in the modern sector leading to absorb the labor which are migrated from subsistence sector. In this way, the surplus labor or the labor which were prey to disguised unemployment will get the employment. Thus both the labor transfer and modern sector employment growth are brought about by output expansion in that sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector. Though the wages have been assumed constant, yet Lewis says that the urban wages are at least 30% higher than average rural income to induce the workers to migrate from their home areas.
In the Lewis model, the modern sector capital stock is allowed to increase from K1 to K2 and K3 as a result of reinvestment of profits by capitalist industrialists. This causes the TP curve in the upper part of fig., to shift upward from TPM(K1) to TPM(K2) and to TPM(K3). The process that will generate these capitalistic profits for reinvestment and growth is illustrated in the lower part of fig. (b). The modern sector MPL curves have been derived from the TPM curves of the upper part of the fig. (b). These curves are demand for labor curve because of assumption of perfect competition.
The OA in both lower parts of fig (a) and (b) represents the average level of real subsistence income in the traditional rural sector. But in the modern sector the real wages have been represented by OW (the 30% higher than rural wages).
At such wages the supply of rural labor is assumed to be unlimited or perfectly elastic as shown by WSL curve in fig (b). This means that modern sector employer can hire as much labor as he likes without any fear of rise in wages. It is also told that in traditional sector the supply of labor is in the millions, while the employment in modern sector is in thousands. In the modern sector the employment is made by the employer to the point where MPL = W. (the point F in the lower part of fig. (b). Thus the basic employment is OL1, with this employment of labor CD1FL, output in manufacturing sector is being produced. While the share of such employed labor will be OWFL1.
The balance of output shown by the shaded area WD1F would be the total profits (surplus) that accrue to the capitalists. As Lewis assumes that all of these profits are reinvested, the total stock of capital in the modern sector will rise from K1 to K2. As a result, TPM will shift from TPM(K1) to TPM(K2) which in a turn leads to increase MPL. In other words, the demand for labor will increase as shown by the curve D2(K2) in the lower part of fig (b).
Now the new equilibrium in the modern sector takes place at point G where OL2 labor are being employed. The total output rises to OTP2 or OD2GL2 while total wages and profits increase to OWGL2 and WD2G, respectively. Once again, these larger (WD2G) profits are reinvested, the total stock of capital will increase to K3. Again the TP curve will shift upward, as the TPM(K3), and demand for labor curve will shift to D3(K3).
This process of modern self sustaining growth and employment expansion will remain continue till all the surplus rural labor is absorbed in the new industrial sector. There after, additional workers can be withdrawn from agri. sector only at a higher cost of lost food production because this will decrease the labor to land ratios. In this way, the MPL will be no more zero. Here, labor supply curve will become positively sloped along with the growth of modern sector. The structural transformation of the economy will take place through shifting traditional rural agriculture to modern urban industry.
Criticism on the Lewis Model:
Although Lewis two-sector development model is simple and roughly it is in conformity with the historical growth in the West, but it has following flaws and most of its assumptions do not fit in the institutional and economic realities of UDCs.
(i) Proportionality Between Employment Creation and Capital Accumulation: Lewis model assumes that there exists a proportionality in the labor transfer and employment creation in modern sector and rate of capital accumulation in the modern sector. The faster the rate of capital accumulation, the higher the growth rate of the modern sector and faster the rate of new job creation.
But if the capitalists reinvest their profits in the labor-saving capital equipment rather increasing the labor employment (what has been assumed in Lewis model) the jobs will not be created and modern sector will not expand. This happened in case of Pakistan where during 2nd five year plan, the wages remained constant and the capitalists rather re-ploughing their surplus shifted it to the ‘Swiss Banks’. All this led to a resentment against the strategy of increasing the surpluses of capitalistic class. Now we employ a diagram where we shall show that labor demand curves do not shift uniformly outward. It is so because that increase in capital stock will embody labor saving technology.
(ii) Peak Harvesting and Sowing Season: Lewis did not pay attention to the pattern of seasonality of labor demand in traditional agri. sector. According to Mehra, labor demand varies considerably and such demand is at its peak during the sowing and harvesting season. Thus during some months of the year the MPL may be above-zero. In such situation, the positive opportunity costs will involve in transferring the labor from agri. sector. As a result, the labor transfer will reduce agri. output.
(iii) Rise in Urban Wages: According to Prof. Mabro the absorption of surplus labor itself may end pre-maturely because competitors (producers) may alter wage rates and lower the share of profit. It has been shown that rural-urban migration in Egyptian economy was accompanied by increase in wage rate of 15% and a fall in profits by 12%. Moreover, the wages in industrial sector were forced up directly by unions, civil service wage scales, minimum wage laws and MNCs (multi-national corporations) hiring practices tend to negate the role of competitive forces in the modern sector labor market. Again, the wages in subsistence sector may go up indirectly through rise in productivity in this sector.
(iv) Full Impact of Growing Population: Lewis model underestimates the full impact on the poor economy of a rapidly growing population, i.e., its effects on agri. surplus, the capitalist profit share, wage rates and overall employment opportunities. Similarly, Lewis assumed that the rate of growth in manufacturing sector would be identical to that in agri. sector. But, if industrial development involves more intensive use of capital than labor, then the flow of labor from agri. to industry will simply create more unemployment.
(v) Ignoring the Balanced Growth: Lewis ignored the balanced growth between agri. sector and industrial sector. But we know that there, exists a linkage between agri. growth and industrial expansion in poor countries. If a part of profits made by capitalists is not devoted to agri. sector, the process of industrialization would be jeopardized (perhaps, due to reduced supply of raw material). Because of this flaw, Ranis-Fei model considers the balanced growth of both sectors. This will be discussed after this model.
Uta-Daniel Nneoma Blossom
2017/249592
Economics department
LEWIS-FEI-RANIS MODEL OF SURPLUS LABOUR
Like most economic theories, the Lewis-Fei-Ranis model relies on various assumptions:
(i) There is an abundance of labor in such underdeveloped countries and shortage of natural resources.
(ii) The population growth rate is very high which results in mass unemployment in the economy.
(iii) The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labor is zero and negative in agriculture
sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy.
These assumptions are necessary for the justifications of the various conclusions reach in the model. That is, it is necessary for restating the model. The model suggests that if agricultural labourers are transferred to industrial sector, there will be economic development since the labour force in the economy will become more productive. This model is classified under the structural change theory (The hypothesis that undevelopment is due to underutilization of resources arising from structural or institutional factors that have their origins in both domestic and international dualism) and their solution to this problem is transfer of surplus labour from agricultural sector ,where it is less utilised, to industrial sector for better productivity. The model divided into three phases:
– Breaking Point: The first stage of Fei-Ranis model is very similar to Lewis. Disguised unemployment comes into being because the supply of labor is perfectly elastic and MPL(Marginal Productivity of Labour) = 0. Therefore, such disguised unemployed are to be transferred to industrial sector at the constant institutional wage. That is, there is redundant agricultural labour.
– Shortage Point: In the second stage of Fei-Ranis model (phase) agricultural sector workers add to agricultural output but they produce less than institutional wage they get. In other words, in the second stage the labor surplus exists where APL(average productivity of labour) > MPL, but it is not equal to subsistence (institutional) wages. That is, at this point, the constitutional institutional wage(CIW)>MP>AP. This means there is disguised agricultural unemployment. This, such disguised unemployed also have to be transferred to industrial sector. If the migration to industrial sector continues a situation is eventually reached where the farm workers produce output equal to institutional wages. This would mean that productivity in agricultural sector has gone up. With this the third phase (stage) starts.
– The Lewis turning point or Commercialization Point: In the third stage of FR model , the take-off situation comes to an end and there begins the era of self-sustained growth where the farm workers produce more than the institutional wage they get. In this stage of economic growth the surplus labor comes to an end and the agricultural sector becomes commercialized sector. Accordingly, they have to be shifted to industrial sector. As labor are transferred to industrial sector a shortage of labor will develop in agricultural sector. In other words, it will be difficult for the industrial sector to get the labor at same prevailing constant wages. That is, there is self-sustaining agricultural growth with commercialization of agricultural sector. This is because MPL>CIW. Here, the economy is fully commercialized in the absence of disguised unemployment.
This theory has many policy repercussions. And economists who adopt these theories in their analysis recommend policies like: that government should focus on balanced growth strategies and date of labour absorption must be higher than the rate of population growth to get out of the Malthusian trap .
Lewis was a great proponent of balanced growth strategy and it is only natural that this theory will be of the above policy impications. And this has influenced various policies in developing countries. For empirical analysis has shown that China development miracles was as a result of it going through this stages systematically. China’s economic growth is mainly attributable to the development of the non-agricultural (industrial and service) sector, driven by rapid labor migration and capital accumulation. It was found that the sectoral reallocation of labor plays a significant role inpromoting China’s economic growth. Further, it was found that in China marginal productivity of agricultural labor stopped stagnating in 1978, which indicates that China entered quickly into phase two of economic development with the initiation of market reforms. Moreover, by 2009, the marginal productivity of labor has likely exceeded the institutional wage, as defined by the initially low average labor productivity, indicating that China may be now in th The same cannot be said for Japan.
Although the Lewis two-sector development model is simple and roughly reflects the historical experience of economic growth in the West, four of its key assumptions do not fit the institutional and economic realities of most contemporary developing countries. This, it has been subjected to various criticism:
(i) Marginal Productivity of Labor in Phase I: The FR model is of the view that MFL = 0 in the first phase of growth, and the transfer of labor from agriculture would not reduce output in the agri. sector in phase I. Various economists are of the view that agri. output in phase I of Fei-Ranis model will not remain constant and may fell under different systems of land tenure, i.e., the peasant proprietorship and share cropping etc.
(ii) Marginal Productivity of Labor is Not Zero: Prof. Jorgenson, a development economist, who has also presented a model of ‘dual economy’ has object FR model’s contention of zero MP in phase I. He says whether MPL will be zero is an empirical issue. During the seasons of sowing and harvesting the MPL > 0. Jorgenson concluded on the basis of Japanese data even for the pre I world war period the supply of labor was not unlimited. Then how MPL can be zero.
(iii) Ignoring The Role of Capital: The Fei-Ranis model concentrated upon land and labor as the determinants of output, ignoring the role of capital. But Profs. Brown, Byres, Frankel, Griffen, Ghatak and Ingersent are of the view that in the UDCs there has occurred what is known as ‘Green Revolution’ in agri. which has promoted the greater use of capital and technology on lands. Consequently, there has been a greater increase in the agri. productivity and agrcultural incomes.
(iv) Open Economy: FR model ignored the role of foreign trade as it assumed a closed economy model. In the 2nd phase when agri. product decreases the Terms of Trade goes against industrial sector. This would occur in the presence of closed economy. But if the model is made open such would not happen as the goods could be imported in the presence of then-scarcity. This was especially observed in case of Japan which imported cheap farm products to improve her Terms of Trade.
(v) Supply of Land in Long Run: Fei-Ranis model assumed that in the process of economic development the supply of land remained fixed. But it is not true. The supply of land can be increased in case of long run.
(vi) Commercialization Of Agriculture And Inflation: According to FR model when 3rd phase starts the agri. sector becomes commercialized. But it is criticized by saying that this phase does not start so easily The shifting of labor to industrial sector will create labor shortage in agri. sector. This will create shortage of food stuff leading to increase their prices. In this way, the inflation will generate which may obstruct the process of development.
(vii) Low Productivity in Agricultural Sector: According to Jorgenson it has been observed that there has been a very slow rise in the productivity of agri. sector. Consequently, the surplus will hardly be created in agri. sector. Accordingly, agri. sector will not contribute to development Thus the growth requires that the surplus must be generated and it should persist.
In conclusion, although, Lewis-Fei-Ranis model is flawed in multiple direction, it is still instrumental in explaining the stages of development in various cases.
THE LEWIS-FEI-RANIS MODEL
The Nobel Laureate, W. Arthur Lewis in the mid 1950s presented his model of supply of labor or of surplus labor economy. By surplus labor it means that part of manpower which even if is withdrawn from the process of production there will be no fall in the amount of output. It is also known as the two sector model, and the surplus labour model. It focused on the need for countries to transform their structures, away from agriculture, with low productivity of labour, towards industrial activity, with a high productivity of labour.
In the labour-surplus models of Lewis and Fei-Ranis, the wage rate in the modern industrial sector is determined by the average productivity in the agriculture. To this average productivity is added a margin (Lewis fixes this margin at 30%) which is required for furnishing an incentive for labourers to transfer themselves from the countryside to the urban industries as well as for meeting the higher cost of urban living.
Assumptions of the Lewis Model:
Lewis model makes the following assumptions;
(i) There is a dual economy i.e., the economy is characterized by a traditional, over-populated rural subsistence sector furnished with zero MPL, and the high productivity modern urban industrial sector.
(ii) The subsistence sector does not make the use of ‘Reproducible Capital’, while the modern sector uses the produced means of capital.
(iii) The production in the advanced sector is higher than the production in traditional and backward sector.
(iv) According to Lewis, the supply of labor is perfectly elastic. In other words, the supply of labor is greater than demand for labor.
The followings are the sources of supply of labor in UDCs.
(i) Because of severe increase in population more, than required number of labors are working with lands, the so called disguised unemployed.(ii) In UDCs so many people are having temporary and part time jobs, as the shoe-shines, loaders, porters and waiters etc. There will be no fall in the production even their number are one halved.
(iii) The landlords and feudals are having an army of tenants for the sake of their influence, power and prestige. They do not make any contribution towards production, and they are prepared to work even at less than subsistence wages.
(iv) The women in UDCs do not work, but they just perform house-hold duties. Thus they also represent unemployment.
(v) The high birth rate in UDCs leads to grow unemployment.
Basic Thesis of the Lewis Model:
Lewis model is a classical type model which states that the unlimited supplies of labor can be had at the prevailing subsistence wages. The industrial and advanced modern sector can be developed on the basis of agri. to traditional sector. This can be done by transferring the labor from traditional sector and modern sector.
Lewis says that the wages in industrial sector remain constant. Consequently, the capitalists will earn ‘surplus’. Such surplus will be re-invested in the modern sector leading to absorb the labor which are migrated from subsistence sector. In this way, the surplus labor or the labor which were prey to disguised unemployment will get the employment. Thus both the labor transfer and modern sector employment growth are brought about by output expansion in that sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector. Though the wages have been assumed constant, yet Lewis says that the urban wages are at least 30% higher than average rural income to induce the workers to migrate from their home areas.
In the Lewis model, the modern sector capital stock is allowed to increase from K1 to K2 and K3 as a result of reinvestment of profits by capitalist industrialists. This causes the TP curve in the upper part of fig., to shift upward from TPM(K1) to TPM(K2) and to TPM(K3). The process that will generate these capitalistic profits for reinvestment and growth is illustrated in the lower part of fig. (b). The modern sector MPL curves have been derived from the TPM curves of the upper part of the fig. (b). These curves are demand for labor curve because of assumption of perfect competition.
The OA in both lower parts of fig (a) and (b) represents the average level of real subsistence income in the traditional rural sector. But in the modern sector the real wages have been represented by OW (the 30% higher than rural wages).
At such wages the supply of rural labor is assumed to be unlimited or perfectly elastic as shown by WSL curve in fig (b). This means that modern sector employer can hire as much labor as he likes without any fear of rise in wages. It is also told that in traditional sector the supply of labor is in the millions, while the employment in modern sector is in thousands. In the modern sector the employment is made by the employer to the point where MPL = W. (the point F in the lower part of fig. (b). Thus the basic employment is OL1, with this employment of labor CD1FL, output in manufacturing sector is being produced. While the share of such employed labor will be OWFL1.
The balance of output shown by the shaded area WD1F would be the total profits (surplus) that accrue to the capitalists. As Lewis assumes that all of these profits are reinvested, the total stock of capital in the modern sector will rise from K1 to K2. As a result, TPM will shift from TPM(K1) to TPM(K2) which in a turn leads to increase MPL. In other words, the demand for labor will increase as shown by the curve D2(K2) in the lower part of fig (b).
Now the new equilibrium in the modern sector takes place at point G where OL2 labor are being employed. The total output rises to OTP2 or OD2GL2 while total wages and profits increase to OWGL2 and WD2G, respectively. Once again, these larger (WD2G) profits are reinvested, the total stock of capital will increase to K3. Again the TP curve will shift upward, as the TPM(K3), and demand for labor curve will shift to D3(K3).
This process of modern self sustaining growth and employment expansion will remain continue till all the surplus rural labor is absorbed in the new industrial sector. There after, additional workers can be withdrawn from agri. sector only at a higher cost of lost food production because this will decrease the labor to land ratios. In this way, the MPL will be no more zero. Here, labor supply curve will become positively sloped along with the growth of modern sector. The structural transformation of the economy will take place through shifting traditional rural agriculture to modern urban industry.
Criticism on the Lewis Model:
Although Lewis two-sector development model is simple and roughly it is in conformity with the historical growth in the West, but it has following flaws and most of its assumptions do not fit in the institutional and economic realities of UDCs.
(i) Proportionality Between Employment Creation and Capital Accumulation: Lewis model assumes that there exists a proportionality in the labor transfer and employment creation in modern sector and rate of capital accumulation in the modern sector. The faster the rate of capital accumulation, the higher the growth rate of the modern sector and faster the rate of new job creation.
But if the capitalists reinvest their profits in the labor-saving capital equipment rather increasing the labor employment (what has been assumed in Lewis model) the jobs will not be created and modern sector will not expand. This happened in case of Pakistan where during 2nd five year plan, the wages remained constant and the capitalists rather re-ploughing their surplus shifted it to the ‘Swiss Banks’. All this led to a resentment against the strategy of increasing the surpluses of capitalistic class. Now we employ a diagram where we shall show that labor demand curves do not shift uniformly outward. It is so because that increase in capital stock will embody labor saving technology.
(ii) Peak Harvesting and Sowing Season: Lewis did not pay attention to the pattern of seasonality of labor demand in traditional agri. sector. According to Mehra, labor demand varies considerably and such demand is at its peak during the sowing and harvesting season. Thus during some months of the year the MPL may be above-zero. In such situation, the positive opportunity costs will involve in transferring the labor from agri. sector. As a result, the labor transfer will reduce agri. output.
(iii) Rise in Urban Wages: According to Prof. Mabro the absorption of surplus labor itself may end pre-maturely because competitors (producers) may alter wage rates and lower the share of profit. It has been shown that rural-urban migration in Egyptian economy was accompanied by increase in wage rate of 15% and a fall in profits by 12%. Moreover, the wages in industrial sector were forced up directly by unions, civil service wage scales, minimum wage laws and MNCs (multi-national corporations) hiring practices tend to negate the role of competitive forces in the modern sector labor market. Again, the wages in subsistence sector may go up indirectly through rise in productivity in this sector.
(iv) Full Impact of Growing Population: Lewis model underestimates the full impact on the poor economy of a rapidly growing population, i.e., its effects on agri. surplus, the capitalist profit share, wage rates and overall employment opportunities. Similarly, Lewis assumed that the rate of growth in manufacturing sector would be identical to that in agri. sector. But, if industrial development involves more intensive use of capital than labor, then the flow of labor from agri. to industry will simply create more unemployment.
(v) Ignoring the Balanced Growth: Lewis ignored the balanced growth between agri. sector and industrial sector. But we know that there, exists a linkage between agri. growth and industrial expansion in poor countries. If a part of profits made by capitalists is not devoted to agri. sector, the process of industrialization would be jeopardized (perhaps, due to reduced supply of raw material). Because of this flaw, Ranis-Fei model considers the balanced growth of both sectors. This will be discussed after this model.
Okoroji Arinze Emmanuel
2017/241443
arinze.okoroji.241443@unn.edu.ng
The Harris-Todaro model assumes that unemployment is non-existent in the rural agricultural sector which makes the wage equal to marginal productivity in the rural agricultural sector. In equilibrium, the rate of migration between rural-urban sector is zero, since the expected rural income equals the expected urban income. The model is used in less developed countries which Nigeria is amongst.
In the Nigerian economy, there is movement from rural-urban sector due to an expected increase in income which makes labour to be distributed more to the Urban sector and causing unemployment. The rural sector which offers more economic opportunities is left with few labour which makes the wage equal marginal productivity.
Whereas in the Fei-Ranis model which is an extension of the lewis model,is also called the surplus labor economy. This model recognizes the agricultural sector more than the rural modern sector. Development is brought in the rural sector by a complete shift of labor from rural to Urban sector making underdeveloped countries not suffer labor supply.
In Nigeria as a case study. Due to the high unemployment it makes the wage of the Urban sector lower than productivity due to high movement of labor from rural to Urban sector.
This was discovered the year 2015/16 by the president elect Gen. Buhari which farm machineries were provided for in the North so to improve the agricultural sector bringing development to the agricultural modern sector.
Ranis and Fei (1961) formalised Lewis’s theory by combining it with Rostow’s model (1956), the three linear stages of growth theory. They disassembled Lewis’s two-stage economic development into three, defined by the marginal productivity of agricultural labour. They assumed the economy to be stagnant in its pre-conditioning stage. The breakout point marks the creation of an infant non-agricultural sector and the entry into phase one. Agricultural labour starts to be reallocated to the non-agricultural sector. Due to the abundance of surplus agricultural labour, its marginal productivity is extremely low and average labour productivity defines the agricultural institutional wage. When the redundant agricultural labour force has been reallocated, the agricultural marginal productivity of labour starts to rise but is still lower than the institutional wage. This marks the shortage point at which the economy enters phase two of development. During phase two the remaining agricultural unemployment is gradually absorbed. At the end of this process the economy reaches the commercialisation point and enters phase three where the agricultural labour market is fully commercialised.
NAME: OKWUOGU LYNDA MESOMA
REG NO: 2017/249401
Email: Okwuogulynda9@gmail.com
ECONOMICS/POLITICAL SCIENCE (C.S.S)
A BRIEF SUMMARY OF THE LEWIS-FEI-RANIS MODEL OF ECONOMIC GROWTH AND HARRIS-TODARO MODEL OF MIGRATION AND IT’S APPLICABILITY TO NIGERIAN ECONOMY.
THE LEWIS-FEI-RANIS MODEL OF ECONOMIC GROWTH.
Dual-sector model as given by W. Arthur Lewis was enumerated in his article entitled “Economic Development with Unlimited Supplies of Labour” written in 1954, the model itself was named in Lewis’s honor. First published in The Manchester School in May 1954, the article and the subsequent model were instrumental in laying the foundation for the field of development economics. But One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labour should take place prior to the labour shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economic growth model
Fei-Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis. It can also be understood as an extension of the Lewis model. The model is also known as the Surplus Labour model that recognizes the presence of a dual economy comprising both the modern and the primitive sectors, and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labour from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labour supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials.
Some of the major assumptions of this model are (i) There is a duel economy i.e., the economy is characterized by a traditional, over-populated rural subsistence sector furnished with zero MPL, and the high productivity modern industrial sector.
(ii) According to Lewis, the supply of labour is perfectly elastic. In other words, the supply of labour is greater than demand for labour.
(iii) Entrepreneurs in the manufacturing sector make profit because they charge a price above the fixed wage rate.
Though this model has helped enormously in Economic development it has been criticized on the ground that Economic development takes place via the absorption of labor from the subsistence sector where opportunity costs of labor are very low. However, if there are positive opportunity costs, e.g. loss of crops in times of peak harvesting season, labor transfer will reduce agricultural output.
Secondly absorption of surplus labor itself may end prematurely because competitors may raise wage rates and lower the share of profit. It has been shown that rural-urban migration in the Egyptian economy was accompanied by an increase in wage rates of 15 per cent and a fall in profits of 12 per cent. Wages in the industrial sector were forced up directly by unions and indirectly through demands for increased wages in the subsistence sector, as payment for increased productivity
Again it was criticized for it’s assumption of rationality, perfect information and unlimited capital formation in industry. These do not exist in practical situations and so the full extent of the model is rarely realized.
HARRIS-TODARO MODEL OF MIGRATION
It has been realized that in order for an economy to develop or grow, a large
amount of labor has to be transferred from the traditional (or backward)
agricultural sector in rural are as where the productivity of labor is low (or negligible, or zero, or even negative) to the modern manufacturing sector where the productivity of labor is higher and rising due to capital accumulation in that
sector.This model of migration by Harris-Todaro is generally an offshoot of the dualistic model of development economics.
TheHarris-Todaro model therefore assume that migration from rural to urban areas depend primarily on the difference in wages between the rural
and urban labour markets. An equilibrium is said to be reached in the Harris-Todaro model when the expected wage in urban areas (actual wage adjusted for
the unemployment rate) , is equal to the marginal product of an agricultural
worker.The main idea of the Harris-Todaro model is that labour migration in underdeveloped countries is due to rural-urban differences in average expected wages rather than actual wages. The migrants consider the various opportunities of employment available to them in rural and urban sectors and choose the one that maximises their expected wages from migration.
SOME MAJOR ASSUMPTIONS OF THE MODEL.
The number of urban jobs available (LM) is exogenously fixed. In the rural sector some work is always available. Therefore, the total urban labour force LM comprises L-LAalong with an available supply of rural migrants.
Furthermore it assumes that Rural-urban migration continues so long as the expected urban real income is more that the real agricultural income.
Again The rural wage equals the rural marginal product of labour and the urban wage is exogenously determined.
On the other hand the model has been criticized by various scholars for the fact that it doesn’t not take into account the the costs of rural-urban migration or the relatively higher costs of urban living which the migrants have to incur in the urban sector.
Conclusion
APPLICATION OF THESE MODELS IN NIGERIA.
These models can be applied to the Nigerian economy through the understanding of the fact that the Nigerian economy is also divided into to which is the rural sector and the urban sector.
It is obvious that we notice that people travel from the rural sector to the urban sector for employment not even putting into consideration the amount of people who are not employed in the urban sector.
The Lewis-Fei-Ranis model presumes therefore that the government should play a crucial role in migration as a time will come when the agricultural sector will be commercialized thereby bringing about equal Development in the economy.
Name: Ugwu Sandra Ogechukwu
Reg no:2017/241433
Email: sandra.ugwu.241433@unn.edu.ng
Answer:
LEWIS-FEI-RANIS MODEL
(SURPLUS LABOUR THEORY)
INTRODUCTIONS
Lewis theory was one of the early theoretical models of development that focused on the structural transformation of subsistence economy. The theory was formulated by Nobel laureate W. Arthur Lewis in the 1950s and later modified, formalized and extended by John Fei and Gustav Ranis. It became the general theory of development process in surplus labour developing nations during the 1960s and early 1970s.
ARGUMENTS OF THE MODEL
In the Lewis model, the underdeveloped economy consists of two sectors; the traditional and the industrial sector. The traditional sector which is the overpopulated rural subsistence sector is characterized by zero marginal productivity; a situation that permits Lewis to classify this as ‘surplus labour’ in the sense that it can be withdrawn from the traditional agricultural sector without any loss of output. On the other hand, the industrial sector is characterized by high productivity which results from gradual transfer of labour from the subsistence (traditional) sector to the modern urban industrialized sector.
The primary focus of the Lewis model is on both the process of labour transfer and the growth of output and employment in the modern (industrial) sector which is brought about by output expansion in the sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern (industrial) sector. Such investment is made possible by the excess of modern sector profits over wages on the assumption that capitalist reinvest all their profits. Lewis also assumed that the level of wages in the industrial sector was constant and determined as a given premium over a fixed average subsistence level of wages in the traditional agricultural sector. At the constant urban wage, the supply curve of rural labour to modern sector labour supply is considered perfectly elastic.
APPLICATION OF MODEL TO THE NIGERIAN ECONOMY
Although the Lewis two-sector development model is simple and roughly reflects the historical experience of economic growth in the West, four of its key assumptions do not fit the institutional and economic realities of Nigeria.
First, the model implicitly assumes that the rate of labour transfer and employment creation in the modern sector is proportional to the rate of modern sector capital accumulation. The faster the rate of capital accumulation the higher the growth rates of the modern sector and the faster the rate of new job creation. This is not always the case in Nigeria as capitalists in most cases choose to invest in more sophisticated laboursaving capital equipment which makes production capital intensive and hence less demand for labour in the modern sector (which means reduction in job creation). It is also worthy to note that the capitalist profit is not always reinvested as we can consider a scenario of ‘capital flight’. Capital flight is a situation where the profits made by capitalists are sent abroad (either saved or invested abroad) hence leading to zero growth of capital in the local economy. It has become a norm for Nigerian capitalist to invest or save profit abroad as they assume high security of investment and more returns (profit) on investment.
The second questionable assumption of the Lewis model is the notion that surplus labour exists in rural areas while there is full employment in the urban areas. This assumption however gives room to zero marginal productivity assumption in the rural area. This is not valid as contemporary research indicates that there is little surplus labour in the rural areas in Nigeria; which is to say that marginal product of labour is not zero but rather subject to diminishing marginal returns. Hence, surplus labour can be said to be little since addition of labour in the rural area to a certain extent can lead to zero or negative productivity.
The third controversial assumption is the notion of a competitive modern sector labour market that guarantees the continued existence of constant real urban wages up to the point where the supply of rural surplus labour is exhausted. This assumption has been nullified in Nigeria as it has been observed that wages tend to increase overtime due to factors like union bargaining power, civil service wage scales and multinational corporations hiring practices.
A final concern with the Lewis model is its assumption of diminishing returns in the modern industrial sector. Yet there is much evidence that increasing returns prevail in that sector, posing special problems for development policymaking.
In summary, when we take into account the laboursaving bias of most modern technological transfer, the existence of substantial capital flight, the widespread nonexistence of rural surplus labour, the growing prevalence of urban surplus labour, and the tendency for modern sector wages to rise rapidly even where substantial open unemployment exist; it could be concluded that the Lewis model is not applicable in Nigeria.
HARRIS-TODARO MODEL
(THEORY OF MIGRATION)
INTRODUCTION
Harris-Todaro model also known as the theory of migration is an economic model developed in 1970 by John R.Harris and Michael Todaro. It is an economic model used in development economics to explain some of the issues concerning rural urban migration.
ARGUMENTS OF THE MODEL
The main argument of the model is that migration decision is based on the difference between expected income in the urban areas and rural wages (rather than just differences in wages). When the difference between expected income in urban areas and rural wage is high, there is a higher rate of migration and otherwise when low. Hence, equilibrium is attained in the model when the expected wage in the urban area is equal to the marginal product of labour in the rural area.
The model also argues that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labour market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income.
However, even though this migration creates unemployment and induces informal sector growth, this behaviour is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
APPLICATION OF THE MODEL IN THE NIGERIAN ECONOMY
The Harris-Todaro model can be said to be a more realistic and applicable model of growth in the Nigerian economy. Over the years there has been a high rate of migration from rural to urban areas due to information on expected income. Thus, labour tends to leave the rural (agricultural sector) to the urban areas in search of ‘greener pasture’. ‘Greener pasture’ here means that expected income in urban areas should be higher than present rural wage.
This migration has led to unemployment in the urban area but can still be considered rational since the individual expects to earn more than what he earns in the rural area. However, there is always a fall in expectation as there is a pressure on urban areas to accommodate and provide jobs for more than its capacity.
Hence, the point of equilibrium is important in Nigeria. The point of equilibrium is attained where the expected rural income equals the expected urban income. To attain this point the Nigerian government should not only concentrate on the development of urban areas but rather should ensure an equitable development between the two sectors (rural and urban). An equitable development will ensure that expected rural wage will be equal to expected urban income.
Name: Christopher Favour Chidiebube
Reg number: 2017/242945
Email address: christopherfaye60@gmail.com
Answer:
The Harris_Todaro model:
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.In light of these events, John Harris and Michael Todaro formulated the Harris-Todaro model to explain the puzzle. At the core of the Harris-Todaro model were the following features. First, real wages (adjusted for cost-of-living differences) are higher in urban formal-sector jobs than in rural traditional-sector jobs. Second, to be hired for a formal-sector job, one has to be physically present in the urban areas where the formal-sector jobs are located. Third, and as a consequence of the first two features, more workers search for formal-sector jobs than are hired, employers hire some of the job seekers but not all of them, and those not hired end up unemployed. Fourth, for equality to be maintained between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting is characterized by urban unemployment. And fifth, any temporary difference in the expected wages between one sector and another is eroded as workers migrate from the low-expected-wage labor market to the high-expected-wage labor market.The Harris-Todaro model produced two powerful policy results. The first concerns the policy of formal-sector job creation to employ the unemployed (who, in the Harris-Todaro model, are all in urban areas, because that is where the formal-sector jobs are assumed to be located). Such a policy, they concluded, would increase the formalsector labor force by more than the number of new jobs created, thereby raising the number of urban unemployed. Thus, the solution to urban unemployment is not to create urban employment.
The second policy option that Harris and Todaro considered was a policy of rural development. If such a program could increase the rural traditional-sector wage, unemployment would then fall. Thus, in the Harris-Todaro model, the solution to urban unemployment is rural development.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
ASSUMPTIONS
The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity.
The assumptions of this model include:
1. There are two sectors in the economy_ the rural or agricultural sector (A) and the urban or manufacturing sector(B)
2. The model operates in the short run.
3. The marginal production of labour in agriculture (MPLA) and of industry are determined by their respective technologies.
4. Capital is available in fixed quantities in the two sectors.
5. There are L workers in the economy with LA and LM numbers employed in the rural and urban sectors respectively.
6. The number of urban jobs available (LM) is exogenously fixed in the rural sectors is the same work is always available
The Fei_Ranis Model Of Economic Growth
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.[1] It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.[2] According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector.[3] Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.[4] They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development[5] In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits;
The nature of the industry’s technical progress and its associated bias;
Growth rate of population.
So, the three fundamental ideas used in this model are:
Agricultural growth and industrial growth are both equally important;
Agricultural growth and industrial growth are balanced;
Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap.
This shifting of labor can take place by the landlords’ investment activities and by the government’s fiscal measures. However, the cost of shifting labor in terms of both private and social cost may be high, for example transportation cost or the cost of carrying out construction of buildings. In addition to that, per capita agricultural consumption can increase, or there can exist a wide gap between the wages of the urban and the rural people. These three occurrences- high cost, high consumption and high gap in wages, are called as leakages, and leakages prevent the creation of agricultural surplus. In fact, surplus generation might be prevented due to a backward-sloping supply curve of labor as well, which happens when high income-levels are not consumed. This would mean that the productivity of laborers with rise in income will not rise. However, the case of backward-sloping curves is mostly unpractical.
The ASSUMPTIONS include:
1. The Model assumes that a developing economy has a surplus of unproductive labor in the agricultural sector.
2.These workers are attracted to the growing manufacturing sector where higher wages are offered.
3.It also assumes that the wages in the manufacturing sector are more or less fixed.
4.Entrepreneurs in the manufacturing sector make profit because they charge a price above the fixed wage rate.
5.The model assumes that these profits will be reinvested in the business in the form of fixed capital.
6.An advanced manufacturing sector means an economy has moved from a traditional to an industrialized one.
Name:MGBA CLARA CHINECHEREM
Dept: Economics
Reg no: 2017/249527
Course code and title: Development Economics (ECO 361)
LEWIS-RANIS-FEI MODEL
The central idea behind the Lewis model is fairly simple. Lewis divided labour force into two differentiated groups – “subsistence sector” and “capitalist sector” where the former is assumed to contain unlimited supply and consequently, a pool of surplus labour[1] that sets labour-supply conditions for the latter. The concept of a dual economy is heavily criticised. As Leeson (1982) pointed out, “dual economy” models are “held to imply a false picture of the nature of the historical process of change in underdeveloped countries”.
Subsequently, Ranis’ and Fei’s extension to Lewis’ model can be analysed. They observed the model by reading it from left to right and assessed the changes in the output and wage as more and more people moved from agriculture to the industry. A new concept was added – namely, disguised unemployment, which appears in the traditional subsistence sector. The marginal product of labour, which is observed as the slope of the production function, in agricultural sector is lower than in industry . Under competitive assumptions, the real wage rate would fall to zero, but due to the presence of institutional or non-market forces, the institutional wage is sustained. Therefore, there are gains to be had by switching resources away to the industrial sector. Nevertheless, it is generally not likely to happen because the market, left on its own, does not change. If the industrial sector does pay according to marginal product, then, as noted by Ray (1998), there would be efficiency gains available as long as the marginal product of the agricultural labour is less than the wage, whether it is zero or not. By decreasing the labour force in agriculture by a small amount (whilst still remaining in the surplus labour area), the total wage bill in agriculture falls along the diagonal straight line in Figure 1.3 , provided that the wage in agriculture does not rise. Since output does not fall, the reduction in the total wage bill gives an economy an agricultural surplus. Only at point C will this process come to an end because there is no more disguised unemployment – it only appears at points at which the marginal product of labour is less than the institutional wage. Hence, condition for the existence of disguised unemployment is:
W > MPL
Ranis and Fei subsequently claimed that the average wage bill in agricultural sector is no longer measured as a straight line. At point C, the slope of the production function is parallel to the wage bill line, yielding that the disguised unemployment is no longer observed. Furthermore, beyond point C (when the disguisedly unemployed have been absorbed) the marginal product of labour exceeds the traditionally given wage rate (Ranis and Fei, 1961). The wage in agriculture begins to rise, because it becomes profitable to bid for labour. As a result, wage bill falls more slowly.This brings me to the central point of the paper capturing the “turning points” in the Lewis-Ranis-Fei model. Ranis and Fei divided the model into three phases[3]. The phase where the supply wage of labour tilts upwards is referred to as the “first turning point”. At this point, redundant labour disappears altogether (Jorgenson, 1967). Employment in the industry would have risen as far as point z’ had the turning point not occurred. However, since it did and since the wage rate began to rise as demand was pushed upwards, employment can only rise up to z where demand meets supply.
According to Chen (2005), Lewis-Ranis-Fei model should be considered a classical model because of the usage of industrial wage. However, Jorgenson claims that once the commercialization point is reached, instead of the classical approach, the neo-classical theory of growth for an advanced economy is to be observed .
Berry came to a significant conclusion of the Lewis-Ranis-Fei model. In effect, a shift in the terms of trade has a negative effect on the industry, forcing capitalist employers to pay a higher wage and thus generating less profits and less investment. However, there is a role of interdependence between the two sectors (Ranis and Fei). In fact, raising the price of goods in agriculture would give an agricultural sector an incentive to raise the output, thus encouraging investments in agriculture, leading to a decline in the terms of trade, which in turn lowers wages, increases profits and generates more investment in the industry. Consequently, there will be a balanced expansion in both, agriculture and industry. In other words, what Ranis and Fei observed was that the allocation of investment funds must be such that as to “continuously sustain investment incentives in both sectors of the economy”. The terms of trade should not deteriorate substantially against either sector. Consequently, the demand curve shifts up and there will be a new intersection point which lies on the balanced-growth path and this new equilibrium allows the economy to enjoy even further profits. After the first turning point, there will be a small proportion of profit that will be forgone because the first turning point occurs, yet the overall amount of profit increases. Nevertheless, it becomes clear that it is reasonable to have a policy to invest in both sectors as the economy will then maintain the balanced growth path.
To conclude, the existence of surplus labour in agriculture allows the industry to continue to pay the institutional wage and therefore enjoy further profits and continued investment. At the same time, as more and more people are moving away from agriculture, there will be some amount of agricultural surplus that can be used up to fuel further development. This process continues until the surplus labour is absorbed. Hence, saving and investment are a crucial part in the Lewis-Ranis-Fei to support economic development.
HARRIS -TODARO MODEL OF MIGRATION
Migration: This can be seen as the movement of persons away from their usual residence, either across an international border or within a state.
The HarrisTodaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration
The Harris-Todaro model was created to explain how internal migration occurs from rural to urban sectors through the difference in the expected wage. Pritchett points out that migration can benefit developing countries and their population much more significantly than any aid attempts. Industrial world transfer is around $70bn a year in aid, but by simply allowing a 3% rise in their labour force (taken up by migrants), the gains would be $300 billion: 4.5x greater. Fundamentally it was used to explain migration within an economy, but we attempt to expand the model to an international level. The model begins by accepting that the assumption of full employment in urban labour markets isnt particularly appropriate for developing countries which are beset by a chronic (under/) unemployment problem whereby many uneducated and unskilled rural migrants cannot find a job in the formal sector so become unemployed or join the informal sector. Thus in deciding whether to move to the city or stay at home on the farm, an individual has to weigh up the probability and risks of being unemployed for a considerable period of time against the positive urban-rural real income differential.
ASSUMPTIONS OF HARRIS-TODARO MODEL
1) The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity.
2)The most fundamental /main assumption in this model is that migration is an economic phenomenon in response to urban-rural differences in the expected income. This assumes that people only move for monetary gains, when in reality there are many other factors involved in this decision. For example, a lot of migration occurs due to humanitarian reasons as a result of conflict or disease for example, the huge influx of migrants from the Middle East to Europe in the summer of 2015 is unlikely to be as a result of economic motives, but more for a desire of safety and a better standard of living. Therefore, if we use the Harris-Todaro model to try and explain international migration (internal migration based on humanitarian/ethical grounds is perhaps unlikely, but not equal to zero: e.g. ethnic minorities may be more welcome in cities than rural areas and hence migrate) then we would be omitting a large chunk of migrants who move in order to escape persecution and death. It may seem unrealistic for manufacturing firms to pay an efficiency wage; after all they can attract labor at the equilibrium rate. But this can be thought of as a wage necessary to ensure that workers have better nutrition (and so have higher productivity); reduce staff turnover; and ensure workers dont shirk. If we try and explain the international migration process in a Harris-Todaro model, we would say that rich countries (the urban sector) offer an efficiency wage which is higher than poor countries (the rural sector) in order to encourage them to migrate. So long as this expected wage difference is great enough (i.e. it includes the possibility that migrants will be unable to find jobs, as well as the costs of moving) then individuals from poor countries should move to rich countries in search for a job. In reality, the expected wage difference would be even greater than the market rate, due to the existence of unemployment benefits which means that developing country nationals would continue to migrate to the rich world, so long as unemployment insurance was sufficiently greater than rural wages and the cost of moving. This thus leads to political motives, in the developed world, to limit the amount of assistance given to migrant workers and perhaps curtail the amount of unemployment insurance they can receive.
schematic framework for analyzing rural to urban migration decision
3)Moreover, the model assumes that costs are given in a monetary sense, whereas in reality it might be quite difficult to put a value on leaving your family in a distant country to go and work abroad. Similarly, the model assumes that individuals can rationally calculate the economic gains from migration, but by moving individuals would be imposing a cost upon themselves, and would have to include the value of living abroad (i.e. even though wages are higher they are eaten up by housing, food, clothing and other living costs) which may be quite difficult to calculate.
Other issues with the model, in both an internal and international perspective, are that it doesnt include human capital, there are no externalities and it treats workers and citizens as homogenous. Carrington, Detragiache and Vishwanath, develop a model which incorporates a positive externality associated with earlier people moving from nearby villages and the probability of a rural citizen migrating. Because this increases the social network of a migrating individual it may increase the probability that he decides to move. This is anecdotally evidence in the UK through the clustering of nationals in certain parts of the country: in order to improve their social network and chance of acquiring employment. The third issue is a more interesting point, in that cities arent homogenous: different cities develop different industrial sectors, and over time some of these sectors will boom whilst others will decline. This may mean that unemployment rates between cities vary and not only does a potential migrant have to decide whether he ought to move from agriculture to industry, but has to choose to which city he ought to move based on distance (and other costs), and returns (seeing which city is the most prosperous). This adds an even greater complex nature to such a model, especially with the large distances associated with cities in developed countries, and the different opportunities within
We see that the Harris-Todaro model is very limited in its scope in both an international and internal setting due to its narrow-mindedness assumption on economic values, which dont incorporate emotional, social and humanitarian costs/benefits. More fundamentally, it isnt an appropriate model in an international setting due to the barriers to entry which are erected by the developed world. By not incorporating human capital into our model, we are missing any migrants which may well be allowed into the developed world as high skilled workers can sometimes (but not always, even highly skilled workers can be limited to entering a country) get past the developed countries quota barriers. Todaro and Smith suggest that education for the sake of education should be restricted as a policy in developing countries, as often the urban sector can only ration jobs through education as a signaling effect. Whilst this seems like a bizarre idea, given that this would mean only the rich who are generally the ones able to afford education in developing countries would be able to attain jobs, and not poor, but clever productive individuals; it contradicts the policy prescription in an international setting, which ought to be for developing countries to increase their education so that workers become skilled and can improve their chances of migrating to developed country.
The movement of migrants from developing countries to developed countries, shouldnt necessarily be seen as detrimental to the plight of developing countries, as proponents of brain drain theory suggest. Empirically we would expect most migrants to be of working age (i.e. between 18-50) and we would expect a lot more males to migrate than females, as their job unfortunately tend to be better. Whilst this may be the case overall, there is still substantial evidence that women, children and the elderly migrate, more than the economic model would suggest.
Furthermore, the fact that a significant proportion of migrants are not economic, but asylum seekers on humanitarian grounds would suggest that the Harris-Todaro model isnt particularly useful in explaining world migration patterns. Migration restrictions are imposed both in an international sense and sometimes internally for example, see China, where nationals have to get permits (hukou) to reside in urban areas. The effect of this is to keep workers in rural areas to prevent a large source of unemployed workers in urban areas. The main reason for this is to prevent the social issues associated with overcrowding and the development of slums in urban areas. If deployed successfully whilst being normatively unfair and ethically wrong this could be quite successful at solving the issues associated with a swelling of urban populations and would maintain an equitable distribution of labor in rural areas. However, this can be achieved, perhaps more effectively, and certainly more humanely, by increasing the benefits to staying in rural areas. For example, by increase agricultural non-farm jobs. On the other hand, wage subsidies are ineffective. A wage subsidy would increase the rural-urban expected wage differential (by either initially reducing unemployment, or through a higher urban wage) and thus encourage even more workers to migrate from farms to the city in hope for a better life creating even greater unemployment and would thereby fail in attempting to achieve an equitable labour distribution across sectors.
Reducing inequality in land holdings would only promote efficiency in allocation of workers between sectors if it increased the wages in rural areas. This may be unlikely if there are increasing returns to scale, but under the assumption of constant returns to scale it may be possible if we assume that tenants are more likely to invest in their own land (and hence increase returns and rural wages) than if they were working on somebody elses land.
IROEGBU BLESSING O.
2017/249518
ECONOMICS
HARRIS-TODARO MODEL OF MIGRATION
INTRODUCTION
The Harris-Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
DISCUSSIONS OF THE MODEL
The Harris-Todaro model is far more difficult to program than the Lewis model as it is a 2 sector model. For the sake of simplicity in modeling, let us assume that instead of an informal sector, there is unemployment, and that these workers receive some minimum compensation to survive. This simplification does not change the core of the H-T model. Even with an informal sector in the H-T model, the wage in the informal sector is significantly lower than formal wage, and potentially lower than the agricultural wage. By imposing an unemployment sector, it simply makes not being in the urban formal sector receive a wage of zero. This simplifies the Harris-Todaro equilibrium condition to the following,
wa=(Lf/Nu)wf
Where Nu denote urban population (Lf+U).
We will assume Cobb Douglas production function in both rural and urban sectors. Wage determination in both sector is assumed to be on the margin, instead of average as was the case in the Lewis model. The following computational model is adapted from a paper on the Harris-Todaro model by Espindola et al. (2005).
ASSUMPTIONS OF THE MODEL
The H-T model is based on the Assumption that the premise that a fixed wage leads to an outlook of misrepresentation and urban unemployment.
The H-T model presupposes that the fixed wage in one sector is added to the Assumption of the S.F model, which is done by introducing the concept of expected wage in the urban sector. The economy in his model consist of two sectors, one is the agricultural sector and the other is a manufacturing sector. The economy considered in the model is a small open economy. There are 3 kinds of production factors, specific production factors in sector 1, k1, production factors in sector 2, k2 and Labour (L) which is employed in both sectors and mobile between sectors.
In the HOS model, the capital Labour ratio are in a one to one relation with the relative price of product. However in the H-T model, there relations among variables are not in a one to one relationship. This makes H-T model more suitable for describing developing countries. This feature also gives the impression that the H-T model depends only on the supply side of the model and ignores the demand side. It is possible for workers to move freely to the wage gap between sectors. In other words, workers move to the higher wage sector by comparing their expected wages in sector 1 and 2. In both sectors, the expected wage is defined by multiplying wi (I=1,2) by the probability of finding a job in the sector.
CONCLUSION
Relating to our Nigerian economy, it is true that the wages prevailing in the urban sector are higher than that of the rural sector which leads to migration and this obviously agrees with the dualistic economic system where one sector is geared towards local needs and another to global export market. However, the assumption that the manufacturing sector is modern may not hold true for the country seeing that the colonial masters were not at all focused on advancing the technology prevalent in the sector but on using the sector to supply cheap raw materials to their country. Nigeria does not have her rural sectors geared only to local needs but the agricultural sector provides export of primary products, with the manufacturing contributing little or nothing to the country’s export. A perfectly competitive labour market is not obtainable seeing as there is no homogenous skill set for all rural migrants. The model ignored the differentials in skill levels amongst the migrants waving away the fact that some could be skilled, semi-skilled or even possess formal education. Also, urban minimum wage is assumed to be fixed institutionally at a level above equilibrium in the labour market which unfortunately, though the same in Nigeria “by law”, is not applied and enforced. The model is right in its explanation that the wage incentives and the need for presence to actually get a job amongst others cause rural-urban migration even if not all migrants are employed which increase the urban unemployment just as is attainable in Nigeria.
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
INTRODUCTION
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and under-employment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
ASSUMPTIONS OF THE MODEL
An economy starts with 2 sectors:A rural agricultural sector and urban industrial sector.
Agriculture generally under-employs workers and marginal productivity of labour is virtually zero.
Transferring workers out of agriculture doesn’t reduce productivity in the whole economy.
Labour is then released for work in the more productive urban sector.
Industrialization is now possible,given the increase in supply of workers who have moved from the land.
Industrial firms starts to make profit which can be re-invested into more industrialization and capital starts to accumulate.
As soon as capital accumulate further economy development can sustain itself.
CRITICISMS OF THE MODEL
The Lewis model is criticized on the grounds that it neglects agriculture. Fei–Ranis model goes a step beyond and states that agriculture has a very major role to play in the expansion of the industrial sector. In fact, it says that the rate of growth of the industrial sector depends on the amount of total agricultural surplus and on the amount of profits that are earned in the industrial sector. So, larger the amount of surplus and the amount of
surplus put into productive investment and larger the amount of industrial profits earned, the larger will be the rate of growth of the industrial economy. As the model focuses on the shifting of the focal point of progress from the agricultural to the industrial sector, Fei and Ranis believe that the ideal shifting takes place when the investment funds from surplus and industrial profits are sufficiently large so as to purchase industrial capital goods like plants and machinery. These capital goods are needed for the creation of employment opportunities. Hence, the condition put by Fei and Ranis for a successful transformation is that the rate of increase of capital stock & rate of employment opportunities should be greater than the rate of population growth.
CONCLUSION
The model failed to recognize and put into consideration the sluggish economic situation present in less developed countries (eg Nigeria). If they had considered that they would find out that the agricultural backwardness was a result of the institutional structure that prevailed.
The model also assumed a closed model i.e there is absence of foreign trade in the economy which is unrealistic as raw materials and other products can’t be imported, an example is Japan.
These limitations do not undermine the importance of the Fei-Ranis model for the economic development of labour surplus countries. It systematically analyses the development process from the take-off to self sustained growth through the interaction of the agricultural sectors of an underdeveloped economy.
Isaac Blessing chiyantirimam
2017/242942
isaacblessing49@gmail.com
Buahblessing.blogsport.com
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
W Authur Lewis
The dual-sector model is a model in development economics. It is commonly known as the Lewis model after its inventor professor W. Arthur Lewis. It explains the growth of a developing economy in terms of a labour transition between two sectors, the capitalist sector and the subsistence sector. He believes development can only occur when capital accumulates as a result of the withdrawal of surplus labour from the subsistence sector with the ascertion that the classical economic theory of perfectly elastic supply of labour at a subsistence wage holds true in the case of a number of underdeveloped countries. Development consist of the reallocation of surplus agricultural workers,whose contribution in output level is zero to the industrial sector where they become productive at a wage equal to the institutional wage in agriculture. John C.H Fei and Gustav Ranos model goes a step beyond and states that agriculture has a very major role to play in the expansion of the industrial sector. In fact, it says that the rate of growth of the industrial sector depends on the amount of total agricultural surplus and on the amount of profits that are earned in the industrial sector. The shifting ideas from the agricultural sector to the industrial sector bring about the investment funds from surplus and industrial profits are sufficiently large so as to purchase industrial capital goods like plants and machinery.
Capitalist surplus: It’s depends on the minimum wage earning required for subsistence. The wage level cannot be less than the average product of the workers in the subsistence sector. Though, earning in the subsistence sector set a floor to wage in the capitalist sector yet in capitalist wage are more than 30% higher than subsistence wage .
Surplus labour can be used instead of capital in the creation of new industrial investment projects, or it can be channeled into nascent industries, which are labour-intensive in their early stages. Such growth does not raise the value of the subsistence wage, because the supply of labor exceeds the demand at that wage, and rising production via improved labour techniques has the effect of lowering the capital coefficient.
ASSUMPTIONS
1.A developing economy has a surplus of unproductive labor in the agricultural sector .
2. These workers are attracted to the growing manufacturing sector where higher wages are offered.
3. The wages in the manufacturing sector are more or less fixed.
4. Entrepreneurs in the manufacturing sector make profit because they charge a price above the fixed wage rate.
5. The model assumes that these profits will be reinvested in the business in the form of fixed capital.
6. An advanced manufacturing sector means an economy has moved from a traditional to an industrialized one.
7. The land is fixed supply
8. Agricultural activity is a characterized by constant return to scale with labour as a variable factor .
9. It is assumed that the marginal productivity of labour becomes zero at some point.
10. The output of the industrial sector is a function of capital and labour alone.
The capitalist sector : Lewis defined this sector as “that part of the economy which uses reproducible capital and pays capitalists thereof”. The use of capital is controlled by the capitalists, who hire the services of labour. It can be private or public.
The subsistence sector: This sector was defined by him as “that part of the economy which is not using reproducible capital”. It can also be adjusted as the indigenous traditional sector or the “self employed sector”. The per head output is comparatively lower in this sector and this is because it is not fructified with capital.
The relationship between the two sectors is that when the capitalist sector expands, it extracts or draws labour from the subsistence sector. This causes the output per head of labourers who move from the subsistence sector to the capitalist sector to increase.
Criticism
A major criticism of the Lewis model concerns his notion of “surplus labour”. It was interpreted often as zero marginal productivity of agricultural labour. According to Lewis, surplus labour was thought of in terms of human beings rather than man-hours, thereby defining his surplus labour happening at the given wage rate. This idea was consistent with what Fei-Ranis emphasize; that there might be a low or even a zero MPL, when marginal product does not exceed the agriculture wage . There is surplus labour except in certain times of the year. He further rejects the possibility of increased savings occurring due to the population becoming more careful with their income.
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.Phase 3 begins from the point of commercialization. Fei- Ranis model of economic development of labour surplus establishes the development process from the take off to self sustained growth through interaction in both sectors of an underdeveloped economy.
Harris- Todaro Model of Migration
Development economics is known for dualistic than the single model of economic growth. Considering the agricultural sector alongside the manufacturing sector. It is well known that for an economy to grow and develop, it must shift her labour forces from traditional or subsistence sector to the modern or commercial sector of the economy. That means, labour has to be moved from the sector of the economy where production is low to the sector where production is high in order to increase production and then create more goods and services which would ensure increased economic growth. The single model brings about the dualistic model, some of the theories of economic growth include the Harrod-Domar (Harrod 1939 and 1948, Domar 1946) brought up by two economists Sir Roy Harrod of England and Professor Evesey Domar of the United States. They were of the view that a country’s level of output was being influenced or determined directly by the net-savings ratio (s) and inversely by the capital-output ratio (c). That is, ∆Y/Y = s/c.
Another model is the Lewis model of (1954). The idea of surplus labour, subsistence wages in the development of a dualistic economy in Lewis (1954) was later diagrammatically formalized by Ranis and Fei (1961). These two also showed how agricultural surplus could lead to the growth of industries.
The modern thinking brought about another model propounded Michael Todaro (1969) and John Harris (Harris and Todaro 1970). The Harris-Todaro Model is an equilibrium version of the Todaro Migration Model which forecasts and explains the rural-urban migration as an economically rational process despite the high urban unemployment. The migrants calculate the value of the urban expected income or its equivalent and move of it is more than the average rural income.
The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector.
With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.
Conclusion
* Urban wages increase in the urban sector , increasing the expected urban income.
* Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector , decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision. Harris and Todaro subsequently formulated a model to explain rural-urban economic preferences to migrate. The distinctive concept in the model is that the rate of migration flow from rural (agricultural) areas to urban (industrial) areas is determined by the difference between expected urban wages and rural wages.
Name:Ugwu Sandra Ogechukwu
Reg no: 2017/241433
Email: sandra.ugwu.241433@unn.edu.ng
Answer:
LEWIS-FEI-RANIS MODEL
(SURPLUS LABOUR THEORY)
INTRODUCTIONS
Lewis theory was one of the early theoretical models of development that focused on the structural transformation of subsistence economy. The theory was formulated by Nobel laureate W. Arthur Lewis in the 1950s and later modified, formalized and extended by John Fei and Gustav Ranis. It became the general theory of development process in surplus labour developing nations during the 1960s and early 1970s.
ARGUMENTS OF THE MODEL
In the Lewis model, the underdeveloped economy consists of two sectors; the traditional and the industrial sector. The traditional sector which is the overpopulated rural subsistence sector is characterized by zero marginal productivity; a situation that permits Lewis to classify this as ‘surplus labour’ in the sense that it can be withdrawn from the traditional agricultural sector without any loss of output. On the other hand, the industrial sector is characterized by high productivity which results from gradual transfer of labour from the subsistence (traditional) sector to the modern urban industrialized sector.
The primary focus of the Lewis model is on both the process of labour transfer and the growth of output and employment in the modern (industrial) sector which is brought about by output expansion in the sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern (industrial) sector. Such investment is made possible by the excess of modern sector profits over wages on the assumption that capitalist reinvest all their profits. Lewis also assumed that the level of wages in the industrial sector was constant and determined as a given premium over a fixed average subsistence level of wages in the traditional agricultural sector. At the constant urban wage, the supply curve of rural labour to modern sector labour supply is considered perfectly elastic.
APPLICATION OF MODEL TO THE NIGERIAN ECONOMY
Although the Lewis two-sector development model is simple and roughly reflects the historical experience of economic growth in the West, four of its key assumptions do not fit the institutional and economic realities of Nigeria.
First, the model implicitly assumes that the rate of labour transfer and employment creation in the modern sector is proportional to the rate of modern sector capital accumulation. The faster the rate of capital accumulation the higher the growth rates of the modern sector and the faster the rate of new job creation. This is not always the case in Nigeria as capitalists in most cases choose to invest in more sophisticated laboursaving capital equipment which makes production capital intensive and hence less demand for labour in the modern sector (which means reduction in job creation). It is also worthy to note that the capitalist profit is not always reinvested as we can consider a scenario of ‘capital flight’. Capital flight is a situation where the profits made by capitalists are sent abroad (either saved or invested abroad) hence leading to zero growth of capital in the local economy. It has become a norm for Nigerian capitalist to invest or save profit abroad as they assume high security of investment and more returns (profit) on investment.
The second questionable assumption of the Lewis model is the notion that surplus labour exists in rural areas while there is full employment in the urban areas. This assumption however gives room to zero marginal productivity assumption in the rural area. This is not valid as contemporary research indicates that there is little surplus labour in the rural areas in Nigeria; which is to say that marginal product of labour is not zero but rather subject to diminishing marginal returns. Hence, surplus labour can be said to be little since addition of labour in the rural area to a certain extent can lead to zero or negative productivity.
The third controversial assumption is the notion of a competitive modern sector labour market that guarantees the continued existence of constant real urban wages up to the point where the supply of rural surplus labour is exhausted. This assumption has been nullified in Nigeria as it has been observed that wages tend to increase overtime due to factors like union bargaining power, civil service wage scales and multinational corporations hiring practices.
A final concern with the Lewis model is its assumption of diminishing returns in the modern industrial sector. Yet there is much evidence that increasing returns prevail in that sector, posing special problems for development policymaking.
In summary, when we take into account the laboursaving bias of most modern technological transfer, the existence of substantial capital flight, the widespread nonexistence of rural surplus labour, the growing prevalence of urban surplus labour, and the tendency for modern sector wages to rise rapidly even where substantial open unemployment exist; it could be concluded that the Lewis model is not applicable in Nigeria.
HARRIS-TODARO MODEL
(THEORY OF MIGRATION)
INTRODUCTION
Harris-Todaro model also known as the theory of migration is an economic model developed in 1970 by John R.Harris and Michael Todaro. It is an economic model used in development economics to explain some of the issues concerning rural urban migration.
ARGUMENTS OF THE MODEL
The main argument of the model is that migration decision is based on the difference between expected income in the urban areas and rural wages (rather than just differences in wages). When the difference between expected income in urban areas and rural wage is high, there is a higher rate of migration and otherwise when low. Hence, equilibrium is attained in the model when the expected wage in the urban area is equal to the marginal product of labour in the rural area.
The model also argues that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labour market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income.
However, even though this migration creates unemployment and induces informal sector growth, this behaviour is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
APPLICATION OF THE MODEL IN THE NIGERIAN ECONOMY
The Harris-Todaro model can be said to be a more realistic and applicable model of growth in the Nigerian economy. Over the years there has been a high rate of migration from rural to urban areas due to information on expected income. Thus, labour tends to leave the rural (agricultural sector) to the urban areas in search of ‘greener pasture’. ‘Greener pasture’ here means that expected income in urban areas should be higher than present rural wage.
This migration has led to unemployment in the urban area but can still be considered rational since the individual expects to earn more than what he earns in the rural area. However, there is always a fall in expectation as there is a pressure on urban areas to accommodate and provide jobs for more than its capacity.
Hence, the point of equilibrium is important in Nigeria. The point of equilibrium is attained where the expected rural income equals the expected urban income. To attain this point the Nigerian government should not only concentrate on the development of urban areas but rather should ensure an equitable development between the two sectors (rural and urban). An equitable development will ensure that expected rural wage will be equal to expected urban income.
Okonkwo Faith Munachi
2017/242422
LEWIS-FEI-RANIS MODEL
INTRODUCTION
The Fei-Ranis model of economic growth is a dualism model in developmental economics that has been developed by John C.H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogeneous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy and the modern sector that is, the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy wherein lies the crux of development. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labour from the agricultural sector to the industrial one. Showing that underdeveloped countries do not suffer from constraints of labour supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials.
The two economists John Fei and Gustav Ranis presented their dual economy model. There was a flaw in Lewis model that it did not pay enough attention to the importance of agricultural sector in promoting industrial growth but Fei-Ranis model of dual economy explains how the increase in productivity of agricultural sector would become helpful in promoting industrial sector. In this respect, it presents three stages whereby an underdeveloped country moves from stagnation to self-sustained economic growth.
BASIC TENSES OF THE MODEL
This theory is concerned with a poor economy which has the following properties: (i) There is an abundance of labour.
(ii) The population growth rate is very high which result in mass unemployment in the economy.
(iii) The major share of population is engaged in agriculture but agriculture sector is stagnant. Hence, the marginal productivity of labour is zero and negative in agricultural sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy.
Thus, the model suggests that:
Economic development would be taking place if agricultural labourers are transferred to the industrial sector where their productivity will increase.
As was told earlier that there is a dual economy where there is a stagnant agriculture sector and dynamic industrial sector. The situation where MPL=0, that is, labour can be transferred to industrial sector without any loss of agricultural output. The real wages in industrial sector remains fixed and it is equal to the initial level of real income in agricultural sector. Such wages are given the name of institutional wages.
STAGES OF THE MODEL
The model has three stages:
The first stage of Fei-Ranis model is very similar to Lewis. Disguised agricultural unemployment comes into being because supply of labour is perfectly elastic and MPL=0. Therefore, such disguised unemployed are to be transferred to industrial sector at the constant institutional wage.
In the second stage of Fei-Ranis model, agricultural workers add to agricultural output but they produce less than the institutional wage they get. In other words, in the second stage the labour surplus exists where APL > MPL, but it is not equal to institutional wages. Accordingly, such disguised unemployed also have to be transferred to industrial sector. If the migration to industrial sector continues a situation is eventually reached where the farm workers produce output equal to institutional wages. This would mean that productivity in agricultural sector has gone up. With this the third stage starts.
In the third stage of Fei-Ranis model, the take-off situation comes to an end and there begins the era of self-sustained growth where the farm workers produce more than the institutional wage they get. In this stage of economic growth the surplus labour comes to an end and the agricultural sector becomes a commercialized sector in the absence of disguised agricultural unemployment.
CRITICISMS
The Fei-Ranis model is considered to be an improvement over Lewis. This model presents a balanced growth of both sectors of the economy, the most notable thing for the growth of underdeveloped countries. Despite this fact, this model has following shortcomings:
Marginal Productivity of Labour in Phase 1: The Fei-Ranis model is of the view that MPL=0 in the first phase of growth and the transfer of labour from agriculture will not reduce output in the agricultural sector in phase 1. Output in phase 1 of Fei-Ranis model will not remain constant and may fall under different systems of land tenure.
Marginal Productivity of Labour is not Zero: Professor Jorgenson who has also presented a model of ‘dual economy’ has objected Fei-Ranis model’s contention of zero MPL in phase 1. He says whether MPL will be zero is an empirical issue. During the seasons of sowing and harvesting the MPL>0.
Open Economy: Fei-Ranis model ignore the role of foreign trade as it assumed a closed economy model. In the second phase when agricultural product decreases the terms of trade goes against the industrial sector. This would occur in the presence of closed economy but if the model is made open such will not happen as a good could be imported in the presence of then-scarcity.
Supply of Land in Long-run: Fei-Ranis model assumed that in the process of economic development the supply of land remained fixed but it is not true. The supply of land can be increased in the long-run.
Commercialization of Agriculture and Inflation: According to the Fei-Ranis model when third phase starts the agricultural sector becomes commercialized but it is criticized by saying that this phase does not start so easily. The shifting of labour to industrial sector will create labour shortage in agricultural sector. This will create shortage of food leading to increase in their prices. In this way the inflation will generate and may obstruct the process of development.
Low Productivity in Agricultural sector: According to Jorgensen it has been observed that there has been a very slow rise in the productivity of agricultural sector. Consequently, the surplus will hardly be created in agricultural sector. Accordingly, the agricultural sector will not contribute to development. Thus, the growth requires that the surplus must be generated and should persist.
CONCLUSION
In recent times, there has been increasing pressure to increase investment in agriculture due to the need to attain the Millennium Development Goals among other things. The importance of agriculture development in ensuring poverty reduction and the economic growth hinges on the fact that over 70 percent of the population is employed in the agriculture sector. The sector’s role of food production, provision of resources for other sectors, creation of viable market and domestic savings gives credence to its importance in economic growth. Also, Nigeria’s natural endowments in agricultural production factors – extensive arable land, water, human resources, and capital highlight the potential of agriculture in economic transformation. In view of the existing controversy among development economists on the role of agriculture as a precondition for industrialization and economic growth. This model provides that agriculture can contribute significantly to GDP growth in Nigeria. The trend of contributions observed also highlights the responsive nature, the buffer role and the resilient nature of agriculture; we consider these as nature of agriculture that could be leveraged upon. Finally we find that economic growth does not impact on agriculture growth. This supports the notion that lack of investment in the sector may be responsible for the slow growth experienced in Nigerian agriculture. We therefore reaffirm that agriculture is an engine of economic growth in Nigeria and efforts should be made to add value to the sector through increased investment. We also recommend that the linkages between agriculture and other sectors be strengthened to increase the effect of agriculture growth on growth across the sectors. This can be achieved through increased productivity and the development of agriculture value chain.
HARRIS-TODARO MODEL OF MIGRATION
INTRODUCTION AND OVERVIEW OF THE THEORY
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
In the model, equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector.
Harris and Todaro studied the migration of workers in a two-sector economic system, namely:
Rural sector and
Urban sector.
The differences between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods.
ASSUMPTIONS
The model assumes that unemployment is non-existent in the rural agricultural sector.
It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity.
In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector.
The Harris-Todaro model of the rural-urban migration process is revisited under an agent-based approach. The migration of the workers is interpreted as a process of social learning by imitation, formalized by a computational model. By simulating this model, we observe a transitional dynamics with continuous growth of the urban fraction of overall population toward an equilibrium. Such an equilibrium is characterized by stabilization of rural-urban expected wages differential (generalized Harris-Todaro equilibrium condition), urban concentration and urban unemployment. These classic results obtained originally by Harris and Todaro are emergent properties of our model.
CONCLUSION
The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migration decision. In other words, this posits that rural-urban migration will occur while the urban expected wage exceeds the rural wage.
From this crucial assumption, as stated by Harris-Todaro, it is deduced that the migratory dynamics leads the economic system toward equilibrium with urban concentration and high urban unemployment.
Therefore, migration from rural areas to urban areas will increase if:
Urban wages increase in the urban sector, increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector, decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
The Harris-Domar Model of migration is applicable in Nigeria. Migration and remittances have a strong impact on the socio-economic development of Nigeria, it has uplifted the socio-economic level of the people as several members have benefitted from higher wages in urban areas.
NAME: UGWU SANDRA OGECHUKWU
REG NO: 2017/241433
EMAIL: sandra.ugwu.241433@unn.edu.ng
ANSWER:LEWIS-FEI-RANIS MODEL
(SURPLUS LABOUR THEORY)
INTRODUCTIONS
Lewis theory was one of the early theoretical models of development that focused on the structural transformation of subsistence economy. The theory was formulated by Nobel laureate W. Arthur Lewis in the 1950s and later modified, formalized and extended by John Fei and Gustav Ranis. It became the general theory of development process in surplus labour developing nations during the 1960s and early 1970s.
ARGUMENTS OF THE MODEL
In the Lewis model, the underdeveloped economy consists of two sectors; the traditional and the industrial sector. The traditional sector which is the overpopulated rural subsistence sector is characterized by zero marginal productivity; a situation that permits Lewis to classify this as ‘surplus labour’ in the sense that it can be withdrawn from the traditional agricultural sector without any loss of output. On the other hand, the industrial sector is characterized by high productivity which results from gradual transfer of labour from the subsistence (traditional) sector to the modern urban industrialized sector.
The primary focus of the Lewis model is on both the process of labour transfer and the growth of output and employment in the modern (industrial) sector which is brought about by output expansion in the sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern (industrial) sector. Such investment is made possible by the excess of modern sector profits over wages on the assumption that capitalist reinvest all their profits. Lewis also assumed that the level of wages in the industrial sector was constant and determined as a given premium over a fixed average subsistence level of wages in the traditional agricultural sector. At the constant urban wage, the supply curve of rural labour to modern sector labour supply is considered perfectly elastic.
APPLICATION OF MODEL TO THE NIGERIAN ECONOMY
Although the Lewis two-sector development model is simple and roughly reflects the historical experience of economic growth in the West, four of its key assumptions do not fit the institutional and economic realities of Nigeria.
First, the model implicitly assumes that the rate of labour transfer and employment creation in the modern sector is proportional to the rate of modern sector capital accumulation. The faster the rate of capital accumulation the higher the growth rates of the modern sector and the faster the rate of new job creation. This is not always the case in Nigeria as capitalists in most cases choose to invest in more sophisticated laboursaving capital equipment which makes production capital intensive and hence less demand for labour in the modern sector (which means reduction in job creation). It is also worthy to note that the capitalist profit is not always reinvested as we can consider a scenario of ‘capital flight’. Capital flight is a situation where the profits made by capitalists are sent abroad (either saved or invested abroad) hence leading to zero growth of capital in the local economy. It has become a norm for Nigerian capitalist to invest or save profit abroad as they assume high security of investment and more returns (profit) on investment.
The second questionable assumption of the Lewis model is the notion that surplus labour exists in rural areas while there is full employment in the urban areas. This assumption however gives room to zero marginal productivity assumption in the rural area. This is not valid as contemporary research indicates that there is little surplus labour in the rural areas in Nigeria; which is to say that marginal product of labour is not zero but rather subject to diminishing marginal returns. Hence, surplus labour can be said to be little since addition of labour in the rural area to a certain extent can lead to zero or negative productivity.
The third controversial assumption is the notion of a competitive modern sector labour market that guarantees the continued existence of constant real urban wages up to the point where the supply of rural surplus labour is exhausted. This assumption has been nullified in Nigeria as it has been observed that wages tend to increase overtime due to factors like union bargaining power, civil service wage scales and multinational corporations hiring practices.
A final concern with the Lewis model is its assumption of diminishing returns in the modern industrial sector. Yet there is much evidence that increasing returns prevail in that sector, posing special problems for development policymaking.
In summary, when we take into account the laboursaving bias of most modern technological transfer, the existence of substantial capital flight, the widespread nonexistence of rural surplus labour, the growing prevalence of urban surplus labour, and the tendency for modern sector wages to rise rapidly even where substantial open unemployment exist; it could be concluded that the Lewis model is not applicable in Nigeria.
HARRIS-TODARO MODEL
(THEORY OF MIGRATION)
INTRODUCTION
Harris-Todaro model also known as the theory of migration is an economic model developed in 1970 by John R.Harris and Michael Todaro. It is an economic model used in development economics to explain some of the issues concerning rural urban migration.
ARGUMENTS OF THE MODEL
The main argument of the model is that migration decision is based on the difference between expected income in the urban areas and rural wages (rather than just differences in wages). When the difference between expected income in urban areas and rural wage is high, there is a higher rate of migration and otherwise when low. Hence, equilibrium is attained in the model when the expected wage in the urban area is equal to the marginal product of labour in the rural area.
The model also argues that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labour market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income.
However, even though this migration creates unemployment and induces informal sector growth, this behaviour is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
APPLICATION OF THE MODEL IN THE NIGERIAN ECONOMY
The Harris-Todaro model can be said to be a more realistic and applicable model of growth in the Nigerian economy. Over the years there has been a high rate of migration from rural to urban areas due to information on expected income. Thus, labour tends to leave the rural (agricultural sector) to the urban areas in search of ‘greener pasture’. ‘Greener pasture’ here means that expected income in urban areas should be higher than present rural wage.
This migration has led to unemployment in the urban area but can still be considered rational since the individual expects to earn more than what he earns in the rural area. However, there is always a fall in expectation as there is a pressure on urban areas to accommodate and provide jobs for more than its capacity.
Hence, the point of equilibrium is important in Nigeria. The point of equilibrium is attained where the expected rural income equals the expected urban income. To attain this point the Nigerian government should not only concentrate on the development of urban areas but rather should ensure an equitable development between the two sectors (rural and urban). An equitable development will ensure that expected rural wage will be equal to expected urban income.
LEWIS-RANIS-FEI MODEL
The central idea behind the Lewis model is fairly simple. Lewis divided labour force into two differentiated groups – “subsistence sector” and “capitalist sector” where the former is assumed to contain unlimited supply and consequently, a pool of surplus labour[1] that sets labour-supply conditions for the latter. The concept of a dual economy is heavily criticised. As Leeson (1982) pointed out, “dual economy” models are “held to imply a false picture of the nature of the historical process of change in underdeveloped countries”.
Subsequently, Ranis’ and Fei’s extension to Lewis’ model can be analysed. They observed the model by reading it from left to right and assessed the changes in the output and wage as more and more people moved from agriculture to the industry. A new concept was added – namely, disguised unemployment, which appears in the traditional subsistence sector. The marginal product of labour, which is observed as the slope of the production function, in agricultural sector is lower than in industry . Under competitive assumptions, the real wage rate would fall to zero, but due to the presence of institutional or non-market forces, the institutional wage is sustained. Therefore, there are gains to be had by switching resources away to the industrial sector. Nevertheless, it is generally not likely to happen because the market, left on its own, does not change. If the industrial sector does pay according to marginal product, then, as noted by Ray (1998), there would be efficiency gains available as long as the marginal product of the agricultural labour is less than the wage, whether it is zero or not. By decreasing the labour force in agriculture by a small amount (whilst still remaining in the surplus labour area), the total wage bill in agriculture falls along the diagonal straight line in Figure 1.3 , provided that the wage in agriculture does not rise. Since output does not fall, the reduction in the total wage bill gives an economy an agricultural surplus. Only at point C will this process come to an end because there is no more disguised unemployment – it only appears at points at which the marginal product of labour is less than the institutional wage. Hence, condition for the existence of disguised unemployment is:
W > MPL
Ranis and Fei subsequently claimed that the average wage bill in agricultural sector is no longer measured as a straight line. At point C, the slope of the production function is parallel to the wage bill line, yielding that the disguised unemployment is no longer observed. Furthermore, beyond point C (when the disguisedly unemployed have been absorbed) the marginal product of labour exceeds the traditionally given wage rate (Ranis and Fei, 1961). The wage in agriculture begins to rise, because it becomes profitable to bid for labour. As a result, wage bill falls more slowly.This brings me to the central point of the paper capturing the “turning points” in the Lewis-Ranis-Fei model. Ranis and Fei divided the model into three phases[3]. The phase where the supply wage of labour tilts upwards is referred to as the “first turning point”. At this point, redundant labour disappears altogether (Jorgenson, 1967). Employment in the industry would have risen as far as point z’ had the turning point not occurred. However, since it did and since the wage rate began to rise as demand was pushed upwards, employment can only rise up to z where demand meets supply.
According to Chen (2005), Lewis-Ranis-Fei model should be considered a classical model because of the usage of industrial wage. However, Jorgenson claims that once the commercialization point is reached, instead of the classical approach, the neo-classical theory of growth for an advanced economy is to be observed .
Berry came to a significant conclusion of the Lewis-Ranis-Fei model. In effect, a shift in the terms of trade has a negative effect on the industry, forcing capitalist employers to pay a higher wage and thus generating less profits and less investment. However, there is a role of interdependence between the two sectors (Ranis and Fei). In fact, raising the price of goods in agriculture would give an agricultural sector an incentive to raise the output, thus encouraging investments in agriculture, leading to a decline in the terms of trade, which in turn lowers wages, increases profits and generates more investment in the industry. Consequently, there will be a balanced expansion in both, agriculture and industry. In other words, what Ranis and Fei observed was that the allocation of investment funds must be such that as to “continuously sustain investment incentives in both sectors of the economy”. The terms of trade should not deteriorate substantially against either sector. Consequently, the demand curve shifts up and there will be a new intersection point which lies on the balanced-growth path and this new equilibrium allows the economy to enjoy even further profits. After the first turning point, there will be a small proportion of profit that will be forgone because the first turning point occurs, yet the overall amount of profit increases. Nevertheless, it becomes clear that it is reasonable to have a policy to invest in both sectors as the economy will then maintain the balanced growth path.
To conclude, the existence of surplus labour in agriculture allows the industry to continue to pay the institutional wage and therefore enjoy further profits and continued investment. At the same time, as more and more people are moving away from agriculture, there will be some amount of agricultural surplus that can be used up to fuel further development. This process continues until the surplus labour is absorbed. Hence, saving and investment are a crucial part in the Lewis-Ranis-Fei to support economic development.
HARRIS-TODARO MODEL OF MIGRATION
Migration: This can be seen as the movement of persons away from their usual residence, either across an international border or within a state.
The HarrisTodaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration
The Harris-Todaro model was created to explain how internal migration occurs from rural to urban sectors through the difference in the expected wage. Pritchett points out that migration can benefit developing countries and their population much more significantly than any aid attempts. Industrial world transfer is around $70bn a year in aid, but by simply allowing a 3% rise in their labour force (taken up by migrants), the gains would be $300 billion: 4.5x greater. Fundamentally it was used to explain migration within an economy, but we attempt to expand the model to an international level. The model begins by accepting that the assumption of full employment in urban labour markets isnt particularly appropriate for developing countries which are beset by a chronic (under/) unemployment problem whereby many uneducated and unskilled rural migrants cannot find a job in the formal sector so become unemployed or join the informal sector. Thus in deciding whether to move to the city or stay at home on the farm, an individual has to weigh up the probability and risks of being unemployed for a considerable period of time against the positive urban-rural real income differential.
ASSUMPTIONS OF HARRIS-TODARO MODEL
1) The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity.
2)The most fundamental /main assumption in this model is that migration is an economic phenomenon in response to urban-rural differences in the expected income. This assumes that people only move for monetary gains, when in reality there are many other factors involved in this decision. For example, a lot of migration occurs due to humanitarian reasons as a result of conflict or disease for example, the huge influx of migrants from the Middle East to Europe in the summer of 2015 is unlikely to be as a result of economic motives, but more for a desire of safety and a better standard of living.
3)Moreover, the model assumes that costs are given in a monetary sense, whereas in reality it might be quite difficult to put a value on leaving your family in a distant country to go and work abroad. Similarly, the model assumes that individuals can rationally calculate the economic gains from migration, but by moving individuals would be imposing a cost upon themselves, and would have to include the value of living abroad (i.e. even though wages are higher they are eaten up by housing, food, clothing and other living costs) which may be quite difficult to calculate.
Lewis Fei Ranis Surplus Labour Theory
Lewis model is the best known early theoretical models of development that focused on the structural transformation of a primarily subsistence economy.
In the Lewis model, the underdeveloped economy consists of two sectors, a traditional, overpopulated rural subsistence sector characterized by zero marginal labour productivity ie a situation that permits Lewis to classify this as surplus labor in the sense that it can be withdrawn from the traditional agricultural sector without any loss of output and a high productivity modern urban industrial sector into which labor from the subsistence sector is gradually transferred.
The primary focus of the model is on both the process of labor transfer and the growth of output and employment in the modern sector. The modern sector could include modern agriculture, but we will call the sector industrial as a shorthand. Both labor transfer and modern sector employment growth are brought about by output expansion in that sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector. Such investment is made possible by the excess of modern sector profit over wages on the assumption that capitalists reinvest all their profits. Finally Lewis assumed that the level of wages in the urban industrial sector was constant, determined as a given premium over a fixed average subsistence level of wages in the traditional agricultural sector. At the constant urban wage, the supply curve of rural labor to the modern sector is considered to be perfectly elastic.
Harris Todaro theory of migration
Harris todaro model studied the migration of workers in a two sector economic aspect namely the rural and urban sector.The different between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods while the urban sector is specialized in the production of manufactured goods.
The rural sector has a choice of either using all available labour to produce a single agricultural good, some of which is exported to the urban sector, or using only parts of its labour to produce this goods while exporting the remaining labour to the urban sector in return for wages paid in the form of manufactured good. We are thus assuming that the typical migrant retains his ties to the rural sector and therefore the income he earns as an urban worker will be considered from the standpoint of sectoral welfare, as acquring to the rural sector. However this assumption is not that necessary for our demonstration of the rationality of migration in the face of significant urban unemployment.
The crucial assumption to be made in our model is that rural urban migration will continue as long as an expected urban real income at the margin exceeds real agricultural products ie prospective rural migrant behave as maximizers of expected utility. For analytical purpose we shall assume that the total urban labour force consists of a permanent urban protectariat without ties to the rural sector plus the available supply of rural migrants. We therefore assume that a periodic rabdom job selection process exist whenever the number of available jobs is exceeded by the numbers of job seekers . Consequently the expected urban wage will be defined as equal to the fixed minimum wage expressed in terms of manufactured goods times the proportion of the urban labour force actually employed
Finally we assume perfectly competitive behaviour on the part of producers in both sectors with the further simplifying assumptions that the price of the agricultural good defined in terms of manufactured good is determined directly by the relative quantities of the two goods produced.
Name: Doro Yahaya Adamu
Reg No: 2017/249490
Department: Economics
Eco 361 Assignment
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
Introductions:
One of the best known early theoretical models of development that focussed on the structural transformation of a primarily subsistence economy was that formulated by Nobel laureate W.Arthur Lewis in the mid 1950s and later modified, formalized, and extended by John Fei and Gustav Ranis.The Lewis two-sector model became the general theory of development process in surplus- labour developing nation during most of the 1960s and early 1970s, and it is sometimes still applied particularly to study the recent growth experience in China and labour market in other developing countries.
Core Discussion
In the Lewis model, the underdeveloped economy consist of two sector;
1.a traditional, overpopulated rural subsistence sector characterized by zero marginal labour productivity- situation that permit Lewis to classify this as surplus labour in the sense that it can be withdrawn from the traditional agricultural sector without any loss of output and
2.high – productivity modern urban industrial sector into which labour from the subsistence sector gradually transferred.
Assumption of Lewis-Fei-Ranis model
1.it is a two sector model
2.supply of labour is perfectly elastic
3.surplus labour in rural sector (cheap labour)
4.marginal productivity of labour si zero
5.saving is due only to capitalist
6.there is negative aggregate demand
7.Rise in profits of capital called capital surplus
8.capital formation may increased with increase in credit.
The primary focus of the model is on both the process of labour transfer and growth of output and employment in the modern sector. (The modern sector could include modern agriculture, but we will call the sector ” industrial” as a shorthand). Both labour transfer and modern sector economy employment growth are brought about by output expansion in the sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the mode n sector. such investment is made possible by the excess of modern- sector profits over wages on the assumption that capitalist reinvest all their profits. Finally Lewis assumed that, the level of wages in the urban industrial sector was constant determined as a given premium over a fixed average subsistence level of wages in the traditional agricultural sector. At the constant uriban wage, the supply curve of rural labour to the modern sector is considered to be perfectly elastic.
This process of modern- sector self- sustaining growth and employment expansion is assumed to continue until all s surplus rural labour is absorbed in the new industrial sector . Therefore, additional workers can be withdrawn from the agricultural sector only at a high cost of lost food production because , the declining labour – to – land ratio means that the marginal product of rural labour is no longer zero. This is known as the ” Lewis turning point”. Thus the labour supply curve becomes positively sloped as modern – sector wages and employment continue to grow. The structural transformation of the economy will have taken place with the balance of economic activity shifted from traditional rural agriculture to modern urban industry.
CRITICISM OF LEWIS MODEL
Although the Lewis two- sector development model is simple and roughly reflects the
historical experience of economic growth in the west, four of its key assumption do not fit the institutional and economic realities of most contemporary developing countries. First, the model implicitly assumes that the rate of labour transfer and employment creation in the modern sector is proportional to the rate of modern sector capital accumulation. The faster the rate of capital accumulation the higher the growth rate of the modern sector and the faster the rate of new job creation. But what if capitalist profits are reinvested in more sophisticated labour saving capital equipment rather than just duplicating the existing capital as is implicitly assumed in the Lewis model? (we are, of course here accepting the debatable assumption that capitalist profits are in fact reinvested in the local economy and not sent abroad as a form of “capital flight” to be added to the deposit of western banks). In the figure below, the demand curve D2 (Km2) has a greater negative slope than D1 (Km1) to reflect the fact that addition to the capital stock embody labour saving technical progress that is Km2 technology requires much less labour per unit of output than Km1 We see that even though total output has grown substantially ( i.e., OD2EL2 is significantly greater than OD1EL1), total wages (OWmEL1) and employment (L1) remain unchanged. All of the extra output accrues to capitalist in the form of profit. The figure above, provides an illustration of what some might call “antidevelopmental” economic growth – all the extra income and output growth are distributed to the few owners of capital, while income and employment level for the masses of workers remain largely unchanged. Although total GDP would rise, there would be little or no improvement in aggregate social welfare measured, say in terms of more widely distributed gains in income and employment.
The second questionable assumption of the Lewis model is the notion that surplus labour exists in rural areas while there is full employment in the urban areas. Most contemporary research indicates that there is little surplus labour in rural location. but by and large development, economist today agree that Lewis assumption of surplus labour is generally nor valid.
The third dubious assumption is
is the notion of a competitive modern sector labour market thatguarantees the continued existence of constanas real urban wages up to the point where the supply of rural surplus labor is exhausted. prior to the 1980s, a striking feature of urban labour markets and wages determination in almost all developing countries was the tendency for these wages to rise substantially over time both in absolute terms and relative to average rural income, even in the presence of rising levels of open modern sector unemployment and low or zero marginal productivity in agriculture.
A final concern with Lewis model is its assumption of diminishing returns in the modern industrial sector, yet there is much evidence that increasing returns prevail in that sector, posing special problems the development policy making.
Conclusions
However, when we take into account the labour saving bias of most modern technological transfer, the existence of substantial capital flight, the wide spread nonexistence of rural surplus labour, the growing prevalence of urban surplus labour, and the tendency for modern- sector wages to rise rapidly even where substantial open unemployment exists, we must acknowledge that the Lewis two sector model though valuable as an every conceptual portrayal of the development process of sectoral interaction and structural change and a description of some historical experience including some recent ones such as China – requires considerable modification in assumptions and analysis to fit the reality of most contemporary developing nation. does.
HARRIS-TODARO MODEL
Harris-Todaro model, named after John R. Harris and Michael Todaro, s an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural- urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas, rather than just wage differentials. This implies that rural – urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income. In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that ruralbagricultural production and the subsequent labour market is perfectly competitive. As a result, the agricultural rural wages is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero, since the expected rural income equals the expected urban income. However,in this equilibrium there will be positive unemployment in the urban sector. The model explain internal migration as the regional income gap has been proved to be a primary drive of rural- urban migration, while urban unemployment is local government main concern in many cities.
The formal statement of the equilibrium condition of the Harris-Todaro model is as follows;
• Let Wr be the wage rate (marginal productivity of labour) in the rural agricultural sector.
• Let Le be the number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
• Let Lus be the total number of job seekers, employed and unemployed in the urban sector.
• Let Wu be the wage rate in the urban sector, which could possibly be set by the government with a minimum of wage law.
With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be enable to find a job. As a result, in equilibrium the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.
CONCLUSIONS
Therefore, migration from rural areas to urban areas will increase if:
• urban wages (Wu) increase in the urban sector (Le) increasing the expected urban income.
• Agricultural productivity decreases,lowering marginal productivity and wages i the agricultural sector (Wr), decreasing the expected rural income.
Name : Odu David Oluchukwu
Reg Num:2017/241432
Dept: Economics
TOPIC: HARRIS -TODARO MODEL OF MIGRATION .
The Harris -Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970s and used in development economics and welfare economics to explain some of the issues concerning rural -urban migration.
The Harris-Todaro (H-T) model is based on the experiences of tropical Africa facing the problems of rural – urban migration and urban unemployment. The labour migration is due to rural -urban differences in average expected wages. The minimum urban wage is substantially higher than the rural wage. So, if more employment opportunities are created in the urban sector at the minimum wage, the expected wage will tend to rise, and as a result, the rural – urban migration will rise too. When this happens, there will be a rise in unemployment in the urban sector.
And to remove this unemployment, Harris-Todaro suggested a subsidized minimum wage through a lump sum tax.
The fundamental contribution of Harris and Todaro’s rural – urban two sector migration model was to build a model that fit the stylized facts of the labour market on the lines of the theory, developing countries adopted program on integrated rural development which encouraged an increase in the rural traditional sector wage. The theory proves that the higher the unemployment rate, the lower is the probability of new migrants from the countryside actively seeking formal sector employment who are unable to find it.
The significant findings of the theory are:
First, if the expected urban wage equals rural income, there is no incentive to migrate.
Second, if the expected urban wage is greater than rural income, there is a great incentive to move from rural to urban area.
Third, if the expected urban wage is less than rural income, there would be an incentive to move in other direction.
Fourth, the expected urban wage depends on what type of job migrant is engaged in.
ASSUMPTIONS OF THE MODEL
The Harris – Todaro model is based on the following assumptions:
1. There are two sectors in the economy: the rural or agricultural sector (A) and the urban or manufacturing sector (M)
2. The rural sector produces x(A) units of the agricultural good and the urban sector produces x(M) units of the manufactured good. Each sector produces only one good.
3. The model operates in the short run.
4. Capital is available in fixed quantities K in two sectors
5. There are N workers in economy with N( A) and N(M) numbers employed in the rural and urban sectors respectively.
6. The rural wage equals the rural marginal product of labour and the urban wage is exogenously determined.
7. Rural- urban migration continues so long as the expected urban real income is more than the real agricultural income
8. The expected urban real income is equal to the proportion of urban labour force actually employed multiplied by the fixed minimum urban wage.
9. There is perfect competition among producers in the both sectors
10. The price of the agricultural good is determined directly by the relative quantity of the two goods produced in the both sectors.
Starting from the assumption that migration is based primarily on privately rational economic calculations despite the existence of high urban unemployment, the Todaro model postulates that migration proceeds in response to urban-rural differences in expected rather than actual earnings. The fundamental premise is that as decision-makers migrants consider the various labor-market opportunities available to them as, say, between the rural and urban sectors, choosing the one that maximizes their “expected” gains from migration. Expected gains are measured by the difference in real incomes between rural and urban work opportunities and the probability of a new migrant’s obtaining urban job.
The “thought process” of the Todaro model can be explained as follows. Suppose the average unskilled or semiskilled rural worker has a choice between being a farm laborer (or working his own land) for an annual average real income of, say, 50 units per year, and migrating to the city where a worker with his skill or educational background can obtain wage employment yielding an annual real income of, say, 100 units. The more traditional economic models of migration that place exclusive emphasis on the income differential factor as the determinant of the decision to migrate would indicate a clear choice in this situation. The worker should seek the higher-paying urban job. It is important to recognize, however, that these migration models were developed largely in the context of advanced industrial economies and, as such, implicitly assumed the existence of full or near-full employment in urban areas. In a full-employment environment the decision to migrate can in fact be predicated solely on securing the highest-paying job wherever it becomes available, other factors being held constant. Simple economic theory would then indicate that such migration should lead to a reduction in wage differentials through geographic changes in supply and demand, both in areas of out-migration (where incomes rise) and in points of in-migration (where they fall). Unfortunately, such an analysis is not very realistic in the context of the institutional and economic framework of most Third World nations. First of all, these countries are beset by a chronic and serious problem of urban surplus labor, so that many migrants cannot expect to secure high
paying urban jobs immediately upon arrival. In fact, it is much more likely that upon entering the urban labor market many migrants will either become totally unemployed or will seek casual and parttime employment in the urban traditional sector for some time. Consequently, in his decision to migrate the individual must in effect balance the probabilities and risks of being unemployed or underemployed for a considerable period of time against the positive urban-rural real-income differential. That it is possible for our hypothetical migrant to earn twice as much annual real income in an urban area as in his rural environment may be of little consequence if his actual probability of securing the higher-paying job within a year is one chance in five. In such a situation the migrant’s actual probability of being successful in securing the higher paying urban job is 20%, so that his “expected” urban income for the one-year period is in fact 20 units, not the 100 units that a migrant in a full-employment urban environment might expect to receive. Thus, with a one-period time horizon and a probability of success of 20% it would be irrational for this migrant to seek an urban job even though the differential between urban and rural earnings capacity is 100%. On the other hand, if the probability of success were, say, 60%, so that the expected urban income is 60 units, it would be entirely rational for such a migrant with his one-period time horizon to try his luck in the urban job “lottery” even though urban unemployment may be extremely high. Returning now to the more realistic situation of longer time horizons for potential migrants, especially considering that the vast majority are between the ages of 15 and 24, It is argued that the decision to migrate should be represented on the basis of a “permanent income” calculation. If the migrant anticipates a relatively low probability of finding regular wage employment in the initial period but expects this probability to increase over time as he is able to broaden his urban contacts, then it would still be rational for him to migrate even though expected urban income during the initial period or periods might be lower than expected rural income. As long as the present value of the net stream of expected urban income over the migrant’s planning horizon exceeds that of the expected rural income, the decision to migrate is economically justified.
Application :
A study of migration behavior conducted by Robert E. B. Lucas in Botswana addressed such problems in the most economically and statistically sophisticated empirical study of migration in a developing country. His econometric model consisted of four way various factors were controlled for—and statistically significant. It represents clear evidence in support of Todaro’s
original hypothesis. Moreover, Lucas estimated that at current pay differentials, the creation of one job in an urban center would draw more than one new migrant from the rural areas, thus confirming the Harris-Todaro effect. Earnings were also found to rise significantly the longer a migrant had been in an urban center, holding education and age constant. But the reason was because of increases in the rate of pay rather than in the probability of modern-sector employment. Taken together, the best-conducted studies of urbanization confirm the value of probabilistic migration models as the appropriate place to start seeking explanations of rural-to-urban migration in developing countries. But these studies underscore the need to expand these explanations of migration, considering that many people today migrate to participate in the informal rather than the formal urban sector and that workers may face a variety of risks in different settings.
Bringing it home, to our own country, the main reason behind the influx of people from different rural areas of the country to the urban city like Lagos, Abuja , Port etc, is as a result of more employment opportunities in those cuties, given the wage rate.
This, to a great extent has also contributed to a decline in the agricultural sectors. It has also led to a rise in unemployment in those cities .
LEWIS-FEI-RANIS MODEL OF SURPLUS LABOUR
The Nobel Laureate, W. Arthur Lewis in the mid 1950s presented his model of unlimited supply of labor or of surplus labor economy. By surplus labor it means that part of manpower which even if is withdrawn from the process of production there will be no fall in the amount of output
Assumptions of the Lewis Model:
Lewis model makes the following assumptions:
(i) There is a duel economy i.e., the economy is characterized by a traditional, over-populated rural subsistence sector furnished with zero MPL, and the high productivity modern urban industrial sector.
(ii) The subsistence sector does not make the use of ‘Reproducible Capital’, while the modern sector uses the produced means of capital.
(iii) The production in the advanced sector is higher than the production in traditional and backward sector.
(iv) According to Lewis, the supply of labor is perfectly elastic. In other words, the supply of labor is greater than demand for labor
The followings are the sources of unlimited supply of labor in UDCs.
(i) Because of severe increase in population more, than required number of labors are working with lands, the so called disguised unemployed.
(ii) In UDCs so many people are having temporary and part time jobs, as the shoe-shines, loaders, porters and waiters etc. There will be no fall in the production even their number are one halved.
(iii) The landlords and feudals are having an army of tenants for the sake of their influence, power and prestige. They do not make any contribution towards production, and they are prepared to work even at less than subsistence wages.
(iv) The women in UDCs do not work, but they just perform house-hold duties. Thus they also represent unemployment.
(v) The high birth rate in UDCs leads to grow unemployment.
Basic Thesis of the Lewis Model:
Lewis model is a classical type model which states that the unlimited supplies of labor can be had at the prevailing subsistence wages. The industrial and advanced modern sector can be developed on the basis of agri. to traditional sector. This can be done by transferring the labor from traditional sector and modern sector.
Lewis says that the wages in industrial sector remain constant. Consequently, the capitalists will earn ‘surplus’. Such surplus will be re-invested in the modern sector leading to absorb the labor which are migrated from subsistence sector. In this way, the surplus labor or the labor which were prey to disguised unemployment will get the employment. Thus both the labor transfer and modern sector employment growth are brought about by output expansion in that sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector. Though the wages have been assumed constant, yet Lewis says that the urban wages are at least 30% higher than average rural income to induce the workers to migrate from their home areas.
Criticism on the Lewis Model:
Although Lewis two-sector development model is simple and roughly it is in conformity with the historical growth in the West, but it has following flaws and most of its assumptions do not fit in the institutional and economic realities of UDCs.
(i) Proportionality Between Employment Creation and Capital Accumulation: Lewis model assumes that there exists a proportionality in the labor transfer and employment creation in modern sector and rate of capital accumulation in the modern sector. The faster the rate of capital accumulation, the higher the growth rate of the modern sector and faster the rate of new job creation.
But if the capitalists reinvest their profits in the labor-saving capital equipment rather increasing the labor employment (what has been assumed in Lewis model) the jobs will not be created and modern sector will not expand. This happened in case of Pakistan where during 2nd five year plan, the wages remained constant and the capitalists rather re-ploughing their surplus shifted it to the ‘Swiss Banks’. All this led to a resentment against the strategy of increasing the surpluses of capitalistic class. Now we employ a diagram where we shall show that labor demand curves do not shift uniformly outward. It is so because that increase in capital stock will embody labor saving technology.
ii) Peak Harvesting and Sowing Season: Lewis did not pay attention to the pattern of seasonality of labor demand in traditional agri. sector. According to Mehra, labor demand varies considerably and such demand is at its peak during the sowing and harvesting season. Thus during some months of the year the MPL may be above-zero. In such situation, the positive opportunity costs will involve in transferring the labor from agri. sector. As a result, the labor transfer will reduce agri. output.
(iii) Rise in Urban Wages: According to Prof. Mabro the absorption of surplus labor itself may end pre-maturely because competitors (producers) may alter wage rates and lower the share of profit. It has been shown that rural-urban migration in Egyptian economy was accompanied by increase in wage rate of 15% and a fall in profits by 12%. Moreover, the wages in industrial sector were forced up directly by unions, civil service wage scales, minimum wage laws and MNCs (multi-national corporations) hiring practices tend to negate the role of competitive forces in the modern sector labor market. Again, the wages in subsistence sector may go up indirectly through rise in productivity in this sector.
(iv) Full Impact of Growing Population: Lewis model underestimates the full impact on the poor economy of a rapidly growing population, i.e., its effects on agri. surplus, the capitalist profit share, wage rates and overall employment opportunities. Similarly, Lewis assumed that the rate of growth in manufacturing sector would be identical to that in agri. sector. But, if industrial development involves more intensive use of capital than labor, then the flow of labor from agri. to industry will simply create more unemployment.
(v) Ignoring the Balanced Growth: Lewis ignored the balanced growth between agri. sector and industrial sector. But we know that there, exists a linkage between agri. growth and industrial expansion in poor countries. If a part of profits made by capitalists is not devoted to agri. sector, the process of industrialization would be jeopardized (perhaps, due to reduced supply of raw material). Because of this flaw, Ranis-Fei model considers the balanced growth of both sectors. This will be discussed after this model.
(vi) Ignoring the Role of Leakages: Lewis has ignored the role which the leakages can play in the economy. As Lewis assumed that all of increase in profits are diverted into savings. It means that savings of producers are equal to one. But, practically it is not so. The increase in profits may accompany the increase in consumption. As in Pakistan during 2nd plan the capitalistic class diverted their increased profits to palacious houses and conspicuous consumption. In such tike situation the MPS out of profits will be less than one.
Again, it is not necessary that the capital formation will be made by the capitalistic class. The same may be done by the farmers producing cash crops. As the small farmers producing cash crops in Egypt have shown themselves to be quite capable of saving the required capital. Again, the World’s largest Coca industry in Ghana is the result of creation of small enterprise capital formation.
(vii) Process of Migration is Neither Smooth Nor Costless: Lewis assumed that the transfer of unskilled labor from agri. to industry is regarded as almost smooth and costless. But, practically it is no so as industry requires different types of labor. If this problem is removed with the help of investment in education and skill formation, the process of migration will become costlier and expensive
NAME: EZIKE MARYCYNTHIA CHIAMAKA
REG NO: 2017/242944
EMAIL: marycynthiachiamaka95@gmail.com
DEPT: ECONOMICS
LEWIS FEI RANIS MODEL OF ECONOMIC
GROWTH
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development.
ASSUMPTIONS OF THE MODEL
(1). They assume the economy has two sectors which are rural and urban sector.
(2). They assume that there is surplus labour in subsistence sector.
(3). They emphasize on the importance of saving in both sector.
(4). They are of the opinion that land has no role as a factor of production.
(5). Population growth is an exogenous phenomenon.
CRITICISM OF THE MODEL
Fei–Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ like Nigeria, efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.
(1). It has been asserted that Fei and Ranis did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed.
(2). Fei and Ranis say, “It has been argued that money is not a simple substitute for physical capital in an aggregate production function. There are reasons to believe that the relationship between money and physical capital could be complementary to one another at some stage of economic development, to the extent that credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry.” This indicates that in the process of development they neglect the role of money and prices. They fail to differ between wage labor and household labor, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
HARRIS-TODARO MODEL OF RURAL-UBARN MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
Prof. J.R. Harris and P. M. Todaro in an article “Migration, Unemployment and Development: A Two-Sector Analysis” in 1970 presented a model on rural-urban migration in underdeveloped countries. The main idea of the Harris-Todaro model is that labour migration in underdeveloped countries is due to rural-urban differences in average expected wages rather than actual wages. The migrants consider the various opportunities of employment available to them in rural and urban sectors and choose the one that maximises their expected wages from migration.
The minimum urban wage is substantially higher than the rural wage. If more employment opportunities are created in the urban sector at the minimum wage, the expected will rise and rural-urban migration will increase. Expected wages are measured by the difference in real urban income and rural agricultural income and the probability of a migrant’s getting an urban job.
In fact, a migrant compares his expected income for a given time horizon in the urban sector with his prevailing average rural income and migrates if the former is more than the latter.
Thus migration in the Harris-Todaro modal is viewed as the wage or income gap between the urban and the rural sectors. But all migrants cannot be absorbed in the urban sector at high wages. Many fail to find a job and get employment in the informal urban sector at wages which are even lower than in the rural sector. Thus they join the queue of the underemployed or disguised unemployed in the urban sector.
ASSUMPTIONS OF THE MODEL
The Harris-Todaro model is based on the following assumptions:
1. There are two sectors in the economy – the rural or agricultural sector (A) and the urban or manufacturing sector (M).
2. The model operates in the short run.
3. The marginal production of labour in agriculture (MPLA) and of industry (MPLM) are determined by their respective technologies.
4. Capital is available in fixed quantities in the two sectors.
5. There are L workers in economy with LA and LM numbers employed in the rural and urban sectors respectively.
6. The number of urban jobs available (LM) is exogenously fixed. In the rural sector some work is always available. Therefore, the total urban labour force LM comprises L-LAalong with an available supply of rural migrants.
7. The urban wage is fixed at WM and the rural wage at WA, WM> WA.
8. The rural wage equals the rural marginal product of labour and the urban wage is exogenously determined.
9. Rural-urban migration continues so long as the expected urban real income is more that the real agricultural income.
CRITICISM OF THE MODEL
The main drawback of this model is that it does not incorporate the costs of rural-urban migration or the relatively higher costs of urban living which the migrants have to incur in the urban sector. The model assumes that employment transfer proceeds at the same rate as capital accumulates in the modern sector. However, there may be labor saving advances going on. Indeed, in most third world countries, the capacity of the industrial sector to absorb labor has turned out to be rather small; Implicit in the model is the notion that there is surplus labor in rural areas and full employment in urban areas; nominal and real urban wages in the capitalist sector of many third world countries appear to be able to rise rapidly; the model presumes the existence of entrepreneurs who will act in the way specified.8.Harris-Todaro Model: theory of rural urban migration in the context of employment and unemployment in developing countries The Harris-Todaro model of rural-urban migration is usually studied in the context of employment and unemployment in developing countries. In the model, the purpose is to explain the serious urban unemployment problem in developing countries. The applicability of this model depends on the development stage and economic success in the developing country.
Lewis fei ranis model of economic growth
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development.
ASSUMPTIONS OF THE MODEL
(1). They assume the economy has two sectors which are rural and urban sector.
(2). They assume that there is surplus labour in subsistence sector.
(3). They emphasize on the importance of saving in both sector.
(4). They are of the opinion that land has no role as a factor of production.
(5). Population growth is an exogenous phenomenon.
CRITICISM OF THE MODEL
Fei–Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ like Nigeria, efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.
(1). It has been asserted that Fei and Ranis did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed.
(2). Fei and Ranis say, “It has been argued that money is not a simple substitute for physical capital in an aggregate production function. There are reasons to believe that the relationship between money and physical capital could be complementary to one another at some stage of economic development, to the extent that credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry.” This indicates that in the process of development they neglect the role of money and prices. They fail to differ between wage labor and household labor, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
Harris-Todaro Model Of Rural-Urban Migration
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
Prof. J.R. Harris and P. M. Todaro in an article “Migration, Unemployment and Development: A Two-Sector Analysis” in 1970 presented a model on rural-urban migration in underdeveloped countries. The main idea of the Harris-Todaro model is that labour migration in underdeveloped countries is due to rural-urban differences in average expected wages rather than actual wages. The migrants consider the various opportunities of employment available to them in rural and urban sectors and choose the one that maximises their expected wages from migration.
The minimum urban wage is substantially higher than the rural wage. If more employment opportunities are created in the urban sector at the minimum wage, the expected will rise and rural-urban migration will increase. Expected wages are measured by the difference in real urban income and rural agricultural income and the probability of a migrant’s getting an urban job.
In fact, a migrant compares his expected income for a given time horizon in the urban sector with his prevailing average rural income and migrates if the former is more than the latter.
Thus migration in the Harris-Todaro modal is viewed as the wage or income gap between the urban and the rural sectors. But all migrants cannot be absorbed in the urban sector at high wages. Many fail to find a job and get employment in the informal urban sector at wages which are even lower than in the rural sector. Thus they join the queue of the underemployed or disguised unemployed in the urban sector.
Assumptions of the Model
The Harris-Todaro model is based on the following assumptions:
1. There are two sectors in the economy – the rural or agricultural sector (A) and the urban or manufacturing sector (M).
2. The model operates in the short run.
3. The marginal production of labour in agriculture (MPLA) and of industry (MPLM) are determined by their respective technologies.
4. Capital is available in fixed quantities in the two sectors.
5. There are L workers in economy with LA and LM numbers employed in the rural and urban sectors respectively.
6. The number of urban jobs available (LM) is exogenously fixed. In the rural sector some work is always available. Therefore, the total urban labour force LM comprises L-LAalong with an available supply of rural migrants.
7. The urban wage is fixed at WM and the rural wage at WA, WM> WA.
8. The rural wage equals the rural marginal product of labour and the urban wage is exogenously determined.
9. Rural-urban migration continues so long as the expected urban real income is more that the real agricultural income.
CRITICISM OF THE MODEL
The main drawback of this model is that it does not incorporate the costs of rural-urban migration or the relatively higher costs of urban living which the migrants have to incur in the urban sector. The model assumes that employment transfer proceeds at the same rate as capital accumulates in the modern sector. However, there may be labor saving advances going on. Indeed, in most third world countries, the capacity of the industrial sector to absorb labor has turned out to be rather small; Implicit in the model is the notion that there is surplus labor in rural areas and full employment in urban areas; nominal and real urban wages in the capitalist sector of many third world countries appear to be able to rise rapidly; the model presumes the existence of entrepreneurs who will act in the way specified.8.Harris-Todaro Model: theory of rural urban migration in the context of employment and unemployment in developing countries The Harris-Todaro model of rural-urban migration is usually studied in the context of employment and unemployment in developing countries. In the model, the purpose is to explain the serious urban unemployment problem in developing countries. The applicability of this model depends on the development stage and economic success in the developing country.
INTRODUCTION
The Lewis (1954) theory of dualistic economic development provides the seminal contribution to theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150).
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.HISTORY OF SURPLUS LABOUR THEORY
The historical emergence of surplus labour is, according to Marx, also closely associated with the growth of trade (the economic exchange of goods and services) and with the emergence of a society divided into social classes. As soon as a permanent surplus product can be produced, the moral-political question arises as to how it should be distributed, and for whose benefit surplus-labour should be performed. The strong defeat the weak, and it becomes possible for a social elite to gain control over the surplus-labour and surplus product of the working population; they can live off the labour of others.
Labour which is sufficiently productive so that it can perform surplus labour is, in a cash economy, the material foundation for the appropriation of surplus-value from that labour. How exactly this appropriation will occur, is determined by the prevailing relations of production and the balance of power between social classes.
THE CONCEPT OF SURPLUS LABOUR
The concept of surplus labour is widely discussed among development economics but its specific meaning needs to be defined, especially in technical terms, as many neoclassical economists still doubt the existence of surplus labour in an economy. Defining the source and the extent of surplus labour is then a prerequisite for further study. This section considers the various definitions of surplus labour and clarifies them.
ASSUMPTIONS OF THE LEWIS-FEI-RANIS MODEL
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion. Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc of those in the capitalist sector. Lewis in fact so much fascinated by the higher propensity to save of the capitalist sector that he even advocates a transfer of income from the subsistence sector to the capitalist sector. He feels that steps have to be taken to raise the rate of savings from 10% to 15% if the development of the economy has to be smooth.
COMPARISONS OF THE THEORY OF SURPLUS LABOUR
Surplus labor models are a class of models for analyzing developing countries as dual economies with a modern capitalist sector and a traditional precapitalist sector. The precapitalist sector is viewed as having a large pool (“unlimited supplies”) of labor from which the capitalist sector may draw at constant cost. While these models are often described as finding their inspiration in the old classical economists and Karl Marx, the 1954 model of W. Arthur Lewis and its extensions are technically more neoclassical than truly classical. The Lewis model was elaborated and formalized by many others, most notably John C. H. Fei and Gustav Ranis (1964), with important theoretical contributions from Amartya Sen (1966) and Stephen Marglin (1976). Questions have been raised as to the historical relevance of the neoclassical labor surplus models (Schultz 1964; Myint 1971; Arrighi 1973; Williamson 1985).
CRITICISM
Lewis-Fei-Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.
It has been asserted that the Lewis-Fei-Ranis model did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed.
CONCLUSIONS AND RECOMMENDATIONS
Lewis-Fei-Ranis model can be grouped under three instruments; labour force, capital accumulation and integration to the world economy. The main focus in Lewis-Fei-Ranis model was on the reallocation of labour until the turning point is reached, i.e., the time when labour reallocation has outstripped population growth long enough for dualism to atrophy and the economy to become fully commercialized. The model implicitly showed that the traditional sector do not produce any capital accumulation as they are very small and poor. Trade between agriculture and industry as the supply or marketed food falls or the demand for it rises, or both causing the value of marginal product of labour in agriculture to rise.
In sum up, there are several weaknesses of Lewis-Fei-Ranis model that are underlined by many economists. The first and most important is that if marginal productivity of labour in agricultural sector is negligible, zero. Schultz (1964), Sen (1967), Harris and Todaro (1970) and Fields (1975) proved with their empirical results that this cannot happen in agriculture sector. It is obvious that there is a disguised unemployment in agriculture. Particularly, agricultural sector should be considered in two ways: during harvest time and post harvest. If the agricultural surplus is solely considered for the regions where there can be seen harsh winter conditions, it could be accepted of the doctrine of Lewis, otherwise it is irrelevant to say there is a zero marginal productivity for agriculture labours. Also, there are positive opportunity costs, e.g. loss of crops in times of peak harvesting season, labour transfer will reduce agricultural output.
Harris-Todaro Model of Migration
INTRODUCTION
Harris and Todaro work, is considered one of the starting points of the classic rural-urban migration theory. The hypothesis and predictions of Harris-Todaro model have been subjected to econometric evaluation and have been corroborated by several studies. The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migraton decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage. From this crucial assumption, as denominated by Harris-Todaro, is deduced that the migratory dynamics leads the economic system toward an equilibrium with urban concentration and high urban unemployment.
THE HARRIS-TODARO MODEL
Assumptions
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function: where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a < 1 are parametric constants. Both goods and labor markets are perfectly competitive.
HARRIS-TODARO AGENT-BASED MODEL
Computational Implementation
Initially, workers are randomly placed in a square lattice with linear dimension L = 500. The reference values of the parameters used for these simulations are the same done to evaluate the equilibrium of the Harris-Todaro model, namely, Aa = 1.0, Am = 1.0, f = 0.3, a = 0.7, r = 1.0 and g = 1.0. The value of the minimum wage used is wm = 0.8 and the initial urban fraction of the total population is nu = 0.2, where nu = Nu/N is the normalized urban population also called urban share. The initial value nu = 0.2 is in agreement with historical data of developing economies. Given these parameters, one can calculate the vector which characterizes temporary equilibrium of the system by using eqs. (7 – 12). By using eq. (7), the employment level of the urban sector, Nm, is obtained. If nu Nm/N there will be a fraction of Nm/Nu workers employed, which earn the minimum wage, wi = wm, and (1-Nm/Nu) workers unemployed, which earn a wage wi = 0. Each worker can be selected to review his sectorial location with probability a, called activity. Therefore, in each time step only a fraction of workers becomes potential migrants, going through the sectorial location reviewing process. Potential migrants will determine their satisfaction level of being in the current sector by comparing their earnings, wi, among nearest neighbors.
CONCLUSION
In this paper we developed and agent-based computational model which formalizes the rural-urban allocation of workers as a process of social learning by imitation. We analyze a two-sectorial economy composed by adaptative agents, i.e., individuals that grope over time for best sectorial location in terms of earnings. This search is a process of imitation of successful neighbor agents. The dispersed and non-coordinated individual migration decisions, made based on local information, generate aggregate regularities.
Firstly, the crucial assumption of Harris and Todaro, the principle that rural-urban migration will occur while the urban expected wage exceed the rural wage, comes out as spontaneous upshot of interaction among adaptative agents.
Secondly, the migratory dynamics generated by agents that seek to adaptate to the economic environment that they co-create leads the economy toward a long run equilibrium characterized by urban concentration with urban unemployment. When this long run equilibrium is reached, the generalized Harris-Todaro condition is satisfied, i.e., there is a stabilization of the rural-urban expected wage differential.
Ngwu Osita Enoch
2017 /242022
Ositangwu95@gmail.com
Education Economics
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
INTRODUCTION
The Lewis (1954) theory of dualistic economic development provides the seminal contribution to theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150).
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.HISTORY OF SURPLUS LABOUR THEORY
The historical emergence of surplus labour is, according to Marx, also closely associated with the growth of trade (the economic exchange of goods and services) and with the emergence of a society divided into social classes. As soon as a permanent surplus product can be produced, the moral-political question arises as to how it should be distributed, and for whose benefit surplus-labour should be performed. The strong defeat the weak, and it becomes possible for a social elite to gain control over the surplus-labour and surplus product of the working population; they can live off the labour of others.
Labour which is sufficiently productive so that it can perform surplus labour is, in a cash economy, the material foundation for the appropriation of surplus-value from that labour. How exactly this appropriation will occur, is determined by the prevailing relations of production and the balance of power between social classes.
THE CONCEPT OF SURPLUS LABOUR
The concept of surplus labour is widely discussed among development economics but its specific meaning needs to be defined, especially in technical terms, as many neoclassical economists still doubt the existence of surplus labour in an economy. Defining the source and the extent of surplus labour is then a prerequisite for further study. This section considers the various definitions of surplus labour and clarifies them.
ASSUMPTIONS OF THE LEWIS-FEI-RANIS MODEL
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion. Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc of those in the capitalist sector. Lewis in fact so much fascinated by the higher propensity to save of the capitalist sector that he even advocates a transfer of income from the subsistence sector to the capitalist sector. He feels that steps have to be taken to raise the rate of savings from 10% to 15% if the development of the economy has to be smooth.
COMPARISONS OF THE THEORY OF SURPLUS LABOUR
Surplus labor models are a class of models for analyzing developing countries as dual economies with a modern capitalist sector and a traditional precapitalist sector. The precapitalist sector is viewed as having a large pool (“unlimited supplies”) of labor from which the capitalist sector may draw at constant cost. While these models are often described as finding their inspiration in the old classical economists and Karl Marx, the 1954 model of W. Arthur Lewis and its extensions are technically more neoclassical than truly classical. The Lewis model was elaborated and formalized by many others, most notably John C. H. Fei and Gustav Ranis (1964), with important theoretical contributions from Amartya Sen (1966) and Stephen Marglin (1976). Questions have been raised as to the historical relevance of the neoclassical labor surplus models (Schultz 1964; Myint 1971; Arrighi 1973; Williamson 1985).
CRITICISM
Lewis-Fei-Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.
It has been asserted that the Lewis-Fei-Ranis model did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed.
CONCLUSIONS AND RECOMMENDATIONS
Lewis-Fei-Ranis model can be grouped under three instruments; labour force, capital accumulation and integration to the world economy. The main focus in Lewis-Fei-Ranis model was on the reallocation of labour until the turning point is reached, i.e., the time when labour reallocation has outstripped population growth long enough for dualism to atrophy and the economy to become fully commercialized. The model implicitly showed that the traditional sector do not produce any capital accumulation as they are very small and poor. Trade between agriculture and industry as the supply or marketed food falls or the demand for it rises, or both causing the value of marginal product of labour in agriculture to rise.
In sum up, there are several weaknesses of Lewis-Fei-Ranis model that are underlined by many economists. The first and most important is that if marginal productivity of labour in agricultural sector is negligible, zero. Schultz (1964), Sen (1967), Harris and Todaro (1970) and Fields (1975) proved with their empirical results that this cannot happen in agriculture sector. It is obvious that there is a disguised unemployment in agriculture. Particularly, agricultural sector should be considered in two ways: during harvest time and post harvest. If the agricultural surplus is solely considered for the regions where there can be seen harsh winter conditions, it could be accepted of the doctrine of Lewis, otherwise it is irrelevant to say there is a zero marginal productivity for agriculture labours. Also, there are positive opportunity costs, e.g. loss of crops in times of peak harvesting season, labour transfer will reduce agricultural output.
Harris-Todaro Model of Migration
INTRODUCTION
Harris and Todaro work, is considered one of the starting points of the classic rural-urban migration theory. The hypothesis and predictions of Harris-Todaro model have been subjected to econometric evaluation and have been corroborated by several studies. The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migraton decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage. From this crucial assumption, as denominated by Harris-Todaro, is deduced that the migratory dynamics leads the economic system toward an equilibrium with urban concentration and high urban unemployment.
THE HARRIS-TODARO MODEL
Assumptions
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function: where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a < 1 are parametric constants. Both goods and labor markets are perfectly competitive.
HARRIS-TODARO AGENT-BASED MODEL
Computational Implementation
Initially, workers are randomly placed in a square lattice with linear dimension L = 500. The reference values of the parameters used for these simulations are the same done to evaluate the equilibrium of the Harris-Todaro model, namely, Aa = 1.0, Am = 1.0, f = 0.3, a = 0.7, r = 1.0 and g = 1.0. The value of the minimum wage used is wm = 0.8 and the initial urban fraction of the total population is nu = 0.2, where nu = Nu/N is the normalized urban population also called urban share. The initial value nu = 0.2 is in agreement with historical data of developing economies. Given these parameters, one can calculate the vector which characterizes temporary equilibrium of the system by using eqs. (7 – 12). By using eq. (7), the employment level of the urban sector, Nm, is obtained. If nu Nm/N there will be a fraction of Nm/Nu workers employed, which earn the minimum wage, wi = wm, and (1-Nm/Nu) workers unemployed, which earn a wage wi = 0. Each worker can be selected to review his sectorial location with probability a, called activity. Therefore, in each time step only a fraction of workers becomes potential migrants, going through the sectorial location reviewing process. Potential migrants will determine their satisfaction level of being in the current sector by comparing their earnings, wi, among nearest neighbors.
CONCLUSION
In this paper we developed and agent-based computational model which formalizes the rural-urban allocation of workers as a process of social learning by imitation. We analyze a two-sectorial economy composed by adaptative agents, i.e., individuals that grope over time for best sectorial location in terms of earnings. This search is a process of imitation of successful neighbor agents. The dispersed and non-coordinated individual migration decisions, made based on local information, generate aggregate regularities.
Firstly, the crucial assumption of Harris and Todaro, the principle that rural-urban migration will occur while the urban expected wage exceed the rural wage, comes out as spontaneous upshot of interaction among adaptative agents.
Secondly, the migratory dynamics generated by agents that seek to adaptate to the economic environment that they co-create leads the economy toward a long run equilibrium characterized by urban concentration with urban unemployment. When this long run equilibrium is reached, the generalized Harris-Todaro condition is satisfied, i.e., there is a stabilization of the rural-urban expected wage differential.
Name: Meteke Joy Orimusue
Department: Economics
Reg.no:2017/242430
Email: joymetex2000@gmail.com
Website:metekejoy01.blogspot.com
LEWIS FEI RANIS THEORY OF ECONOMIC GROWTH (SURPLUS LABOUR THEORY)
This model was propounded by W.Arthur Lewis who made a great contribution to the theories of economic development and based on his findings,Ranis and Fei extended his model.They looked at the changes in the agricultural and industrial labour in detail. A major tenent of this model is that Lewis broke down the labour force into two; substitence and capitalist sectors ,where the substitence sector has unlimited supply labour leading to a pool of surplus labour that determines the capitalist sector .
Ranis and Fri extended the theory explaining that with the changes in output and wage,more people would move from agricultural to industrial sector.They also talked on disguised unemployment saying it appears in the traditional substitence sector,the MPL is observed as the slope of the production function in agricultural sector is lower than that of the industrial.Ran is and Fei assumed that labour in the industrial sector would be paid in terms of industrial products.
Lewis failed to take into account that the increase in productivity of lab our should take place as a result of a shift between sectors.This was addressed by Ranis and Fei in their three growth stages;
In phase 1,the elasticity of agricultural labor is infinite that leads to disguised unemployment where the MPL is 0.
In phase 2, the agricultural sector observes a rise in the level of productivity leading to an increase in industrial growth.
In phase 3,the economy becomes completely commercialized with absence of disguised unemployment.
From the above ,we could say that;
1. Agricultural growth and industrial growth have equal importance.
2. That both agricultural growth and industrial growth are balanced.
ASSUMPTIONS OF THE MODEL
1.surplus labour in substitence sector where MPL is zero,productivity is positive but is less than industrial wage.It is made up of farmers, petty traders and women .
2. Importance of savings generated from both the capitalist sector and industrial sector. The capitalist sector invest their savings while the substitence sector spends all the savings,ie MP’s capitalist >MPSindustrial.
In conclusion,the Lewis Fei Ranis model according to Chen(2005)is seen as a classical model because of the input;industrial wage .
HARRIS TODARO THEORY OF MIGRATION
This model was developed by John.R.Harris and M.P.Todaro in 1970.Also called the model of internal migration,the model explains the movement of labour from rural to urban areas caused by some incentives. A key tenent of the model is centered on the migration decision determined by the expected wage differential for both urban and rural areas.Some of the assumptions of the model are;
1. The model assumes that unemployment does not exist in the rural agricultural sector.
2. The model assume that agricultural production in the rural sector and labour market are perfectly competitive leading to an equal productivity.With the above equilibrium,there would be a positive unemployment in the urban sector.
In conclusion,urban wages increase in the urban sector thereby increasing the expected urban income,a decrease in rural income will make productivity decrease of the agricultural sector.Using Nigeria as an example,the wages of the urban sector affects the expected wage of the rural sector and as a result constantly encourage the workers to move from the rural sector to the urban sector.
NAME: Ideba Tochukwu Emmanuel
REG NO: 2017/241435
EMAIL: tochukwuideba@gmail.com
Lewis-Fei-Ranis model (Surplus Labour theory)
The underdeveloped economy consists of two sectors: a traditional, overpopulated, rural subsistence sector in the Lewis model. It is characterized by zero marginal labor productivity—this permits Lewis to classify this as surplus labor which means that it can be withdrawn from the traditional agricultural sector without any loss of output—and a high productivity modern, urban industrial sector into which labour from the subsistence sector is moved or transferred gradually. The fundamental focus of the model is placed on both the process of labour transfer and the growth of output and employment in the modern sector. Output expansion in that sector results in labour transfer and modern sector employment. The rate of industrial investment and capital accumulation in the modern sector determines how fast this expansion occurs. The surplus of modern-sector profits over wages under the assumption that capitalists reinvest all their profits brings about such investment.
Finally, Lewis assumed that the level of wages in the urban industrial sector was constant, which is determined as a given premium over a fixed average subsistence level of wages in the traditional agricultural sector. The supply curve of rural labor to the modern sector is considered to be perfectly elastic at the constant or fixed urban wage.
Application to developing nations like Nigeria
In Nigeria, there is evidence of surplus labour in villages or rural areas. The urban areas are able to draw surplus labour from the villages due to the higher wage rate existing in the sector. An example is an urban area like Lagos, which offers higher wages compared to villages and this attracts the surplus labour in the rural areas or villages although there still exists high unemployment in the sector.
Harris-Todaro model of migration
The first assumption is that migration is primarily an economic phenomenon. It is a rational decision for the migrant despite unemployment existing in the urban sector. The Harris-Todaro model argues that migration is as a result of urban-rural differences in expected income rather than actual earnings. The fundamental idea is that migrants consider the various labor market opportunities available to them in the rural and urban sectors and choose the one that maximizes their expected gains from migration.
In this sense, the theory assumes that both actual and potential members of the labour force, compare their expected incomes for a given time horizon in the urban sector (the difference between returns and costs of migration) with prevailing average rural incomes and migrate if the former exceeds the latter.
Applications to Developing countries like Nigeria
This phenomenon is evident in developing nations like Nigeria. Many graduates who were onced based in rural areas, upon graduation migrate to urban areas expecting to get a job which will pay them higher incomes against the prevailing average rural income which is lower than what is obtainable in urban areas.
Ngwu Osita Enoch
2017/242022
Enoch.ngwu.242022@unn.edu.ng
Education Economics
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
INTRODUCTION
The Lewis (1954) theory of dualistic economic development provides the seminal contribution to theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150).
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output.
HISTORY OF SURPLUS LABOUR THEORY
The historical emergence of surplus labour is, according to Marx, also closely associated with the growth of trade (the economic exchange of goods and services) and with the emergence of a society divided into social classes. As soon as a permanent surplus product can be produced, the moral-political question arises as to how it should be distributed, and for whose benefit surplus-labour should be performed. The strong defeat the weak, and it becomes possible for a social elite to gain control over the surplus-labour and surplus product of the working population; they can live off the labour of others.
Labour which is sufficiently productive so that it can perform surplus labour is, in a cash economy, the material foundation for the appropriation of surplus-value from that labour. How exactly this appropriation will occur, is determined by the prevailing relations of production and the balance of power between social classes.
THE CONCEPT OF SURPLUS LABOUR
The concept of surplus labour is widely discussed among development economics but its specific meaning needs to be defined, especially in technical terms, as many neoclassical economists still doubt the existence of surplus labour in an economy. Defining the source and the extent of surplus labour is then a prerequisite for further study. This section considers the various definitions of surplus labour and clarifies them.
The simple definition of surplus labour implies the existence of a point at which the marginal product of labour becomes zero and labour can be transferred out of the traditional sector without reducing the quantity of output, as noted by Wellisz (1968: 22): The (disguised-unemployment or the Unlimited Supply of Labour) hypothesis claims that in poor, densely populated countries, more people are employed than needed to produce the prevailing output with the existing techniques and the existing supply of non-labour inputs. The ‘surplus’ labour constitutes ‘hidden’ or ‘disguised’ unemployment. Many of the proponents of the hypothesis make the further claim that agricultural output will not decrease, and industrial output will increase, if measures are taken to re-allocate labour from subsistence agriculture (where the surplus is supposed to exist) to industry (where there is no surplus labour).
ASSUMPTIONS OF THE LEWIS-FEI-RANIS MODEL
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion. Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc of those in the capitalist sector. Lewis in fact so much fascinated by the higher propensity to save of the capitalist sector that he even advocates a transfer of income from the subsistence sector to the capitalist sector. He feels that steps have to be taken to raise the rate of savings from 10% to 15% if the development of the economy has to be smooth.
COMPARISONS OF THE THEORY OF SURPLUS LABOUR
Surplus labor models are a class of models for analyzing developing countries as dual economies with a modern capitalist sector and a traditional precapitalist sector. The precapitalist sector is viewed as having a large pool (“unlimited supplies”) of labor from which the capitalist sector may draw at constant cost. While these models are often described as finding their inspiration in the old classical economists and Karl Marx, the 1954 model of W. Arthur Lewis and its extensions are technically more neoclassical than truly classical. The Lewis model was elaborated and formalized by many others, most notably John C. H. Fei and Gustav Ranis (1964), with important theoretical contributions from Amartya Sen (1966) and Stephen Marglin (1976). Questions have been raised as to the historical relevance of the neoclassical labor surplus models (Schultz 1964; Myint 1971; Arrighi 1973; Williamson 1985).
CRITICISM
Lewis-Fei-Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.
It has been asserted that the Lewis-Fei-Ranis model did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed.
The Lewis-Fei-Ranis model say, “It has been argued that money is not a simple substitute for physical capital in an aggregate production function. There are reasons to believe that the relationship between money and physical capital could be complementary to one another at some stage of economic development, to the extent that credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry.” This indicates that in the process of development they neglect the role of money and prices. They fail to differ between wage labor and household labor, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
The Lewis-Fei-Ranis model assume that MPPL is zero during the early phases of economic development, which has been criticized by Harry T.Oshima and some others on the grounds that MPPL of labor is zero only if the agricultural population is very large, and if it is very large, some of that labor will shift to cities in search of jobs. In the short run, this section of labor that has shifted to the cities remains unemployed, but over the long run it is either absorbed by the informal sector, or it returns to the villages and attempts to bring more marginal land into cultivation.
CONCLUSIONS AND RECOMMENDATIONS
Lewis-Fei-Ranis model can be grouped under three instruments; labour force, capital accumulation and integration to the world economy. The main focus in Lewis-Fei-Ranis model was on the reallocation of labour until the turning point is reached, i.e., the time when labour reallocation has outstripped population growth long enough for dualism to atrophy and the economy to become fully commercialized. The model implicitly showed that the traditional sector do not produce any capital accumulation as they are very small and poor. Trade between agriculture and industry as the supply or marketed food falls or the demand for it rises, or both causing the value of marginal product of labour in agriculture to rise.
In sum up, there are several weaknesses of Lewis-Fei-Ranis model that are underlined by many economists. The first and most important is that if marginal productivity of labour in agricultural sector is negligible, zero. Schultz (1964), Sen (1967), Harris and Todaro (1970) and Fields (1975) proved with their empirical results that this cannot happen in agriculture sector. It is obvious that there is a disguised unemployment in agriculture. Particularly, agricultural sector should be considered in two ways: during harvest time and post harvest. If the agricultural surplus is solely considered for the regions where there can be seen harsh winter conditions, it could be accepted of the doctrine of Lewis, otherwise it is irrelevant to say there is a zero marginal productivity for agriculture labours. Also, there are positive opportunity costs, e.g. loss of crops in times of peak harvesting season, labour transfer will reduce agricultural output.
Second, the model employed mostly for the closed economies and gave relatively less information on open economies. Lewis-Fei-Ranis model was criticized as it neglects international trade. The model was to a certain extent supply-oriented, which does not foresee any trade between capital and other sectors. Also it was criticized advocating industrialization and ignores agriculture. If a section of the profit made by the capitalists is not devoted to agricultural development, the process of industrialization would be jeopardized.
Third, Lewis-Fei-Ranis model believed that the more the rate of labour transfer to urban employment, the more the economic grows and more jobs are created. But this is not a common applicable in practice if industrial development involves more intensive use of capital than labour, then the flow of labour from agriculture to industry will simply create more unemployment.
Fourth, the Lewis-Fei-Ranis model would imply that aggregate living standards should not rise as rapidly as productivity until surplus labour is eliminated. However, the evidence on living standards in Latin America during the twentieth century indicates that these have risen in line with productivity, and that the ‘indirect’ components of the real wage (health and education) have actually risen more rapidly that average incomes.
Fifth, the Lewis-Fei-Ranis model stated the wage in industrial sector does not increase before labour surplus is absorbed. But this does not happen in any way in reality as the development of the urban, or industrial, or formal sector can itself lead to the creation of pressure groups and swing the balance of power towards those in that sector, to the detriment of those remaining outside it. The wage in the industrial sector in reality outstandingly rises long before the labour surplus is absorbed.
Haven tested the Lewis-Ranis-Fei theory for developing economy over 1965-2002 we have found that the developing economic growth is mainly attributable to the development of the non-agricultural sector. This is driven by rapid capital accumulation as well as employment growth. The reallocation of labour away from agriculture has made a positive net contribution to rapid economic of the developing economy. The rise in the marginal productivity of agricultural labour indicates the absorption of redundant agricultural labour since the 1978 Economic Reform. However, the marginal productivity of agricultural labour is still lower than the initial low average productivity of agricultural labour. This implies the continued existence of disguised agricultural unemployment. This suggests that the these developing economy has entered the Lewis-Ranis-Fei phase two of development but has not yet achieved phase three. The continuing widening productivity gap between the two sectors calls for the removal of market restrictions and government interventions so as to allow the continued absorption of surplus labour. Several policy recommendations are tentatively suggested. First and foremost, more effort should be made in promoting employment to effectively absorb the remaining labour surplus and promote economic development. This can be achieved by further relaxing the Hukou restrictions on migration, increasing labour market flexibility and improving the allocative efficiency of labour. It can also be achieved by encouraging the development of private enterprise to create more employment opportunities. Second, Government of developing economy should continue implementing the Sunshine Policy, initiated in 2003, designed to provide rudimentary job training, recruitment information and information about conditions in the destination cities to rural migrants. This will not only help facilitate employment of rural migrants but also satisfy the increasing demand for skilled labour in the growing non-agricultural sector. Third, agriculture could be promoted by tax breaks, direct subsidies and most importantly, by removing price controls on agricultural products. Agriculture could thus be commercialised and the economy would enter phase three of economic development.
Harris-Todaro Model of Migration
INTRODUCTION
Harris and Todaro work, is considered one of the starting points of the classic rural-urban migration theory. The hypothesis and predictions of Harris-Todaro model have been subjected to econometric evaluation and have been corroborated by several studies. The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migraton decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage. From this crucial assumption, as denominated by Harris-Todaro, is deduced that the migratory dynamics leads the economic system toward an equilibrium with urban concentration and high urban unemployment.
THE HARRIS-TODARO MODEL
Assumptions
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function: where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a < 1 are parametric constants. Both goods and labor markets are perfectly competitive. Nevertheless, there is segmentation in the labor market due to a high minimum urban wage politically determined. In the rural sector, the real wage, perfectly flexible, is equal to the marginal productivity of labor in this sectors where wa is the real wage and p is the price of the agricultural good, both expressed in units of manufactured good.
HARRIS-TODARO AGENT-BASED MODEL
Computational Implementation
Initially, workers are randomly placed in a square lattice with linear dimension L = 500. The reference values of the parameters used for these simulations are the same done to evaluate the equilibrium of the Harris-Todaro model, namely, Aa = 1.0, Am = 1.0, f = 0.3, a = 0.7, r = 1.0 and g = 1.0. The value of the minimum wage used is wm = 0.8 and the initial urban fraction of the total population is nu = 0.2, where nu = Nu/N is the normalized urban population also called urban share. The initial value nu = 0.2 is in agreement with historical data of developing economies. Given these parameters, one can calculate the vector which characterizes temporary equilibrium of the system by using eqs. (7 – 12). By using eq. (7), the employment level of the urban sector, Nm, is obtained. If nu Nm/N there will be a fraction of Nm/Nu workers employed, which earn the minimum wage, wi = wm, and (1-Nm/Nu) workers unemployed, which earn a wage wi = 0. Each worker can be selected to review his sectorial location with probability a, called activity. Therefore, in each time step only a fraction of workers becomes potential migrants, going through the sectorial location reviewing process. Potential migrants will determine their satisfaction level of being in the current sector by comparing their earnings, wi, among nearest neighbors. The potential migrant starts the comparison process with a initial satisfaction level si = 0. When wi > wneighbor the satisfaction level si is added in one unit; if wi < wneighbor, si is diminished in one unit; if wi = wneighbor, si does not change. After the worker has passed through the reviewing process his/her satisfaction level is checked. The migration will occur only if si < 0, what means that the worker's i earnings is less than the most of his/her nearest neighbors. After all the potential migrants complete the reviewing process and have decided migrate or not, a new configuration of the system is set. Therefore, once again a new temporary equilibrium of the system is calculated by using eqs. (8 – 12). The whole procedure is repeated until a pre-set number of steps is reached. It is important to emphasize that Nm is kept constant throughout the simulation. Its given by eq. (7) which depends on the technological parameters, a,Am, and the minimum wage, wm, which are constants too.
In this case, the differential of expected wages is negative. In an economy mainly rural (nu < 0:5), the transitional dynamics characterized by a continuous growth of population of the urban sector with a differential of expected wages relatively high is followed by the stabilization of rural-urban differential of expected wages. In other words, the generalized Harris-Todaro condition, eq. (15), arises as a long run equilibrium result of the agent-based migratory dynamics.
CONCLUSION
In this paper we developed and agent-based computational model which formalizes the rural-urban allocation of workers as a process of social learning by imitation. We analyze a two-sectorial economy composed by adaptative agents, i.e., individuals that grope over time for best sectorial location in terms of earnings. This search is a process of imitation of successful neighbor agents. The dispersed and non-coordinated individual migration decisions, made based on local information, generate aggregate regularities.
Firstly, the crucial assumption of Harris and Todaro, the principle that rural-urban migration will occur while the urban expected wage exceed the rural wage, comes out as spontaneous upshot of interaction among adaptative agents.
Secondly, the migratory dynamics generated by agents that seek to adaptate to the economic environment that they co-create leads the economy toward a long run equilibrium characterized by urban concentration with urban unemployment. When this long run equilibrium is reached, the generalized Harris-Todaro condition is satisfied, i.e., there is a stabilization of the rural-urban expected wage differential.
Thirdly, the impact of the minimum wage and elasticity of terms of trade in a long run equilibrium obtained by simulations are in agreement with the predictions of the original Harris-Todaro model with Cobb-Douglas technology.
Finally, the simulations showed an aggregated pattern not found in the original Harris-Todaro model. There is the possibility of small fluctuations of the urban share around an average value. This phenomenon is known as reverse migration.
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Lewis-Fei-Ranis model(Surplus Labour theory)
According to this model, the surplus workers in the rural areas will migrate to the urban areas as these workers become attracted to the development rising in the cities. The model also assumes a surplus of workers in the rural areas. The rise in demand for labour in developing rural areas will attract the unemployed from the rural areas to migrate to the city or urban area. This movement will ultimately benefit the society. Once the stock of surplus of labour are exhausted, wages are driven up in both sectors. So, we have a surplus of workers in the rural areas. So excess of workers without work in the rural areas begin to migrate into the urban areas, filling the demand for workers in the growing urban area. The migration of this surplus workers create some sort of equilibrium in both the rural and urban areas in terms of unemployment. Full employment occurs in both the urban and rural areas meaning there are less people who are unemployed in the rural areas now, at the same time, the urban areas also has full employment. So rural to urban migration will benefit the whole economy. Both sectors will have full employment. In the absence of surplus labour, this will increase wages in both sectors because labour becomes more valuable.
Application to Nigeria as a developing Nation
In Nigeria, there exists an excess or surplus labour in rural areas or villages. These individuals do not add to national output and they are assimilated into the urban sector due to the attractive wages offered in this sector. But the assumption that wages are constant in the urban sector does not apply because of the existence of trade unions.
Harris-Todaro model of Migration
The Harris-Todaro model is an economic model developed in the 1970s by John R. Harris and Michael Todaro and is used in development economics to explain rural-urban migration.
The main idea of the model is that migration is based on expected income differentials between rural and urban areas. The individuals believe and hope that their incomes will be better in the long run when they migrate to urban areas than if they remain in the rural areas.
To compute the rural wage floor, the following formula is used;
Wt=(Lm/Lu)×Wm
Where Wt= Agricultural wage floor,
Lm=number of employed labourers in manufacturing sector
Lu=total labour force in the urban sector
Wm=minimum daily wage in urban sector
The model predicts that unemployment can exist with rapid labour movement to the city.
The lure of the city include the stories told by their relatives that had just migrated, this is enough to induce the young workers to migrate.
Workers willing to wait in low paid and not fully employed positions in the city waiting to get a job in the higher paid occupations.
Workers migrate in order to provide remittance income for their families at home.
Overestimation of prospects in the city and perceived benefits of living in the city.
Application to Nigeria as a developing nation
This phenomenon is obviously seen in a country like Nigeria. There has been a large influx of people migrating from rural areas to urban areas over the years. Individuals who migrate to urban areas hope or expect to get higher incomes than the average wage prevailing in rural areas or villages. Unfortunately, when they migrate to urban areas, the reality is that there is usually less job available to them and this results in rise in unemployment in the urban areas. An example of an urban area where this is evident in Nigeria is the urban area of Lagos where there is high unemployment.
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The Lewis-Ranis-Fei theory of dualistic economic development therefore provides a suitable theoretical framework for studying the growth path of labour-surplus developing economies. Lewis Fei-Ranis model of dual economy explains how the increased productivity in agricultural sector would become helpful in promoting industrial sector.
Since the late 1960s Nigeria economy has been based primarily on the petroleum industry.Because of this agricultural production has been stagnated to such an extent that cash crops such as palm oil, peanuts (groundnuts), and cotton were no longer significant export commodities. Although much of the population remained engaged in farming(labour-surplus), too little food was produced, requiring increasingly costly imports.
The Harris–Todaro model, in development economics describes some of the issues concerning rural-urban migration. It is a two sector model, which recognized the persistent wage differences between urban and rural sector. In this model an individual make their migration decision based on the expected urban-rural earning difference.
The world oil price increases from 1973 produced rapid economic growth in transportation, construction, manufacturing, and government services in Nigeria and led to a great influx of rural people into the larger urban centres. The Harris–Todaro model failed to realize that urbanization may also lead to an unbalanced distribution of the population and contribute to increasing disparities between rural and urban areas
In low developed and developing countries capital accumulation in the urban sector is essential for economic development
With reference to the Nigeria economy,the economy considered in the Harris-Todaro model is a small open economy which consists of two sectors, the agricultural rural sector and a manufacturing urban sector. Lewis Fei-Ranis model is dual economy model based on the agricultural and industrial sector. The Nigeria mixed economic system which includes a variety of private freedom, combined with centralized economic planning and government regulation make the two models inapplicable due to the complexity of the Nigeria economy.
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LEWIS-FEI-RANIS
Model.
Fei-Ranis (FR) model of dual economy explains how the increased productivity in agricultural sector would become helpful in promoting industrial sector. In this respect, it presents three stages whereby a underdeveloped country moves from stagnation to self-sustained economic growth. Thus, this model is treated as an improvement over Lewis model of unlimited supply of labor. This is because the assumption of unlimited supply of labour is unrealistic.
Assumptions of the model
1) They assume that there is surplus labour in subsistence sector and emphasized on the importance of saving in both sector.
2) Saving accumulated by the capitalist and subsistence sector. The model states that the subsistence sector consumes all or most of its Saving in the purchase of materialistic items or on construction of religion centers known as temples, while it states that the capitalist sector invests almost all of its entire savings for its further expansion. Therefore the Saving rate in the capitalist sector is relatively high as compared to the subsistence sector.
3) The population growth rate is very high which results in mass unemployment in the economy.
4) The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labor is zero and negative in agriculture sector.
CRITICISM
The model assumed that besides labour there is an unlimited supply of entrepreneur in the capitalist sector and this is not true in most developed countries. The cost involved in training the unskilled workers transferred from the subsistence sector is also ignored. When labour is transferred from the subsistence sector, share of agricultural output falling to each one left in the agricultural sector will start rising.
Since Fei-Ranis model builds on the proponents of Lewis two-sector model, both are generally referred to as Lewis-Fei-Ranis model.
For example: in Nigeria, there has been various agricultural policies influenced by the LEWIS-FEI-RANIS model. This is because these policies believe that this will lead to general economic growth.
THE HARRIS TODARO MODEL.
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration.
The model is assumed to study the migration of workers in a two-sector economic system, namely, rural sector and urban sector.
• Rural-urban migration condition: when urban real wage exceeds real agricultural product
• No migration cost: there is little to no cost on migrating from one sector to another.
• Perfect competition in the two sectors: Both the agricultural and manufacturing sectors are perfectly competitive in nature.
• Cobb-Douglas production function
The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
This explains the movement of laborers to Lagos in search for “greener pastures” as they believe there is higher employment opportunities
To conclude, the Harris-Todaro model which is not without it’s flaw has been a very powerful development model as it aims as furthering the discussion of development. It is also a very courageous move to explain the existence of Urban unemployment which as come to be referred to as the Todaro Paradox. This model ,which seem incomplete at first, has been advanced and improved upon by latter economists increasing its analytic, predictive and prescriptive power.
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HARRIS-TODARO MODEL:
This model of economic development was developed by J. R. Harris and M. P. Todaro which is relevant for labour surplus countries like India. It is the best known model of internal migration in the context of present-day developing countries. The model has focused on migration of labour from rural to urban areas induced by certain incentives. They have referred to two types of migration—induced migration and internal migration. In the Harris-Todaro model, the probability of obtaining an urban job is defined as the number of urban jobs divided by the urban labor force. Implicitly, this specification assumes that persons living in rural areas have no chance whatever of finding urban job.
Harris-Todaro Model is bounded by the following assumptions:
• Two sectors: urban (manufacture) and rural (agriculture)
• Rural-urban migration condition: when urban real wage exceeds real agricultural product
• No migration cost: there is little to no cost on migrating from one sector to another.
• Perfect competition in the two sectors: Both the agricultural and manufacturing sectors are perfectly competitive in nature.
• Cobb-Douglas production function
• Static approach
• Low risk aversion: the Migrants are not risk averse. That is, they are risk takers.
Under the Harris-Todaro Model, the decision to migrate is made upon differences in expected income between rural and urban areas. On a fundamental level, expected income accounts for the wage differential between urban and rural areas. The existence of a higher wage in urban areas compared to rural areas is a relatively constant observation. Rural to urban migration, however, does not clear the wage differential between the two labor markets as designated by demand and supply fundamentals. The reason for this is the lack of full employment in urban areas. The probability of finding a job in an urban area (i.e. the inverse of the unemployment rate) is never 100%. In other words, the urban labor market never fully clears due to institutionally determined urban wages; there will always be unemployment. This provides a technical rational to the reason why there is rural to urban migration amidst unemployment.
It is important to note that the probability of finding a job in an urban area is also taken into account in the determination of expected income. Individuals weigh these two notions in the decision to migrate. An individual accounts for the rural to urban wage differential and the probability of finding a job in an urban area. The Harris-Todaro migration model assumes an institutionally determined urban wage.
This model is flawed by oversimplification. It is not a rare case for an economic model to be subject to criticisms. Despite its various flaws, it is used extensively by various economists for the same simplicity that is it’s flaw. It has been adopted in policy analysis in many (but not restricted to) developing countries. For example, Robert Lucas’s work in Botswana shows that it’s Urban unemployment shows pattern predictable by the Harris-Todaro model. The main critiques are:
1. The lottery style job allocation excludes investment in job search on the part of the immigrants;
2. The informal sector is not explicitly modelled;
3. There is not enough evidence to support the assumption of a rigid wage in the modern sector. Moreover, besides trade union pressure or minimum wage legislation, the wage differentials among sectors could be explained as well by, say, firm-specific training costs; 4. The issue of discount rates and rational migrants is ignored;
4. The influence on decision making of risk and risk attitudes on the part of the potential immigrants is not included;
5. Differentials in skill levels among the migrants are not accounted for.
In conclusion, the Harris-Todaro model explains some issues of rural-urban migration. This migration is as a result of rational decision makers comparing Urban expected income with wage in rural wages. The equilibrium condition of this model is when expected rural wage is equal to rural wage. The policy for governance to take is to deal with the problem of unemployment, instead of simply job creation as it makes rural labourers to overestimate the economic opportunities in Urban areas. The model also advises against government setting the minimum wage as this further increases unemployment especially if minimum wage is set above the equilibrium wage rate.
Lewis-fei-Ranis model (SURPLUS LABOUR THEORY):
The Fei-Ranis model of economic growth developed by John C. H. Fei and Gustav Ranis and can be seen as an extension of the Lewis model. It is also known as the Surplus Labor model. William Arthur Lewis made great contributions to the theories of economic development with his most famous published works, “Economic Development with Unlimited Supplies of Labour” and “The Theory of Economic Growth”. Based on his findings, Ranis and Fei succeeded to extend the initial Lewis’ model and assessed the changes in the agricultural and industrial labour in more detail.
The Fei–Ranis model of economic growth is a dualism model in developmental economics. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. The model explains how increased productivity in agricultural sector would promote the industrial sector. The five basic assumption concerning under developed countries of this model are:
(i) There is an abundance of labor and scarce natural resources.
(ii) The population growth rate is very high which results in mass unemployment in the economy.
(iii) Majority of the population is engaged in the agricultural sector which is stagnant. Hence, the marginal productivity of labor is zero and negative in agriculture sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy.
The model specified three phases of dualistic economic development which are distinguished by marginal productivity of agricultural labour and each of these phases are marked by turning points which are:
(i) The breakout point leads to phase one which is characterized by growth with excess agricultural labour.
(ii) The shortage point leads to phase two characterized by disguised unemployment.
(iii) The point of commercialization leads to stage three characterized by the commercialization of agricultural product.
The model emphasized upon the simultaneous growth of the aricultural and industrial sectors.. Thus the model believes in ‘Balanced Growth’. It means that there should be a simultaneous investment and growth in both the agricultural sector and industrial sector. According to the model, the surplus rises at first; some part of this surplus will be used in agricultural development, while some part will be ploughed back in industrial development. As a result, both sectors will grow under ‘Balanced Growth’ pattern.
Thus, three major points are highlighted in the model are:
(i) Growth of agriculture is as important as the growth of industry.
(ii) There should be a balanced growth of the agricultural and industrial sectors.
(iii) The rate of labor absorption must be higher than the rate of population growth to get out of the “Malthusian Nightmare”.
FR model argued that surplus can be generated by the investment activities of the land lords and by the fiscal measures of the govt. However, leakages could exist because of the cost of transferring the labor from agri. sector to industrial sector in the form of transport cost and building of schools and hospitals, etc. Moreover, the transference may lead to increased per capita consumption of agri. output, and a gap may also emerge in case of rural wages and urban wages. Again, if the supply curve of- the labor is backward bending, the peasants may reduce their work effort as their incomes rise.
Criticisms of the model
The Ranis-Fei model has the following shortcomings:
(i) The model holds that MPL = 0 in the first phase of growth and the transfer of labor from agriculture would not reduce output in the agricultural sector in phase I but other economists like Berry insists that agricultural output in phase I will not remain constant and can be affected by different land situations.
(ii) MPL is Not Zero: Prof. Jorgenson who has also presented a dual economy model says that the MPL is an empirical issue. During good farming seasons, the MPL > 0.
(iii) The model concentrated upon land and labor as the determinants of output, ignoring the role of capital. But Profs. Brown, Byres, Frankel, Griffen, Ghatak and Ingersent are of the view that in the UDCs, there has occurred what is known as ‘Green Revolution’ in agriculture which has promoted the greater use of capital and technology on lands. Consequently, there has been a greater increase in the agricultural productivity and agricultural incomes.
In conclusion, the model is one of dualism. It is of the view that there should be simultaneous growth in the agricultural and industrial sector as the two sectors are necessary for economic growth, surplus labour should be moved from agriculture into industry to increase growth in the economy. Despite the shortcomings of the model, it is still very realistic and applicable in real life. The two sectors coexists in a real life developing economy and in Nigeria for example, people (labour) are moving from the agricultural sector towards the industrial sector but the agricultural sector is still not neglected, instead, the two sectors are being invested in to enhance growth and development of the economy.
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LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
One of the early known theory of development focused on structural transformation of subsistence economy formulated by a Nobel laureate W. Arthur Lewis in the mid-1950s. The Fei–Ranis model of economic growth is a dualism model in developmental economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model.
The surplus labor models advanced by Lewis (1954), and expanded upon by Ranis and Fei, described a two-sector economy depicting an initially large traditional sector and a relatively small commercialized sector, with the key feature that the traditional sector does not adhere to the neoclassical full employment labor market clearing assumption. It was sufficient to assume that labor was in excess supply relative to cooperating factors at the prevailing wage and technology, and thus that the commercialized sector faced an essentially infinitely elastic labor supply at any moment in time.
The definition of “labor surplus” does not mean that a substantial portion of the agricultural labor force can be withdrawn without loss of output, i.e., that they have a marginal productivity of zero. Indeed, as Sen and Fei-Ranis outlined, when some workers with low marginal productivity are withdrawn, those who remain are likely to work harder and other technology changes of the reorganization variety are likely to result. As Fei and Ranis emphasized, in addition to this organizational dimension of dualism, there is also an important product dualism to be analyzed, focused on the exchange between the food produced by the non-commercialized agricultural sector and the goods produced by the commercialized non-agricultural sector. The key point here is that agricultural and nonagricultural products cannot really be substituted for each other; in the closed economy, food producing agriculture becomes a necessary condition for industry while the converse does not hold.
The first stage of FEI-RANIS model is closely related to Lewis. Disguised unemployment comes into being because the supply of labor is perfectly elastic and MPL = 0. Therefore, such disguised unemployed are to be transferred to industrial sector at the constant institutional wage.
In the second stage of FEI-RANIS (phase) agricultural workers add to agricultural output but they produce less than institutional wage they get. In other words, in the second stage the labor surplus exists where APL > MPL, but it is not equal to subsistence (institutional) wages. Accordingly, such disguised unemployed also have to be transferred to industrial sector. If the migration to industrial sector continues a situation is eventually reached where the farm workers produce output equal to institutional wages. This would mean that productivity in agricultural sector has gone up.
In the third stage of FEI-RANIS model the take-off situation comes to an end and there begins the era of self-sustained growth where the farm workers produce more than the institutional wage they get. In this stage of economic growth the surplus labor comes to an end and the agricultural sector becomes commercialized sector. All such is explained with the Figures.
Accordingly, they have to be shifted to industrial sector. As labor are transferred to industrial sector a shortage of labor will develop in agricultural sector. In other words, it will be difficult for the industrial sector to get the labor at same prevailing constant wages.
Thus, three major points are highlighted in the surplus labour model:
(i) Growth of agriculture is as important as the growth of industry.
(ii) There should be a balanced growth of agricultural industrial sectors.
(iii) The rate of labor absorption must be higher than the rate of population growth to get out of the “Malthusian population trap”.
This model can be applicable to Nigeria economy, early post independence that is during that time the colonial masters had just introduced a vibrant manufacturing sector and the subsistence agriculture had been fully employed. It was of no use that new school leavers would be employed in the subsistence agricultural sector when there is underemployment in the manufacturing sector. So instead government made policies like increment of scholarship opportunities to increase skilled labour and human capital to meet the need of the manufacturing sector.
HARRIS TODARO MODEL OF MIGRATION
INTRODUCTION
Harris-Todaro model or migration theory is an economic model that is used majorly in development and welfare economics. It is used to explain some of the issues concerning rural-urban migration. This model is named after John R. Harris and Michael Todaro, and was developed in 1970. The theory is based on the main assumption that migration decision is based on the expected income differentials between rural and urban areas rather than just wage differentials. This simply means that if expected urban income exceeds expected rural income, the rural-urban migration is said to be high.
Harris and Todaro model gave distinct recognition to the interaction of the agricultural and non-agricultural aspect in determining urban unemployment.
There are important differences between the Harris and Todaro model and that of its predecessors notably the Fei-Rans model. While Harris and Todaro viewed urban employment as a means of economic development and not just laying emphasis on growth as the unique target of development which was done by the previous work by Fei-Rans. In the Harris-Todaro framework, unemployment is assumed to exist in the urban areas unlike the agricultural surplus labor assumption of Fei and Ranis.
Furthermore, there is an important difference in the assumptions concerning wage rates. Harris and Todaro assume an institutionally determined wage rate in the modern sector and a wage rate in the agricultural sector equal to the marginal product of labor. This is a direct reversal of assumptions of the Fei-Ranis model where the wage rate is equal to the marginal product of labor in the modern sector and institutionally determined in the agricultural sector (where the marginal product of labor is assumed zero). Finally, the Harris-Todaro model assumes rural-urban migration as the key interaction between agriculture and non-agriculture rather than the flows of food and consumer goods assumed in the Fei-Ranis model.
The basic Harris-Todaro model can be summarized in eight equations.
Agricultural production function: ;
1. Xa = q(Na, La, Ka ), q’ > 0, q” 0, f” < 0
where:
Xn = the output of the manufactured good
N = the total labor to produce this output
Kn = the fixed capital stock.
Price determination:
3. P = r(Xn/Xa ), r^ 0
where:
P = the price of the agricultural good in terms of the manufactured good.
Agricultural real wage determination:
4. Wa = P q'
where:
W = agricultural real wage.
Manufacturing real wage:
5. W = f' = W n n
where:
W = the real wage in manufacturing
W = the institutionally determined minimum wage.
Urban expected wage:
6. W = W N /N , N /N =1 u n n u n u
where:
W = the expected real wage in the urban areas after adjusting Wn for the proportion of the total urban labor force actually employed.
N = the total labor force in the urban areas.
Labor endowment:
7. N + N = N, a u
where:
N = the total labor endowment (assuming no unemployment in the rural areas).
Migration:
8. N = g(W – Pq«), g'X), g(0) = 0 u u
where:
N = time derivative of rural-urban migration.
Equations 1 and 2 represent production functions for agriculture and non-agriculture. The model is essentially static since the capital stocks and population are fixed. The terms of trade between agriculture and non-agriculture are given in equation 3 by the ratio of outputs of each sector. This allows the agricultural wage rate and nonagricultural wage rate to be expressed in real terms in equations 4 and 5.
The nonagricultural wage rate is- constrained by an institutionally determined minimum wage. An essential feature of the Harris-Todaro model is the use of an expected urban wage rate. Todaro (1969) postulates that the rate of rural-urban migration is not only a function of the urban wage rate relative to the rural wage rate but also a function of the chance of finding an urban job. That is, the urban wage rate is discounted in equation 6 by the rate of urban unemployment to give an expected wage rate. Equation 7 imposes a constraint on the labor force. Again, the static assumptions of the model are exemplified by the fixed endowment of labor. Finally, in equation 8 the rate of rural-urban migration is assumed to be a function of the differential between the expected urban wage rate and the rural wage rate. ASSUMPTIONS OF THE HARRIS-TODARO MODEL
The Harris-Todaro model of migration had the following features. Firstly, to be hired for a formal-sector job, one has to be physically present in the urban areas where the formal-sector jobs are located. Secondly, real wages are higher in urban formal-sector jobs than in rural traditional-sector jobs. As a result of the two features mentioned above, one of the major consequences is that more workers search for formal-sector jobs than those that are actually employed. The employers hire some but not all, and those that are not employed end up being unemployed. Thirdly, for equality to be maintained between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting is characterized by urban unemployment. Lastly, any temporary difference in the expected wages between one sector and another will be eroded as workers migrate from the low expected wage labor market to the high expected wage labor market.
CRITICISM OF THE HARRIS-TODARO MODEL
The Harris-Todaro model, despite its popularity has had some of its assumptions subjected to criticism w has undergone revision ever since it was developed. Williamson (1988) summarized the main critiques to the model as thus;
1. The informal sector is not explicitly modeled.
2. There is not enough evidence to support the assumption of a rigid wage in the modern sector. 3.Moreover, besides trade union pressure or minimum wage legislation, the wage differential among sectors could be explain d as well by, say, firm-specific training costs.
4. The issue of discount wage rates and rational migrants is ignored.
5. Differentials in skill level among the migrants are not accounted for.
6. The influence on decision making of risk and risk attitudes on the part of the potential immigrants is not included.
Kingsley Gift Ebubechukwu
2017/241438
Dept: Economics
HARRIS-TODARO MODEL OF MIGRATION
Harris and Todaro model is considered one of the starting points of the classic rural-urban migration theory. The hypothesis and predictions of the model have been subjected to econometric evaluation and corroborated by several studies. The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migration decision. In other words, the model posit that rural-urban migration will occur while the urban expected wage exceed the rural wage.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model helps to explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
The Assumptions of the Harris Todaro model.
The most fundamental assumption in this model is that migration is an economic phenomenon in response to urban-rural differences in the expected income. This assumes that people only move for monetary gains, when in reality there are many other factors involved in this decision. For example, a lot of migration occurs due to humanitarian reasons as a result of conflict or disease – for example, the huge influx of migrants from the Middle East to Europe.
The following are the critiques of the Harris Todaro model
(1) The Harris-Todaro framework is a static model describing migration, which is a dynamic phenomenon by nature. The model can be used in representing a steady state equilibrium, this is a limitation
(2) The assumption that urban workers are either employed in the manufacturing sector or unemployed has been criticized as too simplistic even though, it was implicit that unemployment could also be interpreted as underemployment in the informal sector.
In conclusion, the Harris Todaro model explains some issues of rural-urban migration. This migration happens in case when expected rural income is higher than rural wages. In this case, economy may have high rates of unemployment. This explains the migration or movement of people from urban area in Lagos, Nigeria such as from badagri village, epe urban areas to City towns like Victoria island, Lekki, Ikoyi, and other cities in Lagos. This can also be seen in the movement of people from lagos cities. Also, the movement of farmers from Nsukka to ENUGU city, all in search for greener pastures and wider markets to sell their good and farm products. This affect the Nigerian Economy, increases Labour and human capital supply in the economy.
LEWIS -FEI-RANIS MODEL (THE SURPLUS LABOUR THEORY)
One of the best-known early theoretical models of development that focused on the structural transformation of a primarily subsistence economy was that formulated by Nobel laureate W. Arthur Lewis in the mid-1950s and later modified, formalized, and extended by John Fei and Gustav Ranis. . The Surplus Labour Model is a dualism model in development and welfare economics. The Lewis two-sector model became the general theory of the development process in surplus-labor developing nations during most of the 1960s and early 1970s, and it is sometimes still applied, particularly to study the recent growth experience in China and labor markets in other developing countries. The model of dual economy explains how the increased productivity in agricultural sector would become helpful in promoting industrial sector. Presenting three stages whereby a underdeveloped country moves from stagnation to self-sustained economic growth. Thus, this model is treated as an improvement over Lewis model of unlimited supply of labor. In the Lewis model, the underdeveloped economy consists of two sectors, the traditional, overpopulated rural subsistence sector characterized by zero marginal labor productivity and a high-productivity modern urban industrial sector into which labor from the subsistence sector is gradually transferred.
The following are the thesis of the model.
I. The growth rate of population is high which results in mass unemployment.
II. The industrial sector is dynamic.
III. The agricultural sector is stagnant and majority of the population are involved in it which results in a zero marginal productivity of labour.
IV. Natural resources are scarce and there is an abundance of labour.
V. There are certain non-agrarian sectors in the economy where there is reduced use of capital.
CRITICISM OF THE MODEL.
The model faced heavy critics which will be highlighted below.
1) There was a flaw in Lewis model that it did not pay enough attention to the importance of the agricultural sector in promoting industrial growth.
2) The assumptions of this model did not fit the institutional and economic realities of most contemporary developing countries.
3) The model assumed a closed economy model, therefore ignoring the role of foreign trade.
4) The model assumed during the process of economic development, the supply of land will remain fixed. This is disregarded as Land supply can be increased in the long run.
In conclusion, the model is one of dualism. The model advocates for simultaneous growth in the agricultural and industrial sector as the two sectors are necessary for economic growth. The excess /surplus labour should be moved from agriculture into industry to increase growth in the economy.
HARRIS-TODARO MODEL
This model of economic development was developed by J. R. Harris and M. P. Todaro which is relevant for labour surplus countries like India. It is the best known model of internal migration in the context of present-day developing countries. The model has focused on migration of labour from rural to urban areas induced by certain incentives. They have referred to two types of migration—induced migration and internal migration. In the Harris-Todaro model, the probability of obtaining an urban job is defined as the number of urban jobs divided by the urban labor force. Implicitly, this specification assumes that persons living in rural areas have no chance whatever of finding urban job.
Harris-Todaro Model is bounded by the following assumptions:
• Two sectors: urban (manufacture) and rural (agriculture)
• Rural-urban migration condition: when urban real wage exceeds real agricultural product
• No migration cost: there is little to no cost on migrating from one sector to another.
• Perfect competition in the two sectors: Both the agricultural and manufacturing sectors are perfectly competitive in nature.
• Cobb-Douglas production function
• Static approach
• Low risk aversion: the Migrants are not risk averse. That is, they are risk takers.
Under the Harris-Todaro Model, the decision to migrate is made upon differences in expected income between rural and urban areas. On a fundamental level, expected income accounts for the wage differential between urban and rural areas. The existence of a higher wage in urban areas compared to rural areas is a relatively constant observation. Rural to urban migration, however, does not clear the wage differential between the two labor markets as designated by demand and supply fundamentals. The reason for this is the lack of full employment in urban areas. The probability of finding a job in an urban area (i.e. the inverse of the unemployment rate) is never 100%. In other words, the urban labor market never fully clears due to institutionally determined urban wages; there will always be unemployment. This provides a technical rational to the reason why there is rural to urban migration amidst unemployment.
It is important to note that the probability of finding a job in an urban area is also taken into account in the determination of expected income. Individuals weigh these two notions in the decision to migrate. An individual accounts for the rural to urban wage differential and the probability of finding a job in an urban area. The Harris-Todaro migration model assumes an institutionally determined urban wage.
This model is flawed by oversimplification. It is not a rare case for an economic model to be subject to criticisms. Despite its various flaws, it is used extensively by various economists for the same simplicity that is it’s flaw. It has been adopted in policy analysis in many (but not restricted to) developing countries. For example, Robert Lucas’s work in Botswana shows that it’s Urban unemployment shows pattern predictable by the Harris-Todaro model. The main critiques are:
1. The lottery style job allocation excludes investment in job search on the part of the immigrants;
2. The informal sector is not explicitly modelled;
3. There is not enough evidence to support the assumption of a rigid wage in the modern sector. Moreover, besides trade union pressure or minimum wage legislation, the wage differentials among sectors could be explained as well by, say, firm-specific training costs; 4. The issue of discount rates and rational migrants is ignored;
4. The influence on decision making of risk and risk attitudes on the part of the potential immigrants is not included;
5. Differentials in skill levels among the migrants are not accounted for.
In conclusion, the Harris-Todaro model explains some issues of rural-urban migration. This migration is as a result of rational decision makers comparing Urban expected income with wage in rural wages. The equilibrium condition of this model is when expected rural wage is equal to rural wage. The policy for governance to take is to deal with the problem of unemployment, instead of simply job creation as it makes rural labourers to overestimate the economic opportunities in Urban areas. The model also advises against government setting the minimum wage as this further increases unemployment especially if minimum wage is set above the equilibrium wage rate.
Lewis-fei-Ranis model (SURPLUS LABOUR THEORY)
The Fei-Ranis model of economic growth developed by John C. H. Fei and Gustav Ranis and can be seen as an extension of the Lewis model. It is also known as the Surplus Labor model. William Arthur Lewis made great contributions to the theories of economic development with his most famous published works, “Economic Development with Unlimited Supplies of Labour” and “The Theory of Economic Growth”. Based on his findings, Ranis and Fei succeeded to extend the initial Lewis’ model and assessed the changes in the agricultural and industrial labour in more detail.
The Fei–Ranis model of economic growth is a dualism model in developmental economics. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. The model explains how increased productivity in agricultural sector would promote the industrial sector. The five basic assumption concerning under developed countries of this model are:
(i) There is an abundance of labor and scarce natural resources.
(ii) The population growth rate is very high which results in mass unemployment in the economy.
(iii) Majority of the population is engaged in the agricultural sector which is stagnant. Hence, the marginal productivity of labor is zero and negative in agriculture sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy.
The model specified three phases of dualistic economic development which are distinguished by marginal productivity of agricultural labour and each of these phases are marked by turning points which are:
(i) The breakout point leads to phase one which is characterized by growth with excess agricultural labour.
(ii) The shortage point leads to phase two characterized by disguised unemployment.
(iii) The point of commercialization leads to stage three characterized by the commercialization of agricultural product.
The model emphasized upon the simultaneous growth of the aricultural and industrial sectors.. Thus the model believes in ‘Balanced Growth’. It means that there should be a simultaneous investment and growth in both the agricultural sector and industrial sector. According to the model, the surplus rises at first; some part of this surplus will be used in agricultural development, while some part will be ploughed back in industrial development. As a result, both sectors will grow under ‘Balanced Growth’ pattern.
Thus, three major points are highlighted in the model are:
(i) Growth of agriculture is as important as the growth of industry.
(ii) There should be a balanced growth of the agricultural and industrial sectors.
(iii) The rate of labor absorption must be higher than the rate of population growth to get out of the “Malthusian Nightmare”.
FR model argued that surplus can be generated by the investment activities of the land lords and by the fiscal measures of the govt. However, leakages could exist because of the cost of transferring the labor from agri. sector to industrial sector in the form of transport cost and building of schools and hospitals, etc. Moreover, the transference may lead to increased per capita consumption of agri. output, and a gap may also emerge in case of rural wages and urban wages. Again, if the supply curve of- the labor is backward bending, the peasants may reduce their work effort as their incomes rise.
Criticisms of the model
The Ranis-Fei model has the following shortcomings:
(i) The model holds that MPL = 0 in the first phase of growth and the transfer of labor from agriculture would not reduce output in the agricultural sector in phase I but other economists like Berry insists that agricultural output in phase I will not remain constant and can be affected by different land situations.
(ii) MPL is Not Zero: Prof. Jorgenson who has also presented a dual economy model says that the MPL is an empirical issue. During good farming seasons, the MPL > 0.
(iii) The model concentrated upon land and labor as the determinants of output, ignoring the role of capital. But Profs. Brown, Byres, Frankel, Griffen, Ghatak and Ingersent are of the view that in the UDCs, there has occurred what is known as ‘Green Revolution’ in agriculture which has promoted the greater use of capital and technology on lands. Consequently, there has been a greater increase in the agricultural productivity and agricultural incomes.
In conclusion, the model is one of dualism. It is of the view that there should be simultaneous growth in the agricultural and industrial sector as the two sectors are necessary for economic growth, surplus labour should be moved from agriculture into industry to increase growth in the economy. Despite the shortcomings of the model, it is still very realistic and applicable in real life. The two sectors coexists in a real life developing economy and in Nigeria for example, people (labour) are moving from the agricultural sector towards the industrial sector but the agricultural sector is still not neglected, instead, the two sectors are being invested in to enhance growth and development of the economy.
Name: Onah Hope Nnenna
Reg no: 2017/249565
Dept: Economics
Email: onahnnenna123@gmail.com
Blog: None
Website: None
THE LEWIS FEI-RANIS MODEL
Introduction
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of
unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
STRENGTH AND WEAKNESS OF LEWIS MODEL
One of the weaknesses of this model is the undermining of the role of agriculture in boosting the growth of the industrial sector. Lewis model did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors
However, the FEI-RANIS MODEL takes into account the two ideas that LEWIS MODEL ignored. The LEWIS FEI-RANIS MODEL became strong when they strongly emphasized on the industry-agriculture interdependency and said that a robust connectivity between the two would encourage and speedup development
HOW LEWIS FEI-RANIS MODEL AFFECT THE ECONOMY
This model affect the Economy significantly in the sense that it reduces disguised unemployment and lowers the rate of import. An economy that imports are always stagnant when it comes to the area of growth and development
The Lewis fei Ranis model tries to develop the agricultural and industrial sector of an economy. The economy with high rate of industries and agriculture provides employment and so on and thereby helping in the growth and development of that economy
Conclusion
The main ideas behind the Lewis fei-Ranis model is to show and explain why it is important to invest in both sectors in order to remain on the balanced growth path and maintain the rate of industrialization. The existence of the surplus labour in agriculture allows the industry to continue to pay the institutional wage and thereby enjoy further profits and continued investment
Hence, saving and investment are a crucial part in the Lewis fei-Ranis to support economic development.
HARRIS TODARO MODEL OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities decision
Conclusions
Therefore, migration from rural areas to urban areas will increase if:
Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income
Name: Onah Hope Nnenna
Reg no: 2017/249565
Dept: Economics
Email: onahnnenna123@gmail.com
Blog: None
Website: None
THE LEWIS FEI-RANIS MODEL
Introduction
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of
unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.[2] According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector.[3] Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
STRENGTH AND WEAKNESS OF LEWIS MODEL
One of the weaknesses of this model is the undermining of the role of agriculture in boosting the growth of the industrial sector. Lewis model did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors
However, the FEI-RANIS MODEL takes into account the two ideas that LEWIS MODEL ignored. The LEWIS FEI-RANIS MODEL became strong when they strongly emphasized on the industry-agriculture interdependency and said that a robust connectivity between the two would encourage and speedup development
HOW LEWIS FEI-RANIS MODEL AFFECT THE ECONOMY
This model affect the Economy significantly in the sense that it reduces disguised unemployment and lowers the rate of import. An economy that imports are always stagnant when it comes to the area of growth and development
The Lewis fei Ranis model tries to develop the agricultural and industrial sector of an economy. The economy with high rate of industries and agriculture provides employment and so on and thereby helping in the growth and development of that economy
Conclusion
The main ideas behind the Lewis fei-Ranis model is to show and explain why it is important to invest in both sectors in order to remain on the balanced growth path and maintain the rate of industrialization. The existence of the surplus labour in agriculture allows the industry to continue to pay the institutional wage and thereby enjoy further profits and continued investment
Hence, saving and investment are a crucial part in the Lewis fei-Ranis to support economic development.
HARRIS TODARO MODEL OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities decision
Conclusions
Therefore, migration from rural areas to urban areas will increase if:
Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income
Okagbue chisom
2017/249552
Chisom.okagbue.249552@unn.edu.ng
LEWIS-FEI-RANIS surplus labour theory
Economic Growth
One of the best known early theoretical models of development that focused on the structural transformation of a primarily subsistence economy was that formulated by Nobel Laureate W. Arthur Lewis in the mid-1950s, and later modified, formalized, and extended by John Fei and Gustav Ranis. The Lewis two-sector model became the general theory of the 1960s and early 1970s, and it is sometimes still applied, particularly to study the recent growth experience in China and labor markets in other developing countries.
The Fei-Ranis model is an improvement over the lewis model. John Fei and Gustav Ranis analyze the transition process through which an underdeveloped economy hopes to move from a condition of stagnation to one of self-sustained growth.
The theory relates to underdeveloped labor surplus and resources; poor economy in which the vast majority of the population is engaged in agriculture amidst widespread unemployment and high rates of population growth.
ASSUMPTIONS OF THE MODEL
1. There is a dual economy divided into a traditional and stagnant agricultural sector and an active industrial sector.
2. The output of the agricultural sector is a function of land and labor alone.
3. There is no accumulation of capital in agriculture except in the form of land reclamation.
4. Land is fixed in supply.
5. Population growth is taken as an exogenous phenomenon.
The real wage in the industrial sector remains fixed and is equal to the initial level of real income in the agricultural sector. It is called an institutional wage.
6. Workers in either sector consume only agricultural products.
Given these assumptions, Fei and Ranis analyze the development of a labor surplus economy into three phases;
In the first phase, the disguised unemployed workers who are not adding to agricultural output are transferred to the industrial sector at a constant institutional wage.
In the second phase, agricultural workers add to agricultural output but produce less than the institutional wage they get. Such workers are shifted to the industrial sector. If the migration of the workers to the industrial sector continues, a point is eventually reached when farmworkers produce output equal to the institutional wage.
In the third phase, which makes the end of the take-of and the beginning of the self-sustained growth when farmworkers produce more than the institutional wage they get. In this phase, the surplus labor is exhausted and the agricultural sector becomes commercialized.
. HARRIS-TODARO AGENT-BASED MODEL
In this section we describe the implementation of the computational model we proposed, as well as the aggregate patterns obtained numerically and the comparison with the respective analytical results.
A. Computational Implementation
Initially, workers are randomly placed in a square lattice with linear dimension L = 500. The reference values of the parameters used for these simulations are the same done to evaluate the equilibrium of the Harris-Todaro model, namely, Aa = 1.0, Am = 1.0, f = 0.3, a = 0.7, r = 1.0 and g = 1.0. The value of the minimum wage used is wm = 0.8 and the initial urban fraction of the total population is nu = 0.2, where nu = Nu/N is the normalized urban population also called urban share. The initial value nu = 0.2 is in agreement with historical data of developing economies. Given these parameters, one can calculate the vector which characterizes temporary equilibrium of the system by using eqs. (7 – 12).
By using eq. (7), the employment level of the urban sector, Nm, is obtained. If nu Nm/N there will be a fraction of Nm/Nu workers employed, which earn the minimum wage, wi = wm, and (1-Nm/Nu) workers unemployed, which earn a wage wi = 0.
Each worker can be selected to review his sectorial location with probability a, called activity . Therefore, in each time step only a fraction of workers becomes potential migrants, going through the sectorial location reviewing process. Potential migrants will determine their satisfaction level of being in the current sector by comparing their earnings, wi, among nearest neighbors.
The potential migrant starts the comparison process with a initial satisfaction level si = 0. When wi > wneighbor the satisfaction level si is added in one unit; if wi < wneighbor, si is diminished in one unit; if wi = wneighbor, si does not change. After the worker has passed through the reviewing process his/her satisfaction level is checked. The migration will occur only if si < 0, what means that the worker's i earnings is less than the most of his/her nearest neighbors.
After all the potential migrants complete the reviewing process and have decided migrate or not, a new configuration of the system is set. Therefore, once again a new temporary equilibrium of the system is calculated by using eqs. (8 – 12). The whole procedure is repeated until a pre-set number of steps is reached. It is important to emphasize that Nm is kept constant throughout the simulation. Its given by eq. (7) which depends on the technological parameters, a,Am, and the minimum wage, wm, which are constants too.
B. Analysis of the Emergent Properties
In this section we develop the analysis of the long run aggregate regularities of Harris-Todaro agent-based computational model. These long run properties will be compared between the solution of the analytical model and simulations.
show the basic characteristics of the transitional dynamics and long run equilibrium generated by simulations. When the economic system has a low initial urban share, nu = 0:2 or nu = 0:3, there is a net migration toward urban sector. This migration takes the urban sector from a full employment situation to an unemployment one. The positive differential of expected wages that pulls workers to the urban sector diminishes. However, if the economic system initiates with a high urban share, nu = 0:8, or nu = 0:9 there is net flow of migration toward rural sector in such a way that the unemployment rate of the urban sector decreases
In this case, the differential of expected wages is negative. In an economy mainly rural (nu < 0:5), the transitional dynamics characterized by a continuous growth of population of the urban sector with a differential of expected wages relatively high is followed by the stabilization of rural-urban differential of expected wages. In other words, the generalized Harris-Todaro condition, eq. (15), arises as a long run equilibrium result of the agent-based migratory dynamics.
Figure 3 also shows that even after the urban share has reached an stable average value, there are small fluctuations around this average. Therefore, differently from the original Harris-Todaro model, our computational model shows in the long run equilibrium the reverse migration. This phenomenon has been observed in developing countries.
for a given value of a, the variation of wm practically does not change the equilibrium values of the urban share, the differential of expected wages and the unemployment rate. However, for a given wm, higher values of a make the urban sector less attractive due the reduction of the employment level. This causes a lower equilibrium urban share, a higher unemployment rate and a gap in the convergence of the expected wages.
The equilibrium values of the urban share, the differential of expected wages and unemployment rate do not have a strong dependence with wm. However, variations in g for a fixedwm, dramatically change the equilibrium values of the variable mentioned before. Higher values of g generate a lower urban concentration, a higher gap in the expected wages and a higher unemployment rate in the equilibrium.
The convergence of migratory dynamics for a urban share, compatible with historical data, is robust in relation to the variation of the key technological parameters, a and f. The impact of the variation of these parameters in the values of the equilibrium differential of expected wages, ( – wa), and the equilibrium urban unemployment rate, (1-Nm=Nu).
CONCLUSION
The dispersed and non-coordinated individual migration decisions, made based on local information, generate aggregate regularities. Firstly, the crucial assumption of Harris and Todaro, the principle that rural-urban migration will occur while the urban expected wage exceed the rural wage, comes out as spontaneous upshot of interaction among adaptative agents.
LEWIS-FEI-RANIS MODEL(SURPLUS LABOUR THEORY)
INTRODUCTION
The Fei–Ranis model of economic growth is a dualism model in developmental economics or
welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the
Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
BASIS OF THE MODEL
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
THE LEWIS MODEL(DUAL SECTOR MODEL)
The dual-sector model is a model in
development economics . It is commonly known as the Lewis model after its inventor
W. Arthur Lewis. It explains the growth of a developing economy in terms of a labour transition between two sectors, the capitalist sector and the subsistence sector.
ASSUMPTIONS
1. The model assumes that a developing economy has a surplus of unproductive labor in the agricultural sector.
2. These workers are attracted to the growing manufacturing sector where higher wages are offered.
3. It also assumes that the wages in the manufacturing sector are more or less fixed.
4. Entrepreneurs in the manufacturing sector make profit because they charge a price above the fixed wage rate.
5. The model assumes that these profits will be reinvested in the business in the form of fixed capital.
6. An advanced manufacturing sector means an economy has moved from a traditional to an industrialized one.
W. A. Lewis divided the economy of an underdeveloped country into 2 sectors:
THE CAPITALIST SECTOR
Lewis defined this sector as “that part of the economy which uses reproducible capital and pays thereof”. The use of capital is controlled by the capitalists, who hire the services of labour. It includes manufacturing, plantations, mines etc. The capitalist sector may be private or public.
The SUBSTINANCE SECTOR
This sector was defined by him as “that part of the economy which is not using reproducible capital”. It can also be adjusted as the indigenous traditional sector or the “self employed sector”. The per head output is comparatively lower in this sector and this is because it is not fructified with capital. The “Dual Sector Model” is a theory of development in which surplus labor from traditional agricultural sector is transferred to the modern industrial sector whose growth over time absorbs the surplus labour, promotes industrialization and stimulates sustained development.
In the model, the subsistence agricultural sector is typically characterized by low wages, an abundance of labour, and low productivity through a labour-intensive production process. In contrast, the capitalist manufacturing sector is defined by higher wage rates as compared to the subsistence sector, higher marginal productivity, and a demand for more workers. Also, the capitalist sector is assumed to use a production process that is capital intensive, so investment and capital formation in the manufacturing sector are possible over time as capitalists’ profits are reinvested in the capital stock. Improvement in the marginal productivity of labour in the agricultural sector is assumed to be a low priority as the hypothetical developing nation’s investment is going towards the physical capital stock in the manufacturing sector.
THE HARRIS- TODARO MODEL
1.
The Harris-Todaro Model of Labor Migration in the
Literature of Development Economics
It has long been realized that in order for an economy to
develop or grow, a large amount of labor has to be transferred
from the traditional (or backward) agricultural sector in
rural areas, where the productivity of labor is low (or
negligible, or zero, or even negative) to the modern
manufacturing sector where the productivity of labor is higher
and rising due to capital accumulation in that sector.
It should not be surprising, therefore, that, in the literature of development economics, dualistic models gained
popularity over the single-commodity or single-sector theories
in the 1950’s. A typical dualistic model in development
economics contains two sectors, a traditional or agricultural
sector in the rural area and a modern or manufacturing sector
in the urban area. The most familiar single-sector model is
the growth theory of Harrod-Domar (Harrod 1939 and 1948, Domar
1946). The most representative and influential dualistic
framework is that of Lewis (1954).
The ideas of surplus labor, subsistence wages, and
turning points in the development of a dualistic economy in
Lewis (1954) were later rigorously and diagrammatically
formalized by Ranis and Fei (1961). Ranis and Fei also showed
how agricultural surplus could lead to the growth of
industries. The production relations of a dual economy,
according to Jorgenson (1961), was characterized by asymmetry.
More precisely, he assumed that output in the agricultural
sector was a function of land and labor alone (there is no
capital accumulation in this sector), and was characterized by
diminishing return to scale. On the other hand, the output of
the urban sector depended on capital and labor alone (no land
was required), and the production function displayed constant
return to scale. Since the amount of land and capital in the
economy was assumed fixed, the only problem was to allocate
labor between the two sectors. The distinctive concept in the H-T model is that the rate of migration flow is determined by the difference between expected urban wages (not actual) and rural wages.
One implications in the H-T model is that job creation in the urban sector worsens the situation because more rural migration would be induced.
2.
Commercial policies for a Harris-Todaro Economy
The purpose of the first three articles is to evaluate
and compare commercial policies adopted by some of the LDCs.
In other words, we find ourselves engaged in the debate of the
superiority of the outward-oriented vs the inward-oriented
strategies. We will do so for an HT type economy which, we
believe, describes the situations in many LDCs in the modern
world.
It is by now a generally accepted belief that outward (or
export) oriented development strategies are superior to the
inward looking (or import substitution) strategies. The often
cited examples are the successful east Asian countries of
Taiwan, Korea, and Singapore, and the not so successful
countries like India, Brazil, Chili, and several other Latin
American countries.
It is argued (Balassa 1989) that the import substitution
policies in many LDCs are biased against the primary (or
agricultural) sector which happens to be the export sector,
while export oriented polices provide similar incentives to
both sectors. In countries that practice inward looking strategies, the limitation of the domestic markets and the
lack of competition led to allocative and technological
inefficiency. On the contrary, outward looking countries are
able to mobilize domestic resources effectively in the
production of goods that have to be competitive in the vast
world markets, which in turn allows the exploitation of the
economies of scale and technological improvement. As a
result, total factor productivity increased at annual rates of
over 3 percent in some outward-oriented LDCs while in some of
the inward-oriented LDCs increases were less than 1 percent or
even negative.
Given the post war experiences of development of the
Third World, proponents of the inward-oriented strategies have
become less staunch. The most effective argument for the
policies remains that of the infant industry (Bruton 1989).
It is believed that even in this situation, protection should
be only a short run policy. It should also be noted that
production subsidy is superior to import protection to achieve
the infant industry objectives.
It is in our opinion that many LDCs have entered or are
approaching what was described as the “take off” stage by
Lewis (1954) and Fei and Ranis (1961), characterized by the
rapidly growing industries, continual and sizable transfer of
labor force from the traditional rural sector, and persistent
problems of high urban unemployment and underemployment rates.
IGWEH SIXTUS OZIOMA
2017/247588
igwehsixtus9@gmail.com
ANSWER;
1) LEWIS-FEI-RANIS MODEL (Surplus Labour Theory)
This theory was propounded by two economists John Fei and Gustav Ranis their theory was seen as an extension of the Lewis model. The model developed by Fanis and Ranis explains how the increased productivity in the agricultural the sector would become helpful in promoting industrial sector. The theory pays attention to the fact that the economy is divided into Modern and Primitive sector i.e the industrial sector and the agriculture sector. This model unlike other models takes into account the situation of unemployment and underemployment particularly to developing countries, it also does not consider underdeveloped countries to be homogenous in nature.
As earlier stated, this model considers development of an economy to be dependent on two sectors of the economy; Primitive (agricultural) and Modern (industrial) sectors Both sectors coexist in the economy to try to attain full development, but development can only be achieved when one sector is invested in more to the detriment of the other sector i.e. if a developing country wants to improve its development process it had to choose between developing the agricultural sector or the industrial sector, it cannot develop both at the same time. If the country decides to develop the agricultural sector then it has to transfer all its labour force in the industrial sector to the agricultural sector to increase productivity since agriculture is very labour intensive and by so doing the country will be able to produce very large food products both for exports and domestic consumption and will maintain a positive balance of trade.
BASIC ASSUMPTIONS OF THE LEWIS-FEI-RANIS MODEL
The theory is mainly focused on poor and developing countries. Below are some of the assumptions of the model
1) There is an abundance of labour in Underdeveloped countries and shortage of natural resources.
2) The population growth rate is very high which results in mass unemployment in the economy.
3) The majority of the population is engaged in agriculture, but the agricultural sector is stagnant. Hence marginal productivity of labour is zero and negative in agricultural sector.
4) There are certain non-agrarian sectors in the economy where there is reduced use of capital’
5) There is a dynamic industrial sector in the economy.
In all, the model opines that economic development is taking place if the agricultural labourers are transferred to industrial sector where their productivity will increase.
Despite the fact that the Fei-Ranis model is an offshoot of the Lewis model, it is necessary to note the little differences between the Fei-Ranis model and the Lewis model.
DIFFERENCE BETWEEN LEWIS MODEL AND RANIS-FEI MODEL
1) Lewis believed that all labour in the agricultural sector whose marginal productivity was either zero or less the institutional wage was available to the industrial sector at the institutional wage While Fei assumed that even if labour was transferred to the industrial sector, the wage rate will be constant i.e. there will be no increase in wage rate as a result of increase in labour.
2) Ranis and Fei assumed that labour in the industrial sector will be paid, in terms of output produced and had to use Terms of trade.
The major difference lies in the thoughts of the two economists. Lewis’s model did not consider the fact that terms of trade can change, he totally ignored it. While the Fei-Ranis model takes account that terms of trade can change and that labour will always be available at a constant institutional wage rate.
STAGES OF THE FEI-RANIS MODEL
The Fei-Ranis dual economy model was developed using three stages
FIRST STAGE: This stage is very similar to the Lewis model. Disguised unemployment comes into being because the supply of labour is perfectly elastic and MPL= 0. Therefore, such disguised unemployed are to be transferred to the industrial sector at the constant institutional wage.
SECOND STAGE: This stage focuses on agricultural sector of the economy and how agricultural produce is affected by the wage rate paid to agricultural workers. It is in this second stage that the theory-SURPLUS LABOUR- comes into play. According to this stage surplus labour exists where APL>MPL, but is not equal to the institutional wage rate. Due to this there will be excess supply of labour to the industrial sectors, and if such migration of labour continues to the industrial sector a situation will occur where farm outputs will be equal to the institutional wage rate. This situation came about to be because there was low demand for labour supply in the agricultural sector which will then cause the agricultural sector to increase its wage rate to match that of the industrial sector so as to not loose anymore labour. The second stage is also called the “Take-Off Stage”.
THIRD STAGE: also called the “Era of Self-Sufficiency growth”, in this stage farm output is greater than the wage rate they receive. Here the agricultural becomes commercialized and the excess supply of labour comes to an end as it is assumed that the economy is at full employment.
From the three stages above there are three major things that are to be noted;
1. Growth of the agricultural sector is important as the growth of the industrial sector.
2. There should be a balanced growth of both sectors.
3. To avoid the situation of the Malthusian Nightmare-where there is excess unemployed population-the rate of labour absorption in the economy must be greater than the population growth rate.
ARGUMENT OF THE FEI-RANIS MODEL
The major argument of the Fei-Ranis model is that surplus can be created by the activities of the government and investment activities of the population. The model talks strongly on the relationship between the agricultural and industrial sector and how proper development of both sectors is the key to attaining full development in the economy, the model does not prioritize development of one sector over the other but instead advocates for equal improvements of both sectors. The model also shows the strong interdependent relationship between the two sectors, if agricultural labourers begin seeking industrial employment and they are employed because industrialists employ more workers due to their larger capital good stock and labour-intensive technology, this shows how the industrial sector is dependent on the excess labour of the agricultural sector. Also, if the surplus owner invests in that section of the industrial sector that is close to the soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized. According to this model, economic development is achieved in dualistic economies of developing and underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision-making powers and use industrial capital and consumer goods for agricultural practices.
However, leakages could exist because of the cost of transferring the labour from agricultural sector to the industrial sector in the form of transport cost and building of schools and hospitals, etc. Also, the transfer of labour may lead to increased per capita consumption of agricultural output and a gap may also emerge in case of rural wages and urban wages. Again, if the supply curve of labour is backward bending, the peasants may reduce their work effort as their income rises.
Fei and Ranis were quick to mention that the necessity of labour reallocation must be linked more to the need to produce more capital investment goods as opposed to the thought of industrial consumer goods following the theory of Engel’s law. This is because the assumption that the demand for industrial good is high seems unrealistic, since the real wage in the agricultural economy is very low and that hinders the demand for industrial goods. In addition to that, low and mostly constant wage rates will render the wage rates in the industrial sector low and constant. This implies that demand for industrial goods will not rise at a particular rate following the theory of Engel’s law. This will cause the citizens of developing countries to experience increase in purchasing power, and the dualistic economies will then follow a “natural austeric” path that is characterized by increase in demand which shows the importance of capital goods industries when compared to consumer goods industries. Investment in capital goods has a long period before benefits are reaped, this then causes government to intervene in the economy and help especially in the early stages of the economy’s growth. The government also works on the social and economic overheads.
REACTIONS/ CRITICISMS OF THE FEI-RANIS MODEL
Despite the improvements made by Fei and Ranis on Lewis’s earlier theory, their model was received with various reactions and criticisms from different economic scholars. We will now look at some of the criticisms of the Fei-Ranis model.
1. Marginal Productivity of labour in early growth stage: the model is of the view that MPL=0 in the first stage of economic growth, and the transfer of labour from agricultural sector will not reduce output in the agricultural sector. But economists like Berry and Soligo are of the view that agricultural output in the early stage of economic growth will not remain constant and may fall under different systems of land tenure, i.e. the peasant proprietorship and share cropping, etc.
2. Marginal Productivity of labour is Not Zero: Prof. Jorgenson who also presented a model of ‘dual economy’ objected to Rei-Fanis model assumption that marginal productivity of labour in the first stage is zero. He says that whether MPL equals zero is an empirical issue. During the seasons of sowing and harvesting the MPL>0. Jorgenson made this conclusion on the basis of the Japanese data where even during the first world war supply of labour was not unlimited, so how then can MPL be zero
3. Ignoring The Role of Capital: The Fei-Ranis model focused more on land and labour as determinants of output thereby ignoring the role of capital. Profs. Brown, Byres, Frankel, Griffen, Ghatak and Ingersent are of the view that in the underdeveloped countries there has occurred what is known as ‘Green Revolution’ in agriculture which has promoted the greater use of capital and technology on lands. Consequently, there has been a greater increase in the agricultural productivity and agricultural incomes.
4. Open Economy: the model ignored the role of foreign trade as it assumed a closed economy model. In the second stage when agricultural products decreases the Terms of Trade goes against industrial sector. This would occur in the presence of closed economy, but if the model is made open such a situation will not occur as the goods could be imported in the presence of current-scarcity. This was especially observed in the case of Japan that imported cheap farm products to improve her Terms of Trade.
5. Supply of Land in Long Run: the Rei-Fanis model assumed that in the process of economic development the supply of land remained fixed, but its not true. The supply of land can be increased in the case of long run
6. Commercialization of Agricultural Sector and Inflation: according to this model when an economy reaches the period of agricultural product commercialization then the third stage has been achieved. But the model is criticized by saying that it is not easy to achieve the third stage, because the shifting of labour to industrial sector will create labour shortage in the agricultural sector. This will create shortage of foodstuffs leading to increase in price of foodstuffs. In this way, inflation will increase which will hamper the development of the country’s economy.
7. Low Productivity in Agricultural Sector: according to Prof. Jorgenson it has been observed that there has been a slow rise in productivity of agricultural sector. Consequently, the surplus will hardly be created in agricultural sector, hence the agricultural sector will not contribute to development. Thus the growth requires that the surplus must be generated and it should persist.
8. Money as a Substitute: Fei and Ranis say, “it has been argued that money is not a simple substitute for physical capital in an aggregate production function. There are reasons to believe that the relationship between money and physical capital could be complementary to each other at some stage of economic development, to the extent that credit policies could play an important role in easing bottlenecks on the growth of agriculture and industry. They fail to differ between wage labour and household labour which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
CONCLUSION
To conclude, the Fei-Ranis model is of the opinion that transfer of labour from one sector to another in the economy will lead to economic development of both sectors of the economy, and the wage rate will still be constant between both sectors. If we were to apply such school of thought in the Nigerian economy, this is what is likely to occur; if in Nigeria doctors earn one million naira every month while farmers earn say two hundred thousand naira every month, according to the Fei-Ranis model more people will begin to shift to become doctors reducing the number of farmers and in the long run the wages of farmers will equal that of doctors due to the lower number of farmers there will be hike in food prices which will cause farmers to earn the same amount as doctors. Still using Nigeria as our real world case-study, such a situation will not occur because if more people shift to become doctors, there is no guarantee that even if numbers of doctors increase that the same wage rate will prevail because the country is very populated and usually where there is excess supply of labour real wage rate decreases. So the theory of Fei-Ranis model would not work in a country like Nigeria because it did not take into account the huge population of the country and it also neglected the fact that Nigeria is densely populated, meaning that even if there is a huge shift in labour to study doctors there will also be an equivalent shift from the industrial sector to the agricultural sector. The theory only sees labour shifts from agricultural to industrial, it does not consider the situation of labour shift from industrial to agricultural.
Note that the above conclusion was drawn based on the writer’s thought process when comparing Nigeria’s current economic situation with the criticisms, basic assumptions and arguments of the Fei-Ranis model. No empirical or statistical data was used.
2) HARRIS TODARO MODEL
SUMMARY OF HARRIS-TODARIS MODEL
The Harris-Todaro, named after John.R.Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
ASSUMPTIONS OF THE MODEL
1) An equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker.
2) Unemployment is non-existent in the rural agricultural production
3) Labour market is perfectly competitive
4) Due to labour migration there will be a positive unemployment equilibrium in the urban sector.
The model is of the opinion that rural to urban migration will increase if;
Urban wages increase in the urban sector, increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector, decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behaviour is economically rational and utility maximizing in the context of the Harris-Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
HARRIS-TODARO MODEL IN THE NIGERIAN ECONOMY
The Harris-Todaro model does the good work of explaining the relationship between the formal and informal sectors of the economy, the model is concerned with how supply of labour is determined by the prevailing real wage rate.
In the Nigerian scenario, we will try to use to the Harris-Todaro model to check the following things;
a) If there is rural-urban migration in the economy?
b) Is rural urban migration in Nigeria caused by change in real wage rate alone?
c) Is rural-urban migration a problem or solution to Nigeria’s economic problems?
d) Is rural-urban migration needed before any country can said to be developed?
We will now use the Harris-Todaro model, to check how Rural-Urban migration affects Nigeria’s economy and if the rural-urban migration is needed for economic developments among other developing countries.
In Nigeria, it is right to say that the rate of rural-urban migration in the country is very high. Citizens all over the country residing in rural areas across the country are always seeking to leave their rural settlements in search of “greener pastures”, most citizens believe that moving out of the rural areas will improve their chances of gaining better income paying jobs. The believe that they do not receive enough income for the huge amounts of work that they do particularly in the agricultural sector. Some Nigerians go to the extent of even viewing Nigeria as a rural settlement and they feel that remaining in the country, they will not be paid adequately after services are rendered. This has increased the number of Nigerian citizens outside the country all in the name of looking for better income paying jobs. Most Nigerian citizens are not to be blamed for wanting to leave the country, or wanting to leave the rural areas to the urban areas because every human being wants to go to a place where he or she is paid well for services rendered and is valued by the government.
In Nigeria assuming that change in real wage rate is the only cause of Rural-Urban migration, is to have a biased view. Real wage rate is a major factor of rural-urban migration but it is not the only cause. There are others which will be listed below;
a) Age of the rural family members
b) Level of education
c) Physical Distance between rural areas and urban areas
d) Employment
e) Availability of relatives residing in urban areas
f) Attractiveness of the urban areas
g) Climate variety
h) To Improve allocation of human resources that are relatively scarce(land)
i) To escape from social inequalities(poverty, famines, flooding, civil wars,etc)
So from the few above factors, real wage is not the only determinant of rural-urban migration.
Rural-Urban migration is a double edged sword, depending on its effect on economic productivity it can make or mar an economy. In the case of Nigeria rural-urban migration is not necessarily a solution to the country’s current economic situation, since the country has a population estimated over 200 million. So rural-urban migration in this case can be seen as a problem, because Nigeria’s economic problem is not majorly rural-urban migration but rather on failed implementation of economic policies that would have improved the country’s economy. So if more people are moving roundabout the country it reduces the chances of gathering adequate population data, increases the rate of poor human resource allocation and over population of particular states in the nation, as can be seen in the case of Lagos.
The one question that has a straightforward answer is the last question-is rural-urban migration needed before a country is developed- and the answer to that question is YES. This is because for development to occur whether in individuals or in the economy, changes must take place, you cannot grow or improve by remaining static. So it is ok to assume that rural-migration is a prerequisite before any country can be developed. Citizens migrate from rural to urban areas and then back to rural areas, for example a person leaves his village to the city to gain new jobs and after attaining said job, the next thing the person will want to do is to try and make said job available to rural settlers as well not just for urban dwellers. This can be seen in the opening of bank branches in different villages across the country.
CONSEQUENCES OF RURAL-URBAN MIGRATION IN NIGERIA
The consequences of migration affects both the rural and urban settlers in the economy and some of them will be listed below. They include;
a) Population; the rural-urban migration reduces the number of rural dwellers in the Nigerian community which has a negative effect on agricultural output and slows down the pace of development of the rural areas due to human flight capital.
b) Neglect of Rural Areas; constant human flight capital from the rural areas will lead to neglect of the rural areas by the government. The government will not concern themselves much with the activities of the rural areas because they feel that they do not contribute anything positive to the economy and since they are relatively small that they don’t need much support or help. Hence the government will focus more on obviously populated urban places.
c) Congestion of the urban areas; due to the excess populace in the urban areas there will be much people making use of few scarce resources, also due to that overpopulation there is a high risk that basic amenities may not be enough to satisfy the large population size.
Other consequences include; unemployment, high crime rate, political and civil unrest, armed robbery, alcoholism, drug abuse, health hazards from pollution and an overall decline in traditional values.
CONCLUSION
Across the course of this assignment work, I can say that the major reason why people migrate from the rural to the urban areas is the desire to attain better living conditions (improve their standard of living), under which we see factors such as real wage rate playing a major role.
So to address the problem of rural-urban migration, the government needs to provide the same infrastructural and social facilities that are in the urban areas to the rural areas as well. With these facilities ranging from good roads, electricity, pipe-borne water, healthcare amenities, good and quality education and finally down to adequate housing and proper sewage disposal mechanisms.
Name: Fidelis Emmanuel Oluebubechukwu
Reg. No.: 2017/241440
Email: emmanuel.fidelis.241440@unn.edu.ng
HARRIS-TODARO MODEL OF MIGRATION
This model was name after John R. Harris and Michael Todaro. It was developed in 1970 and used to explain some of the problems of rural-urban migration. It illustrate migrants’ decision on expected income differentials between rural or agriculture sector and urban or manufacturing sector. The Harris-Todaro model is a pioneering general equilibrium model describing the labor migration mechanism from rural to urban areas due to a wage gap and the existence of urban unemployment and underemployment in developing countries. This model seeks to explain the critical urban unemployment problem in developing countries. It treats rural-urban migration primarily as an economic phenomenon. It assumes that workers compare the expected incomes in the urban sector with rural wage rates and migrate if the expected income in the urban sector exceeds that of the rural sector. This model assumes that the urban wage is institutionally and legally fixed, so that as a result of the migration of workers, if there are more workers than the number of new jobs, some workers would necessarily be unemployed. Rural-urban migration is thus the equilibrating force which equates rural and urban expected incomes and as such is a disequilibrium phenomenon.
The introduction of the probability of employment as an element in the decision making process of a potential migrant is Todaro’s main contribution. He proposed what he called “a more realistic picture of labor migration in less developed countries”, i.e., a two-stage process. The first stage is where the rural migrant enters the urban area and settles down in the so called “traditional urban sector” (or more popularly, the informal sector) for a certain period of time. The second stage is reached when the migrant finds a more permanent job in the modern sector. According to Todaro the probability of landing a job depends on the number of newly created jobs in the modern sector, the size of the population of the urban unemployed, and the length of time a migrant has been in the urban area. Understandably, the longer one has been in the urban area, the more likely he will find a job in the manufacturing sector. The criterion used in making the decision to migrate or not is the expected relative present real values of the two choices.
ASSUMPTIONS
1. It is based on the premise that a fixed wage leads to an outbreak of distortion and urban unemployment.
2. The economy consist of two sectors namely agricultural sector and manufacturing sector.
3. Wages are flexible and equal to the marginal product of labour according to profit maximization in the rural sector.
4. Migration between the rural and urban sectors will cease when the urban-expected wage is equal to the rural expected wage.
5. Migration is two stage process. In the first stage, migrant workers find jobs in the informal sector. In the second stage, they move to the formal sector.
CRITICISMS
1. The Harris-Todaro framework is only a static model describing migration, which is a dynamic phenomenon by nature.
2. Important aspects are absent from the standard Harris-Todaro model, including the probable heterogeneity of migrants which is not accounted for.
3. The assumption that urban workers are either employed in the manufacturing sector or unemployed has been criticized as too simplistic even though, in the authors’ minds, it was implicit that unemployment could also be interpreted as underemployment in the informal sector.
4. Cole and Sanders (1985) criticized the Harris-Todaro model arguing that it flawed the job selection process and expected income calculations if, by lack of qualification, uneducated migrants could not find a job in the modern urban sector.
5. The job rationing mechanism or hiring model hypothesized is not realistic.
Relating this to the Nigerian economy, it is obvious that because of the wage differences between the rural and urban sector most people from the rural area migrate to the urban area in search for greener pastures and to make a living for themselves and their families and by doing so the population and the labour force of the rural reduces and that of the urban area increases above the number of jobs available. For instance, in Nigeria many people have moved from the villages to cities like Lagos in search of jobs thereby increasing the number of people searching for jobs. Because the job available in lagos is less than the number of people searching for jobs the rate of unemployment is high.
LEWIS FEI RANIS MODEL OF ECONOMIC GROWTH
The Lewis Fei Ranis model of economic growth was developed by John C. H. Fei and Gustav Ranis. It is a dualism model in developmental economics or welfare economics that has been and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. In this model, the economy in an underdeveloped country is divided into two sectors namely the Subsistence sector and the capitalist sector. Subsistence is identified with the agricultural sector of the economy while the capitalist sector implies mainly the manufacturing sector of the economy. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Assumptions of the Lewis Model
1. Surplus Labour in the Subsistence Sectors: The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
2. Importance of Saving: Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion while those in the subsistence sector squander away their savings,
Critical Review of the Lewis’s Model:
1. According to Schultz, Viner, Heberler and Hopper, the production in the subsistence sector will be affected when labour is withdrawn from it.
2. Lewis ignored the cost involved in training the unskilled worker transferred from the subsistence sector.
3. When labour is transferred from the subsistence sector share of agricultural output falling to each one left in the agricultural sector will go a rising. This means the institutional wage will go on rising with every transfer and so will be the wages paid in the capitalist sector.
4. The model assumes that, besides labour, there is unlimited supply of entrepreneurs in the capitalist sector. This is not true in the case of many of the underdeveloped countries.
5. It is wrong to assume that a capitalist will always re-invest their profits. They to can indulge in un-productive pursuits. They can use their profits for speculative purposes.
NAME: IGWEH SIXTUS OZIOMA
REG NO: 2017.247588
EMAIL: igwehsixtus9@gmail.com
ANSWER:
1) HARRIS TODARO MODEL
SUMMARY OF HARRIS-TODARIS MODEL
The Harris-Todaro, named after John.R.Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
ASSUMPTIONS OF THE MODEL
An equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker.
Unemployment is non-existent in the rural agricultural production
Labour market is perfectly competitive
Due to labour migration there will be a positive unemployment equilibrium in the urban sector.
The model is of the opinion that rural to urban migration will increase if;
Urban wages increase in the urban sector, increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector, decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behaviour is economically rational and utility maximizing in the context of the Harris-Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
HARRIS-TODARO MODEL IN THE NIGERIAN ECONOMY
The Harris-Todaro model does the good work of explaining the relationship between the formal and informal sectors of the economy, the model is concerned with how supply of labour is determined by the prevailing real wage rate.
In the Nigerian scenario, we will try to use to the Harris-Todaro model to check the following things;
If there is rural-urban migration in the economy?
Is rural urban migration in Nigeria caused by change in real wage rate alone?
Is rural-urban migration a problem or solution to Nigeria’s economic problems?
Is rural-urban migration needed before any country can said to be developed?
We will now use the Harris-Todaro model, to check how Rural-Urban migration affects Nigeria’s economy and if the rural-urban migration is needed for economic developments among other developing countries.
In Nigeria, it is right to say that the rate of rural-urban migration in the country is very high. Citizens all over the country residing in rural areas across the country are always seeking to leave their rural settlements in search of “greener pastures”, most citizens believe that moving out of the rural areas will improve their chances of gaining better income paying jobs. The believe that they do not receive enough income for the huge amounts of work that they do particularly in the agricultural sector. Some Nigerians go to the extent of even viewing Nigeria as a rural settlement and they feel that remaining in the country, they will not be paid adequately after services are rendered. This has increased the number of Nigerian citizens outside the country all in the name of looking for better income paying jobs. Most Nigerian citizens are not to be blamed for wanting to leave the country, or wanting to leave the rural areas to the urban areas because every human being wants to go to a place where he or she is paid well for services rendered and is valued by the government.
In Nigeria assuming that change in real wage rate is the only cause of Rural-Urban migration, is to have a biased view. Real wage rate is a major factor of rural-urban migration but it is not the only cause. There are others which will be listed below;
Age of the rural family members
Level of education
Physical Distance between rural areas and urban areas
Employment
Availability of relatives residing in urban areas
Attractiveness of the urban areas
Climate variety
To Improve allocation of human resources that are relatively scarce(land)
To escape from social inequalities(poverty, famines, flooding, civil wars,etc)
So from the few above factors, real wage is not the only determinant of rural-urban migration.
Rural-Urban migration is a double edged sword, depending on its effect on economic productivity it can make or mar an economy. In the case of Nigeria rural-urban migration is not necessarily a solution to the country’s current economic situation, since the country has a population estimated over 200 million. So rural-urban migration in this case can be seen as a problem, because Nigeria’s economic problem is not majorly rural-urban migration but rather on failed implementation of economic policies that would have improved the country’s economy. So if more people are moving roundabout the country it reduces the chances of gathering adequate population data, increases the rate of poor human resource allocation and over population of particular states in the nation, as can be seen in the case of Lagos.
The one question that has a straightforward answer is the last question-is rural-urban migration needed before a country is developed- and the answer to that question is YES. This is because for development to occur whether in individuals or in the economy, changes must take place, you cannot grow or improve by remaining static. So it is ok to assume that rural-migration is a prerequisite before any country can be developed. Citizens migrate from rural to urban areas and then back to rural areas, for example a person leaves his village to the city to gain new jobs and after attaining said job, the next thing the person will want to do is to try and make said job available to rural settlers as well not just for urban dwellers. This can be seen in the opening of bank branches in different villages across the country.
CONSEQUENCES OF RURAL-URBAN MIGRATION IN NIGERIA
The consequences of migration affects both the rural and urban settlers in the economy and some of them will be listed below. They include;
Population; the rural-urban migration reduces the number of rural dwellers in the Nigerian community which has a negative effect on agricultural output and slows down the pace of development of the rural areas due to human flight capital.
Neglect of Rural Areas; constant human flight capital from the rural areas will lead to neglect of the rural areas by the government. The government will not concern themselves much with the activities of the rural areas because they feel that they do not contribute anything positive to the economy and since they are relatively small that they don’t need much support or help. Hence the government will focus more on obviously populated urban places.
Congestion of the urban areas; due to the excess populace in the urban areas there will be much people making use of few scarce resources, also due to that overpopulation there is a high risk that basic amenities may not be enough to satisfy the large population size.
Other consequences include; unemployment, high crime rate, political and civil unrest, armed robbery, alcoholism, drug abuse, health hazards from pollution and an overall decline in traditional values.
CONCLUSION
Across the course of this assignment work, I can say that the major reason why people migrate from the rural to the urban areas is the desire to attain better living conditions (improve their standard of living), under which we see factors such as real wage rate playing a major role.
So to address the problem of rural-urban migration, the government needs to provide the same infrastructural and social facilities that are in the urban areas to the rural areas as well. With these facilities ranging from good roads, electricity, pipe-borne water, healthcare amenities, good and quality education and finally down to adequate housing and proper sewage disposal mechanisms.
2) LEWIS-FEI-RANIS MODEL
LEWIS-FEI-RANIS MODEL (Surplus Labour Theory)
This theory was propounded by two economists John Fei and Gustav Ranis their theory was seen as an extension of the Lewis model. The model developed by Fanis and Ranis explains how the increased productivity in the agricultural the sector would become helpful in promoting industrial sector. The theory pays attention to the fact that the economy is divided into Modern and Primitive sector i.e the industrial sector and the agriculture sector. This model unlike other models takes into account the situation of unemployment and underemployment particularly to developing countries, it also does not consider underdeveloped countries to be homogenous in nature.
As earlier stated, this model considers development of an economy to be dependent on two sectors of the economy; Primitive (agricultural) and Modern (industrial) sectors Both sectors coexist in the economy to try to attain full development, but development can only be achieved when one sector is invested in more to the detriment of the other sector i.e. if a developing country wants to improve its development process it had to choose between developing the agricultural sector or the industrial sector, it cannot develop both at the same time. If the country decides to develop the agricultural sector then it has to transfer all its labour force in the industrial sector to the agricultural sector to increase productivity since agriculture is very labour intensive and by so doing the country will be able to produce very large food products both for exports and domestic consumption and will maintain a positive balance of trade.
BASIC ASSUMPTIONS OF THE LEWIS-FEI-RANIS MODEL
The theory is mainly focused on poor and developing countries. Below are some of the assumptions of the model
There is an abundance of labour in Underdeveloped countries and shortage of natural resources.
The population growth rate is very high which results in mass unemployment in the economy.
The majority of the population is engaged in agriculture, but the agricultural sector is stagnant. Hence marginal productivity of labour is zero and negative in agricultural sector.
There are certain non-agrarian sectors in the economy where there is reduced use of capital’
There is a dynamic industrial sector in the economy.
In all, the model opines that economic development is taking place if the agricultural labourers are transferred to industrial sector where their productivity will increase.
Despite the fact that the Fei-Ranis model is an offshoot of the Lewis model, it is necessary to note the little differences between the Fei-Ranis model and the Lewis model.
DIFFERENCE BETWEEN LEWIS MODEL AND RANIS-FEI MODEL
Lewis believed that all labour in the agricultural sector whose marginal productivity was either zero or less the institutional wage was available to the industrial sector at the institutional wage While Fei assumed that even if labour was transferred to the industrial sector, the wage rate will be constant i.e. there will be no increase in wage rate as a result of increase in labour.
Ranis and Fei assumed that labour in the industrial sector will be paid, in terms of output produced and had to use Terms of trade.
The major difference lies in the thoughts of the two economists. Lewis’s model did not consider the fact that terms of trade can change, he totally ignored it. While the Fei-Ranis model takes account that terms of trade can change and that labour will always be available at a constant institutional wage rate.
STAGES OF THE FEI-RANIS MODEL
The Fei-Ranis dual economy model was developed using three stages
FIRST STAGE: This stage is very similar to the Lewis model. Disguised unemployment comes into being because the supply of labour is perfectly elastic and MPL= 0. Therefore, such disguised unemployed are to be transferred to the industrial sector at the constant institutional wage.
SECOND STAGE: This stage focuses on agricultural sector of the economy and how agricultural produce is affected by the wage rate paid to agricultural workers. It is in this second stage that the theory-SURPLUS LABOUR- comes into play. According to this stage surplus labour exists where APL>MPL, but is not equal to the institutional wage rate. Due to this there will be excess supply of labour to the industrial sectors, and if such migration of labour continues to the industrial sector a situation will occur where farm outputs will be equal to the institutional wage rate. This situation came about to be because there was low demand for labour supply in the agricultural sector which will then cause the agricultural sector to increase its wage rate to match that of the industrial sector so as to not loose anymore labour. The second stage is also called the “Take-Off Stage”.
THIRD STAGE: also called the “Era of Self-Sufficiency growth”, in this stage farm output is greater than the wage rate they receive. Here the agricultural becomes commercialized and the excess supply of labour comes to an end as it is assumed that the economy is at full employment.
From the three stages above there are three major things that are to be noted;
Growth of the agricultural sector is important as the growth of the industrial sector.
There should be a balanced growth of both sectors.
To avoid the situation of the Malthusian Nightmare-where there is excess unemployed population-the rate of labour absorption in the economy must be greater than the population growth rate.
ARGUMENT OF THE FEI-RANIS MODEL
The major argument of the Fei-Ranis model is that surplus can be created by the activities of the government and investment activities of the population. The model talks strongly on the relationship between the agricultural and industrial sector and how proper development of both sectors is the key to attaining full development in the economy, the model does not prioritize development of one sector over the other but instead advocates for equal improvements of both sectors. The model also shows the strong interdependent relationship between the two sectors, if agricultural labourers begin seeking industrial employment and they are employed because industrialists employ more workers due to their larger capital good stock and labour-intensive technology, this shows how the industrial sector is dependent on the excess labour of the agricultural sector. Also, if the surplus owner invests in that section of the industrial sector that is close to the soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized. According to this model, economic development is achieved in dualistic economies of developing and underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision-making powers and use industrial capital and consumer goods for agricultural practices.
However, leakages could exist because of the cost of transferring the labour from agricultural sector to the industrial sector in the form of transport cost and building of schools and hospitals, etc. Also, the transfer of labour may lead to increased per capita consumption of agricultural output and a gap may also emerge in case of rural wages and urban wages. Again, if the supply curve of labour is backward bending, the peasants may reduce their work effort as their income rises.
Fei and Ranis were quick to mention that the necessity of labour reallocation must be linked more to the need to produce more capital investment goods as opposed to the thought of industrial consumer goods following the theory of Engel’s law. This is because the assumption that the demand for industrial good is high seems unrealistic, since the real wage in the agricultural economy is very low and that hinders the demand for industrial goods. In addition to that, low and mostly constant wage rates will render the wage rates in the industrial sector low and constant. This implies that demand for industrial goods will not rise at a particular rate following the theory of Engel’s law. This will cause the citizens of developing countries to experience increase in purchasing power, and the dualistic economies will then follow a “natural austeric” path that is characterized by increase in demand which shows the importance of capital goods industries when compared to consumer goods industries. Investment in capital goods has a long period before benefits are reaped, this then causes government to intervene in the economy and help especially in the early stages of the economy’s growth. The government also works on the social and economic overheads.
REACTIONS/ CRITICISMS OF THE FEI-RANIS MODEL
Despite the improvements made by Fei and Ranis on Lewis’s earlier theory, their model was received with various reactions and criticisms from different economic scholars. We will now look at some of the criticisms of the Fei-Ranis model.
Marginal Productivity of labour in early growth stage: the model is of the view that MPL=0 in the first stage of economic growth, and the transfer of labour from agricultural sector will not reduce output in the agricultural sector. But economists like Berry and Soligo are of the view that agricultural output in the early stage of economic growth will not remain constant and may fall under different systems of land tenure, i.e. the peasant proprietorship and share cropping, etc.
Marginal Productivity of labour is Not Zero: Prof. Jorgenson who also presented a model of ‘dual economy’ objected to Rei-Fanis model assumption that marginal productivity of labour in the first stage is zero. He says that whether MPL equals zero is an empirical issue. During the seasons of sowing and harvesting the MPL>0. Jorgenson made this conclusion on the basis of the Japanese data where even during the first world war supply of labour was not unlimited, so how then can MPL be zero
Ignoring The Role of Capital: The Fei-Ranis model focused more on land and labour as determinants of output thereby ignoring the role of capital. Profs. Brown, Byres, Frankel, Griffen, Ghatak and Ingersent are of the view that in the underdeveloped countries there has occurred what is known as ‘Green Revolution’ in agriculture which has promoted the greater use of capital and technology on lands. Consequently, there has been a greater increase in the agricultural productivity and agricultural incomes.
Open Economy: the model ignored the role of foreign trade as it assumed a closed economy model. In the second stage when agricultural products decreases the Terms of Trade goes against industrial sector. This would occur in the presence of closed economy, but if the model is made open such a situation will not occur as the goods could be imported in the presence of current-scarcity. This was especially observed in the case of Japan that imported cheap farm products to improve her Terms of Trade.
Supply of Land in Long Run: the Rei-Fanis model assumed that in the process of economic development the supply of land remained fixed, but its not true. The supply of land can be increased in the case of long run
Commercialization of Agricultural Sector and Inflation: according to this model when an economy reaches the period of agricultural product commercialization then the third stage has been achieved. But the model is criticized by saying that it is not easy to achieve the third stage, because the shifting of labour to industrial sector will create labour shortage in the agricultural sector. This will create shortage of foodstuffs leading to increase in price of foodstuffs. In this way, inflation will increase which will hamper the development of the country’s economy.
Low Productivity in Agricultural Sector: according to Prof. Jorgenson it has been observed that there has been a slow rise in productivity of agricultural sector. Consequently, the surplus will hardly be created in agricultural sector, hence the agricultural sector will not contribute to development. Thus the growth requires that the surplus must be generated and it should persist.
Money as a Substitute: Fei and Ranis say, “it has been argued that money is not a simple substitute for physical capital in an aggregate production function. There are reasons to believe that the relationship between money and physical capital could be complementary to each other at some stage of economic development, to the extent that credit policies could play an important role in easing bottlenecks on the growth of agriculture and industry. They fail to differ between wage labour and household labour which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
CONCLUSION
To conclude, the Fei-Ranis model is of the opinion that transfer of labour from one sector to another in the economy will lead to economic development of both sectors of the economy, and the wage rate will still be constant between both sectors. If we were to apply such school of thought in the Nigerian economy, this is what is likely to occur; if in Nigeria doctors earn one million naira every month while farmers earn say two hundred thousand naira every month, according to the Fei-Ranis model more people will begin to shift to become doctors reducing the number of farmers and in the long run the wages of farmers will equal that of doctors due to the lower number of farmers there will be hike in food prices which will cause farmers to earn the same amount as doctors. Still using Nigeria as our real world case-study, such a situation will not occur because if more people shift to become doctors, there is no guarantee that even if numbers of doctors increase that the same wage rate will prevail because the country is very populated and usually where there is excess supply of labour real wage rate decreases. So the theory of Fei-Ranis model would not work in a country like Nigeria because it did not take into account the huge population of the country and it also neglected the fact that Nigeria is densely populated, meaning that even if there is a huge shift in labour to study doctors there will also be an equivalent shift from the industrial sector to the agricultural sector. The theory only sees labour shifts from agricultural to industrial, it does not consider the situation of labour shift from industrial to agricultural.
Note that the above conclusion was drawn based on the writer’s thought process when comparing Nigeria’s current economic situation with the criticisms, basic assumptions and arguments of the Fei-Ranis model. No empirical or statistical data was used.
MADUKO MAUREEN ADAEZE
2017/249049
ECONOMICS DEPARTMENT
dymphnamaureen@gmail.com
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HARRIS TODARO’S THEORY OF MIGRATION
From observation of economic development in western Europe and the United States, one can notice the movement of labor from rural to urban areas. For the most part, with a rural sector dominated by agricultural activities and an urban sector focusing on industrialization, overall economic development in these countries was characterized by the gradual reallocation of labor out of agriculture and into industry through rural-urban migration, both internal and international. Urbanization and industrialization were in essence synonymous. This historical model served as a blueprint for structural change in developing countries, as evidenced, for example, by the original Lewis theory of labor transfer. But the overwhelming evidence of the past several decades, when developing nations witnessed a massive migration of their rural populations into urban areas despite rising levels of urban unemployment and underemployment, lessens the validity of the Lewis two-sector model of development. An explanation of the phenomenon, as well as policies to address the resulting problems, must be sought elsewhere. One theory to explain the apparently paradoxical relationship of accelerated rural-urban migration in the context of rising urban unemployment has come to be known as the Todaro migration model and in its equilibrium form as the Harris-Todaro model.Employment policy in developing countries like India cannot be formulated and implemented without answering a basic question, viz., how can underutilised labour be used in a development strategy? Ragnar Nurkse and W. A. Lewis asserted that large numbers of people remain engaged in work which adds nothing to national output. Nurkse saw the reallocation of a surplus labour to more productive uses, especially labour-intensive construction projects, as a major source of capital formation and economic growth.Lewis envisaged a similar reallocation process but he pictured the ‘capitalist sector’, essentially industry, as the principal employer of surplus labour. Both theories regarded the labour reallocation process as nearly costless but they worried about how to capture from the agricultural sector the food necessary to feed the transferred workers. While criticising the Lewis model J. R. Harris and M. P. Todaro have developed a new model of economic development which is relevant for labour surplus countries like India. It is the best known model of internal migration in the context of present-day developing countries. The model has focused on migration of labour from rural to urban areas induced by certain incentives. They have referred to two types of migration—induced migration and internal migration.
Main arguments of the Model
Starting from the assumption that migration is primarily an economic phenomenon, which for the individual migrant can be a quite rational decision despite the existence of urban unemployment, the Todaro model postulates that migration proceeds in response to urban-rural differences in expected income rather than actual earnings. The fundamental premise is that migrants consider the various labor market opportunities available to them in the rural and urban sectors and choose the one that maximizes their expected gains from migration. In essence, the theory assumes that members of the labor force, both actual and potential, compare their expected incomes for a given time horizon in the urban sector (the difference between returns and costs of migration) with prevailing average rural incomes and migrate if the former exceeds the latter.
Consider the following illustration. Suppose that the average unskilled or semiskilled rural worker has a choice between being a farm laborer (or working his own land) for an annual average real income of, say, 50 units or migrating to the city, where a worker with his skill or educational background can obtain wage employment yielding an annual real income of 100 units. The more commonly used economic models of migration, which place exclusive emphasis on the income differential factor as the determinant of the decision to migrate, would indicate a clear choice in this situation. The worker should seek the higher-paying urban job. It is important to recognize, however, that these migration models were developed largely in the context of advanced industrial economies and hence implicitly assume the existence of full or near-full employment. In a full-employment environment, the decision to migrate can be based solely on the desire to secure the highest-paid job wherever it becomes available. Simple economic theory would then indicate that such migration should lead to a reduction in wage differentials through the interaction of the forces of supply and demand, in areas of both emigration and immigration.
Unfortunately, such an analysis is not realistic in the context of the institutional and economic framework of most developing nations. First, these countries are plagued by a chronic unemployment problem, which means that a typical migrant cannot expect to secure a high-paying urban job immediately. In fact, it is much more likely that on entering the urban labor market, many uneducated, unskilled migrants will either become totally unemployed or will seek casual and part-time employment as vendors, hawkers, repairmen, and itinerant day laborers in the urban traditional or informal sector, where ease of entry, small scale of operation, and relatively competitive price and wage determination prevail. In the case of migrants with considerable human capital in the form of a secondary or university certificate, opportunities are much better, and many will find formal-sector jobs relatively quickly. But they constitute only a small proportion of the total migration stream. Consequently, in deciding to migrate, the individual must balance the probabilities and risks of being unemployed or underemployed for a considerable period of time against the positive urban-rural real income differential. The fact that a typical migrant who gains a modern-sector job can expect to earn twice the annual real income in an urban area than in a rural environment may be of little consequence if the actual probability of his securing the higher-paying job within, say, a one-year period is one chance in five. Thus, the actual probability of his being successful in securing the higher-paying urban job is 20%, and therefore his expected urban income for the one-year period is in fact 20 units and not the 100 units that an urban worker in a full-employment environment would expect to receive. So with a one-period time horizon and a probability of success of 20%, it would be irrational for this migrant to seek an urban job, even though the differential between urban ` and rural earnings capacity is 100%. However, if the probability of success were 60% and the expected urban income therefore 60 units, it would be entirely rational for our migrant with his one-period time horizon to try his luck in the urban area, even though urban unemployment may be extremely high. If we now approach the situation by assuming a considerably longer time horizon—a more realistic assumption, especially in view of the fact that the vast majority of migrants are between the ages of 15 and 24—the decision to migrate should be represented on the basis of a longer-term, more permanent income calculation. If the migrant anticipates a relatively low probability of finding regular wage employment in the initial period but expects this probability to increase
over time as he is able to broaden his urban contacts, it would still be rational for him to migrate, even though expected urban income during the initial period or periods might be lower than expected rural income. As long as the present value of the net stream of expected urban income over the migrant’s planning horizon exceeds that of the expected rural income, the decision to migrate is justifiable.
Rather than equalizing urban and rural wage rates, as would be the case in a competitive model, we see that rural-urban migration in our model equates rural and urban expected incomes. For example, if average rural income were 60 and urban income were 120, a 50% urban unemployment rate would be necessary before further migration would no longer be profitable. Since expected incomes are defined in terms of both wages and employment probabilities, it is possible to have continued migration despite the existence of sizable rates of urban unemployment. In our example, migration would continue even if the urban unemployment rate were 30% to 40%.
APPLICATION OF HARRIS TODARO’S MIGRATION THEORY TO NIGERIA
Concern over the problems of high rates of rural-urban migration in Nigeria , as indeed in most of the third world , centres around three main issues . First there is the concern over the environmental issue of overcrowding in the metropolitan areas resulting from rapid urban growth . The urban physical environment rapidly deteriorates in such a circumstance and enormous strains are placed upon municipal administrative and fiscal resources . Secondly , there is concern arising from-the fact that the swelling pool of urban unemployed , sustained by ruraI-urban migration streams , can no longe r represent a desirable economic phenomenon, but a constraint on economic development .
Thirdly , there is concern over the adverse socio-political implications of prolonged frustration among the urban poor .To the governments of Nigeria , therefore,rural-urban migration is a problem that must be thoroughly understood , in order to allow realistic policies to be generated . This work aims at making a modest contribution towards such an understanding .
Traditional disciplinary approaches have so far not succeeded in making any significant headway toward a solution to the problem of rural -urban migration , and it is argued here that the major caus e of failure may well be that the approaches have been partial in nature . Proceeding the premise that rural-urban migration is in reality a process within a complex socio-economic system consisting off many interacting components and significant feedback effects , general systems theory was considered a useful analytical framework for its investigation . As well as providing a broader perspective , a systems framework is a powerful tool for exploratory research and well-suited to the problem under investigation . By relying on material from existing literature and personal experience of the process in south-eastern Nigeria it was possible to construct a twenty component model of rural-urban migration for Nigeria . Eight of the components are stock variables ; twelve are rate variables. Most of the interrelationships depicted in the model are only hypothesized to be representative of reality . Thus a logical application of the model is the generation of a large number of related , testable hypotheses whose verifications should make a significant addition to the understanding of the process of rural-urban migration in this part of the world . Each of the rate variables in the systems model represents a policy intervention point because all are processes whose operations change other rate variables , the stock variables and , thus ,the conditions of the system . A systematic way to generate a whole range of potential policies for influencing the rate of rural-urban migration is to consider the possibilities for intervention for each of the rate variables .In this way, the generation of potential policies is not handicapped by arbitrariness or incomplete coverage .This application of the model was demonstrated herein .
The main thrust of this study is to lay the groundwork for further ,substantive research on rural-urban migration in Nigeria. There are two main directions along which to proceed beyond this point : the modification of the conceptual structure of the systems model to incorporate several other important aspects of the process of Rural Urban migration; and the testing of the validity of hypotheses arising from the model through the development of primary data. After the construction of the present model , it became clear that the roles of social amenities in rural and urban areas were important elements in migration decisions and should be incorporated in the model . Such an enrichment will make the model more realistic .
Secondly , the treatment of rural employment in the present model is not quite satisfactory . Farm and non-farm employment ought to be disaggregated because the existence or non existence of non-farm jobs in a rural location may well be a critical element in migrator behaviour .The modifications suggested above will allow the generation and testing of hypotheses regarding additional basic policy questions about rural-urban migration .The first question concerns the kind of trade-off functions ,if any ,that govern the behaviour of potential migrants and the urban unemployed , ie. what are they prepared to consider as a minimum inducement package not to migrate (in the case of potential migrants ) and to leave the urban area (in the case of the urban unemployed) Successful investigation of these questions will yield information of considerable importance in fashioning migration policy .
The second basic question that has to be raised and answered is this : how does one define and measure ‘rural development’ ,and in what way is it related to rural-urban migration ? Of all the concepts one encounters in the rural-urban migration literature ,very few surpass that of rural development in both popularity of usage and imprecision . A clarification of this concept and its role in the rural urban migration process would be a significant contribution.
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THE LEWIS-FEI-RANIS SURPLUS LABOUR THEORY
Lewis-Fei-Ranis published his model entitled; “Economic Development with Unlimited Supplies of Labour” in 1954. In his model Lewis divides the economy in an underdeveloped country in two sectors namely the Subsistence sector and the capitalist sector. Subsistence is identified with the agricultural sector of the economy while the capitalist sector implies mainly the manufacturing sector of the economy. Capitalist sector also includes plantations and mining where hired labour is employed for purposes of production. The capitalist sector can either be private or public in nature. Subsistence sector, that the agricultural sector is considered to be labour intensive. It does not use reproducible capital. It uses poor techniques of production and has very low productivity.
Assumptions of the Lewis Model:
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women. The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets. Lewis calls it as institutional wage because every worker gets this wage because of some institutional arrangements. This wages is equal to an average share of each worker in the total output in the subsistence sector. If market forces were allowed to operate in the subsistence sector labourers with zero margin productivity or those with a very low marginal productivity would not have received this wage.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion. Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sectors. Lewis in fact so much fascinated by the higher propensity to save of the capitalist sector that he even advocates a transfer of income from the subsistence sector to the capitalist sector. He feels that steps have to be taken to raise the rate of savings from 10% to 15% if the development of the economy has to be smooth
.
N.B: The explanation of working of the Lewis model is quite simple. He feels that if a wage higher than the institutional wage prevailing in the subsistence sector by a certain proportion of the institutional wage is fixed in the capitalist sector the capitalist sector will be able to attract an unlimited quantity, the labour from subsistence sector. This will enable the capitalist sector to expand. It will, in turn lead to the generation of more savings in the capitalists sector.
The additional saving, will not only help the entrepreneurs to invest more but also to improve the quality of capital invested. This will result in more employment of labour from the subsistence sector. This will lead to generation of more savings in the Capitalist sector which can be further invested leading to employment of more surplus labour and so on. A time will come when the additional savings generated by the investment of borrowed funds become equal to these very funds. At that time, prices will stop rising further. As he says, an equilibrium.is reached when savings generated through the investment of additional bank credit become equal to the amount of bank credit itself. He is also aware of another fact. Inflation can make the distribution of income unfair. However, he says, it will be good for the manufacturing sector if the distribution of income moves in favour of the capitalists. Of course, if inflation tilts the distribution of income in favour of the traders it will be bad for the economy. It will only lead to more speculative activities
.
APPLICATION OF LEWIS MODEL TO THE NIGERIAN ECONOMY
In addition, the total welfare and productivity in both sectors will increase and high wages in modern sector will attract more labour from the subsistence sector, but the marginal productivity and the wage of an additional worker transfered to the modern sector will fall and the marginal productivities and wages of workers in the subsistence sector will rise. This process will continue until the marginal products of labour in the modern sector are equal to that of those in the traditional sector, wages differential in both sectors will disappear and workers no longer have monetary incentives to move from the subsistence or traditional agricultural sector to the capitalist or modern industrial sector. The analyses above will make the Lewis theory applicable to Nigeria as a developing country if and only if the government is able to provide the rural sector of the economy with the good things of life, like water, electricity, good roads and health facilities. However, the Lewis’s theory of development may not be applicable to the Nigerian economy due to the following shortcomings: One, the wage differential that exists between the capitalist sector and the subsistence sector may not be sufficient enough to incentivize people to move from rural areas to urban areas. In Nigeria, it is evident that farmers and other unskilled personnel who have stayed in rural areas during their productive years will want to hold tenaciously to their land and they may not like to migrate even if the government of Nigeria promises them incentives. Farmers and other unskilled persons may also express some resentment because of overcrowding in urban areas, high prices of goods and services and high level of insecurity.Also Lewis expected that the modern industrial sector would have been fully industrialized that is, it would have had stable electricity, adequate housing, stable legal system, high rates of savings and investment to absorb those who transit from the subsistence sector to the capitalist sector. However, all these major economic and social indicators have only been fantasies that have not been realized in Nigeria.Thus, in Nigeria, many roads are still in deplorable conditions, some factories are no longer operating; there is food scarcity crisis, insecurity of life and property through accidents and theft, political and social instability. The aforementioned and other problems may not make the unproductive or surplus labour in the subsistence sector to move into the capitalist sector. Lewis’s assumption that persons are rational and that there is perfect information may not be applicable to the Nigerian situation. In Nigeria, people have refused to operate based on the rationality principle when it comes to migration for a better standard of living, economic growth and development. As a matter of fact, balkanization of land by family relatives and bunkering of oil resources may prevent those who are unproductive in the rural areas of the country to transit to urban areas. Also, there is lack of perfect information in Nigeria about those whose marginal productivities have fallen. Based on this lack of information, development economists may not be fully aware of the need for the transfer of labour from rural sites or the subsistence sector to urban areas or the capitalist sector.In addition, Lewis operated on the classicalists’ principle that profits made by capitalists would be saved and invested. However in Nigeria, rather than investing in the country, many capitalists send their money abroad, thereby contributing to the economic growth of foreign countries instead of their own. In Nigeria, most unproductive workers have labour unions that may feel reluctant to move workers from the subsistence sector to the capitalist sector, because of the sector’s improper exploitation of human and natural resources.
Lewis also asserted that there would be unlimited capital formation. However, this is not the case in Nigeria. Lewis asserted that firms or the state would plough back their profits into the economy thereby increasing savings, investment and the national income. As firms did this, capital formation or capital stock rises, workers earn higher wages; their propensities to save increase and economic growth and pdevelopment take place. However, this is not evident in Nigeria, workers consume more than they save due to high food prices and investment rate refuses to rise. Moreover, the oil industry has almost replaced the traditional agricultural sector and massive exploitation has been experienced by workers who lend their labour out to the oil sector. Firms such as Shell, Oando and some telecommunication firms have refused to invest in the economy and poverty still exists in modern industrial or capitalist sector and traditional agricultural sector. The refusal of these foreign firms to develop and invest in the subsistence sector has led to the current crises in the Niger Delta.
In Conclusion, Lewis’s theory of unlimited labour supply need not be applied to Nigeria because government does not necessarily have to move unskilled workers from rural areas to urban areas. What the government has to do is to provide good amenities for the people in the rural areas. When people in the rural areas enjoythe same amenities like their urban counterparts, there may not be motivation for them to migrate from the rural to the urban areas. This will reduce some of the problems created as a result of rural-urban migration. The provision of good things of life for the rural areas will allow the traditional sector to better service the modern industrial or capitalist thereby promoting forward and backward linkages. Consequently, the applicability of Lewis’s theory of development depends on the proper study of socio economic and political conditions of the Nigerian economy.
EDE CHIDIMMA JULIET
2017/249325
ECONOMICS/GEOGRAPHY
edechidimma100@gmail
LEWIS-FEI-RANIS MODEL OF ECONOMIC GROWTH
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model . It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem.
In Nigeria, development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation or increase of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that Nigeria do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model , saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development.
In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model.
In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared.
Phase 3 is the point where the economy becomes completely commercialized in the absence of disguised unemployment.
The amount of labor that is shifted and the time that this shifting takes depends upon:
1. The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits;
2. The nature of the industry’s technical progress and its associated bias;
3. Growth rate of population.
So, the three fundamental ideas used in this model are:
1. Agricultural growth and industrial growth are both equally important;
2. Agricultural growth and industrial growth are balanced;
3. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap .
HARRIS-TODARO MODEL OF MIGRATION
The Harris–Todaro model , named after John R. Harris and Michael Todaro , is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration . The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive . As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector.
The formal statement of the equilibrium condition of the Harris–Todaro model is as follows:
Let wr be the wage rate (marginal productivity of labor) in the rural agricultural sector.
Let le be the total number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
Let lus be the total number of job seekers, employed and unemployed, in the urban sector.
Let wu be the wage rate in the urban sector, which could possibly be set by government with a minimum wage law.
Rural to urban migration will take place if:
wr (le/lus) wu
At equilibrium,
wr = (le/lus) wu
With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.
Therefore, migration from rural areas to urban areas will increase if:
Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing and therefore should be applied in the Nigerian economy in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment wherever there are migrating to, they will make an expected income-maximizing decision.
Name : Ebe Chidimma Prosper
Reg No: 2017/249323
Email : chidinma.ebe.249323@unn.edu.ng
Website : ebechidimma.blogspot.com
Lewis Fei Ranis Model (Surplus Labour Model)
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.
The central idea behind the Lewis model is fairly simple. Lewis divided labour force into two differentiated groups – “subsistence sector” and “capitalist sector” where the former is assumed to contain unlimited supply and consequently, a pool of surplus labour that sets labour-supply conditions for the latter. The concept of a dual economy is heavily criticised. As Leeson (1982) pointed out, “dual economy” models are “held to imply a false picture of the nature of the historical process of change in underdeveloped countries”.
The two economists John Fei and Gustav Ranis presented their dual economy model. There was a flaw in Lewis model that it did not pay enough attention to the importance of agricultural sector in promoting industrial growth. But Fei-Ranis (FR) model of dual economy explains how the increased productivity in agricultural sector would become helpful in promoting industrial sector. In this respect, it presents three stages whereby a UDC (Under Developed Country) moves from stagnation to self-sustained economic growth. Thus, this model is treated as an improvement over Lewis model of unlimited supply of labor.
Basic Thesis of the Model:
This theory is concerned with a poor economy which has the following properties:
(i) There is an abundance of labor in such UDC and shortage of natural resources.
(ii) The population growth rate is very high which results in mass unemployment in the economy.
(iii) The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labor is zero and negative in agriculture sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy.
Thus the model suggests that:
“Economic development would be taking place if agricultural laborers are transferred to industrial sector where their productivity will increase”.
As we told earlier that it is a dual economy where there is a stagnant agricultural sector and dynamic industrial sector. The situation where MPL – 0, labor can be transferred to industrial sector without any loss in agricultural output. The real wages in industrial sector remains fixed and it is equal to the initial level of real income in agri. sector. Such wages are given the name of institutional wages.
The Harris Todaro Model of Migration
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration.
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods.
The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
Therefore, migration from rural areas to urban areas will increase if:
A) Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
B) Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
The Harris todaro model of migration
The fundamental contribution of Harris and Todaro’s rural-urban two sector migration model was tobuild a model that fit the stylized facts of the labour market. On the lines of the theory, developing countries adopted program on integrated rural development which encouraged anincrease in the rural traditional sector wage. The theory proves that the higher the unemployment rate, the lower is the probability of new migrants from the countryside actively seeking formal sector employment who are unable to find it. The significant findings of the theory are: first,if the expected urban wage equals rural income, there is no incentive to migrate. Second, if the expected urban wage is greater than rural income, there is a great incentive to move from rural to urban area. Third, if the expected urban wage is less than rural incomes, there would be an incentive to move in other direction. Fourth, the expected urban wage depends on what type of job migrant is engaged in. Therefore,the Haris Todaro’smodel helps policy-makers to avoid two mistakes. One is to assume that development efforts should necessarily be channeled to the sectors where the poor are. The other is to assume that efforts should necessarily be focused on getting the poor out of the sectors in which they presently are.
Assumptions of the Harris Todaro Model
1. There are two sectors in the economy; the rural or agricultural sector (A) and the urban or manufacturing sector (M).
2. Each sector produces only one unit X( XA agricultural good; XM- manufacturing sector).
3.The model operates in the short run.
4. Capital is available in fixed quantities in the two sectors.
5. There are N workers in economy with NA and NM numbers employed in the rural and
urban sectors respectively.
6. The number of urban jobs available NM is exogenously fixed. In the rural sector some
work is always available. Therefore, the total urban labour force comprises N-NA along
with an available supply of rural migrants. In other words, the total urban labour force
equals N-NA with (N-NA )-NM unemployed.
7. The urban wage is fixed at WM and the rural wage at WA, WM> WA
8. The rural wage equals the rural marginal product of labour and the urban wage is
exogenously determined.
9. Rural-urban migration continues so long as the expected urban real income is more than
the real agricultural income.
10. The expected urban real income is equal to the proportion of urban labour force actually
employed multiplied by the fixed minimum urban wage.
11. There is perfect competition among producers in both the sectors.
12. The price of the agricultural goods is determined directly by the relative quantity of the two
goods produced in both the sectors.
Lewis-Fei-Ranis Model (Surplus labour theory)
The Lewis-Ranis-Fei model
The Lewis (1954) theory of dualistic economic development provides the seminal contribution to theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent . The non-agricultural sector accumulates capital by drawing surplus labour out of the agricultural sector. The expansion of the non-agricultural sector takes advantage of the infinitely elastic supply of labour from the agricultural sector due to its labour surplus. When the surplus labour is exhausted, the labour supply curve in the non-agricultural sector. Due to the abundance of surplus agricultural labour, its marginal productivity is extremely low and average labour productivity defines the agricultural institutional wage. When the redundant agricultural labour force has been reallocated, the agricultural marginal productivity of labour starts to rise but is still lower than the institutional wage. This marks the shortage point at which the economy enters phase
MADUKO MAUREEN ADAEZE
2017/249049
dymphnamaureen@gmail.com
ECONOMICS DEPARTMENT
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The Lewis-Fei-Ranis surplus labour theory
Lewis-Fei-Ranis published his model entitled; “Economic Development with Unlimited Supplies of Labour” in 1954. In his model Lewis divides the economy in an underdeveloped country in two sectors namely the Subsistence sector and the capitalist sector. Subsistence is identified with the agricultural sector of the economy while the capitalist sector implies mainly the manufacturing sector of the economy. Capitalist sector also includes plantations and mining where hired labour is employed for purposes of production. The capitalist sector can either be private or public in nature. Subsistence sector, that the agricultural sector is considered to be labour intensive. It does not use reproducible capital. It uses poor techniques of production and has very low productivity.
Assumptions of the Lewis Model:
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women. The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets. Lewis calls it as institutional wage because every worker gets this wage because of some institutional arrangements. This wages is equal to an average share of each worker in the total output in the subsistence sector. If market forces were allowed to operate in the subsistence sector labourers with zero margin productivity or those with a very low marginal productivity would not have received this wage.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion. Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sectors. Lewis in fact so much fascinated by the higher propensity to save of the capitalist sector that he even advocates a transfer of income from the subsistence sector to the capitalist sector. He feels that steps have to be taken to raise the rate of savings from 10% to 15% if the development of the economy has to be smooth.
N.B: The explanation of working of the Lewis model is quite simple. He feels that if a wage higher than the institutional wage prevailing in the subsistence sector by a certain proportion of the institutional wage is fixed in the capitalist sector the capitalist sector will be able to attract an unlimited quantity, the labour from subsistence sector. This will enable the capitalist sector to expand. It will, in turn lead to the generation of more savings in the capitalists sector.
The additional saving, will not only help the entrepreneurs to invest more but also to improve the quality of capital invested. This will result in more employment of labour from the subsistence sector. This will lead to generation of more savings in the Capitalist sector which can be further invested leading to employment of more surplus labour and so on. A time will come when the additional savings generated by the investment of borrowed funds become equal to these very funds. At that time, prices will stop rising further. As he says, an equilibrium.is reached when savings generated through the investment of additional bank credit become equal to the amount of bank credit itself. He is also aware of another fact. Inflation can make the distribution of income unfair. However, he says, it will be good for the manufacturing sector if the distribution of income moves in favour of the capitalists. Of course, if inflation tilts the distribution of income in favour of the traders it will be bad for the economy. It will only lead to more speculative activities.
*APPLICATION OF LEWIS MODEL TO THE NIGERIAN ECONOMY
In addition, the total welfare and productivity in both sectors will increase and high wages in modern sector will attract more labour from the subsistence sector, but the marginal productivity and the wage of an additional worker transfered to the modern sector will fall and the marginal productivities and wages of workers in the subsistence sector will rise. This process will continue until the marginal products of labour in the modern sector are equal to that of those in the traditional sector, wages differential in both sectors will disappear and workers no longer have monetary incentives to move from the subsistence or traditional agricultural sector to the capitalist or modern industrial sector. The analyses above will make the Lewis theory applicable to Nigeria as a developing country if and only if the government is able to provide the rural sector of the economy with the good things of life, like water, electricity, good roads and health facilities. However, the Lewis’s theory of development may not be applicable to the Nigerian economy due to the following shortcomings: One, the wage differential that exists between the capitalist sector and the subsistence sector may not be sufficient enough to incentivize people to move from rural areas to urban areas. In Nigeria, it is evident that farmers and other unskilled personnel who have stayed in rural areas during their productive years will want to hold tenaciously to their land and they may not like to migrate even if the government of Nigeria promises them incentives. Farmers and other unskilled persons may also express some resentment because of overcrowding in urban areas, high prices of goods and services and high level of insecurity.Also Lewis expected that the modern industrial sector would have been fully industrialized that is, it would have had stable electricity, adequate housing, stable legal system, high rates of savings and investment to absorb those who transit from the subsistence sector to the capitalist sector. However, all these major economic and social indicators have only been fantasies that have not been realized in Nigeria.Thus, in Nigeria, many roads are still in deplorable conditions, some factories are no longer operating; there is food scarcity crisis, insecurity of life and property through accidents and theft, political and social instability. The aforementioned and other problems may not make the unproductive or surplus labour in the subsistence sector to move into the capitalist sector. Lewis’s assumption that persons are rational and that there is perfect information may not be applicable to the Nigerian situation. In Nigeria, people have refused to operate based on the rationality principle when it comes to migration for a better standard of living, economic growth and development. As a matter of fact, balkanization of land by family relatives and bunkering of oil resources may prevent those who are unproductive in the rural areas of the country to transit to urban areas. Also, there is lack of perfect information in Nigeria about those whose marginal productivities have fallen. Based on this lack of information, development economists may not be fully aware of the need for the transfer of labour from rural sites or the subsistence sector to urban areas or the capitalist sector.In addition, Lewis operated on the classicalists’ principle that profits made by capitalists would be saved and invested. However in Nigeria, rather than investing in the country, many capitalists send their money abroad, thereby contributing to the economic growth of foreign countries instead of their own. In Nigeria, most unproductive workers have labour unions that may feel reluctant to move workers from the subsistence sector to the capitalist sector, because of the sector’s improper exploitation of human and natural resources.
Lewis also asserted that there would be unlimited capital formation. However, this is not the case in Nigeria. Lewis asserted that firms or the state would plough back their profits into the economy thereby increasing savings, investment and the national income. As firms did this, capital formation or capital stock rises, workers earn higher wages; their propensities to save increase and economic growth and pdevelopment take place. However, this is not evident in Nigeria, workers consume more than they save due to high food prices and investment rate refuses to rise. Moreover, the oil industry has almost replaced the traditional agricultural sector and massive exploitation has been experienced by workers who lend their labour out to the oil sector. Firms such as Shell, Oando and some telecommunication firms have refused to invest in the economy and poverty still exists in modern industrial or capitalist sector and traditional agricultural sector. The refusal of these foreign firms to develop and invest in the subsistence sector has led to the current crises in the Niger Delta.
In Conclusion, Lewis’s theory of unlimited labour supply need not be applied to Nigeria because government does not necessarily have to move unskilled workers from rural areas to urban areas. What the government has to do is to provide good amenities for the people in the rural areas. When people in the rural areas enjoythe same amenities like their urban counterparts, there may not be motivation for them to migrate from the rural to the urban areas. This will reduce some of the problems created as a result of rural-urban migration. The provision of good things of life for the rural areas will allow the traditional sector to better service the modern industrial or capitalist thereby promoting forward and backward linkages. Consequently, the applicability of Lewis’s theory of development depends on the proper study of socio economic and political conditions of the Nigerian economy.
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HARRIS TODARO’S THEORY OF MIGRATION
From observation of economic development in western Europe and the United States, one can notice the movement of labor from rural to urban areas. For the most part, with a rural sector dominated by agricultural activities and an urban sector focusing on industrialization, overall economic development in these countries was characterized by the gradual reallocation of labor out of agriculture and into industry through rural-urban migration, both internal and international. Urbanization and industrialization were in essence synonymous. This historical model served as a blueprint for structural change in developing countries, as evidenced, for example, by the original Lewis theory of labor transfer. But the overwhelming evidence of the past several decades, when developing nations witnessed a massive migration of their rural populations into urban areas despite rising levels of urban unemployment and underemployment, lessens the validity of the Lewis two-sector model of development. An explanation of the phenomenon, as well as policies to address the resulting problems, must be sought elsewhere. One theory to explain the apparently paradoxical relationship of accelerated rural-urban migration in the context of rising urban unemployment has come to be known as the Todaro migration model and in its equilibrium form as the Harris-Todaro model.Employment policy in developing countries like India cannot be formulated and implemented without answering a basic question, viz., how can underutilised labour be used in a development strategy? Ragnar Nurkse and W. A. Lewis asserted that large numbers of people remain engaged in work which adds nothing to national output. Nurkse saw the reallocation of a surplus labour to more productive uses, especially labour-intensive construction projects, as a major source of capital formation and economic growth.Lewis envisaged a similar reallocation process but he pictured the ‘capitalist sector’, essentially industry, as the principal employer of surplus labour. Both theories regarded the labour reallocation process as nearly costless but they worried about how to capture from the agricultural sector the food necessary to feed the transferred workers. While criticising the Lewis model J. R. Harris and M. P. Todaro have developed a new model of economic development which is relevant for labour surplus countries like India. It is the best known model of internal migration in the context of present-day developing countries. The model has focused on migration of labour from rural to urban areas induced by certain incentives. They have referred to two types of migration—induced migration and internal migration.
Main arguments of the Model
Starting from the assumption that migration is primarily an economic phenomenon, which for the individual migrant can be a quite rational decision despite the existence of urban unemployment, the Todaro model postulates that migration proceeds in response to urban-rural differences in expected income rather than actual earnings. The fundamental premise is that migrants consider the various labor market opportunities available to them in the rural and urban sectors and choose the one that maximizes their expected gains from migration. In essence, the theory assumes that members of the labor force, both actual and potential, compare their expected incomes for a given time horizon in the urban sector (the difference between returns and costs of migration) with prevailing average rural incomes and migrate if the former exceeds the latter.
Consider the following illustration. Suppose that the average unskilled or semiskilled rural worker has a choice between being a farm laborer (or working his own land) for an annual average real income of, say, 50 units or migrating to the city, where a worker with his skill or educational background can obtain wage employment yielding an annual real income of 100 units. The more commonly used economic models of migration, which place exclusive emphasis on the income differential factor as the determinant of the decision to migrate, would indicate a clear choice in this situation. The worker should seek the higher-paying urban job. It is important to recognize, however, that these migration models were developed largely in the context of advanced industrial economies and hence implicitly assume the existence of full or near-full employment. In a full-employment environment, the decision to migrate can be based solely on the desire to secure the highest-paid job wherever it becomes available. Simple economic theory would then indicate that such migration should lead to a reduction in wage differentials through the interaction of the forces of supply and demand, in areas of both emigration and immigration.
Unfortunately, such an analysis is not realistic in the context of the institutional and economic framework of most developing nations. First, these countries are plagued by a chronic unemployment problem, which means that a typical migrant cannot expect to secure a high-paying urban job immediately. In fact, it is much more likely that on entering the urban labor market, many uneducated, unskilled migrants will either become totally unemployed or will seek casual and part-time employment as vendors, hawkers, repairmen, and itinerant day laborers in the urban traditional or informal sector, where ease of entry, small scale of operation, and relatively competitive price and wage determination prevail. In the case of migrants with considerable human capital in the form of a secondary or university certificate, opportunities are much better, and many will find formal-sector jobs relatively quickly. But they constitute only a small proportion of the total migration stream. Consequently, in deciding to migrate, the individual must balance the probabilities and risks of being unemployed or underemployed for a considerable period of time against the positive urban-rural real income differential. The fact that a typical migrant who gains a modern-sector job can expect to earn twice the annual real income in an urban area than in a rural environment may be of little consequence if the actual probability of his securing the higher-paying job within, say, a one-year period is one chance in five. Thus, the actual probability of his being successful in securing the higher-paying urban job is 20%, and therefore his expected urban income for the one-year period is in fact 20 units and not the 100 units that an urban worker in a full-employment environment would expect to receive. So with a one-period time horizon and a probability of success of 20%, it would be irrational for this migrant to seek an urban job, even though the differential between urban ` and rural earnings capacity is 100%. However, if the probability of success were 60% and the expected urban income therefore 60 units, it would be entirely rational for our migrant with his one-period time horizon to try his luck in the urban area, even though urban unemployment may be extremely high. If we now approach the situation by assuming a considerably longer time horizon—a more realistic assumption, especially in view of the fact that the vast majority of migrants are between the ages of 15 and 24—the decision to migrate should be represented on the basis of a longer-term, more permanent income calculation. If the migrant anticipates a relatively low probability of finding regular wage employment in the initial period but expects this probability to increase
over time as he is able to broaden his urban contacts, it would still be rational for him to migrate, even though expected urban income during the initial period or periods might be lower than expected rural income. As long as the present value of the net stream of expected urban income over the migrant’s planning horizon exceeds that of the expected rural income, the decision to migrate is justifiable.
Rather than equalizing urban and rural wage rates, as would be the case in a competitive model, we see that rural-urban migration in our model equates rural and urban expected incomes. For example, if average rural income were 60 and urban income were 120, a 50% urban unemployment rate would be necessary before further migration would no longer be profitable. Since expected incomes are defined in terms of both wages and employment probabilities, it is possible to have continued migration despite the existence of sizable rates of urban unemployment. In our example, migration would continue even if the urban unemployment rate were 30% to 40%.
APPLICATION OF HARRIS TODARO’S MIGRATION THEORY TO NIGERIA
Concern over the problems of high rates of rural-urban migration in Nigeria , as indeed in most of the third world , centres around three main issues . First there is the concern over the environmental issue of overcrowding in the metropolitan areas resulting from rapid urban growth . The urban physical environment rapidly deteriorates in such a circumstance and enormous strains are placed upon municipal administrative and fiscal resources . Secondly , there is concern arising from-the fact that the swelling pool of urban unemployed , sustained by ruraI-urban migration streams , can no longe r represent a desirable economic phenomenon, but a constraint on economic development .
Thirdly , there is concern over the adverse socio-political implications of prolonged frustration among the urban poor .To the governments of Nigeria , therefore,rural-urban migration is a problem that must be thoroughly understood , in order to allow realistic policies to be generated . This work aims at making a modest contribution towards such an understanding .
Traditional disciplinary approaches have so far not succeeded in making any significant headway toward a solution to the problem of rural -urban migration , and it is argued here that the major caus e of failure may well be that the approaches have been partial in nature . Proceeding the premise that rural-urban migration is in reality a process within a complex socio-economic system consisting off many interacting components and significant feedback effects , general systems theory was considered a useful analytical framework for its investigation . As well as providing a broader perspective , a systems framework is a powerful tool for exploratory research and well-suited to the problem under investigation . By relying on material from existing literature and personal experience of the process in south-eastern Nigeria it was possible to construct a twenty component model of rural-urban migration for Nigeria . Eight of the components are stock variables ; twelve are rate variables. Most of the interrelationships depicted in the model are only hypothesized to be representative of reality . Thus a logical application of the model is the generation of a large number of related , testable hypotheses whose verifications should make a significant addition to the understanding of the process of rural-urban migration in this part of the world . Each of the rate variables in the systems model represents a policy intervention point because all are processes whose operations change other rate variables , the stock variables and , thus ,the conditions of the system . A systematic way to generate a whole range of potential policies for influencing the rate of rural-urban migration is to consider the possibilities for intervention for each of the rate variables .In this way, the generation of potential policies is not handicapped by arbitrariness or incomplete coverage .This application of the model was demonstrated herein .
The main thrust of this study is to lay the groundwork for further ,substantive research on rural-urban migration in Nigeria. There are two main directions along which to proceed beyond this point : the modification of the conceptual structure of the systems model to incorporate several other important aspects of the process of Rural Urban migration; and the testing of the validity of hypotheses arising from the model through the development of primary data. After the construction of the present model , it became clear that the roles of social amenities in rural and urban areas were important elements in migration decisions and should be incorporated in the model . Such an enrichment will make the model more realistic .
Secondly , the treatment of rural employment in the present model is not quite satisfactory . Farm and non-farm employment ought to be disaggregated because the existence or non existence of non-farm jobs in a rural location may well be a critical element in migrator behaviour .The modifications suggested above will allow the generation and testing of hypotheses regarding additional basic policy questions about rural-urban migration .The first question concerns the kind of trade-off functions ,if any ,that govern the behaviour of potential migrants and the urban unemployed , ie. what are they prepared to consider as a minimum inducement package not to migrate (in the case of potential migrants ) and to leave the urban area (in the case of the urban unemployed) Successful investigation of these questions will yield information of considerable importance in fashioning migration policy .
The second basic question that has to be raised and answered is this : how does one define and measure ‘rural development’ ,and in what way is it related to rural-urban migration ? Of all the concepts one encounters in the rural-urban migration literature ,very few surpass that of rural development in both popularity of usage and imprecision . A clarification of this concept and its role in the rural urban migration process would be a significant contribution.
• Introduction
The Lewis dual economy model is widely recognised in development economics for providing profound explanatory insights into the early stages of development. Although its general framework is inspiring, its fundamental concepts and micro-mechanisms – especially, the definition of surplus labour, the wage determination mechanisms in both the traditional and modern sectors and the dynamics of labour flows between the two sectors – lack sufficient detail. This creates several problems. First, this lack of detail has impeded further advances of theory along this line. Second, it has made it difficult to conduct empirical work, whether to examine the process of development or to confirm the insights of the theory. There is an increasing urgency1 to address these problems. Some recent advances allow us to address these problems and provide a more coherent and consistent theory of development in a dual economy.
.
. The concept of surplus labour The concept of surplus labour is widely discussed among development economics but its specific meaning needs to be defined, especially in technical terms, as many neoclassical economists still doubt the existence of surplus labour in an economy. Defining the source and the extent of surplus labour is then a prerequisite for further 12 We can prove that even in the situation of a mark-up above the biologically determined level of consumption, it is still a conventional view of the minimum required for subsistence. Below that, survival is not possible.
Wage determination mechanisms in the traditional sector in the absence of population growth15 We have previously established that, in the long run, the wage (which is also the average product of labour) in the traditional sector is set to a constant low wage at the subsistence level, as a result of the population adjustment dynamics. Now we consider how the wage in
Lthe traditional agricultural sector changes in the presence of labour transfer, but in the absence of population growth in the traditional sector. When economic growth takes place and the modern capitalist sector emerges, workers are drawn out of the traditional sector into the modern capitalist sector. Because the wage in the traditional sector is set in relation to the average productivity of that sector, in the absence of population growth (or when emigration outweighs the population increase), those who remain in the traditional sector each enjoy higher average productivity and thus receive a higher income than before.16
Dynamics of labour transfer There are two driving forces that determine the amount of surplus labour and affect the transfer of labour from the traditional sector to the modern sector. On the supply side, the MPLandAPLand the rate of technical change in the traditional sector all determine the amount of labour that can be released. On the demand side, the rate of modern sector expansion and development determines the amount of labour that can be absorbed. The number of people who can be taken on by the modern sector depends on the absorptive capacity or the job creation ability of the modern sector.34 Now let us study the transition dynamics of labour transfer using a diagram to illustrate the modern sector. This new diagram, Diagram 2, is a modified version of Diagram 1 where we have replaced P by O′. The horizontal axis, OO′, is the total population in the economy, assumed here to be constant. The traditional agricultural sector’s labour is measured rightwards from the origin O. The modern industrial sector’s employment is measured leftwards from O′. The curves AMPL and AAPL are, respectively, the marginal and average product of labour curves in the agricultural sector, as in Diagram 1. The curve IMPL is the marginal product of labour in the modern industrial sector. IMPL ′ and IMPL ′′ represent two stages of industry development. The question of why and how the modern industrial sector appears is beyond the scope of this paper; for now, we just assume that for some reason industry appears, on a small scale in the beginning, and it creates job vacancies and is willing to take some surplus labour from the traditional agricultural sector. When the modern sector appears and offers jobs, some type I surplus labour is transferred out from the agricultural sector. Up to IMPL ′, all the labour transferred is type I surplus labour.
24 becomes positive in the industrial sector.35 Although they are still paid a subsistence level of wage, this is a net contribution to the economy. The economy achieves a Pareto gain from this transfer. When type I surplus labour is transferred out of agriculture, the average product in agriculture will go up. This will cause a population increase, and O′will be moved further east, until again the AAPLy=is reached.36 This will not affect productivity in the modern industrial sector, but the agricultural sector will absorb all the increased population. In this sense, we can call the agricultural sector ‘the sink of surplus labour’.
Critiques
There have been various critiques of the Lewis model, many of which are of a ‘red herring’ variety as Ranis (2004, p. 716) puts it, meaning they are easily responded to or actually criticisms of Lewisians rather than the writing of Lewis himself. Many relate to the assumption of labour abundance in the subsistence sector (and thus the dominance of the wage from that sector across the economy), and the emergence of the urban informal sector, Lewis (1954, p. 141) did not ignore the urban informal sector in the unlimited supply of labour.
1. Conclusions For economies in the early stages of development, the rural agricultural sector consists of family farming units, with a hiring principle that is different from that of the firm. Family members work together and share the value of their output. They are paid not the marginal product but the average product of labour.
Harris todaro model of migration
The Harris-Todaro model produced two powerful policy results. The first concerns the policy of formal-sector job creation to employ the unemployed (who, in the Harris-Todaro model, are all in urban areas, because that is where the formal-sector jobs are assumed to be located). Such a policy, they concluded, would increase the formal-sector labor force by more than the number of new jobs created, thereby raising the number of urban unemployed. Thus, the solution to urban unemployment is not to create urban employment.
The second policy option that Harris and Todaro considered was a policy of rural development. If such a program could increase the rural traditional-sector wage, unemployment would then fall. Thus, in the Harris-Todaro model, the solution to urban unemployment is rural development.
Soon after the model was published, the government of Kenya followed the Harris-Todaro precepts by putting into place an integrated program of rural development. The result was that unemployment in Kenya fell.
Harris and Todaro’s fundamental contribution was building a model that fit the stylized facts of the labor market they were analyzing and that was based on sound micro foundations. The fact that the model remains part of the economist’s intellectual toolkit today is a tribute to its basic insight and enduring analytic power.
The original model has been both simplified for some purposes and expanded for others by later contributors, including Stiglitz, Bell, Khan, Anand and Joshi, Bourguignon, Corden and Findlay, and others (Fields 2005). Harris and Todaro formulated general processes for determining prices of the products produced by the two sectors and also for determining a rural-sector wage that varies inversely with the number of people in the rural sector. A simplified version of the Harris-Todaro model was developed in which product prices and rural-sector wages are taken as constant. Numerous additional analytic and policy results were derived in the simplified Harris-Todaro model. At the same time, some of the assumptions of the Harris-Todaro model were judged to be too restrictive, and so the model was generalized in the years that followed to nest their specific formulation within a broader framework. The initial Harris-Todaro model has been extended to allow for on-the-job search from a rural agriculture setting, the existence of an urban informal sector, preferential hiring of the better-educated, employment fixity, duality of production conditions and earnings levels within the rural sector, capital mobility, endogenous urban wage setting, risk aversion, and a system of demand for goods, among other factors.
As an early multisector labor-market model, the Harris-Todaro model set forth a principal alternative framework for policy analysis. It showed how employment and wage levels in one labor market reflect supply, demand, and institutional conditions not only in that labor market but also in other labor markets.
In terms of pro-poor economic growth, the Harris-Todaro model and other multisector-labor-market models can help policy makers avoid two mistakes. One is to assume that development efforts should be channeled to the sectors where the poor are. The other is to assume that efforts should always be focused on getting the poor out of the sectors in which they now are. Careful cost-benefit analysis based on well-specified labor-market models is required to decide among such alternatives.
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
. CONCLUSION
In this paper we developed and agent-based computational model which formalizes the rural-urban allocation of workers as a process of social learning by imitation. We analyze a two-sectorial economy composed by adaptive agents, i.e., individuals that grope over time for best sectorial location in terms of earnings. This search is a process of imitation of successful neighbor agents.
The dispersed and non-coordinated individual migration decisions, made based on local information, generate aggregate regularities. Firstly, the crucial assumption of Harris and Todaro, the principle that rural-urban migration will occur while the urban expected wage exceed the rural wage, comes out as spontaneous upshot of interaction among adaptive agents.
Secondly, the migratory dynamics generated by agents that seek to adapt to the economic environment that they co-create leads the economy toward a long run equilibrium characterized by urban concentration with urban unemployment. When this long run equilibrium is reached, the generalized Harris-Todaro condition is satisfied, i.e., there is a stabilization of the rural-urban expected wage differential.
Thirdly, the impact of the minimum wage and elasticity of terms of trade in a long run equilibrium obtained by simulations are in agreement with the predictions of the original Harris-Todaro model with Cobb-Douglas technology.
Finally, the simulations showed an aggregated pattern not found in the original Harris-Todaro model. There is the possibility of small fluctuations of the urban share around an average value. This phenomenon is known as reverse migration.
NAME:Enyum Joseph ikechukwu
REG NO:2017/249498
EMAIL:Enyumjoseph@gmail.com
LEWIS-FEI RANIS MODEL (SURPLUS LABOUR THEORY)
The Lewis economy model is widely recognized in development economics for providing profound explanatory insights into the early stages of development. Although its general framework is inspiring, its fundamental concepts and micro-mechanisms – especially, the definition of surplus labour, the wage determination mechanisms in both the traditional and modern sectors and the dynamics of labour flows between the two sectors – lack sufficient detail. This creates several problems. First, this lack of detail has impeded further advances of theory along this line. Second, it has made it difficult to conduct empirical work, whether to examine the process of development or to confirm the insights of the theory.
Assumptions of the Lewis Model:
Lewis model makes the following assumptions:
(i) There is a duel economy i.e., the economy is characterized by a traditional, over-populated rural subsistence sector furnished with zero MPL, and the high productivity modern urban industrial sector.
(ii) The subsistence sector does not make the use of ‘Reproducible Capital’, while the modern sector uses the produced means of capital.
(iii) The production in the advanced sector is higher than the production in traditional and backward sector.
(iv) According to Lewis, the supply of labor is perfectly elastic. In other words, the supply of labor is greater than demand for labor.
There is an increasing urgency1 to address these problems. Some recent advances allow us to address these problems and provide a more coherent and consistent theory of development in a dual economy. This paper contributes to the literature in three ways: first, it identifies in the existing literature the vagueness and ambiguities that have led to theoretical confusion, which may have caused the conflicting empirical results. Second, the source of this vagueness is due to subtly different assumptions – we examine the sensitivity of the model to these different assumptions. Third, it provides a sound theoretical foundation upon which empirical studies may be built.
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
Using the help of the figure on the left, we see that
According to Fei and Ranis, AD amount of labor (see figure) can be shifted from the agricultural sector without any fall in output. Hence, it represents surplus labor.
After AD, MP begins to rise, and industrial labor rises from zero to a value equal to AD. AP of agricultural labor is shown by BYZ and we see that this curve falls downward after AD. This fall in AP can be attributed to the fact that as agricultural laborers shift to the industrial sector, the real wage of industrial laborers decreases due to shortage of food supply, since less laborers are now working in the food sector. The decrease in the real wage level decreases the level of profits, and the size of surplus that could have been re-invested for more industrialization. However, as long as surplus exists, growth rate can still be increased without a fall in the rate of industrialization. This re-investment of surplus can be graphically visualized as the shifting of MP curve outwards. In Phase2 the level of disguised unemployment is given by AK.[4] This allows the agricultural sector to give up a part of its labor-force until
Phase 3 begins from the point of commercialization which is at K in the Figure. This is the point where the economy becomes completely commercialized in the absence of disguised unemployment. The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor.
The amount of labor that is shifted and the time that this shifting takes depends upon:
1. The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits;
2. The nature of the industry’s technical progress and its associated bias;
3. Growth rate of population.
Conclusion
Lewis, taking a classical perspective, addresses the stylized facts of savings growth, and labour transfer, while explaining how the real wage can remain low during industrialization. The dual economy theory seeks to provide an explanation of how a primarily agrarian economy is transformed, via a dualistic state, into a mature economy, or, in other words, how, and under what conditions, industry may grow from small beginnings to overtake agriculture in both production and employment.
It has been more than 50 years since the publication of Arthur Lewis’ seminal paper in The Manchester School in 1954 (Lewis, 1954). This paper was considered by many to be the starting point of development economics and has generated a large theoretical and empirical literature. It is ‘widely regarded as the single most influential contribution to the establishment of development economics as an academic discipline’ (Kirkpatrick and Barrientos 2004). A large part of the literature on development economics can be seen as extended commentary on the meaning and ramification of the ideas set out in the 1954 paper (Findlay, 1980: 64). Discussion and debate on the ramifications of Lewis’ paper mapped out the sub-discipline of development economics (Ranis, 2004a).
The concept of surplus labour is widely discussed among development economics but its specific meaning needs to be defined, especially in technical terms,
An unlimited supply of labour may be said to exist in those countries where population is so large relatively to capital and natural resources, that there are large sectors of the economy where the marginal productivity of labour is negligible, zero, or even negative.
The ‘surplus’ labour constitutes ‘hidden’ or ‘disguised’ unemployment. Many of the proponents of the hypothesis make the further claim that agricultural output will not decrease, and industrial output will increase, if measures are taken to re-allocate labour from subsistence agriculture (where the surplus is supposed to exist) to industry (where there is no surplus labour). Since labour can be removed from agriculture at no social cost, its supply to industry is, in a sense, ‘unlimited’ as long as disguised unemployment prevails.
However, Ranis (2004) does not agree with this definition of ‘surplus labour’, preferring to regard those whose marginal product lies below their consumption or income share as ‘surplus labour’, or more specifically, as ‘disguised unemployed’ or ‘underemployed’.
Ranis defines surplus labour as follows:
The basic premise is that there exist some sectors or sub-sectors in which, in the presence of a large endowment of unskilled labour and the absence of sufficient cooperating land or capital, with a given technology and a wage level bounded from below, labour markets cannot clear.
THE HARRIS-TODARO MODEL OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
Assumptions
Harris and Todaro [1] studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a 0 and g > 0 are a parametric constants. g is the elasticity of p with respect to the ratio Ym/Ya.
The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified.
CONCLUSION
In this paper we developed and agent-based computational model which formalizes the rural-urban allocation of workers as a process of social learning by imitation. We analyze a two-sectorial economy composed by adaptative agents, i.e., individuals that grope over time for best sectorial location in terms of earnings. This search is a process of imitation of successful neighbor agents.
The dispersed and non-coordinated individual migration decisions, made based on local information, generate aggregate regularities. Firstly, the crucial assumption of Harris and Todaro, the principle that rural-urban migration will occur while the urban expected wage exceed the rural wage, comes out as spontaneous upshot of interaction among adaptative agents.
Secondly, the migratory dynamics generated by agents that seek to adaptate to the economic environment that they co-create leads the economy toward a long run equilibrium characterized by urban concentration with urban unemployment. When this long run equilibrium is reached, the generalized Harris-Todaro condition is satisfied, i.e., there is a stabilization of the rural-urban expected wage differential.
Thirdly, the impact of the minimum wage and elasticity of terms of trade in a long run equilibrium obtained by simulations are in agreement with the predictions of the original Harris-Todaro model with Cobb-Douglas technology.
Finally, the simulations showed an aggregated pattern not found in the original Harris-Todaro model. There is the possibility of small fluctuations of the urban share around an average value. This phenomenon is known as reverse migration.
Name: Meteke Joy Orimusue
Department: Economics
Reg.no:2017/242430
Email: joymetex2000@gmail.com
Website:metekejoy01.blogspot.com
LEWIS FEI RANIS THEORY OF ECONOMIC GROWTH (SURPLUS LABOUR THEORY)
This model was propounded by W.Arthur Lewis who made a great contribution to the theories of economic development and based on his findings,Ranis and Fei extended his model.They looked at the changes in the agricultural and industrial labour in detail. A major tenent of this model is that Lewis broke down the labour force into two; substitence and capitalist sectors ,where the substitence sector has unlimited supply labour leading to a pool of surplus labour that determines the capitalist sector .
Ranis and Fri extended the theory explaining that with the changes in output and wage,more people would move from agricultural to industrial sector.They also talked on disguised unemployment saying it appears in the traditional substitence sector,the MPL is observed as the slope of the production function in agricultural sector is lower than that of the industrial.Ran is and Fei assumed that labour in the industrial sector would be paid in terms of industrial products.
Lewis failed to take into account that the increase in productivity of lab our should take place as a result of a shift between sectors.This was addressed by Ranis and Fei in their three growth stages;
In phase 1,the elasticity of agricultural labor is infinite that leads to disguised unemployment where the MPL is 0.
In phase 2, the agricultural sector observes a rise in the level of productivity leading to an increase in industrial growth.
In phase 3,the economy becomes completely commercialized with absence of disguised unemployment.
From the above ,we could say that;
1. Agricultural growth and industrial growth have equal importance.
2. That both agricultural growth and industrial growth are balanced.
ASSUMPTIONS OF THE MODEL
1.surplus labour in substitence sector where MPL is zero,productivity is positive but is less than industrial wage.It is made up of farmers, petty traders and women .
2. Importance of savings generated from both the capitalist sector and industrial sector. The capitalist sector invest their savings while the substitence sector spends all the savings,ie MP’s capitalist >MPSindustrial.
In conclusion,the Lewis Fei Ranis model according to Chen(2005)is seen as a classical model because of the input;industrial wage .
HARRIS TODARO THEORY OF MIGRATION
This model was developed by John.R.Harris and M.P.Todaro in 1970.Also called the model of internal migration,the model explains the movement of labour from rural to urban areas caused by some incentives. A key tenent of the model is centered on the migration decision determined by the expected wage differential for both urban and rural areas.Some of the assumptions of the model are;
1. The model assumes that unemployment does not exist in the rural agricultural sector.
2. The model assume that agricultural production in the rural sector and labour market are perfectly competitive leading to an equal productivity.With the above equilibrium,there would be a positive unemployment in the urban sector.
In conclusion,urban wages increase in the urban sector thereby increasing the expected urban income,a decrease in rural income will make productivity decrease of the agricultural sector.Using Nigeria as an example,the wages of the urban sector affects the expected wage of the rural sector and as a result constantly encourage the workers to move from the rural sector to the urban sector.
NAME: MADUAGUM MADONNA CHIOMA
REG.NO: 2017/241456
EMAIL: cmaduagum@gmail.com
ECO 361
THE LEWIS-FEI-RANIS MODEL
The Lewis-Fei-Ranis Model, also known as the Surplus Labour Model is a dualism model in development economics developed by John.C.H. Fei and Gustave Ranis. This model is treated as an improvement over the Lewis Model of unlimited supply of labour. It assumes a modern and primitive sector which takes unemployment and underemployment of resources into account. The Lewis Model failed to pay enough attention to the importance of the agricultural sector in promoting industrial growth whereas the Fei-Ranis model explains how the increased productivity in agricultural sector would become helpful in promoting the industrial sector. It presents three stages whereby an underdeveloped country moves from stagnation to self-sustained economic growth. Ranis and Fei succeeded to extend the initial Lewis’ model and assessed the changes in the agricultural and industrial labour in more detail. Moreover, FR model emphasized upon the simultaneous growth of agricultural and industrial sectors. Thus Fei-Ranis model believes in Balanced Growth in the take-off stage. It means that there should be a simultaneous investment in both the agricultural sector and industrial sector. According to the Fei-Ranis model in the beginning the surplus rises, such surplus will be available as a capital in the take-offstage. Some part of this surplus will be used in the agricultural development, while some part will be reploughed in industrial development. As a result, both the agricultural sector and the industrial sectors will grow under the Balanced Growth pattern.
The Primitive sector (subsistence sector) in this theory consists of the existing agricultural sector in the economy which is assumed to contain unlimited supply of surplus labour while the modern sector is the small but rapidly emerging industrial sector (capitalist sector).This theory is concerned with a poor economy which has an abundance of labor in such underdeveloped countries and shortage of natural resources, population growth rate is very high which results in mass unemployment in the economy, there is a dynamic industrial sector in the economy, the major share of population is engaged in agriculture but agriculture sector is stagnant. Hence, the marginal productivity of labor is zero and negative in agriculture sector. Also, there are certain non-agrarian sectors in the economy where there is reduced use of capital.
The Fei-Ranis model was developed with the help of three stages of economic growth. The first stage of the model is very similar to Lewis’. Disguised unemployment comes into being because the supply of labor is perfectly elastic and MPL = 0. Therefore, such disguised unemployed are to be transferred to industrial sector at the constant institutional wage. In the second stage of the model agricultural workers add to agricultural output but they produce less than institutional wage they get. In other words, the labor surplus exists where APL > MPL, but it is not equal to subsistence (institutional) wages. Accordingly, such disguised unemployed also have to be transferred to industrial sector. If the migration to industrial sector continues a situation is eventually reached where the farm workers produce output equal to institutional wages. This would mean that productivity in agricultural sector has gone up. In the third stage of this model, the take-off situation comes to an end and there begins the era of self-sustained growth where the farm workers produce more than the institutional wage they get. In this stage of economic growth, the surplus labor comes to an end and the agricultural sector becomes commercialized. As labor is transferred to industrial sector a shortage of labor will develop in the agricultural sector. Thus, it will be difficult for the industrial sector to get the labor at same prevailing constant wages and as a result, the wages in the industrial sector will rise. In the third stage, take off comes to an end and self-sustained growth starts. This is also known as point of commercialization in the model. Here the economy is fully commercialized in the absence of disguised unemployment. Such commercialization took place at the cost of absorption of disguised unemployment in industrial sector.
Thus, the three major points highlighted in the model are growth of agriculture is as important as the growth of industry, there should be a balanced growth of the agricultural sector and industrial sectors and the rate of labor absorption must be higher than the rate of population growth to escape the Malthusian population trap.
HARRIS-TODARO MODEL OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. It is the best known model of internal migration in the context of present-day developing countries. The model has focused on migration of labour from rural to urban areas induced by certain incentives.
Features:
1. Migration is stimulated primarily by rational economic consideration.
2. Migration is decided on the basis of expected, rather than actual, urban-rural wage differentials.
3. Probability of obtaining urban job is inversely related to the urban unemployment rate.
Assumptions:
1. The economy considered in the Harris-Todaro model is a small open economy in which the economy consists of two sectors, one is an agricultural rural sector, and the other is a manufacturing urban sector. There are three kinds of production factors, specific production factor in agricultural sector, K1, specific production factor in manufacturing sector, K2, and labor, L, which is employed in both sectors and mobile between sectors. In this paper, the specific production factor in the urban sector, K2, includes not only equipment and facilities for production but also social infrastructure, such as airports, roads, and industrial parks, which are related to production. Therefore, an improvement of the social infrastructure means an increase in K2. Accordingly, those specific production factors are immobile between the sectors.
2. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity.
Criticisms:
– Cole and Sanders (1985) have criticized the Harris-Todaro model for not explicitly modeling the subsistence sector employing uneducated migrants, arguing that it flawed the job selection process and expected income calculations if by lack of qualifications, uneducated migrants could not find a job in the modern urban sector.
– It assumes potential migrants are risk neutral, as in they are indifferent between a certain expected rural income and an uncertain expected urban income of the same magnitude. This assumption’s reflection of economic realities is questionable; poor migrants will likely be risk averse and require a significantly greater expected urban income to migrate.
NAME:UGWOKE EMMANUEL IFEANYI
REG NO:2017/242426
EMAIL: ifeanyie722@gmail.com
Blog/website: none
INTRODUCTION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials.
The Harris-Todaro model takes a standard two sector model and imposes a higher wage in the urban sector which is higher than equilibrium clearing, while wage in agriculture is flexible. Equilibrium clearing is simply when wage across both sectors equalize, minus movement costs or natural advantages (such as better living environment) in 1 or the other sector. By imposing this higher wage in the urban sector, we no longer have market clearing wage which gives the workers in the rural sector an incentive to migrate to the urban sector. These migrant workers are not guaranteed to find a job in the urban sector. There is a probability that they will end being unemployed or in the informal sector. For modeling simplicity, it is usually assumed that only 1 of these two sectors are in the model. It fits the situation in LDC’s better to assume that an informal sector exists in the urban sector than unemployment. LDC’s are unlikely to have good social safety nets such as welfare benefits, unemployment benefits, and old 5 age security. Without these benefits, workers in urban sector must do some work to keep themselves alive. If they were unable to find a job in the urban formal sector, which is the modern industrial sector, they would be forced to work in the informal sector to keep themselves alive. The informal sector is very primitive; work in this sector is labour intensive with little or no capital endowment. The equilibrium condition of the Harris-Todaro model can be described as the wage in agriculture must be equal to the expected wage in the urban sector. The model in its most basic form ignores disutility from not being at home farm, or cost of mobility, but these omissions do not change the essence of the model, the only implication of this is a downward shift of the urban sector’s expected returns. This equilibrium can be defined as,
wa=(f/Lf+Li)wf+(Li/Lf+Li)wi
Where wa denote the wage in rural (agricultural) sector
wF denote the wage in urban formal (industry) sector
wi denote the wage in urban informal sector
Lf denote the number of workers in the urban formal sector
Li denote the number of workers in the urban informal sector
It should not be surprising, therefore, that, in the 3 literature of development economics, dualistic models gained popularity over the single-commodity or single-sector theories in the 1950’s. A typical dualistic model in development economics contains two sectors, a traditional or agricultural sector in the rural area and a modern or manufacturing sector in the urban area. The most familiar single-sector model is the growth theory of Harrod-Domar (Harrod 1939 and 1948, Domar 1946). The most representative and influential dualistic framework is that of Lewis (1954). The ideas of surplus labor, subsistence wages, and turning points in the development of a dualistic economy in Lewis (1954) were later rigorously and diagrammatically formalized by Ranis and Fei (1961). Ranis and Fei also showed how agricultural surplus could lead to the growth of industries. The production relations of a dual economy, according to Jorgenson (1961), was characterized by asymmetry. More precisely, he assumed that output in the agricultural sector was a function of land and labor alone (there is no capital accumulation in this sector), and was characterized by diminishing return to scale. On the other hand, the output of the urban sector depended on capital and labor alone (no land was required), and the production function displayed constant return to scale. Since the amount of land and capital in the economy was assumed fixed, the only problem was to allocate labor between the two sectors.
HARRIS TODARO MODEL DISCUSSED
The Harris-Todaro model is far more difficult to program than the Lewis model as it is a 2 sector model. For the sake of simplicity in modeling, let us assume that instead of an informal sector, there is unemployment, and that these workers receive some minimum compensation to survive. This simplification does not change the core of the H-T model. Even with an informal sector in the H-T model, the wage in the informal sector is significantly lower than formal wage, and potentially lower than the agricultural wage. By imposing an unemployment sector, it simply makes not being in the urban formal sector receive a wage of zero. This simplifies the Harris-Todaro equilibrium condition to the following,
wa=(Lf/Nu)wf
Where Nu denote urban population (Lf+U).
We will assume Cobb Douglas production function in both rural and urban sectors. Wage determination in both sector is assumed to be on the margin, instead of average as was the case in the Lewis model. The following computational model is adapted from a paper on the Harris-Todaro model by Espindola et al. (2005).
BASIC MODEL SETUP
Rural sector production function:
Ya = ALa¢
Where Ya denote agricultural sector output, A is the technological parameter in the rural sector (A>0), La denote the agricultural labour force, and α is production parameter (0<¢<1),
Wage in agricultural sector is flexible and determined at the margin, the marginal productivity in agriculture is,
JYa/ JLa = ¢ALa^−1+¢
The agriculture wage is the marginal productivity multiplied by the price of agricultural good, let this be denoted by p. The agricultural wage then is,
wa = ¢ALa^−1+¢ p
The urban wage is determined at the margin; however, as per the H-T model assumption, the wage in urban sector is imposed at a level above market clearing. The marginal productivity in urban sector is,
JYf /JLf=βB Lf ^−1+β
The wage in the H-T model is then,
wf =βBLf^ −1+β such that Lf≤ 𝑁u
Where Nu denote the total urban population, if Lf 0 and ρ > 0). Now, a few definitions of labour force and population must be defined. Let Na be population in rural sector, and recall La is the labour force in rural sector, in this model, it is assumed that Na=La. In the urban sector, let Nu be the population in the urban sector, and recall that Lf is the labour force in the urban sector. As defined previously, if Lf<Nu, then there is unemployment in the urban sector, if Lf=Nu, then there is full employment in the urban sector. Let Ntot be total population in the entire economy, both urban and rural sectors. The following identity can then be defined as,
Na + Nu = Ntot
Short Run Equilibrium
Setting the marginal productivity curves of the two sectors equal will solve for the short run competitive equilibrium in these two sectors, there will be no migration in this equilibrium. Assuming both sectors are competitive, the short run equilibrium is where the marginal productivity curve from both sectors intersects. The following command is used in Mathematica to solve the short run equilibrium, Lftemp = Solve[MPLa − MPLf == 0, Lf , note MPLa is marginal productivity of labour in agriculture and MPLf is marginal productivity of labour in urban, this is solved to be
Lftemp = ( La^−1+¢ a /Bβ )^ 1/ −1+β
Imposing full employment in rural sector would imply that Na=La, so population equals labour force. This also implies that,
La = Ntot – Nu
With Lf, La solved in short as exogenous variables, Outputs Yf and Ya can be solved for the short run.
Yf = (( ALa^ −1+¢a/ Bβ ) ^1/ −1+β ) β
Ya = A(Ntot − Nu)^¢
Recall that rural wage is marginal productivity multiplied by the price factor, the price can be solved as,
p = ( (Ntot − Nu)^ −¢ (( A(Ntot − Nu) −1+¢ ¢ /Bβ )^ 1/ −1+β )β /A) yp
Which yields the agricultural wage to be,
wa = A(Ntot − Nu)^ −1+¢ a( B(Ntot − Nu)^ −¢ (( A(Ntot − Nu) −1+¢ a/Bβ )^ 1 /−1+β )β/A ) yp
wa is perfectly flexible whereas wfbar is rigidly imposed at a level above clearing. The agricultural wage equation above adjusts to reach a short run equilibrium.
Long Run Equilibrium
The short run equilibrium does not hold in the Harris-Todaro framework as there is expected wage differential, rural workers will want to migrate to the urban sector which pays a higher wage. Recall the Harris Todaro equilibrium condition is,
wa = (Lf/Nu)wf
The right hand side is simply the expected wage from the urban sector. When the right hand side is greater than the left, there will be migration. Let M denote the wage differential between expected urban wage and agricultural wage,
M= Lf Nu wf − wa
What is solved with this equation is wage differential; but as part of the Harris-Todaro assumption that difference in expected wage is what drives migration implies that migration will be a simple function (assuming linear for modeling simplicity) of the wage differential. It is reasonable to say that there is a perfect relationship between wage differential and migration in the Harris-Todaro model.
CONCLUSION:
We have reviewed theoretical and empirical models of internal migration in developing countries. On the big question — should rural to urban migration be discouraged, tolerated, or encouraged — the broad assessment is that restrictions in general are not desirable. Empirically testing the Harris-Todaro model has also been complex so that these tests are no more convincing than the tests for the conditions for the Todaro paradox to hold. At best empirical tests have provided microeconomic evidence consistent with the migration incentives present in the Harris-Todaro model, measuring for instance how rural dwellers respond to an increase in the wage differential (see Section 3). But this type of evidence does not provide a real test of the link between urban unemployment and migration.
Many countries have implemented policies aimed at forbidding migration from rural to urban areas. In South Africa, the Apartheid system (1948-1994) used extreme controls to monitor what was meant to be the temporary migration of rural workers to cities. In Indonesia, the ‘transmigration program’, a policy of resettlement from high to low density areas has been implemented over several decades, resulting in the relocation of more than eight million people between 1969 and 1995 (Humanitarian Policy and Conflict Research, 2002). Other policies aimed at providing people with incentives not to migrate have been less extreme. In India and Malaysia, nativist policies favored persons locally born (Waddington, 2003).
Bearing this in mind I have come to conclude that, In principle, the Todarian models can be used for policy analysis in situations where urban unemployment arising from rapid rural to urban migration is a concern. However, the empirical literature has not been convincing in assessing whether the conditions for the Todaro paradox were met in the real world. In urban areas, internal migration does not necessarily cause massive unemployment as suggested by Todarian models, and studies on the labor market assimilation of migrants indicate that migrants can catch-up with natives under certain circumstances. These elements support the view that migration can be beneficial. This change in focus has strong implications for migration policies, suggesting that the general goal of these policies should probably be restated as trying to best accommodate migration flows while preventing the widening of urban and rural imbalances.
NAME: Okoronkwo Uchechukwu David
REG NO: 2017/241455
EMAIL: uchechukwu.okoronkwo.241455@unn.edu.ng
LEWIS-FEI-RANIS MODEL
Prof. Lewis developed a very systematic theory of economic development with unlimited supplies of labour. The theory focuses on structural transformation of a subsistence economy into a modern industrial economy. The theory was later modified by John Fei and Gustar Ranis in the 1950s. Lewis believes that in many undeveloped countries an unlimited supply of labour is available at a subsistence age. The Lewis two-sector model became the general theory of development process in surplus labour. Economic development takes place when capital accumulates as a result of withdrawal of surplus labour from the subsistence sector to the modern sector (capitalist sector). In the Lewis theory the underdeveloped economy consist of two sectors.
i). A traditional – over populated rural subsistence sector characterized by zero marginal labour productivity (surplus labour) which can be withdrawn from agriculture without any loss of output. Ii). A high productivity modern urban industrial sector into which labour from the subsistence sector is gradually transferred. The primary focus of the model is on both the process of labour transfer and modern sector employment growth brought about by output expansion on that factor.
• The speed at which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector
• Such investment is made possible by the excess of modern sector profits on the assumptions that capitalists invests all the profits.
• It is assumed that wages in the modern sector are higher than in the subsistence sector.
So, the three fundamental ideas used in this model are:
1) Agricultural growth and industrial growth are both equally important;
2) Agricultural growth and industrial growth are balanced;
3) Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap.
The assumptions of this model do not fit the institutional and economic realities of most contemporary developing countries. 1. The model assumes that the rate of labour transfer and employment creation is proportional to the rate of modern sector capital accumulation. The faster the rate of capital accumulation, the higher the growth rate of the modern sector and the faster the rate of new job creation. At times capitalists do not reinvest their profits proportionately – capital flights.
2. The assumption of surplus labour in the rural areas might not hold seasonal
3. It is not always given that there is the tendency of increased urban wage rates. Institutional factors such as trade unions, bargaining power, service wage scales and multi-national corporate tend to negate competitive forces in LDCs modern sector, labour markets.
4. The concerns of diminishing returns in the modern industrial sector
5. Fei and Ranis assume a close model and hence there is no presence of foreign trade in the economy, which is very unrealistic as food or raw materials can not be imported.
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared.
This theory concludes that for a country to developed there must be balance between the agricultural and industrial sector, that labour can be utilized to get the efficient amount of output in both sectors, the theory has been used and tested by several countries namely England and japan.
THE HARRIS-TODARO MODEL OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities
While criticising the Lewis model J. R. Harris and M. P. Todaro have developed a new model of economic development which is relevant for labour surplus countries like India. It is the best known model of internal migration in the context of present-day developing countries. The model has focused on migration of labour from rural to urban areas induced by certain incentives. They have referred to two types of migration—induced migration and internal migration.
According to this model migrating workers are essentially participants in a lottery of relatively high-paid jobs in the towns. When new urban jobs are created the lottery becomes more attractive to potential migrants. Depending on their responsiveness to this improved opportunity, more than one worker are likely to migrate for each job created.
If so, the output foregone may be that of two or more agricultural workers, not just one. If the migrants bring some of their family members to urban areas more output will be lost. The reason is that the wife and children of migrants find fewer employment opportunities in towns than in the rural areas because they do not have land in the towns on which to grow food.
migration from rural areas to urban areas will increase if:
Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
The Harris-Todaro model assumes that migration from rural to urban areas depends primarily on the difference in wages between the rural and urban labour markets.
That is:
where Mt is the number of rural to urban migrants in time t, is response function, Wu is the urban wage and W is the rural wage. Since there is unemployment in the town (and it is assumed that there is no unemployment in rural areas), and every migrant cannot expect to find a job there, the model postulates that the expected urban wage with the rural wage. The expected urban wage is the actual urban wage times the probability of getting a job, or
where Weu = expected urban wage and p = probability of getting a job Here p is expressed as
where Eu is urban employment, Uu is urban unemployment and L is total urban work force. Harris and Todaro assume that all members of the urban labour force have equal chances of obtaining the jobs available. So Weu becomes simply the urban wage times the urban employment rate.
Migration in any given time then depends on three factors:
(a) The urban-rural wage gap,
(b) The urban employment rate and
(c) The responsiveness of potential migrants to the resulting opportunities.
Thus
where Mt = migration in period t and h = the response rate of potential migrantsAs long as Weu > Wr the rural-urban migration will continue. It will stop only when migration has forced down the urban wage or forced up urban unemployment so much that expected urban wage (Weu) is covated to existing rural wage (Wr). If Wr > Weu there will be a flow of disappointed urban jobseekers back to the rural areas. This is known as reverse migration.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
Ozioko Michael Chinemerem
2017/249450
chinemeremmichael965@gmail.com
Economics/Political Science (C.S.S)
THE LEWIS-FEI-RANIS MODEL OF ECONOMIC GROWTH AND THE HARRIS-TODARO MODEL OF MIGRATION AND IT’S APPLICATION TO NIGERIA.
Introduction
Lewis(1954) proposed a seminal theory of dualistic economic development for
over-populated and underdeveloped economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics.Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory,an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development.
Later, Ranis and Fei (1961) formalised the Lewis theory and defined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases.Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model.This model therefore is a model which provides the seminal contribution to theories of economic development particularly for labour-surplus and resource poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150).
In Formalizing this model, Ranis and Fei (1961) combined Lewis ideology with that of Rostow’s (1956) three “linear-stages-of-growth” theory. They disassembled Lewis’s two-stage economic development into three phases, defined by the marginal productivity of agricultural labour. They assume the economy to be stagnant in its pre-conditioning stage. The breakout point marks the creation of an infant non-agricultural sector and the entry into phase one. Agricultural labour starts to be reallocated to the non-agricultural sector. Due to the abundance of surplus agricultural labour, its marginal productivity is extremely low and average labour productivity defines the agricultural institutional wage. When the redundant agricultural labour force has been reallocated, the agricultural marginal productivity of labour starts to rise but is still lower than the institutional wage. This marks the shortage point at which the economy enters phase two of development. During phase two the remaining agricultural unemployment is gradually absorbed. At the end of this process the economy reaches the commercialisation point and enters phase three where the agricultural labour market is fully commercialised.
MAJOR ASSUMPTIONS OF THE LEWIS-FEI-RANIS MODEL.
First and foremost this model assume that land is fixed and population growth is taken as an exogenous phenomenon.
Moreover it assumes that there is a dual economy consisting of a stagnant agricultural sector and an active industrial sector.
More still the Lewis-Fei-Ranis model assume that agricultural activity is characterized by constant returns to scale with labour as a variable factor.
Though this model has helped enormously in helping to understand the process of migration from rural to urban setting it has been criticized for the following reasons:
i.Fei and Ranis begin with the assumption that the supply of land is fixed. In the long run, the amount of land is not fixed, as the statistics of crop acreage in many Asian countries reveal.
ii.The model is based on the assumption of a constant institutional wage which is above MPPL during Phases I and II. But there is no empirical evidence to support this assumption. In fact, in labour surplus underdeveloped countries, wages paid to the agricultural workers are much below their MPP.
iii.The theory also assume that the institutional wage remains constant in the first two phases even when agricultural productivity increases. This is highly unrealistic because with a general rise in agricultural productivity, farm wages also tend to rise.
APPLICATION OF THIS MODEL TO THE NIGERIAN ECONOMY.
Based on the assumptions previously discussed,the model analysis the development process in three phases.
In the first phase,unemployed workers, who are not adding to agricultural output are shifted to the industrial sector at the constant institutional wages. Unemployed Nigerians are to move to a more industrial sector in as much as they do not add tangible thing in the agricultural sector.
In the second phase, agricultural workers add to the agricultural output but produce less than the institutional wage they get. These workers are also shifted to the industrial sector in search for a higher pay. If the migration of workers to the industrial sector continues, a point is ultimately reached when farm workers produce output equal to the institutional wage.
In the third phase, farm workers produce more than the institutional wage they get. Thus the surplus labour is exhausted and the agricultural sector becomes commercialised.
THE HARRIS-TODARO MODEL OF MIGRATION
Prof. J.R. Harris and P. M. Todaro in an article “Migration, Unemployment and Development: A Two-Sector Analysis” in 1970 presented a model on rural-urban migration in underdeveloped countries.
The main idea of the Harris-Todaro model is that labour migration in underdeveloped countries is due to rural-urban differences in average expected wages rather than actual wages. The migrants consider the various opportunities of employment available to them in rural and urban sectors and choose the one that maximises their expected wages from migration.
The minimum urban wage is substantially higher than the rural wage. If more employment opportunities are created in the urban sector at the minimum wage, the expected will rise and rural-urban migration will increase. Expected wages are measured by the difference in real urban income and rural agricultural income and the probability of a migrant’s getting an urban job.
In fact, a migrant compares his expected income for a given time horizon in the urban sector with his prevailing average rural income and migrates if the former is more than the latter.
Thus migration in the Harris-Todaro modal is viewed as the wage or income gap between the urban and the rural sectors. But all migrants cannot be absorbed in the urban sector at high wages. Many fail to find a job and get employment in the informal urban sector at wages which are even lower than in the rural sector. Thus they join the queue of the underemployed or disguised unemployed in the urban sector.
The Harris-Todaro model is based on the following assumptions:
i.There are two sectors in the economy – the rural or agricultural sector (A) and the urban or manufacturing sector (M).
ii. It is believed that the model operates in the short run and that the marginal production of labour in agriculture (MPLA) and of industry (MPLM) are determined by their respective technologies.
iii.Capital is available in fixed quantities in the two sectors.
HOW THEN CAN THIS MODEL BE APPLIED IN THE NIGERIAN ECONOMY?
The wage gap between the rural-urban workers attracts rural workers to the urban sector even in the face of urban unemployment and under-employment. Despite this, the rural jobseekers are willing to take their chance in the “urban job lottery” to find their favoured jobs.
This can be seen widely in the face of what is applicable in our country when people migrate to the industrialized states for job without consideration of the unemployed in that particular location.
In conclusion the state has a role to play in migration as it is seen as the result of concerted effort on the part of the state to transfer surplus rural labour to the industrial sector by developing the latter for capital formation and through this economies of the world like that of Nigeria can improve immensely.
Name: Ngene Michael C.
Reg no: 2017/246022
Dept: Economics
michaelchinecherem1997@gmail.com
Lewis-fei-ranis Model Of Economic Growth
Introduction
Lewis (1954) proposed a seminal theory of dualistic economic development for
over-populated and under-developed economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capitala ccumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development. Later, Ranis and Fei (1961) formalised the Lewis theory and defined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to the phase three of the Ranis-Fei model. into which each phase marked three turning points which are :
• The breakout point leads to phase one growth with redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural unemployment.
• The commercialisation point leads to phase three of self-sustaining economic growth with the commercialisation of the agricultural sector.
The Lewis-Ranis-Fei theory of dualistic economic development therefore provides a
suitable theoretical framework for studying the growth path of labour-surplus in developing economies such as China. The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector in the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Fei-Ranis (F-R) Model of Dual Economy:
The two economists John Fei and Gustav Ranis presented their dual economy model. There was a flaw in Lewis model that it did not pay enough attention to the importance of agricultural sector in promoting industrial growth. But Fei-Ranis (F-R) model of dual economy explains how the increased productivity in the agricultural sector would become helpful in promoting the industrial sector. In this respect, it presents three stages whereby a UDC moves from stagnation to self-sustained economic growth. Thus, this model is treated as an improvement over Lewis model of unlimited supply of labor.
Thus the model suggests that:
“Economic development would be taking place if agricultural laborers are transferred to industrial sector where their productivity will increase”.
As we told earlier that it is a dual economy where there is a stagnant agri. sector and dynamic industrial sector. The situation where MPL – 0, labor can be transferred to industrial sector without any loss in agricultural output. The real wages in industrial sector remains fixed and it is equal to the initial level of real income in agri. sector. Such wages are given the name of institutional wages.
Assumptions Of Lewis- Fei- Ranis Model
1. The elasticity of the agricultural labor work force is infinite and as a result suffers from disguised unemployment
2. Marginal product of labor is zero
3. Agricultural surplus is said to take place when Average product is greater than Marginal product
4. Agricultural growth and industrial growth are both equally important; and are balanced
5. The industrial sector invest all its savings for its further expansion
6. There is low propensity to save in subsistence/ agricultural sector
7. Wages in industrial sector remain constant.
8. There is an abundance of labor in such UDC and shortage of natural resources.
9. The population growth rate is very high which results in mass unemployment in the economy.
Significance of agriculture in the Fei–Ranis model
The Lewis model is criticised on the grounds that it neglects agriculture. Fei–Ranis model goes a step beyond and states that agriculture has a very major role to play in theexpansion of the industrial sector. In fact, it says that the rate of growth of the industrial sector depends on the amount of total agricultural surplus and on the amount of profits that are earned in the industrial sector. So, larger the amount of surplus and the amount of surplus put into productive investment and larger the amount of industrial profits earned, the larger will be the rate of growth of the industrial economy. As the model focuses on the shifting of the focal point of progress from the agricultural to the industrial sector, Fei and Ranis believe that the ideal shifting takes place when the investment funds from surplus and industrial profits are sufficiently large so as to purchase industrial capital goods like plants and machinery. These capital goods are needed for the creation of employment opportunities. Hence, the condition put by Fei and Ranis for a successful transformation is that
Rate of increase of capital stock & rate of employment opportunities > Rate of population growth.
However,In comparing it to the real world, Lewis-Ranis-Fei theory of dualistic economic development used China as a Case study
China’s 1.3 billion inhabitants account for a fifth of the world’s population. Over 50
percent of the Chinese population is engaged in the rural agricultural sector. China’s
agricultural labour productivity is very low due to the presence of surplus labour
relative to other scarce resources. The agricultural wage rate is lower than the
non-agricultural one. The 1978 Economic Reform propelled the Chinese economy into a
path of rapid economic growth, at the rate of approximately eight percent per annum.
This remarkable economic growth, particularly in the urban non-agricultural sector,
requires a great inflow of labour (Knight, 2007). The gradual relaxation of the stringent
Hukou registration system has further facilitated the temporary rural to urban migration
of over 100 million workers.
There are very few recent studies discussing China’s economic growth and labour
reallocation within the framework of the Lewis theory. Both Cai (2007) and Knight
(2007), focus more on examining the Lewis turning point than testing the Lewis theory.
In this paper, we are the first to systematically assess the Lewis (1954) theory and its
formalization by Ranis and Fei (1961) for China. We address the three core questions:
(1) Is the main source of economic growth non-agricultural capital accumulation?
(2) What is the net effect of agricultural to non-agricultural labour reallocation?
(3) What phase of economic development is the Chinese economy in?
In other words,
has China passed the commercialisation point signified by the exhaustion of surplus
labour, as discussed by Cai (2007) and Knight (2007)?
To answer these questions we estimate Cobb-Douglas production functions for
China’s agricultural and non-agricultural sectors, using time-series national-level data
over 1965-2002. Our results show that China’s overall economic growth is driven by the
rapid development of the non-agricultural sector, which results from the fast
accumulation of non-agricultural capital. As capital accumulates, employment expands
and contributes almost as much as capital to economic growth in the non-agricultural
sector. This confirms the answer to our first question that capital accumulation is the
main source of economic growth in the non-agricultural sector.
Secondly, we evaluate the effect of labour reallocation away from agriculture to
non-agriculture by comparing the labour productivities of the two sectors. In addition,
we repeat the exercise by applying the Labour Reallocation Effects (LRE) equation
specified by the World Bank (1996). Both approaches suggest that labour reallocation
has a positive impact on China’s economic growth, accounting for 1 to 2 percent per
annum of GDP growth. We find the effect of labour reallocation has declined since the
mid-1990s because of less absorption of the surplus rural labour in the non-agricultural
sector, particularly in industry. Our result coincides with the findings of Kuijs and Wang
(2005), Woo (1998), and World Bank (1996).
Thirdly, we identify the phase of China’s economic development by examining the
evolution of labour productivities over time as indicated in the Lewis-Ranis-Fei model.
We find that the Chinese economy has fully absorbed the redundant agricultural labour,
as shown by the rising marginal productivity of labour since the 1978 Economic Reform,
but has not yet completely reallocated the disguised unemployment, as shown by the
marginal labour productivity being still lower than the institutional wage defined by the
initial low average productivity of labour. All this indicates that, following the 1978
Economic Reform, China entered phase two of economic development defined in the
Lewis-Ranis-Fei model. However, it has not reached phase three marked by the
exhaustion of the disguised agricultural unemployment. Furthermore, we find that the
gap of labour productivities between the two sectors is widening, which is at odds with
the theoretical expectation. This reflects the effects of market imperfections and
government intervention. A “critical minimum effort” is required for China to release
the remaining disguised agricultural unemployment and enter phase three of economic
development.
Conclusion and policy recommendations
Nigeria’s economic growth is mainly attributable to the development of
the non-agricultural sector. This is driven by rapid capital accumulation as well as
employment growth. The reallocation of labour away from agriculture has made a
positive net contribution to Nigerian rapid economic growth by around 1.23 percent.
The rise in the marginal productivity of agricultural labour indicates the absorption of
redundant agricultural labour since the 1978 Economic Reform. However, the marginal
productivity of agricultural labour is still lower than the initial low average productivity
of agricultural labour. This suggests that the Nigerian economy has entered the
Lewis-Ranis-Fei phase two of development but has not yet achieved phase three.
Several policy recommendations are tentatively suggested. First and foremost, more
effort should be made in promoting employment to effectively absorb the remaining
labour surplus and promote Nigeria’s economic development. This can be achieved by
encouraging the development of private enterprise to create more employment
opportunities. Second, agriculture could be promoted by tax breaks, direct subsidies and most importantly, by
removing price controls on agricultural products. Agriculture could thus be commercialised and the economy would enter phase three of economic development.
Haris-Todaro Model of Migration
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
Conclusions
Therefore, migration from rural areas to urban areas will increase in Nigeria if:
Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
NAME: UGWOKE EMMANUEL IFEANYI
REG NO:2017/242426
EMAIL: ifeanyie722@gmail.com
BLOG/WEBSITE: NONE
INTRODUCTION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials.
The Harris-Todaro model takes a standard two sector model and imposes a higher wage in the urban sector which is higher than equilibrium clearing, while wage in agriculture is flexible. Equilibrium clearing is simply when wage across both sectors equalize, minus movement costs or natural advantages (such as better living environment) in 1 or the other sector. By imposing this higher wage in the urban sector, we no longer have market clearing wage which gives the workers in the rural sector an incentive to migrate to the urban sector. These migrant workers are not guaranteed to find a job in the urban sector. There is a probability that they will end being unemployed or in the informal sector. For modeling simplicity, it is usually assumed that only 1 of these two sectors are in the model. It fits the situation in LDC’s better to assume that an informal sector exists in the urban sector than unemployment. LDC’s are unlikely to have good social safety nets such as welfare benefits, unemployment benefits, and old 5 age security. Without these benefits, workers in urban sector must do some work to keep themselves alive. If they were unable to find a job in the urban formal sector, which is the modern industrial sector, they would be forced to work in the informal sector to keep themselves alive. The informal sector is very primitive; work in this sector is labour intensive with little or no capital endowment. The equilibrium condition of the Harris-Todaro model can be described as the wage in agriculture must be equal to the expected wage in the urban sector. The model in its most basic form ignores disutility from not being at home farm, or cost of mobility, but these omissions do not change the essence of the model, the only implication of this is a downward shift of the urban sector’s expected returns. This equilibrium can be defined as,
𝑤𝑎 = ( 𝑓 /𝐿𝑓 + 𝐿𝑖 )𝑤𝑓 + ( 𝐿𝑖/ 𝐿𝑓 + 𝐿𝑖) 𝑤i
Where 𝑤𝑎 denote the wage in rural (agricultural) sector
𝑤𝑓 denote the wage in urban formal (industry) sector
𝑤𝑖 denote the wage in urban informal sector
𝐿𝑓 denote the number of workers in the urban formal sector
𝐿𝑖 denote the number of workers in the urban informal sector
It should not be surprising, therefore, that, in the 3 literature of development economics, dualistic models gained popularity over the single-commodity or single-sector theories in the 1950’s. A typical dualistic model in development economics contains two sectors, a traditional or agricultural sector in the rural area and a modern or manufacturing sector in the urban area. The most familiar single-sector model is the growth theory of Harrod-Domar (Harrod 1939 and 1948, Domar 1946). The most representative and influential dualistic framework is that of Lewis (1954). The ideas of surplus labor, subsistence wages, and turning points in the development of a dualistic economy in Lewis (1954) were later rigorously and diagrammatically formalized by Ranis and Fei (1961). Ranis and Fei also showed how agricultural surplus could lead to the growth of industries. The production relations of a dual economy, according to Jorgenson (1961), was characterized by asymmetry. More precisely, he assumed that output in the agricultural sector was a function of land and labor alone (there is no capital accumulation in this sector), and was characterized by diminishing return to scale. On the other hand, the output of the urban sector depended on capital and labor alone (no land was required), and the production function displayed constant return to scale. Since the amount of land and capital in the economy was assumed fixed, the only problem was to allocate labor between the two sectors.
HARRIS TODARO MODEL DISCUSSED
The Harris-Todaro model is far more difficult to program than the Lewis model as it is a 2 sector model. For the sake of simplicity in modeling, let us assume that instead of an informal sector, there is unemployment, and that these workers receive some minimum compensation to survive. This simplification does not change the core of the H-T model. Even with an informal sector in the H-T model, the wage in the informal sector is significantly lower than formal wage, and potentially lower than the agricultural wage. By imposing an unemployment sector, it simply makes not being in the urban formal sector receive a wage of zero. This simplifies the Harris-Todaro equilibrium condition to the following,
𝑤𝑎 = (𝐿𝑓/ 𝑁𝑢) 𝑤f
Where Nu denote urban population (Lf+U).
We will assume Cobb Douglas production function in both rural and urban sectors. Wage determination in both sector is assumed to be on the margin, instead of average as was the case in the Lewis model. The following computational model is adapted from a paper on the Harris-Todaro model by Espindola et al. (2005).
BASIC MODEL SETUP
Rural sector production function:
𝑌𝑎 = 𝐴La𝛼
Where 𝑌𝑎 denote agricultural sector output, A is the technological parameter in the rural sector (A>0), La denote the agricultural labour force, and α is production parameter (0<α<1),
Wage in agricultural sector is flexible and determined at the margin, the marginal productivity in agriculture is,
𝜕𝑌𝑎/ 𝜕𝐿𝑎 = 𝛼𝐴La^−1+𝛼
The agriculture wage is the marginal productivity multiplied by the price of agricultural good, let this be denoted by p. The agricultural wage then is,
𝑤𝑎 = 𝛼𝐴La^−1+𝛼 p
The urban wage is determined at the margin; however, as per the H-T model assumption, the wage in urban sector is imposed at a level above market clearing. The marginal productivity in urban sector is,
𝜕𝑌𝑓 /𝜕𝐿𝑓 = 𝛽𝐵Lf ^−1+β
The wage in the H-T model is then,
𝑤𝑓 = 𝛽𝐵Lf^ −1+𝛽 𝑠𝑢𝑐ℎ 𝑡ℎ𝑎𝑡 𝐿𝑓 ≤ 𝑁u
Where Nu denote the total urban population, if Lf 0 and ρ > 0). Now, a few definitions of labour force and population must be defined. Let Na be population in rural sector, and recall La is the labour force in rural sector, in this model, it is assumed that Na=La. In the urban sector, let Nu be the population in the urban sector, and recall that Lf is the labour force in the urban sector. As defined previously, if Lf<Nu, then there is unemployment in the urban sector, if Lf=Nu, then there is full employment in the urban sector. Let Ntot be total population in the entire economy, both urban and rural sectors. The following identity can then be defined as,
𝑁𝑎 + 𝑁𝑢 = 𝑁𝑡𝑜t
Short Run Equilibrium
Setting the marginal productivity curves of the two sectors equal will solve for the short run competitive equilibrium in these two sectors, there will be no migration in this equilibrium. Assuming both sectors are competitive, the short run equilibrium is where the marginal productivity curve from both sectors intersects. The following command is used in Mathematica to solve the short run equilibrium, Lftemp = Solve[MPLa − MPLf == 0, Lf , note MPLa is marginal productivity of labour in agriculture and MPLf is marginal productivity of labour in urban, this is solved to be
Lftemp = ( La^−1+𝛼 a /𝐵𝛽 )^ 1/ −1+β
Imposing full employment in rural sector would imply that Na=La, so population equals labour force. This also implies that,
𝐿𝑎 = 𝑁𝑡𝑜𝑡 – 𝑁𝑢
With Lf, La solved in short as exogenous variables, Outputs Yf and Ya can be solved for the short run.
𝑌𝑓 = (( 𝐴𝐿𝑎^ −1+𝛼a/ 𝐵𝛽 ) ^1/ −1+𝛽 ) 𝛽
𝑌𝑎 = 𝐴(𝑁𝑡𝑜𝑡 − 𝑁𝑢)^𝛼
Recall that rural wage is marginal productivity multiplied by the price factor, the price can be solved as,
𝑝 = ( (𝑁𝑡𝑜𝑡 − 𝑁𝑢)^ −𝛼 (( 𝐴(𝑁𝑡𝑜𝑡 − 𝑁𝑢) −1+𝛼 𝛼 /𝐵𝛽 )^ 1/ −1+𝛽 ) 𝛽 /𝐴 ) 𝛾p
Which yields the agricultural wage to be,
𝑤𝑎 = 𝐴(𝑁𝑡𝑜𝑡 − 𝑁𝑢)^ −1+𝛼 a( 𝐵(𝑁𝑡𝑜𝑡 − 𝑁𝑢)^ −𝛼 (( 𝐴(𝑁𝑡𝑜𝑡 − 𝑁𝑢) −1+𝛼 a/ 𝐵𝛽 )^ 1 /−1+𝛽 ) 𝛽/ 𝐴 ) 𝛾p
wa is perfectly flexible whereas wfbar is rigidly imposed at a level above clearing. The agricultural wage equation above adjusts to reach a short run equilibrium.
Long Run Equilibrium
The short run equilibrium does not hold in the Harris-Todaro framework as there is expected wage differential, rural workers will want to migrate to the urban sector which pays a higher wage. Recall the Harris Todaro equilibrium condition is,
𝑤𝑎 = (𝐿𝑓/𝑁𝑢)𝑤𝑓
The right hand side is simply the expected wage from the urban sector. When the right hand side is greater than the left, there will be migration. Let M denote the wage differential between expected urban wage and agricultural wage,
𝑀 = 𝐿𝑓 𝑁𝑢 𝑤𝑓 − 𝑤𝑎
What is solved with this equation is wage differential; but as part of the Harris-Todaro assumption that difference in expected wage is what drives migration implies that migration will be a simple function (assuming linear for modeling simplicity) of the wage differential. It is reasonable to say that there is a perfect relationship between wage differential and migration in the Harris-Todaro model.
CONCLUSION:
We have reviewed theoretical and empirical models of internal migration in developing countries. On the big question — should rural to urban migration be discouraged, tolerated, or encouraged — the broad assessment is that restrictions in general are not desirable. Empirically testing the Harris-Todaro model has also been complex so that these tests are no more convincing than the tests for the conditions for the Todaro paradox to hold. At best empirical tests have provided microeconomic evidence consistent with the migration incentives present in the Harris-Todaro model, measuring for instance how rural dwellers respond to an increase in the wage differential (see Section 3). But this type of evidence does not provide a real test of the link between urban unemployment and migration.
Many countries have implemented policies aimed at forbidding migration from rural to urban areas. In South Africa, the Apartheid system (1948-1994) used extreme controls to monitor what was meant to be the temporary migration of rural workers to cities. In Indonesia, the ‘transmigration program’, a policy of resettlement from high to low density areas has been implemented over several decades, resulting in the relocation of more than eight million people between 1969 and 1995 (Humanitarian Policy and Conflict Research, 2002). Other policies aimed at providing people with incentives not to migrate have been less extreme. In India and Malaysia, nativist policies favored persons locally born (Waddington, 2003).
Bearing this in mind I have come to conclude that, In principle, the Todarian models can be used for policy analysis in situations where urban unemployment arising from rapid rural to urban migration is a concern. However, the empirical literature has not been convincing in assessing whether the conditions for the Todaro paradox were met in the real world. In urban areas, internal migration does not necessarily cause massive unemployment as suggested by Todarian models, and studies on the labor market assimilation of migrants indicate that migrants can catch-up with natives under certain circumstances. These elements support the view that migration can be beneficial. This change in focus has strong implications for migration policies, suggesting that the general goal of these policies should probably be restated as trying to best accommodate migration flows while preventing the widening of urban and rural imbalances.
NAME: Emmanuel Treasure Adanne
Department: Economics
Reg No: 2017/242436
Email address: treasureadaemmanuel@gmail.com
Website:treshvinaemman54.blogspot.com
Answer:
The Lewis Fei Ranis model
The Lewis Fei–Ranis model of economic growth is a dualism model developed by John C. H. Fei and Gustav Ranis and can be also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sector coexist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials Fei and Ranis emphasized strongly on the industry agriculture interdependency and said that a robust connectivity between the two would encourage and speedup development. If agricultural laborers look for industrial employment, and industrialists employ more workers by use of larger capital good stock and labor intensive technology, this connectivity can work between the industrial and agricultural sector. Also, if the surplus owner invests in that section of industrial sector that is close to soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized.
The assumptions of this model are:
1. There is a dual economy consisting of a stagnant agricultural sector and an active industrial sector.
2. Agricultural activity is characterised by constant returns to scale with labour as a variable factor.
3. The output of the agricultural sector is a function of land and labour alone.
4. The output of the industrial sector is a function of capital and labour alone.
5. Workers in both the sectors consume only agricultural products.
6. If population increases above the point where marginal productivity of labour becomes zero, labour can be shifted to the industrial sector without loss in agricultural output.
7. The real wage in the industrial sector remains fixed and is equal to the initial level of real income in the agrarian economy, which they call the institutional wage.
Lewis Fei Ranis argued that these two sectors are connected due to the presence of a decentralized rural industry which was often linked to urban production. According to them, economic progress is achieved in dualistic economics like Nigeria, through the work of a small number of entrepreneurs who have access to land and decision-making powers and use industrial capital and consumer goods for agricultural practices.
Nigerian has a dual economy, a modern sector and an indigenous sector. In Nigeria economy, indigenous sector or agricultural sector is the predominant sector. The capitalist sector is defined as that part of the economy which uses reproducible capital, pays capitalists for the use thereof and employs wage labour for profit making purposes. The distinguishing feature of a capitalist sector is that it hires labour and sells output to earn profit. The subsistence sector is that part of the economy which does not use reproducible capital. Labour is abundant and disguised unemployment is the result. The marginal productivity of labour in the agricultural sector may be zero or even negative. In order to solve the problem of disguised unemployment. Prof. Lewis argued that the capitalist (industrial) sector to be expanded by transferring labour from the subsistence (rural) sector to the capitalist sector. He assumes that the supply of labour is perfectly elastic at the subsistence wage. Since the supply of labour is unlimited, new industries can be established or existing industries can be expanded without limit at the current wage, that is, subsistence wage by withdrawing labour from the subsistence sector. When people migrate from the subsistence sector to the modern sector, the wages should be higher in the capitalist sector than in the subsistence sector by a small but fixed amount.
conclusion
In the Lewis model, migration is the result of concerted effort on the part of the state to transfer surplus rural labour to the industrial sector by developing the latter for capital formation. As Nigerian economy goes through its development process, labor is reallocated from the agricultural to the industrial sector. More the rate of reallocation, faster is the growth of that economy. The economic rationale behind this idea of labor reallocation is that of faster economic development.
2.HARRIS TODARO MODEL OF MIGRATION
This model named after John R. Harris and Michael Todaro was developed in 1970 and is an economic theory used to explain some of the issues in rural urban migration and it cast this decision in a cost benefits setting; the potential migrants rates of the expected returns versus the cost of migration. The cost is that a rural worker will lose his work and the pay that comes with it. The return is the probability of getting an urban job that is potentially better paying. The model asserts that wage distortions in the urban sector causes urban unemployment and that an equilibrium will be reached where the expected wage in urban areas is equal to actual wage of worker. The Harrod- Todaro economic growth model stresses the importance of savings and investment as key determinants of growth.
The Harrod Todaro Growth model is a growth model and not a growth strategy. A model helps to explain how growth has occurred and how it may occur again in the future. Growth strategies are the things a government might introduce to replicate the outcome suggested by the model. Basically, the model suggests that the economy’s rate of growth depends on the level of national saving (S), the productivity of capital investment also known as the capital output ratio(COR).
Harris-Todaro model is based on the following assumptions and equations that describes the model:
1. There are two sectors in the economy; the rural or agricultural sector (A) and the urban or manufacturing sector (M). the differences between these two sectors are the types of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb Douglas production function.
2. Capital is available in fixed quantities in two sectors.
3. There are L workers in the economy with La and Lm numbers employed in the rural and urban sectors respectively
4. The rural wage equals the rural marginal product of labor and urban wage is exogenously determined.
5. Rural urban migration continues so long as the expected urban real income is more that of the real agricultural income.
Using Nigeria’s economy for example, if 100 Naria(In thousands) worth of capital equipment produces each 10 Naria(In thousands) of annual output, a capital output ratio of 10 to 1 exists. A 3 to 1 capital output ratio indicates that only 30 Naria(In thousands) of capital is required to produce each 10 Naria(in thousands) of output annually. If the capital output ratio is low, Nigeria can produce a lot of output from a little capital. If the capital output ratio is high then it needs a lot of capital for production, and it will not get as much value of output for the same amount of capital. When the quality capital resources is high, then the capital output ratio will be lower
Basic Harrod- Todaro model says:
Rate of growth of GDP = Savings ratio / capital output ratio
Numerical examples:
If the savings rate is 10% and the capital output ratio is 2, then Nigeria would grow at 5% per year.
If the savings rate is 20% and the capital output ratio is 1.5, then Nigeria would grow at 13.3% per year.
If the savings rate is 8% and the capital output ratio is 4, then Nigeria would grow at 2% per year.
Based on the model therefore the rate of growth in an economy can be increased in one of two ways, Increased level of savings in the economy (that is, gross national savings as a % of GDP), Reducing the capital output ratio (that is, increasing the quality / productivity of capital inputs). Nigeria’s economy often have an abundant supply of labour, it is a lack of physical capital that holds back economic growth and development. Boosting investment generates economic growth which leads to a higher level of national income. Higher incomes allow more people to save.
Conclusion
Even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income maximizing decision.
Afube Blossom Chibuzor
2017/249473
blossom.afube.249473@unn.edu.ng
HARRIS-TODARO MODEL OF MIGRATION
INTRODUCTION: In order for a country to develop, there has to be a large transfer of labour from the traditional agricultural sector which exists in rural areas where labour productivity is low or even nonexistent; to a modern manufacturing sector whose labour productivity is high and will continue to rise due to the large accumulation of capital in that sector.
John R. Harris and Michael P. Todaro in two seminar papers brought about a canonical model of rural-urban migration which was so influential that they are referred to as the Harris-Todaro model of migration. This model- though made for developing countries- its general mechanism can also be applied to developed countries. It is used in development economics as an economic illustration of the migrant’s decision based on expected income differentials between rural and urban areas rather than just wage differentials. It is typically studied in the context of developing countries employment and unemployment situations. It follows from the Harris-Todaro model that earning differences, economic incentives and the probability of actually getting a job at the place being migrated to plays an active role in the decision to migrate.
The theory assumes that members of labor forces make comparison between the income expected in the urban area for a given time horizon (i.e. the difference between the cost of migration and the returns on migrating) with the current average rural income. Therefore, accordingly, rural-urban migration will only occur and be economically rational when the urban expected wage exceeds the rural obtained wage.
This model was an academic investigation aimed at throwing light on the events following the ‘Tripartite Agreement’ in Kenya as the country being newly independent were facing serious unemployment situations in the major urban cities. It was an agreement between the government public sector and the private sector to increase employment in industrial jobs in exchange for the union holding wages at the current levels which only increased urban unemployment. Some of the features of the model are:
Real wages (adjusted for cost-of-living differences) are higher in urban formal-sector than in rural traditional-sector jobs.
One has to be physically present in the urban areas where the formal-sector jobs are located in order to be hired for the formal-sector job.
As a consequence of the first two features, there are more workers searching for the formal sector jobs than are actually hired. Employers hire some of the job seekers but not all of them and those not hired, end up unemployed.
The assumptions inherent in this model are:
The model is studied in a two sector economic system which is the rural sector and the urban sector with the difference between the two being the technology of production, the types of goods produced and the process of wage determination. The rural sector specializes in the production of agricultural goods and materials while the urban sector specializes in manufacturing.
Both goods and labour markets are perfectly competitive and as a result the agricultural rural wage is perfectly flexible and equal the marginal productivity of labour and the urban minimum wage is assumed to be fixed institutionally at a level above equilibrium in the labour market.
The price of the agricultural good expressed relatively in terms of the manufactured good, varies according to the relative scarcity between agricultural goods and manufactured goods.
Unemployment is non-existent in the rural agricultural sector. This is an implication of the assumptions that there are only two sectors in the economy and rural prices are wholly flexible.
In relation to the Nigerian economy, it is true that the wages prevailing in the urban sector are higher than that of the rural sector which leads to migration and this obviously agrees with the dualistic economic system where one sector is geared towards local needs and another to global export market. However, the assumption that the manufacturing sector is modern may not hold true for the country seeing that the colonial masters were not at all focused on advancing the technology prevalent in the sector but on using the sector to supply cheap raw materials to their country.
Nigeria does not have her rural sectors geared only to local needs but the agricultural sector provides export of primary products, with the manufacturing contributing little or nothing to the country’s export.
A perfectly competitive labour market is not obtainable seeing as there is no homogenous skill set for all rural migrants. The model ignored the differentials in skill levels amongst the migrants waving away the fact that some could be skilled, semi-skilled or even possess formal education. Also, urban minimum wage is assumed to be fixed institutionally at a level above equilibrium in the labour market which unfortunately, though the same in Nigeria “by law”, is not applied and enforced.
The model is right in its explanation that the wage incentives and the need for presence to actually get a job amongst others cause rural-urban migration even if not all migrants are employed which increase the urban unemployment just as is attainable in Nigeria.
LEWIS-FEI-RANIS SURPLUS LABOUR THEORY
John H. Fei and Gaustav Ranis developed a model that can be seen as an extension of the Lewis model; it is the Fei-Ranis model of economic growth also known as the Surplus Labor model. It deals with a dual economy which has both a modern and primitive sector taking the economic situation of unemployment and underemployment of resources into account. The primitive sector here is the agricultural sector of the economy while the modern sector is the small but emerging industrial sector.
According to the model the development problem lay with the fact that both sectors coexist while development can only be achieved if the progress spotlight can be shifted from agricultural to industrial economy. This shift is done by the transfer of labour from the agricultural to the industrial sector but the growth in the agricultural sector should not be neglected, its output should be sufficient enough for the whole economy. The Fei-Ranis model made some crucial improvement from the Lewis model which includes
The model emphasizes the interaction between the capitalist sector and the agricultural sector deeming it significant since this interaction accelerates the overall economic development in the economy.
It takes into account the impact of population growth on the labour force hence making the model closer to the realities in the less developed countries.
In Fei-Ranis model, the speed of transfer of labour force from agriculture to capitalist sector depends upon rate of growth of population, nature of technological progress and growth of industrial capital which depends upon growth of profits of industries and surplus generated in agriculture sector.
In the Fei-Ranis model, balanced growth of capitalist and agriculture sector is necessary because otherwise the end product will be stagnation.
The model defined thee stages of dualistic economic development by dividing the first stage in the Lewis model to two phases with each stage marked by a turning point
The breakout point leads to phase one growth with redundant agricultural labour
The shortage point leads to phase two growth with disguised agricultural unemployment
The commercialization point leads to phase three of self-sustaining economic growth with the commercialization of the agricultural sector
ASSUMPTIONS
There is a presence of dual economy. Traditional or agricultural sector is passive and stagnant in nature while the capitalist sector is active and progressive in nature.
Supply of land is fixed, and both agricultural sector and capitalist sector makes use of the land.
Population is an exogenous factor i.e. it is determined by factors other than those present in the model.
There are constant returns to scale with respect to labour where labour acts as a variable factor in both agricultural sector and capitalist sector.
Real wage rate in the industrial sector is fixed. This wage rate is equal to initial level productivity and is also called constant institutional wage rate.
Output of the agricultural sector depends upon land and labour, while that of the capitalist sector depends upon labour and capital.
There is no accumulation of capital in the agricultural sector except in one form, i.e., land reclamation. It means that if there is no technological breakthrough in agriculture, the sector will become non-remunerative and it will be characterized by fatigue. Therefore, land’s fertility has to be maintained
Marginal product of labour is zero at some points and such labour force can be transferred from agricultural sector to capitalist sector, where the productive capacity is more without any loss to agricultural sector.
In relation to Nigeria, the model has its high and low points. The call for shift in progress focal point from agriculture to industry was heeded by the country except that the warning to create a sense of balance and not neglect the agricultural sector was not heeded which led to an industrialized modern sector coexisting with a backward agricultural sector causing stagnation as was predicted.
The assumption that there is a passive and stagnant agriculture is partially true but he model did not take into consideration the impact capital can make and has made in Nigeria. The agricultural sector is a bit passive but definitely not stagnant due to capital investment in the sector. Unfortunately, in the country, the capital sector is not active neither is it progressive. With heavy reliance on imports and the poor infrastructural set up of Nigeria, the growth of the sector can only be classified as dawdling.
The fact that foreign trade was excluded from this model is a big shame seeing as globalization has made foreign trade something of a necessity and it aids in development of the economy. The existence of closed economy is washed up and hence the model should be worked on if it can be applied successfully to a country like Nigeria with her heavy reliance on foreign trade .
Ngwu Osita Enoch
2017/242022
Ositangwu95@gmail.com
Education Economics
Lewis-Fri-Rannis Model
INTRODUCTION
The Lewis (1954) theory of dualistic economic development provides the seminal contribution to theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150).
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output.
HISTORY OF SURPLUS LABOUR THEORY
The historical emergence of surplus labour is, according to Marx, also closely associated with the growth of trade (the economic exchange of goods and services) and with the emergence of a society divided into social classes. As soon as a permanent surplus product can be produced, the moral-political question arises as to how it should be distributed, and for whose benefit surplus-labour should be performed. The strong defeat the weak, and it becomes possible for a social elite to gain control over the surplus-labour and surplus product of the working population; they can live off the labour of others.
Labour which is sufficiently productive so that it can perform surplus labour is, in a cash economy, the material foundation for the appropriation of surplus-value from that labour. How exactly this appropriation will occur, is determined by the prevailing relations of production and the balance of power between social classes.
THE CONCEPT OF SURPLUS LABOUR
The concept of surplus labour is widely discussed among development economics but its specific meaning needs to be defined, especially in technical terms, as many neoclassical economists still doubt the existence of surplus labour in an economy. Defining the source and the extent of surplus labour is then a prerequisite for further study. This section considers the various definitions of surplus labour and clarifies them.
The simple definition of surplus labour implies the existence of a point at which the marginal product of labour becomes zero and labour can be transferred out of the traditional sector without reducing the quantity of output, as noted by Wellisz (1968: 22): The (disguised-unemployment or the Unlimited Supply of Labour) hypothesis claims that in poor, densely populated countries, more people are employed than needed to produce the prevailing output with the existing techniques and the existing supply of non-labour inputs. The ‘surplus’ labour constitutes ‘hidden’ or ‘disguised’ unemployment. Many of the proponents of the hypothesis make the further claim that agricultural output will not decrease, and industrial output will increase, if measures are taken to re-allocate labour from subsistence agriculture (where the surplus is supposed to exist) to industry (where there is no surplus labour).
ASSUMPTIONS OF THE LEWIS-FEI-RANIS MODEL
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion. Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc of those in the capitalist sector. Lewis in fact so much fascinated by the higher propensity to save of the capitalist sector that he even advocates a transfer of income from the subsistence sector to the capitalist sector. He feels that steps have to be taken to raise the rate of savings from 10% to 15% if the development of the economy has to be smooth.
COMPARISONS OF THE THEORY OF SURPLUS LABOUR
Surplus labor models are a class of models for analyzing developing countries as dual economies with a modern capitalist sector and a traditional precapitalist sector. The precapitalist sector is viewed as having a large pool (“unlimited supplies”) of labor from which the capitalist sector may draw at constant cost. While these models are often described as finding their inspiration in the old classical economists and Karl Marx, the 1954 model of W. Arthur Lewis and its extensions are technically more neoclassical than truly classical. The Lewis model was elaborated and formalized by many others, most notably John C. H. Fei and Gustav Ranis (1964), with important theoretical contributions from Amartya Sen (1966) and Stephen Marglin (1976). Questions have been raised as to the historical relevance of the neoclassical labor surplus models (Schultz 1964; Myint 1971; Arrighi 1973; Williamson 1985).
CRITICISM
Lewis-Fei-Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.
It has been asserted that the Lewis-Fei-Ranis model did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed.
The Lewis-Fei-Ranis model say, “It has been argued that money is not a simple substitute for physical capital in an aggregate production function. There are reasons to believe that the relationship between money and physical capital could be complementary to one another at some stage of economic development, to the extent that credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry.” This indicates that in the process of development they neglect the role of money and prices. They fail to differ between wage labor and household labor, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
The Lewis-Fei-Ranis model assume that MPPL is zero during the early phases of economic development, which has been criticized by Harry T.Oshima and some others on the grounds that MPPL of labor is zero only if the agricultural population is very large, and if it is very large, some of that labor will shift to cities in search of jobs. In the short run, this section of labor that has shifted to the cities remains unemployed, but over the long run it is either absorbed by the informal sector, or it returns to the villages and attempts to bring more marginal land into cultivation.
CONCLUSIONS AND RECOMMENDATIONS
Lewis-Fei-Ranis model can be grouped under three instruments; labour force, capital accumulation and integration to the world economy. The main focus in Lewis-Fei-Ranis model was on the reallocation of labour until the turning point is reached, i.e., the time when labour reallocation has outstripped population growth long enough for dualism to atrophy and the economy to become fully commercialized. The model implicitly showed that the traditional sector do not produce any capital accumulation as they are very small and poor. Trade between agriculture and industry as the supply or marketed food falls or the demand for it rises, or both causing the value of marginal product of labour in agriculture to rise.
In sum up, there are several weaknesses of Lewis-Fei-Ranis model that are underlined by many economists. The first and most important is that if marginal productivity of labour in agricultural sector is negligible, zero. Schultz (1964), Sen (1967), Harris and Todaro (1970) and Fields (1975) proved with their empirical results that this cannot happen in agriculture sector. It is obvious that there is a disguised unemployment in agriculture. Particularly, agricultural sector should be considered in two ways: during harvest time and post harvest. If the agricultural surplus is solely considered for the regions where there can be seen harsh winter conditions, it could be accepted of the doctrine of Lewis, otherwise it is irrelevant to say there is a zero marginal productivity for agriculture labours. Also, there are positive opportunity costs, e.g. loss of crops in times of peak harvesting season, labour transfer will reduce agricultural output.
Second, the model employed mostly for the closed economies and gave relatively less information on open economies. Lewis-Fei-Ranis model was criticized as it neglects international trade. The model was to a certain extent supply-oriented, which does not foresee any trade between capital and other sectors. Also it was criticized advocating industrialization and ignores agriculture. If a section of the profit made by the capitalists is not devoted to agricultural development, the process of industrialization would be jeopardized.
Third, Lewis-Fei-Ranis model believed that the more the rate of labour transfer to urban employment, the more the economic grows and more jobs are created. But this is not a common applicable in practice if industrial development involves more intensive use of capital than labour, then the flow of labour from agriculture to industry will simply create more unemployment.
Fourth, the Lewis-Fei-Ranis model would imply that aggregate living standards should not rise as rapidly as productivity until surplus labour is eliminated. However, the evidence on living standards in Latin America during the twentieth century indicates that these have risen in line with productivity, and that the ‘indirect’ components of the real wage (health and education) have actually risen more rapidly that average incomes.
Fifth, the Lewis-Fei-Ranis model stated the wage in industrial sector does not increase before labour surplus is absorbed. But this does not happen in any way in reality as the development of the urban, or industrial, or formal sector can itself lead to the creation of pressure groups and swing the balance of power towards those in that sector, to the detriment of those remaining outside it. The wage in the industrial sector in reality outstandingly rises long before the labour surplus is absorbed.
Haven tested the Lewis-Ranis-Fei theory for developing economy over 1965-2002 we have found that the developing economic growth is mainly attributable to the development of the non-agricultural sector. This is driven by rapid capital accumulation as well as employment growth. The reallocation of labour away from agriculture has made a positive net contribution to rapid economic of the developing economy. The rise in the marginal productivity of agricultural labour indicates the absorption of redundant agricultural labour since the 1978 Economic Reform. However, the marginal productivity of agricultural labour is still lower than the initial low average productivity of agricultural labour. This implies the continued existence of disguised agricultural unemployment. This suggests that the these developing economy has entered the Lewis-Ranis-Fei phase two of development but has not yet achieved phase three. The continuing widening productivity gap between the two sectors calls for the removal of market restrictions and government interventions so as to allow the continued absorption of surplus labour. Several policy recommendations are tentatively suggested. First and foremost, more effort should be made in promoting employment to effectively absorb the remaining labour surplus and promote economic development. This can be achieved by further relaxing the Hukou restrictions on migration, increasing labour market flexibility and improving the allocative efficiency of labour. It can also be achieved by encouraging the development of private enterprise to create more employment opportunities. Second, Government of developing economy should continue implementing the Sunshine Policy, initiated in 2003, designed to provide rudimentary job training, recruitment information and information about conditions in the destination cities to rural migrants. This will not only help facilitate employment of rural migrants but also satisfy the increasing demand for skilled labour in the growing non-agricultural sector. Third, agriculture could be promoted by tax breaks, direct subsidies and most importantly, by removing price controls on agricultural products. Agriculture could thus be commercialised and the economy would enter phase three of economic development.
REFERENCE
Sadik-Zada, Elkhan Richard (2020). “Natural resources, technological progress, and economic modernization”. Review of Development Economics. doi:10.1111/rode.12716.
“Economnics4Development Website”. Surplus Labor Model of Economic Development. Archived from the original on 16 October 2011. Retrieved 12 October 2011.
Thirlwall, A.P (2006). Growth and Development: With Special Reference to Developing Economies. Palgrave Macmillan. ISBN 1-4039-9600-8.
Subrata, Ghatak (2003). Introduction to Developmental Economics. London: Routledge. ISBN 0-415-09722-3.
“Ranis-Fei model vs. Lewis Model” (PDF). Developmentafrique.com. Archived from the original (PDF) on 30 May 2012. Retrieved 14 October 2011.
“American Economic Review”. The Ranis-Fei Model of Economic Development: Comment. 53: 448–452. JSTOR 1809172.
Ranis, Gustav. “Paper on Labor Surplus Economies” (PDF). Retrieved 4 October 2011.
J. Choo, Hakchung. “American Economic Review”. On the Empirical Relevancy of the Rans-Fei Model of Economic Development: Comment. 61: 695–703. JSTOR 1811863.
Misra, Puri, S.K, V.K (2010). Economics of Development and Planning. Mumbai, India: Himalaya Publishing House. pp. 270–279. ISBN 978-81-8488-829-4.
Ngwu Osita Enoch
2017/242022
Ositangwu95@gmail.com
Education Economics
Enochonline.blogspot.com
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
INTRODUCTION
The Lewis (1954) theory of dualistic economic development provides the seminal contribution to theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150).
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output.
HISTORY OF SURPLUS LABOUR THEORY
The historical emergence of surplus labour is, according to Marx, also closely associated with the growth of trade (the economic exchange of goods and services) and with the emergence of a society divided into social classes. As soon as a permanent surplus product can be produced, the moral-political question arises as to how it should be distributed, and for whose benefit surplus-labour should be performed. The strong defeat the weak, and it becomes possible for a social elite to gain control over the surplus-labour and surplus product of the working population; they can live off the labour of others.
Labour which is sufficiently productive so that it can perform surplus labour is, in a cash economy, the material foundation for the appropriation of surplus-value from that labour. How exactly this appropriation will occur, is determined by the prevailing relations of production and the balance of power between social classes.
THE CONCEPT OF SURPLUS LABOUR
The concept of surplus labour is widely discussed among development economics but its specific meaning needs to be defined, especially in technical terms, as many neoclassical economists still doubt the existence of surplus labour in an economy. Defining the source and the extent of surplus labour is then a prerequisite for further study. This section considers the various definitions of surplus labour and clarifies them.
The simple definition of surplus labour implies the existence of a point at which the marginal product of labour becomes zero and labour can be transferred out of the traditional sector without reducing the quantity of output, as noted by Wellisz (1968: 22): The (disguised-unemployment or the Unlimited Supply of Labour) hypothesis claims that in poor, densely populated countries, more people are employed than needed to produce the prevailing output with the existing techniques and the existing supply of non-labour inputs. The ‘surplus’ labour constitutes ‘hidden’ or ‘disguised’ unemployment. Many of the proponents of the hypothesis make the further claim that agricultural output will not decrease, and industrial output will increase, if measures are taken to re-allocate labour from subsistence agriculture (where the surplus is supposed to exist) to industry (where there is no surplus labour).
ASSUMPTIONS OF THE LEWIS-FEI-RANIS MODEL
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion. Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc of those in the capitalist sector. Lewis in fact so much fascinated by the higher propensity to save of the capitalist sector that he even advocates a transfer of income from the subsistence sector to the capitalist sector. He feels that steps have to be taken to raise the rate of savings from 10% to 15% if the development of the economy has to be smooth.
COMPARISONS OF THE THEORY OF SURPLUS LABOUR
Surplus labor models are a class of models for analyzing developing countries as dual economies with a modern capitalist sector and a traditional precapitalist sector. The precapitalist sector is viewed as having a large pool (“unlimited supplies”) of labor from which the capitalist sector may draw at constant cost. While these models are often described as finding their inspiration in the old classical economists and Karl Marx, the 1954 model of W. Arthur Lewis and its extensions are technically more neoclassical than truly classical. The Lewis model was elaborated and formalized by many others, most notably John C. H. Fei and Gustav Ranis (1964), with important theoretical contributions from Amartya Sen (1966) and Stephen Marglin (1976). Questions have been raised as to the historical relevance of the neoclassical labor surplus models (Schultz 1964; Myint 1971; Arrighi 1973; Williamson 1985).
CRITICISM
Lewis-Fei-Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.
It has been asserted that the Lewis-Fei-Ranis model did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed.
The Lewis-Fei-Ranis model say, “It has been argued that money is not a simple substitute for physical capital in an aggregate production function. There are reasons to believe that the relationship between money and physical capital could be complementary to one another at some stage of economic development, to the extent that credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry.” This indicates that in the process of development they neglect the role of money and prices. They fail to differ between wage labor and household labor, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
The Lewis-Fei-Ranis model assume that MPPL is zero during the early phases of economic development, which has been criticized by Harry T.Oshima and some others on the grounds that MPPL of labor is zero only if the agricultural population is very large, and if it is very large, some of that labor will shift to cities in search of jobs. In the short run, this section of labor that has shifted to the cities remains unemployed, but over the long run it is either absorbed by the informal sector, or it returns to the villages and attempts to bring more marginal land into cultivation.
CONCLUSIONS AND RECOMMENDATIONS
Lewis-Fei-Ranis model can be grouped under three instruments; labour force, capital accumulation and integration to the world economy. The main focus in Lewis-Fei-Ranis model was on the reallocation of labour until the turning point is reached, i.e., the time when labour reallocation has outstripped population growth long enough for dualism to atrophy and the economy to become fully commercialized. The model implicitly showed that the traditional sector do not produce any capital accumulation as they are very small and poor. Trade between agriculture and industry as the supply or marketed food falls or the demand for it rises, or both causing the value of marginal product of labour in agriculture to rise.
In sum up, there are several weaknesses of Lewis-Fei-Ranis model that are underlined by many economists. The first and most important is that if marginal productivity of labour in agricultural sector is negligible, zero. Schultz (1964), Sen (1967), Harris and Todaro (1970) and Fields (1975) proved with their empirical results that this cannot happen in agriculture sector. It is obvious that there is a disguised unemployment in agriculture. Particularly, agricultural sector should be considered in two ways: during harvest time and post harvest. If the agricultural surplus is solely considered for the regions where there can be seen harsh winter conditions, it could be accepted of the doctrine of Lewis, otherwise it is irrelevant to say there is a zero marginal productivity for agriculture labours. Also, there are positive opportunity costs, e.g. loss of crops in times of peak harvesting season, labour transfer will reduce agricultural output.
Second, the model employed mostly for the closed economies and gave relatively less information on open economies. Lewis-Fei-Ranis model was criticized as it neglects international trade. The model was to a certain extent supply-oriented, which does not foresee any trade between capital and other sectors. Also it was criticized advocating industrialization and ignores agriculture. If a section of the profit made by the capitalists is not devoted to agricultural development, the process of industrialization would be jeopardized.
Third, Lewis-Fei-Ranis model believed that the more the rate of labour transfer to urban employment, the more the economic grows and more jobs are created. But this is not a common applicable in practice if industrial development involves more intensive use of capital than labour, then the flow of labour from agriculture to industry will simply create more unemployment.
Fourth, the Lewis-Fei-Ranis model would imply that aggregate living standards should not rise as rapidly as productivity until surplus labour is eliminated. However, the evidence on living standards in Latin America during the twentieth century indicates that these have risen in line with productivity, and that the ‘indirect’ components of the real wage (health and education) have actually risen more rapidly that average incomes.
Fifth, the Lewis-Fei-Ranis model stated the wage in industrial sector does not increase before labour surplus is absorbed. But this does not happen in any way in reality as the development of the urban, or industrial, or formal sector can itself lead to the creation of pressure groups and swing the balance of power towards those in that sector, to the detriment of those remaining outside it. The wage in the industrial sector in reality outstandingly rises long before the labour surplus is absorbed.
Haven tested the Lewis-Ranis-Fei theory for developing economy over 1965-2002 we have found that the developing economic growth is mainly attributable to the development of the non-agricultural sector. This is driven by rapid capital accumulation as well as employment growth. The reallocation of labour away from agriculture has made a positive net contribution to rapid economic of the developing economy. The rise in the marginal productivity of agricultural labour indicates the absorption of redundant agricultural labour since the 1978 Economic Reform. However, the marginal productivity of agricultural labour is still lower than the initial low average productivity of agricultural labour. This implies the continued existence of disguised agricultural unemployment. This suggests that the these developing economy has entered the Lewis-Ranis-Fei phase two of development but has not yet achieved phase three. The continuing widening productivity gap between the two sectors calls for the removal of market restrictions and government interventions so as to allow the continued absorption of surplus labour. Several policy recommendations are tentatively suggested. First and foremost, more effort should be made in promoting employment to effectively absorb the remaining labour surplus and promote economic development. This can be achieved by further relaxing the Hukou restrictions on migration, increasing labour market flexibility and improving the allocative efficiency of labour. It can also be achieved by encouraging the development of private enterprise to create more employment opportunities. Second, Government of developing economy should continue implementing the Sunshine Policy, initiated in 2003, designed to provide rudimentary job training, recruitment information and information about conditions in the destination cities to rural migrants. This will not only help facilitate employment of rural migrants but also satisfy the increasing demand for skilled labour in the growing non-agricultural sector. Third, agriculture could be promoted by tax breaks, direct subsidies and most importantly, by removing price controls on agricultural products. Agriculture could thus be commercialised and the economy would enter phase three of economic development.
Harris-Todaro Model of Migration
INTRODUCTION
Harris and Todaro work, is considered one of the starting points of the classic rural-urban migration theory. The hypothesis and predictions of Harris-Todaro model have been subjected to econometric evaluation and have been corroborated by several studies. The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migraton decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage. From this crucial assumption, as denominated by Harris-Todaro, is deduced that the migratory dynamics leads the economic system toward an equilibrium with urban concentration and high urban unemployment.
THE HARRIS-TODARO MODEL
Assumptions
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function: where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a < 1 are parametric constants. Both goods and labor markets are perfectly competitive. Nevertheless, there is segmentation in the labor market due to a high minimum urban wage politically determined. In the rural sector, the real wage, perfectly flexible, is equal to the marginal productivity of labor in this sectors where wa is the real wage and p is the price of the agricultural good, both expressed in units of manufactured good.
HARRIS-TODARO AGENT-BASED MODEL
Computational Implementation
Initially, workers are randomly placed in a square lattice with linear dimension L = 500. The reference values of the parameters used for these simulations are the same done to evaluate the equilibrium of the Harris-Todaro model, namely, Aa = 1.0, Am = 1.0, f = 0.3, a = 0.7, r = 1.0 and g = 1.0. The value of the minimum wage used is wm = 0.8 and the initial urban fraction of the total population is nu = 0.2, where nu = Nu/N is the normalized urban population also called urban share. The initial value nu = 0.2 is in agreement with historical data of developing economies. Given these parameters, one can calculate the vector which characterizes temporary equilibrium of the system by using eqs. (7 – 12). By using eq. (7), the employment level of the urban sector, Nm, is obtained. If nu Nm/N there will be a fraction of Nm/Nu workers employed, which earn the minimum wage, wi = wm, and (1-Nm/Nu) workers unemployed, which earn a wage wi = 0. Each worker can be selected to review his sectorial location with probability a, called activity. Therefore, in each time step only a fraction of workers becomes potential migrants, going through the sectorial location reviewing process. Potential migrants will determine their satisfaction level of being in the current sector by comparing their earnings, wi, among nearest neighbors. The potential migrant starts the comparison process with a initial satisfaction level si = 0. When wi > wneighbor the satisfaction level si is added in one unit; if wi < wneighbor, si is diminished in one unit; if wi = wneighbor, si does not change. After the worker has passed through the reviewing process his/her satisfaction level is checked. The migration will occur only if si < 0, what means that the worker's i earnings is less than the most of his/her nearest neighbors. After all the potential migrants complete the reviewing process and have decided migrate or not, a new configuration of the system is set. Therefore, once again a new temporary equilibrium of the system is calculated by using eqs. (8 – 12). The whole procedure is repeated until a pre-set number of steps is reached. It is important to emphasize that Nm is kept constant throughout the simulation. Its given by eq. (7) which depends on the technological parameters, a,Am, and the minimum wage, wm, which are constants too.
In this case, the differential of expected wages is negative. In an economy mainly rural (nu < 0:5), the transitional dynamics characterized by a continuous growth of population of the urban sector with a differential of expected wages relatively high is followed by the stabilization of rural-urban differential of expected wages. In other words, the generalized Harris-Todaro condition, eq. (15), arises as a long run equilibrium result of the agent-based migratory dynamics.
CONCLUSION
In this paper we developed and agent-based computational model which formalizes the rural-urban allocation of workers as a process of social learning by imitation. We analyze a two-sectorial economy composed by adaptative agents, i.e., individuals that grope over time for best sectorial location in terms of earnings. This search is a process of imitation of successful neighbor agents. The dispersed and non-coordinated individual migration decisions, made based on local information, generate aggregate regularities.
Firstly, the crucial assumption of Harris and Todaro, the principle that rural-urban migration will occur while the urban expected wage exceed the rural wage, comes out as spontaneous upshot of interaction among adaptative agents.
Secondly, the migratory dynamics generated by agents that seek to adaptate to the economic environment that they co-create leads the economy toward a long run equilibrium characterized by urban concentration with urban unemployment. When this long run equilibrium is reached, the generalized Harris-Todaro condition is satisfied, i.e., there is a stabilization of the rural-urban expected wage differential.
Thirdly, the impact of the minimum wage and elasticity of terms of trade in a long run equilibrium obtained by simulations are in agreement with the predictions of the original Harris-Todaro model with Cobb-Douglas technology.
Finally, the simulations showed an aggregated pattern not found in the original Harris-Todaro model. There is the possibility of small fluctuations of the urban share around an average value. This phenomenon is known as reverse migration.
Ngwu Osita Enoch
2017/242022
Ositangwu95@gmail.com
Education Economics
Enochonline.blogspot.com
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
INTRODUCTION
The Lewis (1954) theory of dualistic economic development provides the seminal contribution to theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150).
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output.
HISTORY OF SURPLUS LABOUR THEORY
The historical emergence of surplus labour is, according to Marx, also closely associated with the growth of trade (the economic exchange of goods and services) and with the emergence of a society divided into social classes. As soon as a permanent surplus product can be produced, the moral-political question arises as to how it should be distributed, and for whose benefit surplus-labour should be performed. The strong defeat the weak, and it becomes possible for a social elite to gain control over the surplus-labour and surplus product of the working population; they can live off the labour of others.
Labour which is sufficiently productive so that it can perform surplus labour is, in a cash economy, the material foundation for the appropriation of surplus-value from that labour. How exactly this appropriation will occur, is determined by the prevailing relations of production and the balance of power between social classes.
THE CONCEPT OF SURPLUS LABOUR
The concept of surplus labour is widely discussed among development economics but its specific meaning needs to be defined, especially in technical terms, as many neoclassical economists still doubt the existence of surplus labour in an economy. Defining the source and the extent of surplus labour is then a prerequisite for further study. This section considers the various definitions of surplus labour and clarifies them.
The simple definition of surplus labour implies the existence of a point at which the marginal product of labour becomes zero and labour can be transferred out of the traditional sector without reducing the quantity of output, as noted by Wellisz (1968: 22): The (disguised-unemployment or the Unlimited Supply of Labour) hypothesis claims that in poor, densely populated countries, more people are employed than needed to produce the prevailing output with the existing techniques and the existing supply of non-labour inputs. The ‘surplus’ labour constitutes ‘hidden’ or ‘disguised’ unemployment. Many of the proponents of the hypothesis make the further claim that agricultural output will not decrease, and industrial output will increase, if measures are taken to re-allocate labour from subsistence agriculture (where the surplus is supposed to exist) to industry (where there is no surplus labour).
ASSUMPTIONS OF THE LEWIS-FEI-RANIS MODEL
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion. Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc of those in the capitalist sector. Lewis in fact so much fascinated by the higher propensity to save of the capitalist sector that he even advocates a transfer of income from the subsistence sector to the capitalist sector. He feels that steps have to be taken to raise the rate of savings from 10% to 15% if the development of the economy has to be smooth.
COMPARISONS OF THE THEORY OF SURPLUS LABOUR
Surplus labor models are a class of models for analyzing developing countries as dual economies with a modern capitalist sector and a traditional precapitalist sector. The precapitalist sector is viewed as having a large pool (“unlimited supplies”) of labor from which the capitalist sector may draw at constant cost. While these models are often described as finding their inspiration in the old classical economists and Karl Marx, the 1954 model of W. Arthur Lewis and its extensions are technically more neoclassical than truly classical. The Lewis model was elaborated and formalized by many others, most notably John C. H. Fei and Gustav Ranis (1964), with important theoretical contributions from Amartya Sen (1966) and Stephen Marglin (1976). Questions have been raised as to the historical relevance of the neoclassical labor surplus models (Schultz 1964; Myint 1971; Arrighi 1973; Williamson 1985).
CRITICISM
Lewis-Fei-Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.
It has been asserted that the Lewis-Fei-Ranis model did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed.
The Lewis-Fei-Ranis model say, “It has been argued that money is not a simple substitute for physical capital in an aggregate production function. There are reasons to believe that the relationship between money and physical capital could be complementary to one another at some stage of economic development, to the extent that credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry.” This indicates that in the process of development they neglect the role of money and prices. They fail to differ between wage labor and household labor, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
The Lewis-Fei-Ranis model assume that MPPL is zero during the early phases of economic development, which has been criticized by Harry T.Oshima and some others on the grounds that MPPL of labor is zero only if the agricultural population is very large, and if it is very large, some of that labor will shift to cities in search of jobs. In the short run, this section of labor that has shifted to the cities remains unemployed, but over the long run it is either absorbed by the informal sector, or it returns to the villages and attempts to bring more marginal land into cultivation.
CONCLUSIONS AND RECOMMENDATIONS
Lewis-Fei-Ranis model can be grouped under three instruments; labour force, capital accumulation and integration to the world economy. The main focus in Lewis-Fei-Ranis model was on the reallocation of labour until the turning point is reached, i.e., the time when labour reallocation has outstripped population growth long enough for dualism to atrophy and the economy to become fully commercialized. The model implicitly showed that the traditional sector do not produce any capital accumulation as they are very small and poor. Trade between agriculture and industry as the supply or marketed food falls or the demand for it rises, or both causing the value of marginal product of labour in agriculture to rise.
In sum up, there are several weaknesses of Lewis-Fei-Ranis model that are underlined by many economists. The first and most important is that if marginal productivity of labour in agricultural sector is negligible, zero. Schultz (1964), Sen (1967), Harris and Todaro (1970) and Fields (1975) proved with their empirical results that this cannot happen in agriculture sector. It is obvious that there is a disguised unemployment in agriculture. Particularly, agricultural sector should be considered in two ways: during harvest time and post harvest. If the agricultural surplus is solely considered for the regions where there can be seen harsh winter conditions, it could be accepted of the doctrine of Lewis, otherwise it is irrelevant to say there is a zero marginal productivity for agriculture labours. Also, there are positive opportunity costs, e.g. loss of crops in times of peak harvesting season, labour transfer will reduce agricultural output.
Second, the model employed mostly for the closed economies and gave relatively less information on open economies. Lewis-Fei-Ranis model was criticized as it neglects international trade. The model was to a certain extent supply-oriented, which does not foresee any trade between capital and other sectors. Also it was criticized advocating industrialization and ignores agriculture. If a section of the profit made by the capitalists is not devoted to agricultural development, the process of industrialization would be jeopardized.
Third, Lewis-Fei-Ranis model believed that the more the rate of labour transfer to urban employment, the more the economic grows and more jobs are created. But this is not a common applicable in practice if industrial development involves more intensive use of capital than labour, then the flow of labour from agriculture to industry will simply create more unemployment.
Fourth, the Lewis-Fei-Ranis model would imply that aggregate living standards should not rise as rapidly as productivity until surplus labour is eliminated. However, the evidence on living standards in Latin America during the twentieth century indicates that these have risen in line with productivity, and that the ‘indirect’ components of the real wage (health and education) have actually risen more rapidly that average incomes.
Fifth, the Lewis-Fei-Ranis model stated the wage in industrial sector does not increase before labour surplus is absorbed. But this does not happen in any way in reality as the development of the urban, or industrial, or formal sector can itself lead to the creation of pressure groups and swing the balance of power towards those in that sector, to the detriment of those remaining outside it. The wage in the industrial sector in reality outstandingly rises long before the labour surplus is absorbed.
Haven tested the Lewis-Ranis-Fei theory for developing economy over 1965-2002 we have found that the developing economic growth is mainly attributable to the development of the non-agricultural sector. This is driven by rapid capital accumulation as well as employment growth. The reallocation of labour away from agriculture has made a positive net contribution to rapid economic of the developing economy. The rise in the marginal productivity of agricultural labour indicates the absorption of redundant agricultural labour since the 1978 Economic Reform. However, the marginal productivity of agricultural labour is still lower than the initial low average productivity of agricultural labour. This implies the continued existence of disguised agricultural unemployment. This suggests that the these developing economy has entered the Lewis-Ranis-Fei phase two of development but has not yet achieved phase three. The continuing widening productivity gap between the two sectors calls for the removal of market restrictions and government interventions so as to allow the continued absorption of surplus labour. Several policy recommendations are tentatively suggested. First and foremost, more effort should be made in promoting employment to effectively absorb the remaining labour surplus and promote economic development. This can be achieved by further relaxing the Hukou restrictions on migration, increasing labour market flexibility and improving the allocative efficiency of labour. It can also be achieved by encouraging the development of private enterprise to create more employment opportunities. Second, Government of developing economy should continue implementing the Sunshine Policy, initiated in 2003, designed to provide rudimentary job training, recruitment information and information about conditions in the destination cities to rural migrants. This will not only help facilitate employment of rural migrants but also satisfy the increasing demand for skilled labour in the growing non-agricultural sector. Third, agriculture could be promoted by tax breaks, direct subsidies and most importantly, by removing price controls on agricultural products. Agriculture could thus be commercialised and the economy would enter phase three of economic development.
REFERENCE
Sadik-Zada, Elkhan Richard (2020). “Natural resources, technological progress, and economic modernization”. Review of Development Economics. doi:10.1111/rode.12716.
“Economnics4Development Website”. Surplus Labor Model of Economic Development. Archived from the original on 16 October 2011. Retrieved 12 October 2011.
Thirlwall, A.P (2006). Growth and Development: With Special Reference to Developing Economies. Palgrave Macmillan. ISBN 1-4039-9600-8.
Subrata, Ghatak (2003). Introduction to Developmental Economics. London: Routledge. ISBN 0-415-09722-3.
“Ranis-Fei model vs. Lewis Model” (PDF). Developmentafrique.com. Archived from the original (PDF) on 30 May 2012. Retrieved 14 October 2011.
“American Economic Review”. The Ranis-Fei Model of Economic Development: Comment. 53: 448–452. JSTOR 1809172.
Ranis, Gustav. “Paper on Labor Surplus Economies” (PDF). Retrieved 4 October 2011.
J. Choo, Hakchung. “American Economic Review”. On the Empirical Relevancy of the Rans-Fei Model of Economic Development: Comment. 61: 695–703. JSTOR 1811863.
Misra, Puri, S.K, V.K (2010). Economics of Development and Planning. Mumbai, India: Himalaya Publishing House. pp. 270–279. ISBN 978-81-8488-829-4.
Harris-Todaro Model of Migration
INTRODUCTION
Harris and Todaro work, is considered one of the starting points of the classic rural-urban migration theory. The hypothesis and predictions of Harris-Todaro model have been subjected to econometric evaluation and have been corroborated by several studies. The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migraton decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage. From this crucial assumption, as denominated by Harris-Todaro, is deduced that the migratory dynamics leads the economic system toward an equilibrium with urban concentration and high urban unemployment.
THE HARRIS-TODARO MODEL
Assumptions
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function: where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a < 1 are parametric constants. Both goods and labor markets are perfectly competitive. Nevertheless, there is segmentation in the labor market due to a high minimum urban wage politically determined. In the rural sector, the real wage, perfectly flexible, is equal to the marginal productivity of labor in this sectors where wa is the real wage and p is the price of the agricultural good, both expressed in units of manufactured good.
HARRIS-TODARO AGENT-BASED MODEL
Computational Implementation
Initially, workers are randomly placed in a square lattice with linear dimension L = 500. The reference values of the parameters used for these simulations are the same done to evaluate the equilibrium of the Harris-Todaro model, namely, Aa = 1.0, Am = 1.0, f = 0.3, a = 0.7, r = 1.0 and g = 1.0. The value of the minimum wage used is wm = 0.8 and the initial urban fraction of the total population is nu = 0.2, where nu = Nu/N is the normalized urban population also called urban share. The initial value nu = 0.2 is in agreement with historical data of developing economies. Given these parameters, one can calculate the vector which characterizes temporary equilibrium of the system by using eqs. (7 – 12). By using eq. (7), the employment level of the urban sector, Nm, is obtained. If nu Nm/N there will be a fraction of Nm/Nu workers employed, which earn the minimum wage, wi = wm, and (1-Nm/Nu) workers unemployed, which earn a wage wi = 0. Each worker can be selected to review his sectorial location with probability a, called activity. Therefore, in each time step only a fraction of workers becomes potential migrants, going through the sectorial location reviewing process. Potential migrants will determine their satisfaction level of being in the current sector by comparing their earnings, wi, among nearest neighbors. The potential migrant starts the comparison process with a initial satisfaction level si = 0. When wi > wneighbor the satisfaction level si is added in one unit; if wi < wneighbor, si is diminished in one unit; if wi = wneighbor, si does not change. After the worker has passed through the reviewing process his/her satisfaction level is checked. The migration will occur only if si < 0, what means that the worker's i earnings is less than the most of his/her nearest neighbors. After all the potential migrants complete the reviewing process and have decided migrate or not, a new configuration of the system is set. Therefore, once again a new temporary equilibrium of the system is calculated by using eqs. (8 – 12). The whole procedure is repeated until a pre-set number of steps is reached. It is important to emphasize that Nm is kept constant throughout the simulation. Its given by eq. (7) which depends on the technological parameters, a,Am, and the minimum wage, wm, which are constants too.
In this case, the differential of expected wages is negative. In an economy mainly rural (nu < 0:5), the transitional dynamics characterized by a continuous growth of population of the urban sector with a differential of expected wages relatively high is followed by the stabilization of rural-urban differential of expected wages. In other words, the generalized Harris-Todaro condition, eq. (15), arises as a long run equilibrium result of the agent-based migratory dynamics.
CONCLUSION
In this paper we developed and agent-based computational model which formalizes the rural-urban allocation of workers as a process of social learning by imitation. We analyze a two-sectorial economy composed by adaptative agents, i.e., individuals that grope over time for best sectorial location in terms of earnings. This search is a process of imitation of successful neighbor agents. The dispersed and non-coordinated individual migration decisions, made based on local information, generate aggregate regularities.
Firstly, the crucial assumption of Harris and Todaro, the principle that rural-urban migration will occur while the urban expected wage exceed the rural wage, comes out as spontaneous upshot of interaction among adaptative agents.
Secondly, the migratory dynamics generated by agents that seek to adaptate to the economic environment that they co-create leads the economy toward a long run equilibrium characterized by urban concentration with urban unemployment. When this long run equilibrium is reached, the generalized Harris-Todaro condition is satisfied, i.e., there is a stabilization of the rural-urban expected wage differential.
Thirdly, the impact of the minimum wage and elasticity of terms of trade in a long run equilibrium obtained by simulations are in agreement with the predictions of the original Harris-Todaro model with Cobb-Douglas technology.
Finally, the simulations showed an aggregated pattern not found in the original Harris-Todaro model. There is the possibility of small fluctuations of the urban share around an average value. This phenomenon is known as reverse migration.
REFERENCE
Aquino L. Espíndola thanks CAPES for the financial support. Jaylson J. Silveira acknowledges research grants from CNPq. T. J. P. Penna thanks CNPq for the fellowship.
J. R. Harris and M. P. Todaro, American Economic Review 60, 126 (1970).
M. P. Todaro, American Economic Review 59, 138 (1969).
D. Ray, Development Economics (Princeton: Princeton University Press, 1998).
L. Y. L. Yap, Journal of Development Economics 4, 239 (1977).
D. Mazumdar, Rural-urban Migration in Developing countries. In: Handbook of Regional and Urban Economics, Elsevier, Amsterdam, 1987.
L. Ghatak, P. Levine, and S. Price, Journal of Economics Surveys 10, 159 (1996).
J. G. Willianson, Migration and Urbanization. In: Chenery, H. and Srinivasan, T.N., Handbook of developments economics, Elsevier, Amsterdam, 1988.
J. J. Silveira, A. L. Espíndola, and T. J. P. Penna, physics/0506021, Physica A, to appear.
NAME: IJIGA CHRISTIAN ADAKLE
REG NO: 2017/241255
DEPARTMENT: EDUCATION/ECONOMICS
EMAIL : christianijiga8@gmail.com
LEWIS FEI-RANIS MODEL
INTRODUCTION
The Fei–Ranis model of economic growth is a dualism model developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
ASSUMPTIONS OF THE MODEL
1. There is a dual economy divided into a traditional and stagnant agricultural sector and an active industrial sector.
2. The output of the agricultural sector is a function of land and labor alone.
3. There is no accumulation of capital in agriculture except in the form of land reclamation.
4. Land is fixed in supply.
5. Population growth is taken as an exogenous phenomenon.
The real wage in the industrial sector remains fixed and is equal to the initial level of real income in the agricultural sector. It is called an institutional wage.
6. Workers in either sector consume only agricultural products.
Given these assumptions, Fei and Ranis analyze the development of a labor surplus economy into three phases;
In the first phase, the disguised unemployed workers who are not adding to agricultural output are transferred to the industrial sector at a constant institutional wage.
In the second phase, agricultural workers add to agricultural output but produce less than the institutional wage they get. Such workers are shifted to the industrial sector. If the migration of the workers to the industrial sector continues, a point is eventually reached when farmworkers produce output equal to the institutional wage.
In the third phase, which makes the end of the take-of and the beginning of the self-sustained growth when farmworkers produce more than the institutional wage they get. In this phase, the surplus labor is exhausted and the agricultural sector becomes commercialized.
CRITICISMS OF FEI-RANIS MODEL
1. Commercialization of agriculture leads to inflation. According to the model, when the agricultural sector enters the third phase, it becomes commercialized, but the economy is not likely to move smoothly into a self-sustained growth because inflationary pressure will start.
2. Supply of land is not fixed. Fei-Ranis begins with the assumption that the supply of land is fixed during the development process. In the long run, the amount of land is not fixed, as the statistics of crop average in many Asian countries reveal.
3. Institutional wage not constant in the agricultural sector. The model assumes that the institutional wage remains constant in the first two phases even when agricultural productivity increases. This is unrealistic because with a general rise in agricultural productivity farm wages also tend to rise.
HOW IT RELATE TO NIGERIA ECONOMY
The Lewis theory of development to the Nigerian economy. Nigeria has both rural and urban sectors that provide for each forward and backward linkages and as such, the two sectors are not mutually exclusive in promoting the economic growth of the country and improving the standard of living of citizens. However, the Federal Government of Nigeria does not necessarily have to move surplus labour that exists in the rural areas to the urban areas but instead infrastructural facilities should be provided equally to both the rural and urban areas of the country.
CONCLUSION AND DRAW OPINIONS
Base on this model we can see that nation like Nigeria should invest in both sector to increase it productivity and ensure rapid development of the nation through stopping of transfer of labour from one sector to another , the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector.
HARRIS TODARO MODEL OF MIGRATION
John R. Harris and Michael P. Todaro presented the seminal ‘Two sector model’ in American Economic Association, 1970. This model is a pioneering study in the field encompassing rural-urban migration. The classical theory is used in development economics and is an economic illustration of migrants’ decision on expected income differentials between rural (agriculture) and urban (manufacturing) areas. The model of rural-urban migration is typically studied in the context of employment and unemployment situation in developing countries. The purpose of the model is to explain the critical urban unemployment problem in developing countries. The key hypothesis of Harris and Todaro’s model is that economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migration decision. The distinctive concept in the model is that the rate of migration flow from rural (agricultural) areas to urban (industrial) areas is determined by the difference between expected urban wages and rural wages. The rural-urban two-sector model centrally holds the following futures: 1) Real wages (adjusted for cost-of-living differences) were higher in urban formal sector jobs than in rural traditional sector jobs. 2) To be hired for a formal sector job, it was necessary to be physically present in the urban areas where the formal sector jobs were located. 3) Consequently, from the first two features, more workers searched for formal sector jobs than were actually hired. Employers hired some of the searchers but not all of them. 4) To maintain equality between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting would be characterized by urban unemployment. 5) Any temporary difference in the expected wages between one sector and another would be eroded as workers migrate from the low expected wage labor market to the high expected wage one. Pelted wage exceeds the rural obtain wage.
1.2 COMPARISON OF THE MODEL TO OTHER MODEL
The Todaro (1969) and Harris-Todaro (1970) models also consider the role of internal migration in a dual economy in which the urban sector draws labor force from the rural sector. But the change of focus is radical. In the Lewis model, internal migration removed ‘disguised unemployment’ from rural areas and enabled the transition to a modern economy. In Todarian models, the focus is on explaining the existence of unemployment in urban areas and its link with internal migration.
1.3 Assumptions
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
Where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a 0 and g > 0 are a parametric constants. g is the elasticity of p with respect to the ratio Ym/Ya.
The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified:
B. Temporary Equilibrium
Given a parametric constant vector (Aa,Am,f,a,r,g), an initial urban population Nu, and a minimum wage wm one can calculate the temporary equilibrium of the economic system by using eqs. (1 – 6).
From eq. (4) one can find the employment level at the manufacturing sector
Replacing eq. (7) in eq. (2) we get the production level of the manufacturing sector
From eq. (6) one can obtain the relation
which is used with eq (1) to obtain the agricultural production
By using eqs (5), (8) and (10) the terms of trade are determined
Finally, by using eqs (3), (9) and (11), the rural wage in units of manufacturer good is obtained
In sum, the vector (Nm,Ym,Na,Ya,p,wa) configures a temporary equilibrium that might be altered whether occurs a migration of workers, induced by the differential of sectorial wages, which changes the sectorial distribution of overall population.
C. The Long Run Equilibrium
Harris and Todaro, in determining the long run equilibrium, i.e., the absence of a net rural-urban migratory flow, argue that the rural workers, in their decision on migrating to the urban area, estimate the expected urban wage, , defined as:
The ratio Nm/Nu, which is the employment rate, is an estimative of the probability that a worker living at urban sector gets a job in this sector.
As mentioned before, the key assumption of the model of Harris and Todaro is that there will be a migratory flow from the rural to the urban sector while the expected urban wage is higher than the rural wage. Thus, the long run equilibrium is attained when the urban worker population reaches a level such that the expected urban wage equates the rural wage:
This equality is known in the economic literature as the Harris-Todaro condition. Harris and Todaro argue that the differential of expected wages in eq. (14) can be a constant value d ¹ 0. When this differential reaches d, the net migration ceases. This generalized Harris-Todaro condition can be expressed as follows:
The level of the urban population that satisfies the eq. (15), i.e., the equilibrium urban share = /N, is determined from the solution of the equation resulting from substitution of equations (12), (13) in eq. (15):
The solution of eq. (16) is parameterized by the vector (Aa,Am,r,g,a,f,wm).
Harris and Todaro [1], in order to evaluate the stability of the long run equilibrium, postulate a mechanism of adjustment that is based on the following function of sign preservation:
The differential equation that governs the state transition in the model of Harris and Todaro is obtained by replacing equations (12), (13) in eq. (17). Based on this postulated adjustment process, Harris and Todaro show that the long run equilibrium is globally asymptotically stable. This means that the economy would tend to long run equilibrium with unemployment in the urban sector generated by the presence of a relatively high minimum wage for all possible initial conditions. From now on we will refer to the long run equilibrium simply as equilibrium.
Based on the numerical solutions of eq. (16) one can evaluate the impact that the variation of the minimum wage and the elasticity of the terms of trade on the equilibrium. In Fig. 1 we see that under the hypothesis of a Cobb-Douglas technology, the equilibrium urban share, , does not depend on the minimum wage wm. However, changes in the value of wm reduces the labor demand on the manufacturing sector what results in higher unemployment rates in the equilibrium.
In turn, as seen in Fig. 2, changes in the elasticity of the terms of trade alter slightly the equilibrium urban share and unemployment rate. A net migration toward urban sector shift the terms of trade to higher values. The greater g the greater this shift, what cause an increase in the rural wage in units of manufacturing good, becoming the urban sector less attractive.
HARRIS-TODARO AGENT-BASED MODEL
In this section we describe the implementation of the computational model we proposed, as well as the aggregate patterns obtained numerically and the comparison with the respective analytical results.
A. Computational Implementation
Initially, workers are randomly placed in a square lattice with linear dimension L = 500. The reference values of the parameters used for these simulations are the same done to evaluate the equilibrium of the Harris-Todaro model, namely, Aa = 1.0, Am = 1.0, f = 0.3, a = 0.7, r = 1.0 and g = 1.0. The value of the minimum wage used is wm = 0.8 and the initial urban fraction of the total population is nu = 0.2, where nu = Nu/N is the normalized urban population also called urban share. The initial value nu = 0.2 is in agreement with historical data of developing economies. Given these parameters, one can calculate the vector which characterizes temporary equilibrium of the system by using eqs. (7 – 12).
By using eq. (7), the employment level of the urban sector, Nm, is obtained. If nu Nm/N there will be a fraction of Nm/Nu workers employed, which earn the minimum wage, wi = wm, and (1-Nm/Nu) workers unemployed, which earn a wage wi = 0.
Each worker can be selected to review his sectorial location with probability a, called activity . Therefore, in each time step only a fraction of workers becomes potential migrants, going through the sectorial location reviewing process. Potential migrants will determine their satisfaction level of being in the current sector by comparing their earnings, wi, among nearest neighbors.
The potential migrant starts the comparison process with a initial satisfaction level si = 0. When wi > wneighbor the satisfaction level si is added in one unit; if wi < wneighbor, si is diminished in one unit; if wi = wneighbor, si does not change. After the worker has passed through the reviewing process his/her satisfaction level is checked. The migration will occur only if si < 0, what means that the worker's i earnings is less than the most of his/her nearest neighbors.
After all the potential migrants complete the reviewing process and have decided migrate or not, a new configuration of the system is set. Therefore, once again a new temporary equilibrium of the system is calculated by using eqs. (8 – 12). The whole procedure is repeated until a pre-set number of steps is reached. It is important to emphasize that Nm is kept constant throughout the simulation. Its given by eq. (7) which depends on the technological parameters, a,Am, and the minimum wage, wm, which are constants too.
CONCLUSION
Therefore, migration from rural areas to urban areas will increase in real world if:
Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
Ngwu Osita Enoch
2017/242022
Ositangwu95@gmail.com
Edu Economics
Enochonline.blogspot.com
Lewis-Fei-Ranis Model (Surplus labour theory)
INTRODUCTION
The Lewis (1954) theory of dualistic economic development provides the seminal contribution to theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150).
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output.
HISTORY OF SURPLUS LABOUR THEORY
The historical emergence of surplus labour is, according to Marx, also closely associated with the growth of trade (the economic exchange of goods and services) and with the emergence of a society divided into social classes. As soon as a permanent surplus product can be produced, the moral-political question arises as to how it should be distributed, and for whose benefit surplus-labour should be performed. The strong defeat the weak, and it becomes possible for a social elite to gain control over the surplus-labour and surplus product of the working population; they can live off the labour of others.
Labour which is sufficiently productive so that it can perform surplus labour is, in a cash economy, the material foundation for the appropriation of surplus-value from that labour. How exactly this appropriation will occur, is determined by the prevailing relations of production and the balance of power between social classes.
THE CONCEPT OF SURPLUS LABOUR
The concept of surplus labour is widely discussed among development economics but its specific meaning needs to be defined, especially in technical terms, as many neoclassical economists still doubt the existence of surplus labour in an economy. Defining the source and the extent of surplus labour is then a prerequisite for further study. This section considers the various definitions of surplus labour and clarifies them.
The simple definition of surplus labour implies the existence of a point at which the marginal product of labour becomes zero and labour can be transferred out of the traditional sector without reducing the quantity of output, as noted by Wellisz (1968: 22): The (disguised-unemployment or the Unlimited Supply of Labour) hypothesis claims that in poor, densely populated countries, more people are employed than needed to produce the prevailing output with the existing techniques and the existing supply of non-labour inputs. The ‘surplus’ labour constitutes ‘hidden’ or ‘disguised’ unemployment. Many of the proponents of the hypothesis make the further claim that agricultural output will not decrease, and industrial output will increase, if measures are taken to re-allocate labour from subsistence agriculture (where the surplus is supposed to exist) to industry (where there is no surplus labour).
ASSUMPTIONS OF THE LEWIS-FEI-RANIS MODEL
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion. Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc of those in the capitalist sector. Lewis in fact so much fascinated by the higher propensity to save of the capitalist sector that he even advocates a transfer of income from the subsistence sector to the capitalist sector. He feels that steps have to be taken to raise the rate of savings from 10% to 15% if the development of the economy has to be smooth.
COMPARISONS OF THE THEORY OF SURPLUS LABOUR
Surplus labor models are a class of models for analyzing developing countries as dual economies with a modern capitalist sector and a traditional precapitalist sector. The precapitalist sector is viewed as having a large pool (“unlimited supplies”) of labor from which the capitalist sector may draw at constant cost. While these models are often described as finding their inspiration in the old classical economists and Karl Marx, the 1954 model of W. Arthur Lewis and its extensions are technically more neoclassical than truly classical. The Lewis model was elaborated and formalized by many others, most notably John C. H. Fei and Gustav Ranis (1964), with important theoretical contributions from Amartya Sen (1966) and Stephen Marglin (1976). Questions have been raised as to the historical relevance of the neoclassical labor surplus models (Schultz 1964; Myint 1971; Arrighi 1973; Williamson 1985).
CRITICISM
Lewis-Fei-Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.
It has been asserted that the Lewis-Fei-Ranis model did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed.
The Lewis-Fei-Ranis model say, “It has been argued that money is not a simple substitute for physical capital in an aggregate production function. There are reasons to believe that the relationship between money and physical capital could be complementary to one another at some stage of economic development, to the extent that credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry.” This indicates that in the process of development they neglect the role of money and prices. They fail to differ between wage labor and household labor, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
The Lewis-Fei-Ranis model assume that MPPL is zero during the early phases of economic development, which has been criticized by Harry T.Oshima and some others on the grounds that MPPL of labor is zero only if the agricultural population is very large, and if it is very large, some of that labor will shift to cities in search of jobs. In the short run, this section of labor that has shifted to the cities remains unemployed, but over the long run it is either absorbed by the informal sector, or it returns to the villages and attempts to bring more marginal land into cultivation.
CONCLUSIONS AND RECOMMENDATIONS
Lewis-Fei-Ranis model can be grouped under three instruments; labour force, capital accumulation and integration to the world economy. The main focus in Lewis-Fei-Ranis model was on the reallocation of labour until the turning point is reached, i.e., the time when labour reallocation has outstripped population growth long enough for dualism to atrophy and the economy to become fully commercialized. The model implicitly showed that the traditional sector do not produce any capital accumulation as they are very small and poor. Trade between agriculture and industry as the supply or marketed food falls or the demand for it rises, or both causing the value of marginal product of labour in agriculture to rise.
In sum up, there are several weaknesses of Lewis-Fei-Ranis model that are underlined by many economists. The first and most important is that if marginal productivity of labour in agricultural sector is negligible, zero. Schultz (1964), Sen (1967), Harris and Todaro (1970) and Fields (1975) proved with their empirical results that this cannot happen in agriculture sector. It is obvious that there is a disguised unemployment in agriculture. Particularly, agricultural sector should be considered in two ways: during harvest time and post harvest. If the agricultural surplus is solely considered for the regions where there can be seen harsh winter conditions, it could be accepted of the doctrine of Lewis, otherwise it is irrelevant to say there is a zero marginal productivity for agriculture labours. Also, there are positive opportunity costs, e.g. loss of crops in times of peak harvesting season, labour transfer will reduce agricultural output.
Second, the model employed mostly for the closed economies and gave relatively less information on open economies. Lewis-Fei-Ranis model was criticized as it neglects international trade. The model was to a certain extent supply-oriented, which does not foresee any trade between capital and other sectors. Also it was criticized advocating industrialization and ignores agriculture. If a section of the profit made by the capitalists is not devoted to agricultural development, the process of industrialization would be jeopardized.
Third, Lewis-Fei-Ranis model believed that the more the rate of labour transfer to urban employment, the more the economic grows and more jobs are created. But this is not a common applicable in practice if industrial development involves more intensive use of capital than labour, then the flow of labour from agriculture to industry will simply create more unemployment.
Fourth, the Lewis-Fei-Ranis model would imply that aggregate living standards should not rise as rapidly as productivity until surplus labour is eliminated. However, the evidence on living standards in Latin America during the twentieth century indicates that these have risen in line with productivity, and that the ‘indirect’ components of the real wage (health and education) have actually risen more rapidly that average incomes.
Fifth, the Lewis-Fei-Ranis model stated the wage in industrial sector does not increase before labour surplus is absorbed. But this does not happen in any way in reality as the development of the urban, or industrial, or formal sector can itself lead to the creation of pressure groups and swing the balance of power towards those in that sector, to the detriment of those remaining outside it. The wage in the industrial sector in reality outstandingly rises long before the labour surplus is absorbed.
Haven tested the Lewis-Ranis-Fei theory for developing economy over 1965-2002 we have found that the developing economic growth is mainly attributable to the development of the non-agricultural sector. This is driven by rapid capital accumulation as well as employment growth. The reallocation of labour away from agriculture has made a positive net contribution to rapid economic of the developing economy. The rise in the marginal productivity of agricultural labour indicates the absorption of redundant agricultural labour since the 1978 Economic Reform. However, the marginal productivity of agricultural labour is still lower than the initial low average productivity of agricultural labour. This implies the continued existence of disguised agricultural unemployment. This suggests that the these developing economy has entered the Lewis-Ranis-Fei phase two of development but has not yet achieved phase three. The continuing widening productivity gap between the two sectors calls for the removal of market restrictions and government interventions so as to allow the continued absorption of surplus labour. Several policy recommendations are tentatively suggested. First and foremost, more effort should be made in promoting employment to effectively absorb the remaining labour surplus and promote economic development. This can be achieved by further relaxing the Hukou restrictions on migration, increasing labour market flexibility and improving the allocative efficiency of labour. It can also be achieved by encouraging the development of private enterprise to create more employment opportunities. Second, Government of developing economy should continue implementing the Sunshine Policy, initiated in 2003, designed to provide rudimentary job training, recruitment information and information about conditions in the destination cities to rural migrants. This will not only help facilitate employment of rural migrants but also satisfy the increasing demand for skilled labour in the growing non-agricultural sector. Third, agriculture could be promoted by tax breaks, direct subsidies and most importantly, by removing price controls on agricultural products. Agriculture could thus be commercialised and the economy would enter phase three of economic development.
REFERENCE
Sadik-Zada, Elkhan Richard (2020). “Natural resources, technological progress, and economic modernization”. Review of Development Economics. doi:10.1111/rode.12716.
“Economnics4Development Website”. Surplus Labor Model of Economic Development. Archived from the original on 16 October 2011. Retrieved 12 October 2011.
Thirlwall, A.P (2006). Growth and Development: With Special Reference to Developing Economies. Palgrave Macmillan. ISBN 1-4039-9600-8.
Subrata, Ghatak (2003). Introduction to Developmental Economics. London: Routledge. ISBN 0-415-09722-3.
“Ranis-Fei model vs. Lewis Model” (PDF). Developmentafrique.com. Archived from the original (PDF) on 30 May 2012. Retrieved 14 October 2011.
“American Economic Review”. The Ranis-Fei Model of Economic Development: Comment. 53: 448–452. JSTOR 1809172.
Ranis, Gustav. “Paper on Labor Surplus Economies” (PDF). Retrieved 4 October 2011.
J. Choo, Hakchung. “American Economic Review”. On the Empirical Relevancy of the Rans-Fei Model of Economic Development: Comment. 61: 695–703. JSTOR 1811863.
Misra, Puri, S.K, V.K (2010). Economics of Development and Planning. Mumbai, India: Himalaya Publishing House. pp. 270–279. ISBN 978-81-8488-829-4.
Harris-Todaro Model of Migration
INTRODUCTION
Harris and Todaro work, is considered one of the starting points of the classic rural-urban migration theory. The hypothesis and predictions of Harris-Todaro model have been subjected to econometric evaluation and have been corroborated by several studies. The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migraton decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage. From this crucial assumption, as denominated by Harris-Todaro, is deduced that the migratory dynamics leads the economic system toward an equilibrium with urban concentration and high urban unemployment.
THE HARRIS-TODARO MODEL
Assumptions
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function: where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a < 1 are parametric constants. Both goods and labor markets are perfectly competitive. Nevertheless, there is segmentation in the labor market due to a high minimum urban wage politically determined. In the rural sector, the real wage, perfectly flexible, is equal to the marginal productivity of labor in this sectors where wa is the real wage and p is the price of the agricultural good, both expressed in units of manufactured good.
HARRIS-TODARO AGENT-BASED MODEL
Computational Implementation
Initially, workers are randomly placed in a square lattice with linear dimension L = 500. The reference values of the parameters used for these simulations are the same done to evaluate the equilibrium of the Harris-Todaro model, namely, Aa = 1.0, Am = 1.0, f = 0.3, a = 0.7, r = 1.0 and g = 1.0. The value of the minimum wage used is wm = 0.8 and the initial urban fraction of the total population is nu = 0.2, where nu = Nu/N is the normalized urban population also called urban share. The initial value nu = 0.2 is in agreement with historical data of developing economies. Given these parameters, one can calculate the vector which characterizes temporary equilibrium of the system by using eqs. (7 – 12). By using eq. (7), the employment level of the urban sector, Nm, is obtained. If nu Nm/N there will be a fraction of Nm/Nu workers employed, which earn the minimum wage, wi = wm, and (1-Nm/Nu) workers unemployed, which earn a wage wi = 0. Each worker can be selected to review his sectorial location with probability a, called activity. Therefore, in each time step only a fraction of workers becomes potential migrants, going through the sectorial location reviewing process. Potential migrants will determine their satisfaction level of being in the current sector by comparing their earnings, wi, among nearest neighbors. The potential migrant starts the comparison process with a initial satisfaction level si = 0. When wi > wneighbor the satisfaction level si is added in one unit; if wi < wneighbor, si is diminished in one unit; if wi = wneighbor, si does not change. After the worker has passed through the reviewing process his/her satisfaction level is checked. The migration will occur only if si < 0, what means that the worker's i earnings is less than the most of his/her nearest neighbors. After all the potential migrants complete the reviewing process and have decided migrate or not, a new configuration of the system is set. Therefore, once again a new temporary equilibrium of the system is calculated by using eqs. (8 – 12). The whole procedure is repeated until a pre-set number of steps is reached. It is important to emphasize that Nm is kept constant throughout the simulation. Its given by eq. (7) which depends on the technological parameters, a,Am, and the minimum wage, wm, which are constants too.
In this case, the differential of expected wages is negative. In an economy mainly rural (nu < 0:5), the transitional dynamics characterized by a continuous growth of population of the urban sector with a differential of expected wages relatively high is followed by the stabilization of rural-urban differential of expected wages. In other words, the generalized Harris-Todaro condition, eq. (15), arises as a long run equilibrium result of the agent-based migratory dynamics.
CONCLUSION
In this paper we developed and agent-based computational model which formalizes the rural-urban allocation of workers as a process of social learning by imitation. We analyze a two-sectorial economy composed by adaptative agents, i.e., individuals that grope over time for best sectorial location in terms of earnings. This search is a process of imitation of successful neighbor agents. The dispersed and non-coordinated individual migration decisions, made based on local information, generate aggregate regularities.
Firstly, the crucial assumption of Harris and Todaro, the principle that rural-urban migration will occur while the urban expected wage exceed the rural wage, comes out as spontaneous upshot of interaction among adaptative agents.
Secondly, the migratory dynamics generated by agents that seek to adaptate to the economic environment that they co-create leads the economy toward a long run equilibrium characterized by urban concentration with urban unemployment. When this long run equilibrium is reached, the generalized Harris-Todaro condition is satisfied, i.e., there is a stabilization of the rural-urban expected wage differential.
Thirdly, the impact of the minimum wage and elasticity of terms of trade in a long run equilibrium obtained by simulations are in agreement with the predictions of the original Harris-Todaro model with Cobb-Douglas technology.
Finally, the simulations showed an aggregated pattern not found in the original Harris-Todaro model. There is the possibility of small fluctuations of the urban share around an average value. This phenomenon is known as reverse migration.
REFERENCE
Aquino L. Espíndola thanks CAPES for the financial support. Jaylson J. Silveira acknowledges research grants from CNPq. T. J. P. Penna thanks CNPq for the fellowship.
J. R. Harris and M. P. Todaro, American Economic Review 60, 126 (1970).
M. P. Todaro, American Economic Review 59, 138 (1969).
D. Ray, Development Economics (Princeton: Princeton University Press, 1998).
L. Y. L. Yap, Journal of Development Economics 4, 239 (1977).
D. Mazumdar, Rural-urban Migration in Developing countries. In: Handbook of Regional and Urban Economics, Elsevier, Amsterdam, 1987.
L. Ghatak, P. Levine, and S. Price, Journal of Economics Surveys 10, 159 (1996).
J. G. Willianson, Migration and Urbanization. In: Chenery, H. and Srinivasan, T.N., Handbook of developments economics, Elsevier, Amsterdam, 1988.
J. J. Silveira, A. L. Espíndola, and T. J. P. Penna, physics/0506021, Physica A, to appear.
NAME: NWAFOR CLARA DABELECHI
REG NO. 2017/249534
EMAIL: Clara.daberechi.249534@unn.edu.ng
Harris-Todaro model of migration
The Harris-Todaro model of migration is an economic model developed in the 1970 by John Harris and Michael Todaro used in development economics and welfare economics to explain issues relating to rural urban migration. Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and the urban sector. The differences between these sectors are type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods while the urban sector has formal and informal jobs.
The assumptions of the Harris-Todaro model
Migration decisions are based on the expected income differentials between rural and urban areas rather than just wage differential.
Unemployment does not exist in the rural agricultural sector.
It also assumes that rural agricultural production and the subsequent labor market is perfectly competitive.
The urban wage is institutionally and legally fixed, so that as a result of the migration of workers, if there are more workers than the number of new jobs, some workers would necessarily be unemployed. They have to enter the urban informal sector and be unemployed or underemployed there.
Labour Market friction
The Crucial assumption is that urban formal wages are fixed and higher than agricultural wage for the same type of worker. This is caused by
Urban formal jobs as government showcase i.e. government could use these formal jobs as a showoff to the world that people are well off at least in the capital city
Efficiency wages: an argument that there is a want to have the highest productive workers whom put in a lot of effort
Union bargaining power: i.e. bargaining power by unions that push up wages in the formal sector.
Labour market regulation :regulations in the labour market that might restrict the number of jobs and thereby pushing up wages
The Harris-Todaro model produced two powerful policy results. The first concerns the policy of formal-sector job creation to employ the unemployed (who, in the Harris-Todaro model, are all in urban areas, because that is where the formal-sector jobs are assumed to be located). They concluded that such a policy would increase the formal sector labor force by more than the number of new jobs created, thereby raising the number of urban unemployed. Thus, the solution to urban unemployment is not to create urban employment. The second policy option that Harris and Todaro considered was a policy of rural development. If such a program could increase the rural traditional-sector wage, unemployment would then fall. Thus, in the Harris-Todaro model, the solution to urban unemployment is rural development.
In countries like Nigeria where people migrate from the rural areas to the urban area in search of more paying jobs thereby causing unemployment in the urban areas since workers available are more than available jobs. According to the Harris-Todaro model, increasing jobs in the urban sector will not reduce unemployment; hence the solution to unemployment is the development of the rural areas such that people do not need to migrate to the urban areas.
`
Lewis Fei-Ranis model
The Fei-Ranis model of economic growth is an economic model developed by John C. H. Fei and Gustav Ranis used in developmental economics or welfare economics. It is an extension of the Lewis model and also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account. The model explains how the increased productivity in agricultural sector would become helpful in promoting industrial sector. Development can be brought about only by a complete shift from the agricultural economy to the industrial economy, such that there is increase in the industrial output. This can be achieved by transfer of labor from the agricultural sector to the industrial sector; this means that underdeveloped countries do not suffer from limited labor supply. At the same time, growth in the agricultural sector must not be out looked and its output should be enough to support the whole economy with food and raw materials. The model is concerned with a poor economy which has the following properties:
There is an abundance of labor in such underdeveloped countries and shortage of natural resources.
The population growth rate is very high which results in mass unemployment in the economy.
The major share of population is engaged in agriculture. But the agricultural sector is stagnant. Hence, the marginal productivity of labor is zero and negative in agriculture sector.
There are certain non-agrarian sectors in the economy where there is reduced use of capital.
There is a dynamic industrial sector in the economy.
The model presents three stages whereby an underdeveloped country moves from stagnation to self sustained economic growth. These stages are:
Phase I: Disguised unemployment comes into being because the supply of labor is perfectly elastic and MPL = 0. Therefore, such disguised unemployed are to be transferred to industrial sector at the constant institutional wage. Phase II: Agricultural workers add to Agricultural output but they produce less than the institutional wage they get. Which means that in the second stage the labor surplus exists where APL > MPL, but it is not equal to subsistence (institutional) wages. Accordingly, such disguised unemployed also have to be transferred to industrial sector. If the migration to industrial sector continues a situation is eventually reached where the farm workers produce output equal to institutional wages. This would mean that productivity in Agricultural sector has gone up. Phase III: In the third stage of Fei-Ranis model, the take-off situation comes to an end and there begins the stage of self-sustained growth where the farm workers produce more than the institutional wage they get. In this stage of economic growth the surplus labor comes to an end and the Agricultural sector becomes commercialized sector.
From the analysis above, it is observed that the model supports the balanced growth of the economy, that is, it gives a satisfactory explanation of the agricultural and the industrial sector. It also recognizes the real impact of population growth on the choice of capital intensity on the process of surplus labor absorption. In a developing country like Nigeria, the fei-ranis model suggests that development could only be achieved by shifting surplus labour from agricultural sector to the industrial sector while growing both sectors simultaneously. It means that there should be a simultaneous investment in both agricultural sector and industrial sector such that even though there is a shift to the industrial sector, the agricultural sector will still be given enough attention to be able to produce food and raw materials for the industrial sector. The result therefore will be that both agricultural and industrial sectors will grow under ‘Balanced Growth’ pattern.
NAME: NWAFOR CLARA DABELECHI
REG. NO. 2017/249534
Email: Clara.daberechi.249534@unn.edu.ng
Harris-Todaro model of migration
The Harris-Todaro model of migration is an economic model developed in the 1970 by John Harris and Michael Todaro used in development economics and welfare economics to explain issues relating to rural urban migration. Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and the urban sector. The differences between these sectors are type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods while the urban sector has formal and informal jobs.
The assumptions of the Harris-Todaro model
Migration decisions are based on the expected income differentials between rural and urban areas rather than just wage differential.
Unemployment does not exist in the rural agricultural sector.
It also assumes that rural agricultural production and the subsequent labor market is perfectly competitive.
The urban wage is institutionally and legally fixed, so that as a result of the migration of workers, if there are more workers than the number of new jobs, some workers would necessarily be unemployed. They have to enter the urban informal sector and be unemployed or underemployed there.
Labour Market friction
The Crucial assumption is that urban formal wages are fixed and higher than agricultural wage for the same type of worker. This is caused by
Urban formal jobs as government showcase i.e. government could use these formal jobs as a showoff to the world that people are well off at least in the capital city
Efficiency wages: an argument that there is a want to have the highest productive workers whom put in a lot of effort
Union bargaining power: i.e. bargaining power by unions that push up wages in the formal sector.
Labour market regulation :regulations in the labour market that might restrict the number of jobs and thereby pushing up wages
The Harris-Todaro model produced two powerful policy results. The first concerns the policy of formal-sector job creation to employ the unemployed (who, in the Harris-Todaro model, are all in urban areas, because that is where the formal-sector jobs are assumed to be located). They concluded that such a policy would increase the formal sector labor force by more than the number of new jobs created, thereby raising the number of urban unemployed. Thus, the solution to urban unemployment is not to create urban employment. The second policy option that Harris and Todaro considered was a policy of rural development. If such a program could increase the rural traditional-sector wage, unemployment would then fall. Thus, in the Harris-Todaro model, the solution to urban unemployment is rural development.
In countries like Nigeria where people migrate from the rural areas to the urban area in search of more paying jobs thereby causing unemployment in the urban areas since workers available are more than available jobs. According to the Harris-Todaro model, increasing jobs in the urban sector will not reduce unemployment; hence the solution to unemployment is the development of the rural areas such that people do not need to migrate to the urban areas.
`
Lewis Fei-Ranis model
The Fei-Ranis model of economic growth is an economic model developed by John C. H. Fei and Gustav Ranis used in developmental economics or welfare economics. It is an extension of the Lewis model and also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account. The model explains how the increased productivity in agricultural sector would become helpful in promoting industrial sector. Development can be brought about only by a complete shift from the agricultural economy to the industrial economy, such that there is increase in the industrial output. This can be achieved by transfer of labor from the agricultural sector to the industrial sector; this means that underdeveloped countries do not suffer from limited labor supply. At the same time, growth in the agricultural sector must not be out looked and its output should be enough to support the whole economy with food and raw materials. The model is concerned with a poor economy which has the following properties:
There is an abundance of labor in such underdeveloped countries and shortage of natural resources.
The population growth rate is very high which results in mass unemployment in the economy.
The major share of population is engaged in agriculture. But the agricultural sector is stagnant. Hence, the marginal productivity of labor is zero and negative in agriculture sector.
There are certain non-agrarian sectors in the economy where there is reduced use of capital.
There is a dynamic industrial sector in the economy.
The model presents three stages whereby an underdeveloped country moves from stagnation to self sustained economic growth. These stages are:
Phase I: Disguised unemployment comes into being because the supply of labor is perfectly elastic and MPL = 0. Therefore, such disguised unemployed are to be transferred to industrial sector at the constant institutional wage. Phase II: Agricultural workers add to Agricultural output but they produce less than the institutional wage they get. Which means that in the second stage the labor surplus exists where APL > MPL, but it is not equal to subsistence (institutional) wages. Accordingly, such disguised unemployed also have to be transferred to industrial sector. If the migration to industrial sector continues a situation is eventually reached where the farm workers produce output equal to institutional wages. This would mean that productivity in Agricultural sector has gone up. Phase III: In the third stage of Fei-Ranis model, the take-off situation comes to an end and there begins the stage of self-sustained growth where the farm workers produce more than the institutional wage they get. In this stage of economic growth the surplus labor comes to an end and the Agricultural sector becomes commercialized sector.
From the analysis above, it is observed that the model supports the balanced growth of the economy, that is, it gives a satisfactory explanation of the agricultural and the industrial sector. It also recognizes the real impact of population growth on the choice of capital intensity on the process of surplus labor absorption.
In a developing country like Nigeria, the fei-ranis model suggests that development could only be achieved by shifting surplus labour from agricultural sector to the industrial sector while growing both sectors simultaneously. It means that there should be a simultaneous investment in both agricultural sector and industrial sector such that even though there is a shift to the industrial sector, the agricultural sector will still be given enough attention to be able to produce food and raw materials for the industrial sector. The result therefore will be that both agricultural and industrial sectors will grow under ‘Balanced Growth’ pattern.
NAME:METEKE JOY ORIMUSUE
DEPARTMENT:ECONOMICS
REG.NO:2017/242430
EMAIL:joymetex2000@gmail.com
WEBSITE: metekejoy01.blogspot.com
LEWIS-FEI-RANIS THEORY(SURPLUS LABOUR THEORY)
Lewis (1954) proposed a seminal theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development.The central idea behind the Lewis model is fairly simple. Lewis divided labour force into two differentiated groups – “subsistence sector” and “capitalist sector” where the former is assumed to contain unlimited supply and consequently, a pool of surplus labour that sets labour-supply conditions for the latter.
Assumptions of the Lewis Model
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion.Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector.
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.Ranis and Fei (1961) formalised the Lewis theory and defined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model. These three phases, illustrated in Diagram 1below, are distinguished by the marginal productivity of agricultural labour. The entry into each phase is marked three turning points:
• The breakout point leads to phase one growth with redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural unemployment.
• The commercialisation point leads to phase three of self-sustaining economic growth with the commercialisation of the agricultural sector.One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development. One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.[4] They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development[5] In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.Phase 3 begins from the point of commercialization which is at K in the Figure. This is the point where the economy becomes completely commercialized in the absence of disguised unemployment. The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor.
The amount of labor that is shifted and the time that this shifting takes depends upon:The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits;
The nature of the industry’s technical progress and its associated bias;
Growth rate of population.
So, the three fundamental ideas used in this model are:
1.Agricultural growth and industrial growth are both equally important;
2.Agricultural growth and industrial growth are balanced;
3. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap.
HARRIS TODARO THEORY OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.migration from rural areas to urban areas will increase if:
1.Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
2.Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
RELATION TO NIGERIA ECONOMY
According to this model migrating workers in developing countries sich as Nigeria are essentially participants in a lottery of relatively high-paid jobs in the towns. When new urban jobs are created the lottery becomes more attractive to potential migrants. Depending on their responsiveness to this improved opportnity, more than one worker are likely to migrate for each job created.
If so, the output foregone may be that of two or more agricultural workers, not just one. If the migrants bring some of their family members to urban areas more output will be lost. The reason is that the wife and children of migrants find fewer employment opportunities in towns than in the rural areas because they do not have land in the towns on which to grow food.
NAME:METEKE JOY ORIMUSUE
DEPARTMENT:ECONOMICS
REG.NO:2017/242430
EMAIL:joymetex2000@gmail.com
BLOG WEBSITE:metekejoy01.blogspot.com
LEWIS-FEI-RANIS THEORY(SURPLUS LABOUR THEORY)
Lewis (1954) proposed a seminal theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development.The central idea behind the Lewis model is fairly simple. Lewis divided labour force into two differentiated groups – “subsistence sector” and “capitalist sector” where the former is assumed to contain unlimited supply and consequently, a pool of surplus labour that sets labour-supply conditions for the latter.
Assumptions of the Lewis Model
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion.Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector.
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.Ranis and Fei (1961) formalised the Lewis theory and defined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model. These three phases, illustrated in Diagram 1below, are distinguished by the marginal productivity of agricultural labour. The entry into each phase is marked three turning points:
• The breakout point leads to phase one growth with redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural unemployment.
• The commercialisation point leads to phase three of self-sustaining economic growth with the commercialisation of the agricultural sector.One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development. One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.[4] They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development[5] In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.Phase 3 begins from the point of commercialization which is at K in the Figure. This is the point where the economy becomes completely commercialized in the absence of disguised unemployment. The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor.
The amount of labor that is shifted and the time that this shifting takes depends upon:The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits;
The nature of the industry’s technical progress and its associated bias;
Growth rate of population.
So, the three fundamental ideas used in this model are:
1.Agricultural growth and industrial growth are both equally important;
2.Agricultural growth and industrial growth are balanced;
3. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap.
HARRIS TODARO THEORY OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.migration from rural areas to urban areas will increase if:
1.Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
2.Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
RELATION TO NIGERIA ECONOMY
According to this model migrating workers in developing countries sich as Nigeria are essentially participants in a lottery of relatively high-paid jobs in the towns. When new urban jobs are created the lottery becomes more attractive to potential migrants. Depending on their responsiveness to this improved opportnity, more than one worker are likely to migrate for each job created.
If so, the output foregone may be that of two or more agricultural workers, not just one. If the migrants bring some of their family members to urban areas more output will be lost. The reason is that the wife and children of migrants find fewer employment opportunities in towns than in the rural areas because they do not have land in the towns on which to grow food.
NAME:METEKE JOY ORIMUSUE
DEPARTMENT:ECONOMICS
REG.NO:2017/242430
EMAIL:joymetex2000@gmail.com
BLOG WEBSITE:metekejoy01.blogspot.com
LEWIS-FEI-RANIS THEORY(SURPLUS LABOUR THEORY)
Lewis (1954) proposed a seminal theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development.The central idea behind the Lewis model is fairly simple. Lewis divided labour force into two differentiated groups – “subsistence sector” and “capitalist sector” where the former is assumed to contain unlimited supply and consequently, a pool of surplus labour that sets labour-supply conditions for the latter.
Assumptions of the Lewis Model
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion.Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector.
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.Ranis and Fei (1961) formalised the Lewis theory and defined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model. These three phases, illustrated in Diagram 1below, are distinguished by the marginal productivity of agricultural labour. The entry into each phase is marked three turning points:
• The breakout point leads to phase one growth with redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural unemployment.
• The commercialisation point leads to phase three of self-sustaining economic growth with the commercialisation of the agricultural sector.One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development. One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.[4] They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development[5] In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.Phase 3 begins from the point of commercialization which is at K in the Figure. This is the point where the economy becomes completely commercialized in the absence of disguised unemployment. The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor.
The amount of labor that is shifted and the time that this shifting takes depends upon:The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits;
The nature of the industry’s technical progress and its associated bias;
Growth rate of population.
So, the three fundamental ideas used in this model are:
1.Agricultural growth and industrial growth are both equally important;
2.Agricultural growth and industrial growth are balanced;
3. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap.
HARRIS TODARO THEORY OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.migration from rural areas to urban areas will increase if:
1.Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
2.Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
RELATION TO NIGERIA ECONOMY
According to this model migrating workers in developing countries sich as Nigeria are essentially participants in a lottery of relatively high-paid jobs in the towns. When new urban jobs are created the lottery becomes more attractive to potential migrants. Depending on their responsiveness to this improved opportnity, more than one worker are likely to migrate for each job created.
If so, the output foregone may be that of two or more agricultural workers, not just one. If the migrants bring some of their family members to urban areas more output will be lost. The reason is that the wife and children of migrants find fewer employment opportunities in towns than in the rural areas because they do not have land in the towns on which to grow food.
NAME:METEKE JOY ORIMUSUE
DEPARTMENT:ECONOMICS
REG.NO:2017/242430
EMAIL:joymetex2000@gmail.com
BLOG WEBSITE:metekejoy01.blogspot.com
LEWIS-FEI-RANIS THEORY(SURPLUS LABOUR THEORY)
Lewis (1954) proposed a seminal theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development.The central idea behind the Lewis model is fairly simple. Lewis divided labour force into two differentiated groups – “subsistence sector” and “capitalist sector” where the former is assumed to contain unlimited supply and consequently, a pool of surplus labour that sets labour-supply conditions for the latter.
Assumptions of the Lewis Model
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion.Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector.
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.Ranis and Fei (1961) formalised the Lewis theory and defined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model. These three phases, illustrated in Diagram 1below, are distinguished by the marginal productivity of agricultural labour. The entry into each phase is marked three turning points:
• The breakout point leads to phase one growth with redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural unemployment.
• The commercialisation point leads to phase three of self-sustaining economic growth with the commercialisation of the agricultural sector.One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development. One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.[4] They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development[5] In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.Phase 3 begins from the point of commercialization which is at K in the Figure. This is the point where the economy becomes completely commercialized in the absence of disguised unemployment. The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor.
The amount of labor that is shifted and the time that this shifting takes depends upon:The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits;
The nature of the industry’s technical progress and its associated bias;
Growth rate of population.
So, the three fundamental ideas used in this model are:
1.Agricultural growth and industrial growth are both equally important;
2.Agricultural growth and industrial growth are balanced;
3. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap.
HARRIS TODARO THEORY OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.migration from rural areas to urban areas will increase if:
1.Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
2.Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
RELATION TO NIGERIA ECONOMY
According to this model migrating workers in developing countries sich as Nigeria are essentially participants in a lottery of relatively high-paid jobs in the towns. When new urban jobs are created the lottery becomes more attractive to potential migrants. Depending on their responsiveness to this improved opportnity, more than one worker are likely to migrate for each job created.
If so, the output foregone may be that of two or more agricultural workers, not just one. If the migrants bring some of their family members to urban areas more output will be lost. The reason is that the
NAME:METEKE JOY ORIMUSUE
DEPARTMENT:ECONOMICS
REG.NO:2017/242430
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LEWIS-FEI-RANIS THEORY(SURPLUS LABOUR THEORY)
Lewis (1954) proposed a seminal theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development.The central idea behind the Lewis model is fairly simple. Lewis divided labour force into two differentiated groups – “subsistence sector” and “capitalist sector” where the former is assumed to contain unlimited supply and consequently, a pool of surplus labour that sets labour-supply conditions for the latter.
Assumptions of the Lewis Model
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion.Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector.
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.Ranis and Fei (1961) formalised the Lewis theory and defined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model. These three phases, illustrated in Diagram 1below, are distinguished by the marginal productivity of agricultural labour. The entry into each phase is marked three turning points:
• The breakout point leads to phase one growth with redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural unemployment.
• The commercialisation point leads to phase three of self-sustaining economic growth with the commercialisation of the agricultural sector.One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development. One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.[4] They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development[5] In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.Phase 3 begins from the point of commercialization which is at K in the Figure. This is the point where the economy becomes completely commercialized in the absence of disguised unemployment. The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor.
The amount of labor that is shifted and the time that this shifting takes depends upon:The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits;
The nature of the industry’s technical progress and its associated bias;
Growth rate of population.
So, the three fundamental ideas used in this model are:
1.Agricultural growth and industrial growth are both equally important;
2.Agricultural growth and industrial growth are balanced;
3. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap.
HARRIS TODARO THEORY OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.migration from rural areas to urban areas will increase if:
1.Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
2.Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
RELATION TO NIGERIA ECONOMY
According to this model migrating workers in developing countries sich as Nigeria are essentially participants in a lottery of relatively high-paid jobs in the towns. When new urban jobs are created the lottery becomes more attractive to potential migrants. Depending on their responsiveness to this improved opportnity, more than one worker are likely to migrate for each job created.
If so, the output foregone may be that of two or more agricultural workers, not just one. If the migrants bring some of their family members to urban areas more output will be lost. The reason is that the wife and children of migrants find fewer employment opportunities in towns than in the rural areas because they do not have land in the towns on which to grow food. and children of migrants find fewer employment opportunities in towns than in the rural areas because they do not have land in the towns on which to grow food.
Okoronkwo chibuzo jonah
2017/249400
chibuzojonah08@gmail.com
http://www.wizelinkcommunication.blogspot.com
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
The two economists John Fei and Gustav Ranis presented their dual economy model. There was a flaw in Lewis model that it did not pay enough attention to the importance of agri. sector in promoting industrial growth. But Fei-Ranis (FR) model of dual economy explains how the increased productivity in agri. sector would become helpful in promoting industrial sector. In this respect, it presents three stages whereby a UDC moves from stagnation to self-sustained economic growth.
HOW THE MODEL APPLICABLE TO REAL WORLD SOCIETY
In this model we see that there is surplus of workers in the rural areas – excess of workers without work in the rural areas and they begin to migrate to the urban area. The migration of these workers create some sort of equilibrium where full employment occurs in both the rural and urban areas meaning there is less people who are unemployed in the rural areas now and same time there is full employment in the urban areas so we see that rural to urban migration benefits both sectors (Agricultural and industrial) and in the absence of labour this will also increase wages in the both areas because labour becomes more valueable.
HARIS-TODARO MODEL OF MIGRATION
The Harris-Todaro model assumes that migration from rural to urban areas depends primarily on the difference in wages between the rural and urban labour markets.
AN ESSAY ON THE HARRIS -TODARO MODEL OF MIGRATION.
A) INTRODUCTION
TheHarris-todaro model is an economic model developed in 1970 and used in development and welfare economics to explain some of the issues concerning rural-urban migration.
The advocates of this model John R. Harris and Michael Todaro posited the major assumption of this model, that usf based on differences in expected income between the rural and urban areas rather than just wage differences.
This implies that rural-urban migration in this context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
B) ASSUMPTIONS OF THE MODEL.
The H-T model is based on the Assumption that the premise that a fixed wage leads to an outlook of misrepresentation and urban unemployment.
The H-T model presupposes that the fixed wage in one sector is added to the Assumption of the S.F model, which is done by introducing the concept of expected wage in the urban sector. The economy in his model consist of two sectors, one is the agricultural sector and the other is a manufacturing sector. The economy considered in the model is a small open economy. There are 3 kinds of production factors, specific production factors in sector 1, k1, production factors in sector 2, k2 and Labour (L) which is employed in both sectors and mobile between sectors.
In the HOS model, the capital Labour ratio are in a one to one relation with the relative price of product. However in the H-T model, there relations among variables are not in a one to one relationship. This makes H-T model more suitable for describing developing countries. This feature also gives the impression that the H-T model depends only on the supply side of the model and ignores the demand side. It is possible for workers to move freely to the wage gap between sectors. In other words, workers move to the higher wage sector by comparing their expected wages in sector 1 and 2. In both sectors, the expected wage is defined by multiplying wi (I=1,2) by the probability of finding a job in the sector.
C) CRITICISM
Cole and Sanders(1985) have criticised the Harris-Todaro model explicitly modeling the subsistence sector employing uneducated migrants arguing that it flawed the job selection process and expected income calculations if by lack of qualification, uneducated migrants couldn’t find a job in the modern urban sector.
D) POLICY IMPLICATIONS
The Todaro paradox Conveyed the message that internal migration can be harmful because it exacerbate urban unemployment. The idea has certainly inspired many government to implement restrictive policies even though the empirical validity of the Harris-todaro model. and the Todaro paradox are not clearly established given the high unemployment rates and significant migration in developing countries. The Harris-Todaro model suffers from theoritical oversimplification, among which several are likely to overestimate the link between migration and urban unemployment.
E) LIMITATIONS OF THE MODEL
1. The model assumes that Labour has a perfect knowledge about market wages which is impractical given the high rate of illiteracy among the rural people.
2. The reflection of economic realities by this Assumption is questionable, poor migrants will likely be risk averse (i.e having a strong dislike for risk) and require a significant greater expected urban income to migrate.
3) They assume that potential migrants are indifferent to a certain expected rural income and unexpected urban income of the same magnitude.
F) IMPACT OF THE THEORY IN NIGERIA
Using Nigeria as a case study, rural-urban migration is one of the most distressing problems facing the Nigerian socio-economic development. A situation where the desire for better employment, business opportunities and education pushes both Young and old not of the rural areas to the urban areas.
Rural-urban migration represents a volume of movement of people from the rural countryside to the urban cities.
Historically, migration existed in the form of transferring uneducated workers from the rural sector to the urban sector to function in the industries so s to increase industrial output.
This Harris-Todaro model will help policy makers in Nigeria to avoid two mistakes
a) To assume that efforts should necessarily be focused on getting the poor out of the sector in which they presently are.
b) The other one is to assume that development efforts should necessarily be channeled to the sectors where the poor are.
AN ESSAY ON THE LEWIS FEI-RANIS MODEL(SURPLUS LABOUR THEORY)
A) INTRODUCTION
The Lewis fei-Ranis model of economic growth developed by John C.H Fei and Gustav Ranis and can be seen as an extension of the Lewis model developed by W. Arthur Lewis is a dualism model in both development and welfare economics.it is also known as surplus Labour model. It recognizes the presence of dual economy comprising both the modern and the primitive sector and takes into consideration, the agricultural and modern economics respectively. It takes into consideration, the economic situation of unemployment and underemployment of resources. This model don’t consider underdeveloped countries to be homogenous unlike other models.
Both sectors (agricultural and modern) in the economy coexist. This is where the crux of the development problem lies. According to the6, Development can be brought about only by a complete shift in the social point of progress from the agricultural to the industrial economy, such that there’s increase in industrial output. According to them, underdeveloped countries don’t suffer from Labour constraint, so they advocate the transfer of labour from the agricultural no sector to the industrial sector. At the same time, growth in the agricultural sector shouldn’t be neglected and it’s output should be sufficient enough since they provide the economy with amount of food and raw materials.
B) BASIS OF THE MODEL
The biggest disadvantage of the Lewis-fei Ranis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, He didn’t acknowledge that the increase in the productivity of labour should take place prior to the Labour shift between the two sectors
However, these two ideas where taken into account in the fei-Ranis dual economy model of three growth stages.
The further argued that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development.
In Phase 1of the fei-Ranis model, the workforce is infinite and as a result suffers from disguised unemployment. Also, the marginal product of labour is zero. This phase is similar to the Lewis model .
In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased in agricultural sector sees a rise in productivity and this leads to increased industrial growth such that’s base for the next phase is prepared. In Phase 2, Agricultural surplus may exist as the increasing average product AP, higher than the marginal product MP and not equal to the subsistence level of wages.
The amount of Labour that is shifted and the time that the shifting takes place depends on
1. Growth of surplus generated in the agricultural sector.
2. The Nature of the industry’s technical Progress.
3. Growth of population
and so, The three fundamental ideas used in the model are;
1. Agricultural growth and industrial growth are equally important.
2. Agricultural growth and industrial growth are balanced.
3. Only if the rate at which Labour is shifted from the agricultural to the industrial sector is greater than the economy be able to free itself from the Malthusian population trap.
The shifting of Labour can take place by the landlords investment activities and by the government’s Fiscal measures.
However, the cost of shifting Labour in terms of both private and social cost may be high. For example, the cost of carrying out construction of buildings.
C) ASSUMPTION OF THE LEWIS MODEL
A) The existence of the surplus Labour in the agricultural sector. It includes Labour whose marginal productivity is zero and as well as the existence of redundancy on the part of the agricultural sector. The Labour consist Farmers, agricultural Labourers, petty traders domestic servant and women. The excess Labour bin the agricultural sector serves as a source of supply to the industrial sector and they are the major source of supply to the industrial sector.
By unlimited supply of labour. Lewis means that the supply of Labour is perfectly elastic at a particular wage. This particular wage is somewhat higher than the institutional wage. Which each worker in the agricultural sector.
B) Another important assumption that Lewis makes us about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all there savings for it’s further expansion, those in the subsistence sector on the other hand squander away their savings, if any in purchase of jewellery and for construction of example.
The propensity to save in the subsistent sector is quite lower than the propensity to save in the industrial sector. The Lewis further posits that the subsistence sector should transfer their income to the industrial sector so as to increase the rate of savings in the economy and ensure development in the economy.
C) HOW IT RELATES TO THE NIGERIAN ECONOMY
The Nigerian economy consist of both the agricultural band industrial sector that provide each functions for the growth and development of the economy. These two sectors are not mutually exclusive vin promoting the economic growth of the country and improving the standard of living of citizens. However, the federal government of Nigeria doesn’t necessarily have to move surplus Labour that exists in the rural areas to the urban areas but instead infrastructural facilities should be provided equally to both the agricultural and modern sectors of the economy.
Name: ILLO MARYANN EBUBECHUKWU
REG NO:2017/249350
DEPARTMENT: COMBINED SOCIAL SCIENCE (ECONOMICS AND SOCIOLOGY)
E MAIL: ebubeillo2000@gmail.com
Blog: illoebube.blogspot.com
AN ESSAY ON THE HARRIS -TODARO MODEL OF MIGRATION.
A) INTRODUCTION
TheHarris-todaro model is an economic model developed in 1970 and used in development and welfare economics to explain some of the issues concerning rural-urban migration.
The advocates of this model John R. Harris and Michael Todaro posited the major assumption of this model, that usf based on differences in expected income between the rural and urban areas rather than just wage differences.
This implies that rural-urban migration in this context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
B) ASSUMPTIONS OF THE MODEL.
The H-T model is based on the Assumption that the premise that a fixed wage leads to an outlook of misrepresentation and urban unemployment.
The H-T model presupposes that the fixed wage in one sector is added to the Assumption of the S.F model, which is done by introducing the concept of expected wage in the urban sector. The economy in his model consist of two sectors, one is the agricultural sector and the other is a manufacturing sector. The economy considered in the model is a small open economy. There are 3 kinds of production factors, specific production factors in sector 1, k1, production factors in sector 2, k2 and Labour (L) which is employed in both sectors and mobile between sectors.
In the HOS model, the capital Labour ratio are in a one to one relation with the relative price of product. However in the H-T model, there relations among variables are not in a one to one relationship. This makes H-T model more suitable for describing developing countries. This feature also gives the impression that the H-T model depends only on the supply side of the model and ignores the demand side. It is possible for workers to move freely to the wage gap between sectors. In other words, workers move to the higher wage sector by comparing their expected wages in sector 1 and 2. In both sectors, the expected wage is defined by multiplying wi (I=1,2) by the probability of finding a job in the sector.
C) CRITICISM
Cole and Sanders(1985) have criticised the Harris-Todaro model explicitly modeling the subsistence sector employing uneducated migrants arguing that it flawed the job selection process and expected income calculations if by lack of qualification, uneducated migrants couldn’t find a job in the modern urban sector.
D) POLICY IMPLICATIONS
The Todaro paradox Conveyed the message that internal migration can be harmful because it exacerbate urban unemployment. The idea has certainly inspired many government to implement restrictive policies even though the empirical validity of the Harris-todaro model. and the Todaro paradox are not clearly established given the high unemployment rates and significant migration in developing countries. The Harris-Todaro model suffers from theoritical oversimplification, among which several are likely to overestimate the link between migration and urban unemployment.
E) LIMITATIONS OF THE MODEL
1. The model assumes that Labour has a perfect knowledge about market wages which is impractical given the high rate of illiteracy among the rural people.
2. The reflection of economic realities by this Assumption is questionable, poor migrants will likely be risk averse (i.e having a strong dislike for risk) and require a significant greater expected urban income to migrate.
3) They assume that potential migrants are indifferent to a certain expected rural income and unexpected urban income of the same magnitude.
F) IMPACT OF THE THEORY IN NIGERIA
Using Nigeria as a case study, rural-urban migration is one of the most distressing problems facing the Nigerian socio-economic development. A situation where the desire for better employment, business opportunities and education pushes both Young and old not of the rural areas to the urban areas.
Rural-urban migration represents a volume of movement of people from the rural countryside to the urban cities.
Historically, migration existed in the form of transferring uneducated workers from the rural sector to the urban sector to function in the industries so s to increase industrial output.
This Harris-Todaro model will help policy makers in Nigeria to avoid two mistakes
a) To assume that efforts should necessarily be focused on getting the poor out of the sector in which they presently are.
b) The other one is to assume that development efforts should necessarily be channeled to the sectors where the poor are.
AN ESSAY ON THE LEWIS FEI-RANIS MODEL(SURPLUS LABOUR THEORY)
A) INTRODUCTION
The Lewis fei-Ranis model of economic growth developed by John C.H Fei and Gustav Ranis and can be seen as an extension of the Lewis model developed by W. Arthur Lewis is a dualism model in both development and welfare economics.it is also known as surplus Labour model. It recognizes the presence of dual economy comprising both the modern and the primitive sector and takes into consideration, the agricultural and modern economics respectively. It takes into consideration, the economic situation of unemployment and underemployment of resources. This model don’t consider underdeveloped countries to be homogenous unlike other models.
Both sectors (agricultural and modern) in the economy coexist. This is where the crux of the development problem lies. According to the6, Development can be brought about only by a complete shift in the social point of progress from the agricultural to the industrial economy, such that there’s increase in industrial output. According to them, underdeveloped countries don’t suffer from Labour constraint, so they advocate the transfer of labour from the agricultural no sector to the industrial sector. At the same time, growth in the agricultural sector shouldn’t be neglected and it’s output should be sufficient enough since they provide the economy with amount of food and raw materials.
B) BASIS OF THE MODEL
The biggest disadvantage of the Lewis-fei Ranis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, He didn’t acknowledge that the increase in the productivity of labour should take place prior to the Labour shift between the two sectors
However, these two ideas where taken into account in the fei-Ranis dual economy model of three growth stages.
The further argued that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development.
In Phase 1of the fei-Ranis model, the workforce is infinite and as a result suffers from disguised unemployment. Also, the marginal product of labour is zero. This phase is similar to the Lewis model .
In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased in agricultural sector sees a rise in productivity and this leads to increased industrial growth such that’s base for the next phase is prepared. In Phase 2, Agricultural surplus may exist as the increasing average product AP, higher than the marginal product MP and not equal to the subsistence level of wages.
The amount of Labour that is shifted and the time that the shifting takes place depends on
1. Growth of surplus generated in the agricultural sector.
2. The Nature of the industry’s technical Progress.
3. Growth of population
and so, The three fundamental ideas used in the model are;
1. Agricultural growth and industrial growth are equally important.
2. Agricultural growth and industrial growth are balanced.
3. Only if the rate at which Labour is shifted from the agricultural to the industrial sector is greater than the economy be able to free itself from the Malthusian population trap.
The shifting of Labour can take place by the landlords investment activities and by the government’s Fiscal measures.
However, the cost of shifting Labour in terms of both private and social cost may be high. For example, the cost of carrying out construction of buildings.
C) ASSUMPTION OF THE LEWIS MODEL
A) The existence of the surplus Labour in the agricultural sector. It includes Labour whose marginal productivity is zero and as well as the existence of redundancy on the part of the agricultural sector. The Labour consist Farmers, agricultural Labourers, petty traders domestic servant and women. The excess Labour bin the agricultural sector serves as a source of supply to the industrial sector and they are the major source of supply to the industrial sector.
By unlimited supply of labour. Lewis means that the supply of Labour is perfectly elastic at a particular wage. This particular wage is somewhat higher than the institutional wage. Which each worker in the agricultural sector.
B) Another important assumption that Lewis makes us about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all there savings for it’s further expansion, those in the subsistence sector on the other hand squander away their savings, if any in purchase of jewellery and for construction of example.
The propensity to save in the subsistent sector is quite lower than the propensity to save in the industrial sector. The Lewis further posits that the subsistence sector should transfer their income to the industrial sector so as to increase the rate of savings in the economy and ensure development in the economy.
C) HOW IT RELATES TO THE NIGERIAN ECONOMY
The Nigerian economy consist of both the agricultural band industrial sector that provide each functions for the growth and development of the economy. These two sectors are not mutually exclusive vin promoting the economic growth of the country and improving the standard of living of citizens. However, the federal government of Nigeria doesn’t necessarily have to move surplus Labour that exists in the rural areas to the urban areas but instead infrastructural facilities should be provided equally to both the agricultural and modern sectors of the economy.
LEWIS-FEI-RANIS MODEL OF SURPLUS LABOUR THEORY:
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Assumptions of the Model:
This theory is concerned with a poor economy which has following properties:
(I) There is an abundance of labor in such Underdeveloped countries and shortage of natural resources.
(ii) The population growth rate is very high which results in mass unemployment in the economy.
(iii) The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labor is zero and negative in agriculture sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy.
Thus the model suggests that:
“Economic development would be taking place if agricultural laborers are transferred to industrial sector where their productivity will increase”.
As we told earlier that it is a dual economy where there is a stagnant agricultural sector and dynamic industrial sector. The situation where MPL – 0, labor can be transferred to industrial sector without any loss in agricultural output. The real wages in industrial sector remains fixed and it is equal to the initial level of real income in agricultural sector. Such wages are given the name of institutional wages.
CONCLUSION: Using China as a Case Study.
The Chinese experience China’s dualistic economic development China has had a long history of dualistic economic development. According to Putterman (1992), prior to the 1978 Economic Reform, the rural agricultural sector was run using collective farms and wages were set by the government. In the urban industrial sector, the pursuit of profit was allowed. The 1978 Economic Reform has not brought this dualistic structure to an end. Instead it has allowed the urban sector to develop further by creating an expanding service sector and a new class of town-village enterprises.
Thus, the dualistic structure involves the agricultural sector in rural areas and the non-agricultural sector mainly concentrated in urban areas. Specifically, the agricultural sector includes farming, animal husbandry, forestry and fishery. The non-agricultural sector includes construction, industry (i.e. manufacturing, mining and quarrying, electricity, gas and water supply), transport, post and telecommunication services, wholesale and retail trade and catering services. The output of town-village owned enterprises is included in the non-agricultural sector, though they are in semi-urban locations.
Economic growth in China is largely driven by the non-agricultural sector and less so by that of the agricultural sector.
HARRIS-TODARO MODEL OF MIGRATION.
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
The formal statement of the equilibrium condition of the Harris–Todaro model is as follows:
* Let wr be the wage rate (marginal productivity of labor) in the rural agricultural sector.
* Let le be the total number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
* Let lus be the total number of job seekers, employed and unemployed, in the urban sector.
* Let wu be the wage rate in the urban sector, which could possibly be set by government with a minimum wage law.
Rural to urban migration will take place if:
* wage rate(wr) Le÷Lus×Wu
At equilibrium,
* wage rate(wr) =Le÷Lus×Wu
With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage mutiplied by the employment rate.
Therefore, migration from rural areas to urban areas will increase if:
Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
CONCLUSION
The fact that Nigeria has one of the highest growth rates in the world cannot be over- emphasized. Using the census figure of 140 million according to the national population census of 2006, over 70% of Nigeria is in the rural areas. A resultant of this growth has led to rapid urbanization and an enormous increase in the population leaving rural areas and now living in urban centers. Demographic, environmental and economic issues become primary areas of concern with the rapid growth of Nigerian urban centers and its attendant effect on rural areas. Policy makers and urban planners are faced with the worries these factors are placing on existing infrastructure and services. While various environmental and socio-economic factors are easily associated with the rapid rural- urban migration trends in Nigeria, it is of utmost importance to identify their impact/implications and developing strategies to combat their effects. This paper therefore ague for rural development as a panacea for rural-urban migration in Nigeria.
Rural-Urban Migration in Nigeria, Implication on the Development of the Society: Anambra State as the Focus of the Study.
This paper examines the implication of rural- urban migration on Nigeria Society using Anambra state as focus of the study. Cities have been growing both through natural increase and through stampede from rural areas in Nigeria. People migrate to urban areas based on the prevailing conditions they fund themselves and the reasons for the migration vary from one individual to another depending on the situation that informs the decision to migrate. In most rural areas, the effect of rural-urban migration was a rapid deterioration of the rural economy leading to poverty and food scarcity. The cause of the phenomenon has been described as the push factors in the rural areas and the pull factors in the urban areas. The objective of this paper is to identify the implication of rural-urban migration on Nigeria society. It is a survey research. Thus, 1200 questionnaire were distributed among the selected local governments in Anambra State. The analysis was run using Runs test and mode analysis. The result of the analysis found the effect of people migrating from rural areas to urban centres on the society to include: increase in prostitution in the urban centres; increase in squalor settlement in the urban centres; and people are doing all sorts of odd jobs in order to survive in urban centres. The paper therefore recommends that the government should make and implement a policy on provision of functional social amenities such as electricity, pipe borne water etc. in the rural areas. Good schools and qualified teachers should be made available in the rural areas and establishment of industries in both rural and urban areas that will to an extent accommodate unemployed youths.
NGWU OSITA ENOCH
2017/242022
Ositangwu95@gmail.com
Education Economics
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
INTRODUCTION
The Lewis (1954) theory of dualistic economic development provides the seminal contribution to theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150).
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output.
HISTORY OF SURPLUS LABOUR THEORY
The historical emergence of surplus labour is, according to Marx, also closely associated with the growth of trade (the economic exchange of goods and services) and with the emergence of a society divided into social classes. As soon as a permanent surplus product can be produced, the moral-political question arises as to how it should be distributed, and for whose benefit surplus-labour should be performed. The strong defeat the weak, and it becomes possible for a social elite to gain control over the surplus-labour and surplus product of the working population; they can live off the labour of others.
Labour which is sufficiently productive so that it can perform surplus labour is, in a cash economy, the material foundation for the appropriation of surplus-value from that labour. How exactly this appropriation will occur, is determined by the prevailing relations of production and the balance of power between social classes.
THE CONCEPT OF SURPLUS LABOUR
The concept of surplus labour is widely discussed among development economics but its specific meaning needs to be defined, especially in technical terms, as many neoclassical economists still doubt the existence of surplus labour in an economy. Defining the source and the extent of surplus labour is then a prerequisite for further study. This section considers the various definitions of surplus labour and clarifies them.
The simple definition of surplus labour implies the existence of a point at which the marginal product of labour becomes zero and labour can be transferred out of the traditional sector without reducing the quantity of output, as noted by Wellisz (1968: 22): The (disguised-unemployment or the Unlimited Supply of Labour) hypothesis claims that in poor, densely populated countries, more people are employed than needed to produce the prevailing output with the existing techniques and the existing supply of non-labour inputs. The ‘surplus’ labour constitutes ‘hidden’ or ‘disguised’ unemployment. Many of the proponents of the hypothesis make the further claim that agricultural output will not decrease, and industrial output will increase, if measures are taken to re-allocate labour from subsistence agriculture (where the surplus is supposed to exist) to industry (where there is no surplus labour).
ASSUMPTIONS OF THE LEWIS-FEI-RANIS MODEL
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion. Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc of those in the capitalist sector. Lewis in fact so much fascinated by the higher propensity to save of the capitalist sector that he even advocates a transfer of income from the subsistence sector to the capitalist sector. He feels that steps have to be taken to raise the rate of savings from 10% to 15% if the development of the economy has to be smooth.
COMPARISONS OF THE THEORY OF SURPLUS LABOUR
Surplus labor models are a class of models for analyzing developing countries as dual economies with a modern capitalist sector and a traditional precapitalist sector. The precapitalist sector is viewed as having a large pool (“unlimited supplies”) of labor from which the capitalist sector may draw at constant cost. While these models are often described as finding their inspiration in the old classical economists and Karl Marx, the 1954 model of W. Arthur Lewis and its extensions are technically more neoclassical than truly classical. The Lewis model was elaborated and formalized by many others, most notably John C. H. Fei and Gustav Ranis (1964), with important theoretical contributions from Amartya Sen (1966) and Stephen Marglin (1976). Questions have been raised as to the historical relevance of the neoclassical labor surplus models (Schultz 1964; Myint 1971; Arrighi 1973; Williamson 1985).
CRITICISM
Lewis-Fei-Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.
It has been asserted that the Lewis-Fei-Ranis model did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed.
The Lewis-Fei-Ranis model say, “It has been argued that money is not a simple substitute for physical capital in an aggregate production function. There are reasons to believe that the relationship between money and physical capital could be complementary to one another at some stage of economic development, to the extent that credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry.” This indicates that in the process of development they neglect the role of money and prices. They fail to differ between wage labor and household labor, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
The Lewis-Fei-Ranis model assume that MPPL is zero during the early phases of economic development, which has been criticized by Harry T.Oshima and some others on the grounds that MPPL of labor is zero only if the agricultural population is very large, and if it is very large, some of that labor will shift to cities in search of jobs. In the short run, this section of labor that has shifted to the cities remains unemployed, but over the long run it is either absorbed by the informal sector, or it returns to the villages and attempts to bring more marginal land into cultivation.
CONCLUSIONS AND RECOMMENDATIONS
Lewis-Fei-Ranis model can be grouped under three instruments; labour force, capital accumulation and integration to the world economy. The main focus in Lewis-Fei-Ranis model was on the reallocation of labour until the turning point is reached, i.e., the time when labour reallocation has outstripped population growth long enough for dualism to atrophy and the economy to become fully commercialized. The model implicitly showed that the traditional sector do not produce any capital accumulation as they are very small and poor. Trade between agriculture and industry as the supply or marketed food falls or the demand for it rises, or both causing the value of marginal product of labour in agriculture to rise.
In sum up, there are several weaknesses of Lewis-Fei-Ranis model that are underlined by many economists. The first and most important is that if marginal productivity of labour in agricultural sector is negligible, zero. Schultz (1964), Sen (1967), Harris and Todaro (1970) and Fields (1975) proved with their empirical results that this cannot happen in agriculture sector. It is obvious that there is a disguised unemployment in agriculture. Particularly, agricultural sector should be considered in two ways: during harvest time and post harvest. If the agricultural surplus is solely considered for the regions where there can be seen harsh winter conditions, it could be accepted of the doctrine of Lewis, otherwise it is irrelevant to say there is a zero marginal productivity for agriculture labours. Also, there are positive opportunity costs, e.g. loss of crops in times of peak harvesting season, labour transfer will reduce agricultural output.
Second, the model employed mostly for the closed economies and gave relatively less information on open economies. Lewis-Fei-Ranis model was criticized as it neglects international trade. The model was to a certain extent supply-oriented, which does not foresee any trade between capital and other sectors. Also it was criticized advocating industrialization and ignores agriculture. If a section of the profit made by the capitalists is not devoted to agricultural development, the process of industrialization would be jeopardized.
Third, Lewis-Fei-Ranis model believed that the more the rate of labour transfer to urban employment, the more the economic grows and more jobs are created. But this is not a common applicable in practice if industrial development involves more intensive use of capital than labour, then the flow of labour from agriculture to industry will simply create more unemployment.
Fourth, the Lewis-Fei-Ranis model would imply that aggregate living standards should not rise as rapidly as productivity until surplus labour is eliminated. However, the evidence on living standards in Latin America during the twentieth century indicates that these have risen in line with productivity, and that the ‘indirect’ components of the real wage (health and education) have actually risen more rapidly that average incomes.
Fifth, the Lewis-Fei-Ranis model stated the wage in industrial sector does not increase before labour surplus is absorbed. But this does not happen in any way in reality as the development of the urban, or industrial, or formal sector can itself lead to the creation of pressure groups and swing the balance of power towards those in that sector, to the detriment of those remaining outside it. The wage in the industrial sector in reality outstandingly rises long before the labour surplus is absorbed.
Haven tested the Lewis-Ranis-Fei theory for developing economy over 1965-2002 we have found that the developing economic growth is mainly attributable to the development of the non-agricultural sector. This is driven by rapid capital accumulation as well as employment growth. The reallocation of labour away from agriculture has made a positive net contribution to rapid economic of the developing economy. The rise in the marginal productivity of agricultural labour indicates the absorption of redundant agricultural labour since the 1978 Economic Reform. However, the marginal productivity of agricultural labour is still lower than the initial low average productivity of agricultural labour. This implies the continued existence of disguised agricultural unemployment. This suggests that the these developing economy has entered the Lewis-Ranis-Fei phase two of development but has not yet achieved phase three. The continuing widening productivity gap between the two sectors calls for the removal of market restrictions and government interventions so as to allow the continued absorption of surplus labour. Several policy recommendations are tentatively suggested. First and foremost, more effort should be made in promoting employment to effectively absorb the remaining labour surplus and promote economic development. This can be achieved by further relaxing the Hukou restrictions on migration, increasing labour market flexibility and improving the allocative efficiency of labour. It can also be achieved by encouraging the development of private enterprise to create more employment opportunities. Second, Government of developing economy should continue implementing the Sunshine Policy, initiated in 2003, designed to provide rudimentary job training, recruitment information and information about conditions in the destination cities to rural migrants. This will not only help facilitate employment of rural migrants but also satisfy the increasing demand for skilled labour in the growing non-agricultural sector. Third, agriculture could be promoted by tax breaks, direct subsidies and most importantly, by removing price controls on agricultural products. Agriculture could thus be commercialised and the economy would enter phase three of economic development.
REFERENCE
Sadik-Zada, Elkhan Richard (2020). “Natural resources, technological progress, and economic modernization”. Review of Development Economics. doi:10.1111/rode.12716.
“Economnics4Development Website”. Surplus Labor Model of Economic Development. Archived from the original on 16 October 2011. Retrieved 12 October 2011.
Thirlwall, A.P (2006). Growth and Development: With Special Reference to Developing Economies. Palgrave Macmillan. ISBN 1-4039-9600-8.
Subrata, Ghatak (2003). Introduction to Developmental Economics. London: Routledge. ISBN 0-415-09722-3.
“Ranis-Fei model vs. Lewis Model” (PDF). Developmentafrique.com. Archived from the original (PDF) on 30 May 2012. Retrieved 14 October 2011.
“American Economic Review”. The Ranis-Fei Model of Economic Development: Comment. 53: 448–452. JSTOR 1809172.
Ranis, Gustav. “Paper on Labor Surplus Economies” (PDF). Retrieved 4 October 2011.
J. Choo, Hakchung. “American Economic Review”. On the Empirical Relevancy of the Rans-Fei Model of Economic Development: Comment. 61: 695–703. JSTOR 1811863.
Misra, Puri, S.K, V.K (2010). Economics of Development and Planning. Mumbai, India: Himalaya Publishing House. pp. 270–279. ISBN 978-81-8488-829-4.
NGWU OSITA ENOCH
2017/242022
Ositangwu95@gmail.com
Education Economics
Harris-Todaro Model of Migration
INTRODUCTION
Harris and Todaro work, is considered one of the starting points of the classic rural-urban migration theory. The hypothesis and predictions of Harris-Todaro model have been subjected to econometric evaluation and have been corroborated by several studies. The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migraton decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage. From this crucial assumption, as denominated by Harris-Todaro, is deduced that the migratory dynamics leads the economic system toward an equilibrium with urban concentration and high urban unemployment.
THE HARRIS-TODARO MODEL
Assumptions
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function: where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a < 1 are parametric constants. Both goods and labor markets are perfectly competitive. Nevertheless, there is segmentation in the labor market due to a high minimum urban wage politically determined. In the rural sector, the real wage, perfectly flexible, is equal to the marginal productivity of labor in this sectors where wa is the real wage and p is the price of the agricultural good, both expressed in units of manufactured good.
HARRIS-TODARO AGENT-BASED MODEL
Computational Implementation
Initially, workers are randomly placed in a square lattice with linear dimension L = 500. The reference values of the parameters used for these simulations are the same done to evaluate the equilibrium of the Harris-Todaro model, namely, Aa = 1.0, Am = 1.0, f = 0.3, a = 0.7, r = 1.0 and g = 1.0. The value of the minimum wage used is wm = 0.8 and the initial urban fraction of the total population is nu = 0.2, where nu = Nu/N is the normalized urban population also called urban share. The initial value nu = 0.2 is in agreement with historical data of developing economies. Given these parameters, one can calculate the vector which characterizes temporary equilibrium of the system by using eqs. (7 – 12). By using eq. (7), the employment level of the urban sector, Nm, is obtained. If nu Nm/N there will be a fraction of Nm/Nu workers employed, which earn the minimum wage, wi = wm, and (1-Nm/Nu) workers unemployed, which earn a wage wi = 0. Each worker can be selected to review his sectorial location with probability a, called activity. Therefore, in each time step only a fraction of workers becomes potential migrants, going through the sectorial location reviewing process. Potential migrants will determine their satisfaction level of being in the current sector by comparing their earnings, wi, among nearest neighbors. The potential migrant starts the comparison process with a initial satisfaction level si = 0. When wi > wneighbor the satisfaction level si is added in one unit; if wi < wneighbor, si is diminished in one unit; if wi = wneighbor, si does not change. After the worker has passed through the reviewing process his/her satisfaction level is checked. The migration will occur only if si < 0, what means that the worker's i earnings is less than the most of his/her nearest neighbors. After all the potential migrants complete the reviewing process and have decided migrate or not, a new configuration of the system is set. Therefore, once again a new temporary equilibrium of the system is calculated by using eqs. (8 – 12). The whole procedure is repeated until a pre-set number of steps is reached. It is important to emphasize that Nm is kept constant throughout the simulation. Its given by eq. (7) which depends on the technological parameters, a,Am, and the minimum wage, wm, which are constants too.
In this case, the differential of expected wages is negative. In an economy mainly rural (nu < 0:5), the transitional dynamics characterized by a continuous growth of population of the urban sector with a differential of expected wages relatively high is followed by the stabilization of rural-urban differential of expected wages. In other words, the generalized Harris-Todaro condition, eq. (15), arises as a long run equilibrium result of the agent-based migratory dynamics.
CONCLUSION
In this paper we developed and agent-based computational model which formalizes the rural-urban allocation of workers as a process of social learning by imitation. We analyze a two-sectorial economy composed by adaptative agents, i.e., individuals that grope over time for best sectorial location in terms of earnings. This search is a process of imitation of successful neighbor agents. The dispersed and non-coordinated individual migration decisions, made based on local information, generate aggregate regularities.
Firstly, the crucial assumption of Harris and Todaro, the principle that rural-urban migration will occur while the urban expected wage exceed the rural wage, comes out as spontaneous upshot of interaction among adaptative agents.
Secondly, the migratory dynamics generated by agents that seek to adaptate to the economic environment that they co-create leads the economy toward a long run equilibrium characterized by urban concentration with urban unemployment. When this long run equilibrium is reached, the generalized Harris-Todaro condition is satisfied, i.e., there is a stabilization of the rural-urban expected wage differential.
Thirdly, the impact of the minimum wage and elasticity of terms of trade in a long run equilibrium obtained by simulations are in agreement with the predictions of the original Harris-Todaro model with Cobb-Douglas technology.
Finally, the simulations showed an aggregated pattern not found in the original Harris-Todaro model. There is the possibility of small fluctuations of the urban share around an average value. This phenomenon is known as reverse migration.
REFERENCE
Aquino L. Espíndola thanks CAPES for the financial support. Jaylson J. Silveira acknowledges research grants from CNPq. T. J. P. Penna thanks CNPq for the fellowship.
J. R. Harris and M. P. Todaro, American Economic Review 60, 126 (1970).
M. P. Todaro, American Economic Review 59, 138 (1969).
D. Ray, Development Economics (Princeton: Princeton University Press, 1998).
L. Y. L. Yap, Journal of Development Economics 4, 239 (1977).
D. Mazumdar, Rural-urban Migration in Developing countries. In: Handbook of Regional and Urban Economics, Elsevier, Amsterdam, 1987.
L. Ghatak, P. Levine, and S. Price, Journal of Economics Surveys 10, 159 (1996).
J. G. Willianson, Migration and Urbanization. In: Chenery, H. and Srinivasan, T.N., Handbook of developments economics, Elsevier, Amsterdam, 1988.
J. J. Silveira, A. L. Espíndola, and T. J. P. Penna, physics/0506021, Physica A, to appear.
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NAME: Okaforukwu chizaram sandra
Reg no : 2017/249551
Department : Economics
Email: okagrt01@gmail.com
Blog : sandraokaforukwu@blogspot.com
LEWIS FEI RANIS MODEL ON THEORY OF SURPLUS LABOUR
INTRODUCTION
The Fei–Ranis model of economic growth has been designed by John C. Fei and Gustav Ranis and is an extension of the Lewis Model. It is a model of duality in development economics or social economy. The Surplus Labor model is also known. It recognize the presence, in contrast to many other growth models that consider underdeveloped countries homogenous in nature, of a dual economy that involves both the modern and primitive sectors. It takes into account the economic situation of unemployment and underutilization of resources. According to these theories, the primitive sector is made up of the existing agricultural sector in the economy and that is the rapidly emerging but small industrial sector in the modern sector. Development can only result from a complete shift from the agricultural to the industrial economy in the main focus, so that industrial production increases. The work is transferred from the agricultural sector to the industrial sector, which demonstrates that underdeveloped countries do not suffer from labor supply constraints. At the same time, there should also be no negligible growth in the agricultural sector and sufficient output to support the whole economy with food and raw materials. Saving and investment, as in the Harrod–Domar model, become driving forces in the economic development of developing countries.
The Lewis theory was formalized by Ranis and Fei (1961), who identified three “phases” of economic growth. Three turning points mark the start of each phase: The Lewis model’s second labor-scarce stage corresponds to phase three of ranis fei model .
Phase one growth occurs as a result of the breakout stage, which is fueled by agricultural labor that is no longer required.
As a result of the shortage stage, phase two development occurs, with disguised agricultural unemployment.
With the commercialization of the agricultural sector, the commercialization stage contributes to phase three of self-sustaining economic development.
As a result, the Lewis-Ranis-Fei theory of dualistic economic development is a good theoretical paradigm for analyzing the growth direction of labor-surplus emerging economies like China and other developing countries.
BASICS OF THE MODEL
One of Lewis’ greatest disadvantages was that agriculture’s role is being undermined in boosting the growth of the industry. Moreover, he did not recognize that an increase in labor productivity should occur before the shift of labor between the two sectors. In Fei–Ranis’ dual economic model with three stages of growth, both these ideas were taken into account. They argue further that the model does not apply concentrates on the change that occurs with agricultural development properly. The elasticity of the farm workforce is endless in Phase 1 of the Fei–Ranis model, which results in disguised unemployment. Furthermore, the marginal labor product is zero. The Lewis model resembles this phase. In Phase 2 of the model, productivity in the agricultural sector rises, leading to increased industrial growth in a way that creates a basis for the next phase. Agricultural surpluses can exceed the marginal product (MP) and are not equal to subsistence wages in phase 2 as the increasing average product (AP).
Using the help of the figure on the left, we see that
Phase 1:AL(from figure)=MP=0and AB(from figure)=AP
The figure of AD labor may be shifted from the farm sector without a decrease in output, according to Fei and Ranis. It therefore represents overwork.
Phase2:AP>MP
Following AD, the MP starts to increase and the industrial work increases from 0 to AD. BYZ demonstrates AP of agricultural work and we see that the curve falls downwards after AD. This fall in the AP can be due to the decline in the real salaries of industrial workers due to the food shortage, given the fact that fewer workers are working in the food industry. The reduction in real wages reduces profit levels and the surplus volume that could have been reinvested for greater industrialization. As long as there is surplus, however, growth can still be increased without an industrialization rate decline. This surplus reinvestment can be visualized graphically as the MP curve shifts outside. In phase 2, AK is responsible for the level of covert unemployment. This allows the farm sector to surrender part of its workforce until
MP=Real wages=AB=Constant institutional wages(CIW)
Phase 3 begins from the marketing point at K in the figure. This is where, in the absence of covert unemployment, the economy is fully commercialized. In Phase 3, labor supply curve is steeper and both sectors begin to bid for work equally.
Phase3:MP>CIW
The amount of work that is shifted and the time it takes for this shift is:
Surplus growth in the farming sector and industrial capital stock growth dependent on industrial profit growth;
the nature and associated prejudice of the technological progress of the industry;
Population growth rate.
The three basic ideas in this model are as follows:
1. Both agricultural and industrial growth are equally important;
2. agricultural and industrial growth are equitable;
3. The economy will only be able to rise from the Malthusian population trap when the labor rate moves from agriculture to the industrial sector is higher than the population rate of growth.
This work shift can occur through investments of landlords and fiscal measures by the government. However, both private and social costs may be high for shifting work, for example transportation costs or construction costs. Moreover, farm consumption per capita may increase, or a broad difference between the wages of the rural and the urban population may exist. Three of these are called leakage, which prevent the creation of an agricultural surplus. They include high costs, a high consumption, and a high wage gap. Indeed, a reverse supply curve of work could also prevent surplus generation, which occurs when high levels of income are not consumed. This means that workers with higher earnings will not increase their productivity. The case of reverse curves is, however, generally impractical.
Fei and Ranis said that a robust connectivity between the two would encourage and speedup development. They took the example of Japan’s dualistic economy in the 19th century, where rural industry was often linked to urban production. According to them, economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision-making powers.
ASSUMPTIONS OF THE MODEL
Fei–Ranis model of economic growth has been criticized on multiple grounds.which are
• It has been claimed that the slow economic situation in the developing world was not clearly understood by Fei and Ranis. Had the existing nature and causes been thoroughly examined, they would have discovered the current backwardness of agriculture due to the institutional structure, primarily the feudal system.
• Fei and Ranis say money is not a simple substitute for physical capital in an aggregate production function. Credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry. They fail to differ between wage labor and household labor, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
• In the earliest stages of economic development, which Harry T.Oshima and some others have criticized, Fei and Ranis assume that MPPL is nil only when the agricultural population is very large and that if it is extremely large, some work will be moved towards the urban centers in search of jobs. In the short term, this part of the work which has shifted to the cities remains unemployed, but it is either absorbed in the informal sector or re-enters the towns and tries to cultivate more marginal land. Seasonal unemployment is also overlooked because of seasonal changes in demand for labor and is not permanent.
To better understand this, we refer to the graph showing vertical axis food and horizontal axis recreation in this section. The level of food consumption in subsistence is OS. The SAG curve for transformation falls from A, indicating more leisure is used for the same land units. At A the marginal change between food and leisure and MPL = 0 is also tangent with the transforming curve at this point. Leisure satiation or leisure as an inferior good is an extreme case. Berry and Soligo in their 1968 paper have criticized this model for its MPL=0 assumption. In normal cases, the output would decline with shift of labor to the industrial sector. This is because, a fall in the per capita output would mean fall in consumption in a way that it would be lesser than the subsistence level, and the level of labor input per head would either rise or fall. They show that the output changes, and may fall under various land tenure systems, unless the following situations arise. The graph above shows food and leisure as two commodities of the agriculturalists’ consumption. Food is on the vertical axis, and leisure on the horizontal axis. OS represents the minimum level of food consumption, or the minimum amount of food consumed by agricultural labor that is necessary for their survival. The transformation curve SAG falls from A, which indicates that more leisure is being used to same units of land.
1. The lower good category is leisure
2. Satisfaction with leisure is present.
3. The substitutions for food and leisure are perfect, and for all actual income levels the marginal substitution rate is constant.
If the MPL>0 option is not valid now, and the MPL=0 option is invalid as a perfect substitute for food and leisure. Therefore, leisure as a lower good is the only viable option.
The Fei-Ranis model considers only labor and output as factors of production. Fei and Ranis assume a close model and hence there is no presence of foreign trade in the economy. The reluctant expansionary growth in the industrial sector of underdeveloped countries can be attributed to the lagging growth of subsistence agriculture. There is complete negligence of terms of trade between agriculture and industry, foreign exchange, money and price. Stagnation has not been taken into consideration, and no distinction is made between labor through family and labor through wages. The question of whether MPL = 0 is that of an empirical one, and MPL would definitely be greater than zero during favorable climatic conditions, say that of harvesting or sowing, MPL definitely would be higher than zero.
COMPARISON/CONCLUSIONS
We attempt to describe the basic outlines of the development model of the labor surplus and to address criticisms of this model, certain ‘red herrings,’ readily addressed by the micro econometric branch of neo-classical economics, and others.
The key question is whether wages are neo-classically determined or in the earliest stages of development through a negotiating process. We conclude that the neo-classical school which finds inelastic labor supply curves is concerned with the static cross-sectional analysis of labor supply in the farm industry, whereas the labor surplus model is concerned with the tracing of a dynamic reallocation of labor in the dual economy from a subsistence to a neo-classical organized sector. The attack on the model of labor surplus by the neo-classical school is therefore not justified. We deal with various problems and ships pass through the night.
The article follows marshaling data of a certain number of developing countries in the field of labor surpluses which demonstrate that institutional wages lag behind changes in productivity during the unqualified process of labor redistribution on the road to “a turning point” where, decades of intersectoral balanced growth resulted in unskilled labour shortages and the economy lost its dual nature.
Nonetheless, the Lewis fei ranis model provides a framework for understanding economic development in developing countries, as long as structural transformation can occur in a variety of ways.
NAME : Okaforukwu chizaram sandra
Reg no : 2017/249551
Email: okagrt01@gmail.com
Blog: sandraokaforukwu@blogspot.com
THE HARRIS-TODARO MODEL ON THE THEORY OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is a 1970s economic model used in development economics and welfare economics to describe some of the problems surrounding rural-urban migration. The model’s key assumption is that migration decisions are based on projected income differentials between rural and urban areas rather than simply wage differentials. This implies that rural-urban migration can be economically acceptable in a context of high urban unemployment if projected urban income exceeds expected rural income. A new pattern of economic development that is relevant for labor surplus nations such as India has been developed by J. R. Harris and M. P. Todaro. The model focuses on labor migration from rural to urban areas, which is caused by certain incentives. Under this model, migrant employees are mainly involved in a lottery of high-paid jobs in cities. For each job created, more than one worker may migrate, which would result in a loss of output if migrants take some family members into the urban zone.
ASSUMPTIONS OF THE MODEL
The formal statement of the equilibrium condition of the Harris–Todaro model is as follows:
Let wr be the wage rate (marginal productivity of labor) in the rural agricultural sector.
Let le be the total number of available jobs in the urban sector, which should be equal to the number of urban employees employed.
Let lus be the total number of job seekers, employed and unemployed, in the urban sector.
Let wu be the wage rate in the urban sector, which the government might likely set with a minimum wage rule.
Rural-to-urban migration will occur if and only if the following conditions are met:
Rural to urban migration will take place if:
wrle/lus(wu)
At equilibrium,
wr=le/lus(wu)
The ratio of available jobs to total job seekers provides the likelihood that any person moving from the agricultural sector to the urban sector will be able to find employment. As a result, in equilibrium, the agricultural wage rate equals the estimated urban wage rate, which is calculated by multiplying the urban wage by the job rate.
INTERNAL MIGRATION
The model explains why the high observed levels of small-scale urban migration in most developing countries are economically quite natural. In this model, the main motivating force behind migration is the expected real wage differential between urban and rural areas. First, the potential migrant calculates the actual revenue for a job in the urban area with his current endeavor. Then he compares the expected revenue to what he hopes to get in rural areas. His decision to migrate depends on the difference.
800 = 0.4 x 2000
If the likelihood was 0.8, the anticipated income would be 1600 (= 0.8 x 2000). (Naturally, the costs of transfer may be added to this one.) The model thus focuses on the role of economic stimulus in the decision on migration. Migration in any given time then depends on three factors:
1. The salary gap between urban and rural areas,
2. The rate of urban work and
3. The receptivity of potential migrants to the opportunities created as a result.
THEORETICAL IMPLICATION OF THE MODEL
The cost of opportunities and the value in the next best alternative use is an important part of the social cost of each input. Work hired for a formal urban sector project could also be drawn from the informal urban sector. Some analysts think that the wage paid to incidental farm workers is a good measure of the social cost of unqualified labor. However, this measure probably underpins the true social cost, which other compounds are likely to be significant, although a good indicator of the yield foregone by labor reallocation. In an analysis of the labor reallocation that is likely to take place during eco-work, the Harris-Todaro model integrates both forces.
THE POLICY IMPLICATION OF THE MODEL
The root of the problem is the big difference in income between the modern industrial and rural sectors. The former often go far beyond the clearing levels of the market for different restructuring measures. The long-term solution to the problem is that of adopting urban as well as rural policy that reduces the real income gaps between the two areas. From a political point of view, the H-T model has far-reaching consequences. It can be applied to the development of policies to promote urban development and industrial employment. The effect would be to improve urban employment’s subjective productivity.
CRITICS OF THE MODEL
Internal migration, according to the Todaro Paradox, can be harmful because it exacerbates urban unemployment. Given high unemployment rates and significant migration to cities in developing countries, this idea has undoubtedly inspired many governments to implement restrictive policies, despite the fact that the empirical validity of the Harris-Todaro model and the Todaro paradox is not well established. In any case, the Harris-Todaro model suffers from theoretical oversimplifications, several of which are likely to exaggerate the relationship between migration and urban unemployment. Six major points are raised in the criticisms:
1. The Harris-Todaro framework is only a static model describing migration, which is a dynamic phenomenon by nature.Even though the model can be thought of as representing a steady state equilibrium, this is a limitation
2. .Furthermore, the formalization is made in a partial equilibrium context which greatly weakens the justifications for policy recommendations.
3. Important aspects are absent from the standard Harris-Todaro model, including the probable heterogeneity of migrants which is not accounted for, risk aversion which could dampen migration incentives and render the Todaro paradox even less likely to occur, the possibility of job search in the urban area from the rural area, the possibility of return migration, or the existence of rural unemployment.In fact, the Harris-Todaro is almost silent about what happens in the rural areas.
4. The job rationing mechanism or hiring model hypothesized is not realistic.In particular, assuming random job selection in each period overestimates the likelihood of finding a job.
5. Stiglitz (1974) suggests that the employment probability might vary in a non-monotonic way with the duration of the stay in the city: it could increase in the first periods when migrants form social networks in the city, and then decrease in the later periods because of deteriorating human capital or because of bad signaling.
6. The Harris-Todaro model assumes that the urban wage is exogenously set above the endogenous rural wage since it must be that w > f’R(LR) for (2.3) to hold.The assumption that wages are high find several explanations ranging from the existence of trade unions to the agglomeration of economic activities.
Given these criticisms, the policy implications of the Harris-Todaro model — namely, limiting rural-to-urban migration — are much weaker. Several factors, in particular, qualify the justifications for restrictive migration policies. To begin, Todarian models only consider urban labor markets, whereas national governments should consider whether overall national employment (including rural areas) has improved. Second, as Stark (1991) observed, in a general equilibrium perspective, labor migration between rural and urban areas may reflect a market disequilibrium. It cannot be ruled out that migration has a positive impact on rural areas, possibly by increasing productivity, allowing exchanges with urban areas, and generating income for rural development. Fourth, restrictions on rural-urban migration could be extremely detrimental. We have seen that, from the perspective of the Lewis model, migration controls are labor market constraints that may prevent developing countries from launching labor-intensive industries that could alleviate poverty. Last but not least, mobility is a fundamental human right, and denying it is difficult to justify. The only economic justification for restricting migration flows is that migrants do not contribute to the economy.
CONCLUSIONS
This survey has reviewed theoretical and empirical models of internal migration in developing countries. On the big question — should rural to urban migration be discouraged, tolerated, or encouraged — the broad assessment is that restrictions in general are not desirable.In principle, the Todarian models can be used for policy analysis in situations where urban unemployment arising from rapid rural to urban migration is a concern. However, the empirical literature has not been convincing in assessing whether the conditions formed has also been complex so that these tests are no more convincing than the tests for the Todaro paradox were met in the real world. Empirically testing the Harris-Todaro the conditions for the Todaro paradox to hold.
microeconomic evidence consistent with the migration incentives present in the Harris- Todaro model, measuring for instance how rural dwellers respond to an increase in the wage differential. But this type of evidence does not provide a real test of the link between urban unemployment and migration. In other words, the validity of the model has not been clearly established even though it certainly influenced policies for decades.
Many countries have implemented policies aimed at forbidding migration from rural to urban areas. In South Africa, the Apartheid system (1948-1994) used extreme controls to monitor what was meant to be the temporary migration of rural workers to cities. In Indonesia, the ‘transmigration program’, a policy of resettlement from high to low- density areas has been implemented over several decades, resulting in the relocation of more than eight million people between 1969 and 1995 (Humanitarian Policy and Conflict Research, 2002). Similarly, in China, the Hukou or household registration system initiated in 1955 required that all residents live in the places where they were born and obtain permissions to move. Until the 1970s, migrants were even transferred back to their village in order to prevent ‘over- urbanization’. Some of these programs did meet their objectives of restricting rural to urban migration, but very few have been subjected to a rigorous analysis of their welfare costs. Au and Henderson (2006)’s empirical finding suggest that migration restrictions in China have maintained surplus labor in rural areas and led to insufficient agglomeration of economic activity in cities, resulting in GDP losses.
Name :Okaforukwu chizaram sandra
Reg no : 2017/249551
E-mail: okagrt01@gmail.com
Blog address : sandraokaforukwu@blogspot.com
THE HARRIS-TODARO MODEL
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is a 1970s economic model used in development economics and welfare economics to describe some of the problems surrounding rural-urban migration. The model’s key assumption is that migration decisions are based on projected income differentials between rural and urban areas rather than simply wage differentials. This implies that rural-urban migration can be economically acceptable in a context of high urban unemployment if projected urban income exceeds expected rural income. A new pattern of economic development that is relevant for labor surplus nations such as India has been developed by J. R. Harris and M. P. Todaro. The model focuses on labor migration from rural to urban areas, which is caused by certain incentives. Under this model, migrant employees are mainly involved in a lottery of high-paid jobs in cities. For each job created, more than one worker may migrate, which would result in a loss of output if migrants take some family members into the urban zone.
Assumption of the model .
The formal statement of the equilibrium condition of the Harris–Todaro model is as follows:
Let wr be the wage rate (marginal productivity of labor) in the rural agricultural sector.
Let le be the total number of available jobs in the urban sector, which should be equal to the number of urban employees employed.
Let lus be the total number of job seekers, employed and unemployed, in the urban sector.
Let wu be the wage rate in the urban sector, which the government might likely set with a minimum wage rule.
Rural-to-urban migration will occur if and only if the following conditions are met:
Rural to urban migration will take place if:
wrle/lus(wu)
At equilibrium,
wr=le/lus(wu)
The ratio of available jobs to total job seekers provides the likelihood that any person moving from the agricultural sector to the urban sector will be able to find employment. As a result, in equilibrium, the agricultural wage rate equals the estimated urban wage rate, which is calculated by multiplying the urban wage by the job rate.
Internal Migration:
The model explains why the high observed levels of small-scale urban migration in most developing countries are economically quite natural. In this model, the main motivating force behind migration is the expected real wage differential between urban and rural areas. First, the potential migrant calculates the actual revenue for a job in the urban area with his current endeavor. Then he compares the expected revenue to what he hopes to get in rural areas. His decision to migrate depends on the difference.
800 = 0.4 x 2000
If the likelihood was 0.8, the anticipated income would be 1600 (= 0.8 x 2000). (Naturally, the costs of transfer may be added to this one.) The model thus focuses on the role of economic stimulus in the decision on migration. Migration in any given time then depends on three factors:
1. The salary gap between urban and rural areas,
2. The rate of urban work and
3. The receptivity of potential migrants to the opportunities created as a result.
Theoretical Implication of the Model:
The cost of opportunities and the value in the next best alternative use is an important part of the social cost of each input. Work hired for a formal urban sector project could also be drawn from the informal urban sector. Some analysts think that the wage paid to incidental farm workers is a good measure of the social cost of unqualified labor. However, this measure probably underpins the true social cost, which other compounds are likely to be significant, although a good indicator of the yield foregone by labor reallocation. In an analysis of the labor reallocation that is likely to take place during eco-work, the Harris-Todaro model integrates both forces.
The Policy Implications of the Model:
The root of the problem is the big difference in income between the modern industrial and rural sectors. The former often go far beyond the clearing levels of the market for different restructuring measures. The long-term solution to the problem is that of adopting urban as well as rural policy that reduces the real income gaps between the two areas. From a political point of view, the H-T model has far-reaching consequences. It can be applied to the development of policies to promote urban development and industrial employment. The effect would be to improve urban employment’s subjective productivity.
Critics of the model
Internal migration, according to the Todaro Paradox, can be harmful because it exacerbates urban unemployment. Given high unemployment rates and significant migration to cities in developing countries, this idea has undoubtedly inspired many governments to implement restrictive policies, despite the fact that the empirical validity of the Harris-Todaro model and the Todaro paradox is not well established. In any case, the Harris-Todaro model suffers from theoretical oversimplifications, several of which are likely to exaggerate the relationship between migration and urban unemployment. Six major points are raised in the criticisms:
1. The Harris-Todaro framework is only a static model describing migration, which is a dynamic phenomenon by nature.Even though the model can be thought of as representing a steady state equilibrium, this is a limitation
2. .Furthermore, the formalization is made in a partial equilibrium context which greatly weakens the justifications for policy recommendations.
3. Important aspects are absent from the standard Harris-Todaro model, including the probable heterogeneity of migrants which is not accounted for, risk aversion which could dampen migration incentives and render the Todaro paradox even less likely to occur, the possibility of job search in the urban area from the rural area, the possibility of return migration, or the existence of rural unemployment.In fact, the Harris-Todaro is almost silent about what happens in the rural areas.
4. The job rationing mechanism or hiring model hypothesized is not realistic.In particular, assuming random job selection in each period overestimates the likelihood of finding a job.
5. Stiglitz (1974) suggests that the employment probability might vary in a non-monotonic way with the duration of the stay in the city: it could increase in the first periods when migrants form social networks in the city, and then decrease in the later periods because of deteriorating human capital or because of bad signaling.
6. The Harris-Todaro model assumes that the urban wage is exogenously set above the endogenous rural wage since it must be that w > f’R(LR) for (2.3) to hold.The assumption that wages are high find several explanations ranging from the existence of trade unions to the agglomeration of economic activities.
Given these criticisms, the policy implications of the Harris-Todaro model — namely, limiting rural-to-urban migration — are much weaker. Several factors, in particular, qualify the justifications for restrictive migration policies. To begin, Todarian models only consider urban labor markets, whereas national governments should consider whether overall national employment (including rural areas) has improved. Second, as Stark (1991) observed, in a general equilibrium perspective, labor migration between rural and urban areas may reflect a market disequilibrium. It cannot be ruled out that migration has a positive impact on rural areas, possibly by increasing productivity, allowing exchanges with urban areas, and generating income for rural development. Fourth, restrictions on rural-urban migration could be extremely detrimental. We have seen that, from the perspective of the Lewis model, migration controls are labor market constraints that may prevent developing countries from launching labor-intensive industries that could alleviate poverty. Last but not least, mobility is a fundamental human right, and denying it is difficult to justify. The only economic justification for restricting migration flows is that migrants do not contribute to the economy.
Conclusions
This survey has reviewed theoretical and empirical models of internal migration in developing countries. On the big question — should rural to urban migration be discouraged, tolerated, or encouraged — the broad assessment is that restrictions in general are not desirable.In principle, the Todarian models can be used for policy analysis in situations where urban unemployment arising from rapid rural to urban migration is a concern. However, the empirical literature has not been convincing in assessing whether the conditions formed has also been complex so that these tests are no more convincing than the tests for the Todaro paradox were met in the real world. Empirically testing the Harris-Todaro the conditions for the Todaro paradox to hold.
microeconomic evidence consistent with the migration incentives present in the Harris- Todaro model, measuring for instance how rural dwellers respond to an increase in the wage differential. But this type of evidence does not provide a real test of the link between urban unemployment and migration. In other words, the validity of the model has not been clearly established even though it certainly influenced policies for decades.
Many countries have implemented policies aimed at forbidding migration from rural to urban areas. In South Africa, the Apartheid system (1948-1994) used extreme controls to monitor what was meant to be the temporary migration of rural workers to cities. In Indonesia, the ‘transmigration program’, a policy of resettlement from high to low- density areas has been implemented over several decades, resulting in the relocation of more than eight million people between 1969 and 1995 (Humanitarian Policy and Conflict Research, 2002). Similarly, in China, the Hukou or household registration system initiated in 1955 required that all residents live in the places where they were born and obtain permissions to move. Until the 1970s, migrants were even transferred back to their village in order to prevent ‘over- urbanization’. Some of these programs did meet their objectives of restricting rural to urban migration, but very few have been subjected to a rigorous analysis of their welfare costs. Au and Henderson (2006)’s empirical finding suggest that migration restrictions in China have maintained surplus labor in rural areas and led to insufficient agglomeration of economic activity in cities, resulting in GDP losses.
NAME: ANACHUNAM DABERECHI MARYJANE
REG NO: 2017/241448
EMAIL: daberechi.anachunam.241448@unn.edu.ng
BLOG: maryjaneanachunam.wordpress.com
AN ESSAY ON LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY) AND HARRIS-TODARO MODEL OF MIGRATION
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
William Arthur Lewis, with his most famous published work, “Economic Development with Unlimited Supplies of Labour” (Manchester School, May 1954) and “The Theory of Economic Growth” (Allen and Unwin, 1955), made a great contribution to the theories of economic development. Based on his findings, Ranis and Fei succeeded to extend the initial Lewis’ model and assessed the changes in the agricultural and industrial labour in more detail. (Ukessays, 2018)
The central idea behind the Lewis model is fairly simple. Lewis divided the labour force into two differentiated groups – “subsistence sector” and “capitalist sector” where the former is assumed to contain unlimited supply and consequently, a pool of surplus labour[1] that sets labour-supply conditions for the latter. The concept of a dual economy is heavily criticised.(Ukessays, 2018)
Subsequently, Ranis’ and Fei’s extension to Lewis’ model can be analysed. They observed the model by reading it from left to right and assessed the changes in the output and wage as more and more people moved from agriculture to the industry. A new concept was added – namely, disguised unemployment, which appears in the traditional subsistence sector. The marginal product of labour, which is observed as the slope of the production function, in the agricultural sector is lower than in industry (Ukessays, 2018)
The Lewis-Ranis-Fei model
The Lewis (1954) theory of dualistic economic development provides the seminal
contribution to theories of economic development particularly for labour-surplus and
resource-poor developing countries. In the Lewis theory, the economy is assumed to
comprise the agricultural and non-agricultural sectors. The agricultural sector is
assumed to have vast amounts of surplus labour that result in an extremely low, close to
zero, marginal productivity of labour. The agricultural wage rate is presumed to follow
the sharing rule and be equal to average productivity, which is also known as the
institutional wage. The non-agricultural sector has an abundance capital and resources
relative to labour. It pursues profit and employs labour at a wage rate higher than the
agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150). The
non-agricultural sector accumulates capital by drawing surplus labour out of the
agricultural sector. The expansion of the non-agric ultural sector takes advantage of the
infinitely elastic supply of labour from the agricultural sector due to its labour surplus.
When the surplus labour is exhausted, the labour supply curve in the non-agricultural
sector becomes upward-sloping.
Ranis and Fei (1961) formalised Lewis’s theory by combining it with Rostow’s
(1956) three “linear-stages-of-growth” theory. They disassembled Lewis’s two-stage
economic development into three phases, defined by the marginal productivity of
agricultural labour. They assume the economy to be stagnant in its pre-conditioning
stage. The breakout point marks the creation of an infant non-agricultural sector and the
entry into phase one. Agricultural labour starts to be reallocated to the non-agricultural
sector. Due to the abundance of surplus agricultural labour, its marginal productivity is
extremely low and average labour productivity defines the agricultural institutional
wage. When the redundant agricultural labour force has been reallocated, the
agricultural marginal productivity of labour starts to rise but is still lower than the
institutional wage. This marks the shortage point a t which the economy enters phase two of development. During phase two the remaining agricultural unemployment is
gradually absorbed. At the end of this process the economy reaches the
commercialisation point and enters phase three where the agricultural labour market is
fully commercialised ( Marco G. Ercolani and Zheng Wei, 2010).
To conclude, having shown the main ideas behind the Lewis-Ranis-Fei model . Using Nigeria as a case study, it is important to invest in both sectors in order to remain on the balanced growth path and maintain the rate of industrialization. The existence of surplus labour in agriculture allows the industry to continue to pay the institutional wage and therefore enjoy further profits and continued investment. At the same time, as more and more people are moving away from agriculture, there will be some amount of agricultural surplus that can be used up to fuel further development. This process continues until the surplus labour is absorbed. Hence, saving and investment are a crucial part in the Lewis-Ranis-Fei to support economic development (Ukessays, 2018).
HARRIS-TODARO MODEL OF MIGRATION
John R. Harris and Michael P. Todaro presented the work Two sector modelin American
Economic Association, 1970. This model is an important study in the field encompassing rural-urban
migration.
The main idea of the Harris-Todaro model is that labour migration in underdeveloped countries is due to rural-urban differences in average expected wages rather than actual wages. The migrants consider the various opportunities of employment available to them in rural and urban sectors and choose the one that maximises their expected wages from migration (Divisha s, 2017).
The minimum urban wage is substantially higher than the rural wage. If more employment opportunities are created in the urban sector at the minimum wage, the expected will rise and rural-urban migration will increase. Expected wages are measured by the difference in real urban income and rural agricultural income and the probability of a migrants getting an urban job.
In fact, a migrant compares his expected income for a given time horizon in the urban sector with his prevailing average rural income and migrates if the former is more than the latter.
Thus migration in the Harris-Todaro modal is viewed as the wage or income gap between the urban and the rural sectors. But all migrants cannot be absorbed in the urban sector at high wages. Many fail to find a job and get employment in the informal urban sector at wages which are even lower than in the rural sector. Thus they join the queue of the underemployed or disguised unemployed in the urban sector (Divisha s, 2017)
Assumptions of the Model:
The Harris-Todaro model is based on the following assumptions:
1. There are two sectors in the economy – the rural or agricultural sector (A) and the urban or manufacturing sector (M).
2. The model operates in the short run.
3. The marginal production of labour in agriculture (MPLA) and of industry (MPLM) are determined by their respective technologies.
4. Capital is available in fixed quantities in the two sectors.
5. There are L workers in economy with LA and LM numbers employed in the rural and urban sectors respectively.
6. The number of urban jobs available (LM) is exogenously fixed. In the rural sector some work is always available. Therefore, the total urban labour force LM comprises L-LAalong with an available supply of rural migrants.
7. The urban wage is fixed at WM and the rural wage at WA, WM>WA.
8. The rural wage equals the rural marginal product of labour and the urban wage is exogenously determined.
9. Rural-urban migration continues so long as the expected urban real income is more that the real agricultural income.
. At the core of the Harris-Todaro model were the following features. First, real wages (adjusted for cost-of-living differences) are higher in urban formal-sector jobs than in rural traditional-sector jobs. Second, to be hired for a formal-sector job, one has to be physically present in the urban areas where the formal-sector jobs are located. Third, and as a consequence of the first two features, more workers search for formal-sector jobs than are hired, employers hire some of the job seekers but not all of them, and those not hired end up unemployed. Fourth, for equality to be maintained between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting is characterized by urban unemployment. And fifth, any temporary difference in the expected wages between one sector and another is eroded as workers migrate from the low-expected-wage labor market to the high-expected-wage labor market.
Starting from the assumption that migration is based primarily on privately rational economic calculations despite the existence of high urban unemployment, the Todaro model postulates that migration proceeds in response to urban-rural differences in expected rather than actual earnings. The fundamental premise is that as decision-makers migrants consider the various labor-market opportunities available to them as, say, between the rural and urban sectors, choosing the one that maximizes their “expected” gains from migration. Expected gains are measured by the difference in real incomes between rural and urban work opportunities and the probability of a new migrant’s obtaining urban job. The “thought process” of the Todaro model can be explained as follows. Suppose the average unskilled or semiskilled rural worker has a choice between being a farm laborer (or working his own land) for an annual average real income of, say, 50 units per year, and migrating to the city where a worker with his skill or educational background can obtain wage employment yielding an annual real income of, say, 100 units. The worker should seek the higher-paying urban job. It is important to recognize, however, that these migration models were developed largely in the context of advanced industrial economies and, as such, implicitly assumed the existence of full or near-full employment in urban areas. In a full-employment environment the decision to migrate can in fact be predicated solely on securing the highest-paying job wherever it becomes available, other factors being held constant. Simple economic theory would then indicate that such migration should lead to a reduction in wage differentials through geographic changes in supply and demand, both in areas of out-migration (where incomes rise) and in points of in-migration (where they fall). Unfortunately, such an analysis is not very realistic in the context of the institutional and economic framework of most Third World nations. First of all, these countries are beset by a chronic and serious problem of urban surplus labor, so that many migrants cannot expect to secure high-paying urban jobs immediately upon arrival. In fact, it is much more likely that upon entering the urban labor market many migrants will either become totally unemployed or will seek casual and parttime employment in the urban traditional sector for some time.
Consequently, in his decision to migrate the individual must in effect balance the probabilities and risks of being unemployed or underemployed for a considerable period of time against the positive urban-rural real-income differential. That it is possible for our hypothetical migrant to earn twice as much annual real income in an urban area as in his rural environment may be of little consequence if his actual probability of securing the higher-paying job within a year is one chance in five. In such a situation the migrant’s actual probability of being successful in securing the higherpaying urban job is 20%, so that his “expected” urban income for the one-year period is in fact 20 units, not the 100 units that a migrant in a full-employment urban environment might expect to receive. Thus, with a one-period time horizon and a probability of success of 20% it would be irrational for this migrant to seek an urban job even though the differential between urban and rural earnings capacity is 100%. On the other hand, if the probability of success were, say, 60%, so that the expected urban income is 60 units, it would be entirely rational for such a migrant with his one-period time horizon to try his luck in the urban job “lottery” even though urban unemployment may be extremely high. Returning now to the more realistic situation of longer time horizons for potential migrants, especially considering that the vast majority are between the ages of 15 and 24, It is argued that the decision to migrate should be represented on the basis of a “permanent income” calculation. If the migrant anticipates a relatively low probability of finding regular wage employment in the initial period but expects this probability to increase over time as he is able to broaden his urban contacts, then it would still be rational for him to migrate even though expected urban income during the initial period or periods might be lower than expected rural income. As long as the present value of the net stream of expected urban income over the migrant’s planning horizon exceeds that of the expected rural income, the decision to migrate is economically justified. Rather than wage adjustments bringing about an equilibrium between urban and rural incomes, as would be the case in a competitive model, it is further argued that rural-urban migration itself must act as the ultimate equilibrating force. With urban wages assumed to be inflexible in a downward direction, rural and urban “expected” incomes can be equalized only by falling urban job probabilities resulting from rising urban unemployment. For example, if average rural wages are 60 units and urban wages are institutionally set at a level of 120 units, then in a one-period model a 50% urban unemployment rate would be necessary to vitiate the private profitability of further migration. Since expected incomes are defined in terms of both wages and employment probabilities, argument is that it is not only possible but likely to have continued migration in spite of the existence of sizable rates of urban unemployment. In the above numerical example, migration would continue even if the urban unemployment rate were 30 or 40%.
Conclusion
In the Harris–Todaro model, the rising urban wage pushes up the expected wage in the urban sector and consequently encourages workers to migrate from the rural sector to the urban sector. If, in the resulting migration, there are more workers than the number of job opportunities created in the urban sector, some will necessarily be unemployed which is the case in Nigeria when people leave rural areas to go to bigger cities like Lagos and end up being unemployed. Occasionally, the increase in unemployment lowers the per-capita income level before the capital is accumulated. This phenomenon is referred to as Todaro paradox.
If there is a necessary and sufficient condition under which the increase in capital stock does not increase unemployment in the urban area. This condition concerns the relationship between the institutionally and legally set minimum wage in the urban area and increased agricultural productivity in the rural area, that is there is an institutionally set minimum wage in urban areas (eg Lagos) that can’t be manipulated while the government works harder to develop the agricultural sector. Unsurprisingly, if agricultural productivity rises and income in the rural area increases, rural workers have no need to migrate to the urban sector to find jobs and face the risk of unemployment.
Ngwu Osita Enoch
2017/242022
Ositangwu95@gmail.com
Education Economics
Lewis-Fei-Ranis Model (Surplus Labour Theory)
INTRODUCTION
The Lewis (1954) theory of dualistic economic development provides the seminal contribution to theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150).
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output.
HISTORY OF SURPLUS LABOUR THEORY
The historical emergence of surplus labour is, according to Marx, also closely associated with the growth of trade (the economic exchange of goods and services) and with the emergence of a society divided into social classes. As soon as a permanent surplus product can be produced, the moral-political question arises as to how it should be distributed, and for whose benefit surplus-labour should be performed. The strong defeat the weak, and it becomes possible for a social elite to gain control over the surplus-labour and surplus product of the working population; they can live off the labour of others.
Labour which is sufficiently productive so that it can perform surplus labour is, in a cash economy, the material foundation for the appropriation of surplus-value from that labour. How exactly this appropriation will occur, is determined by the prevailing relations of production and the balance of power between social classes.
THE CONCEPT OF SURPLUS LABOUR
The concept of surplus labour is widely discussed among development economics but its specific meaning needs to be defined, especially in technical terms, as many neoclassical economists still doubt the existence of surplus labour in an economy. Defining the source and the extent of surplus labour is then a prerequisite for further study. This section considers the various definitions of surplus labour and clarifies them.
The simple definition of surplus labour implies the existence of a point at which the marginal product of labour becomes zero and labour can be transferred out of the traditional sector without reducing the quantity of output, as noted by Wellisz (1968: 22): The (disguised-unemployment or the Unlimited Supply of Labour) hypothesis claims that in poor, densely populated countries, more people are employed than needed to produce the prevailing output with the existing techniques and the existing supply of non-labour inputs. The ‘surplus’ labour constitutes ‘hidden’ or ‘disguised’ unemployment. Many of the proponents of the hypothesis make the further claim that agricultural output will not decrease, and industrial output will increase, if measures are taken to re-allocate labour from subsistence agriculture (where the surplus is supposed to exist) to industry (where there is no surplus labour).
ASSUMPTIONS OF THE LEWIS-FEI-RANIS MODEL
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion. Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc of those in the capitalist sector. Lewis in fact so much fascinated by the higher propensity to save of the capitalist sector that he even advocates a transfer of income from the subsistence sector to the capitalist sector. He feels that steps have to be taken to raise the rate of savings from 10% to 15% if the development of the economy has to be smooth.
COMPARISONS OF THE THEORY OF SURPLUS LABOUR
Surplus labor models are a class of models for analyzing developing countries as dual economies with a modern capitalist sector and a traditional precapitalist sector. The precapitalist sector is viewed as having a large pool (“unlimited supplies”) of labor from which the capitalist sector may draw at constant cost. While these models are often described as finding their inspiration in the old classical economists and Karl Marx, the 1954 model of W. Arthur Lewis and its extensions are technically more neoclassical than truly classical. The Lewis model was elaborated and formalized by many others, most notably John C. H. Fei and Gustav Ranis (1964), with important theoretical contributions from Amartya Sen (1966) and Stephen Marglin (1976). Questions have been raised as to the historical relevance of the neoclassical labor surplus models (Schultz 1964; Myint 1971; Arrighi 1973; Williamson 1985).
CRITICISM
Lewis-Fei-Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.
It has been asserted that the Lewis-Fei-Ranis model did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed.
The Lewis-Fei-Ranis model say, “It has been argued that money is not a simple substitute for physical capital in an aggregate production function. There are reasons to believe that the relationship between money and physical capital could be complementary to one another at some stage of economic development, to the extent that credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry.” This indicates that in the process of development they neglect the role of money and prices. They fail to differ between wage labor and household labor, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
The Lewis-Fei-Ranis model assume that MPPL is zero during the early phases of economic development, which has been criticized by Harry T.Oshima and some others on the grounds that MPPL of labor is zero only if the agricultural population is very large, and if it is very large, some of that labor will shift to cities in search of jobs. In the short run, this section of labor that has shifted to the cities remains unemployed, but over the long run it is either absorbed by the informal sector, or it returns to the villages and attempts to bring more marginal land into cultivation.
CONCLUSIONS AND RECOMMENDATIONS
Lewis-Fei-Ranis model can be grouped under three instruments; labour force, capital accumulation and integration to the world economy. The main focus in Lewis-Fei-Ranis model was on the reallocation of labour until the turning point is reached, i.e., the time when labour reallocation has outstripped population growth long enough for dualism to atrophy and the economy to become fully commercialized. The model implicitly showed that the traditional sector do not produce any capital accumulation as they are very small and poor. Trade between agriculture and industry as the supply or marketed food falls or the demand for it rises, or both causing the value of marginal product of labour in agriculture to rise.
In sum up, there are several weaknesses of Lewis-Fei-Ranis model that are underlined by many economists. The first and most important is that if marginal productivity of labour in agricultural sector is negligible, zero. Schultz (1964), Sen (1967), Harris and Todaro (1970) and Fields (1975) proved with their empirical results that this cannot happen in agriculture sector. It is obvious that there is a disguised unemployment in agriculture. Particularly, agricultural sector should be considered in two ways: during harvest time and post harvest. If the agricultural surplus is solely considered for the regions where there can be seen harsh winter conditions, it could be accepted of the doctrine of Lewis, otherwise it is irrelevant to say there is a zero marginal productivity for agriculture labours. Also, there are positive opportunity costs, e.g. loss of crops in times of peak harvesting season, labour transfer will reduce agricultural output.
Second, the model employed mostly for the closed economies and gave relatively less information on open economies. Lewis-Fei-Ranis model was criticized as it neglects international trade. The model was to a certain extent supply-oriented, which does not foresee any trade between capital and other sectors. Also it was criticized advocating industrialization and ignores agriculture. If a section of the profit made by the capitalists is not devoted to agricultural development, the process of industrialization would be jeopardized.
Third, Lewis-Fei-Ranis model believed that the more the rate of labour transfer to urban employment, the more the economic grows and more jobs are created. But this is not a common applicable in practice if industrial development involves more intensive use of capital than labour, then the flow of labour from agriculture to industry will simply create more unemployment.
Fourth, the Lewis-Fei-Ranis model would imply that aggregate living standards should not rise as rapidly as productivity until surplus labour is eliminated. However, the evidence on living standards in Latin America during the twentieth century indicates that these have risen in line with productivity, and that the ‘indirect’ components of the real wage (health and education) have actually risen more rapidly that average incomes.
Fifth, the Lewis-Fei-Ranis model stated the wage in industrial sector does not increase before labour surplus is absorbed. But this does not happen in any way in reality as the development of the urban, or industrial, or formal sector can itself lead to the creation of pressure groups and swing the balance of power towards those in that sector, to the detriment of those remaining outside it. The wage in the industrial sector in reality outstandingly rises long before the labour surplus is absorbed.
Haven tested the Lewis-Ranis-Fei theory for developing economy over 1965-2002 we have found that the developing economic growth is mainly attributable to the development of the non-agricultural sector. This is driven by rapid capital accumulation as well as employment growth. The reallocation of labour away from agriculture has made a positive net contribution to rapid economic of the developing economy. The rise in the marginal productivity of agricultural labour indicates the absorption of redundant agricultural labour since the 1978 Economic Reform. However, the marginal productivity of agricultural labour is still lower than the initial low average productivity of agricultural labour. This implies the continued existence of disguised agricultural unemployment. This suggests that the these developing economy has entered the Lewis-Ranis-Fei phase two of development but has not yet achieved phase three. The continuing widening productivity gap between the two sectors calls for the removal of market restrictions and government interventions so as to allow the continued absorption of surplus labour. Several policy recommendations are tentatively suggested. First and foremost, more effort should be made in promoting employment to effectively absorb the remaining labour surplus and promote economic development. This can be achieved by further relaxing the Hukou restrictions on migration, increasing labour market flexibility and improving the allocative efficiency of labour. It can also be achieved by encouraging the development of private enterprise to create more employment opportunities. Second, Government of developing economy should continue implementing the Sunshine Policy, initiated in 2003, designed to provide rudimentary job training, recruitment information and information about conditions in the destination cities to rural migrants. This will not only help facilitate employment of rural migrants but also satisfy the increasing demand for skilled labour in the growing non-agricultural sector. Third, agriculture could be promoted by tax breaks, direct subsidies and most importantly, by removing price controls on agricultural products. Agriculture could thus be commercialised and the economy would enter phase three of economic development.
REFERENCE
Sadik-Zada, Elkhan Richard (2020). “Natural resources, technological progress, and economic modernization”. Review of Development Economics. doi:10.1111/rode.12716.
“Economnics4Development Website”. Surplus Labor Model of Economic Development. Archived from the original on 16 October 2011. Retrieved 12 October 2011.
Thirlwall, A.P (2006). Growth and Development: With Special Reference to Developing Economies. Palgrave Macmillan. ISBN 1-4039-9600-8.
Subrata, Ghatak (2003). Introduction to Developmental Economics. London: Routledge. ISBN 0-415-09722-3.
“Ranis-Fei model vs. Lewis Model” (PDF). Developmentafrique.com. Archived from the original (PDF) on 30 May 2012. Retrieved 14 October 2011.
“American Economic Review”. The Ranis-Fei Model of Economic Development: Comment. 53: 448–452. JSTOR 1809172.
Ranis, Gustav. “Paper on Labor Surplus Economies” (PDF). Retrieved 4 October 2011.
J. Choo, Hakchung. “American Economic Review”. On the Empirical Relevancy of the Rans-Fei Model of Economic Development: Comment. 61: 695–703. JSTOR 1811863.
Misra, Puri, S.K, V.K (2010). Economics of Development and Planning. Mumbai, India: Himalaya Publishing House. pp. 270–279. ISBN 978-81-8488-829-4.
Ngwu Osita Enoch
2017/242022
Ositangwu95@gmail.com
Education Economics
Lewis-Fei-Ranis Model (Surplus labour theory)
INTRODUCTION
The Lewis (1954) theory of dualistic economic development provides the seminal contribution to theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150).
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output.
HISTORY OF SURPLUS LABOUR THEORY
The historical emergence of surplus labour is, according to Marx, also closely associated with the growth of trade (the economic exchange of goods and services) and with the emergence of a society divided into social classes. As soon as a permanent surplus product can be produced, the moral-political question arises as to how it should be distributed, and for whose benefit surplus-labour should be performed. The strong defeat the weak, and it becomes possible for a social elite to gain control over the surplus-labour and surplus product of the working population; they can live off the labour of others.
Labour which is sufficiently productive so that it can perform surplus labour is, in a cash economy, the material foundation for the appropriation of surplus-value from that labour. How exactly this appropriation will occur, is determined by the prevailing relations of production and the balance of power between social classes.
THE CONCEPT OF SURPLUS LABOUR
The concept of surplus labour is widely discussed among development economics but its specific meaning needs to be defined, especially in technical terms, as many neoclassical economists still doubt the existence of surplus labour in an economy. Defining the source and the extent of surplus labour is then a prerequisite for further study. This section considers the various definitions of surplus labour and clarifies them.
The simple definition of surplus labour implies the existence of a point at which the marginal product of labour becomes zero and labour can be transferred out of the traditional sector without reducing the quantity of output, as noted by Wellisz (1968: 22): The (disguised-unemployment or the Unlimited Supply of Labour) hypothesis claims that in poor, densely populated countries, more people are employed than needed to produce the prevailing output with the existing techniques and the existing supply of non-labour inputs. The ‘surplus’ labour constitutes ‘hidden’ or ‘disguised’ unemployment. Many of the proponents of the hypothesis make the further claim that agricultural output will not decrease, and industrial output will increase, if measures are taken to re-allocate labour from subsistence agriculture (where the surplus is supposed to exist) to industry (where there is no surplus labour).
ASSUMPTIONS OF THE LEWIS-FEI-RANIS MODEL
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion. Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc of those in the capitalist sector. Lewis in fact so much fascinated by the higher propensity to save of the capitalist sector that he even advocates a transfer of income from the subsistence sector to the capitalist sector. He feels that steps have to be taken to raise the rate of savings from 10% to 15% if the development of the economy has to be smooth.
COMPARISONS OF THE THEORY OF SURPLUS LABOUR
Surplus labor models are a class of models for analyzing developing countries as dual economies with a modern capitalist sector and a traditional precapitalist sector. The precapitalist sector is viewed as having a large pool (“unlimited supplies”) of labor from which the capitalist sector may draw at constant cost. While these models are often described as finding their inspiration in the old classical economists and Karl Marx, the 1954 model of W. Arthur Lewis and its extensions are technically more neoclassical than truly classical. The Lewis model was elaborated and formalized by many others, most notably John C. H. Fei and Gustav Ranis (1964), with important theoretical contributions from Amartya Sen (1966) and Stephen Marglin (1976). Questions have been raised as to the historical relevance of the neoclassical labor surplus models (Schultz 1964; Myint 1971; Arrighi 1973; Williamson 1985).
CRITICISM
Lewis-Fei-Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.
It has been asserted that the Lewis-Fei-Ranis model did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed.
The Lewis-Fei-Ranis model say, “It has been argued that money is not a simple substitute for physical capital in an aggregate production function. There are reasons to believe that the relationship between money and physical capital could be complementary to one another at some stage of economic development, to the extent that credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry.” This indicates that in the process of development they neglect the role of money and prices. They fail to differ between wage labor and household labor, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
The Lewis-Fei-Ranis model assume that MPPL is zero during the early phases of economic development, which has been criticized by Harry T.Oshima and some others on the grounds that MPPL of labor is zero only if the agricultural population is very large, and if it is very large, some of that labor will shift to cities in search of jobs. In the short run, this section of labor that has shifted to the cities remains unemployed, but over the long run it is either absorbed by the informal sector, or it returns to the villages and attempts to bring more marginal land into cultivation.
CONCLUSIONS AND RECOMMENDATIONS
Lewis-Fei-Ranis model can be grouped under three instruments; labour force, capital accumulation and integration to the world economy. The main focus in Lewis-Fei-Ranis model was on the reallocation of labour until the turning point is reached, i.e., the time when labour reallocation has outstripped population growth long enough for dualism to atrophy and the economy to become fully commercialized. The model implicitly showed that the traditional sector do not produce any capital accumulation as they are very small and poor. Trade between agriculture and industry as the supply or marketed food falls or the demand for it rises, or both causing the value of marginal product of labour in agriculture to rise.
In sum up, there are several weaknesses of Lewis-Fei-Ranis model that are underlined by many economists. The first and most important is that if marginal productivity of labour in agricultural sector is negligible, zero. Schultz (1964), Sen (1967), Harris and Todaro (1970) and Fields (1975) proved with their empirical results that this cannot happen in agriculture sector. It is obvious that there is a disguised unemployment in agriculture. Particularly, agricultural sector should be considered in two ways: during harvest time and post harvest. If the agricultural surplus is solely considered for the regions where there can be seen harsh winter conditions, it could be accepted of the doctrine of Lewis, otherwise it is irrelevant to say there is a zero marginal productivity for agriculture labours. Also, there are positive opportunity costs, e.g. loss of crops in times of peak harvesting season, labour transfer will reduce agricultural output.
Second, the model employed mostly for the closed economies and gave relatively less information on open economies. Lewis-Fei-Ranis model was criticized as it neglects international trade. The model was to a certain extent supply-oriented, which does not foresee any trade between capital and other sectors. Also it was criticized advocating industrialization and ignores agriculture. If a section of the profit made by the capitalists is not devoted to agricultural development, the process of industrialization would be jeopardized.
Third, Lewis-Fei-Ranis model believed that the more the rate of labour transfer to urban employment, the more the economic grows and more jobs are created. But this is not a common applicable in practice if industrial development involves more intensive use of capital than labour, then the flow of labour from agriculture to industry will simply create more unemployment.
Fourth, the Lewis-Fei-Ranis model would imply that aggregate living standards should not rise as rapidly as productivity until surplus labour is eliminated. However, the evidence on living standards in Latin America during the twentieth century indicates that these have risen in line with productivity, and that the ‘indirect’ components of the real wage (health and education) have actually risen more rapidly that average incomes.
Fifth, the Lewis-Fei-Ranis model stated the wage in industrial sector does not increase before labour surplus is absorbed. But this does not happen in any way in reality as the development of the urban, or industrial, or formal sector can itself lead to the creation of pressure groups and swing the balance of power towards those in that sector, to the detriment of those remaining outside it. The wage in the industrial sector in reality outstandingly rises long before the labour surplus is absorbed.
Haven tested the Lewis-Ranis-Fei theory for developing economy over 1965-2002 we have found that the developing economic growth is mainly attributable to the development of the non-agricultural sector. This is driven by rapid capital accumulation as well as employment growth. The reallocation of labour away from agriculture has made a positive net contribution to rapid economic of the developing economy. The rise in the marginal productivity of agricultural labour indicates the absorption of redundant agricultural labour since the 1978 Economic Reform. However, the marginal productivity of agricultural labour is still lower than the initial low average productivity of agricultural labour. This implies the continued existence of disguised agricultural unemployment. This suggests that the these developing economy has entered the Lewis-Ranis-Fei phase two of development but has not yet achieved phase three. The continuing widening productivity gap between the two sectors calls for the removal of market restrictions and government interventions so as to allow the continued absorption of surplus labour. Several policy recommendations are tentatively suggested. First and foremost, more effort should be made in promoting employment to effectively absorb the remaining labour surplus and promote economic development. This can be achieved by further relaxing the Hukou restrictions on migration, increasing labour market flexibility and improving the allocative efficiency of labour. It can also be achieved by encouraging the development of private enterprise to create more employment opportunities. Second, Government of developing economy should continue implementing the Sunshine Policy, initiated in 2003, designed to provide rudimentary job training, recruitment information and information about conditions in the destination cities to rural migrants. This will not only help facilitate employment of rural migrants but also satisfy the increasing demand for skilled labour in the growing non-agricultural sector. Third, agriculture could be promoted by tax breaks, direct subsidies and most importantly, by removing price controls on agricultural products. Agriculture could thus be commercialised and the economy would enter phase three of economic development.
REFERENCE
Sadik-Zada, Elkhan Richard (2020). “Natural resources, technological progress, and economic modernization”. Review of Development Economics. doi:10.1111/rode.12716.
“Economnics4Development Website”. Surplus Labor Model of Economic Development. Archived from the original on 16 October 2011. Retrieved 12 October 2011.
Thirlwall, A.P (2006). Growth and Development: With Special Reference to Developing Economies. Palgrave Macmillan. ISBN 1-4039-9600-8.
Subrata, Ghatak (2003). Introduction to Developmental Economics. London: Routledge. ISBN 0-415-09722-3.
“Ranis-Fei model vs. Lewis Model” (PDF). Developmentafrique.com. Archived from the original (PDF) on 30 May 2012. Retrieved 14 October 2011.
“American Economic Review”. The Ranis-Fei Model of Economic Development: Comment. 53: 448–452. JSTOR 1809172.
Ranis, Gustav. “Paper on Labor Surplus Economies” (PDF). Retrieved 4 October 2011.
J. Choo, Hakchung. “American Economic Review”. On the Empirical Relevancy of the Rans-Fei Model of Economic Development: Comment. 61: 695–703. JSTOR 1811863.
Misra, Puri, S.K, V.K (2010). Economics of Development and Planning. Mumbai, India: Himalaya Publishing House. pp. 270–279. ISBN 978-81-8488-829-4.
Ngwu Osita Enoch
2017/242022
Ositangwu95@gmail.com
Education Economics
Harris-Todaro Model of Migration
INTRODUCTION
Harris and Todaro work, is considered one of the starting points of the classic rural-urban migration theory. The hypothesis and predictions of Harris-Todaro model have been subjected to econometric evaluation and have been corroborated by several studies. The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migraton decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage. From this crucial assumption, as denominated by Harris-Todaro, is deduced that the migratory dynamics leads the economic system toward an equilibrium with urban concentration and high urban unemployment.
THE HARRIS-TODARO MODEL
Assumptions
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function: where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a < 1 are parametric constants. Both goods and labor markets are perfectly competitive. Nevertheless, there is segmentation in the labor market due to a high minimum urban wage politically determined. In the rural sector, the real wage, perfectly flexible, is equal to the marginal productivity of labor in this sectors where wa is the real wage and p is the price of the agricultural good, both expressed in units of manufactured good.
HARRIS-TODARO AGENT-BASED MODEL
Computational Implementation
Initially, workers are randomly placed in a square lattice with linear dimension L = 500. The reference values of the parameters used for these simulations are the same done to evaluate the equilibrium of the Harris-Todaro model, namely, Aa = 1.0, Am = 1.0, f = 0.3, a = 0.7, r = 1.0 and g = 1.0. The value of the minimum wage used is wm = 0.8 and the initial urban fraction of the total population is nu = 0.2, where nu = Nu/N is the normalized urban population also called urban share. The initial value nu = 0.2 is in agreement with historical data of developing economies. Given these parameters, one can calculate the vector which characterizes temporary equilibrium of the system by using eqs. (7 – 12). By using eq. (7), the employment level of the urban sector, Nm, is obtained. If nu Nm/N there will be a fraction of Nm/Nu workers employed, which earn the minimum wage, wi = wm, and (1-Nm/Nu) workers unemployed, which earn a wage wi = 0. Each worker can be selected to review his sectorial location with probability a, called activity. Therefore, in each time step only a fraction of workers becomes potential migrants, going through the sectorial location reviewing process. Potential migrants will determine their satisfaction level of being in the current sector by comparing their earnings, wi, among nearest neighbors. The potential migrant starts the comparison process with a initial satisfaction level si = 0. When wi > wneighbor the satisfaction level si is added in one unit; if wi < wneighbor, si is diminished in one unit; if wi = wneighbor, si does not change. After the worker has passed through the reviewing process his/her satisfaction level is checked. The migration will occur only if si < 0, what means that the worker's i earnings is less than the most of his/her nearest neighbors. After all the potential migrants complete the reviewing process and have decided migrate or not, a new configuration of the system is set. Therefore, once again a new temporary equilibrium of the system is calculated by using eqs. (8 – 12). The whole procedure is repeated until a pre-set number of steps is reached. It is important to emphasize that Nm is kept constant throughout the simulation. Its given by eq. (7) which depends on the technological parameters, a,Am, and the minimum wage, wm, which are constants too.
In this case, the differential of expected wages is negative. In an economy mainly rural (nu < 0:5), the transitional dynamics characterized by a continuous growth of population of the urban sector with a differential of expected wages relatively high is followed by the stabilization of rural-urban differential of expected wages. In other words, the generalized Harris-Todaro condition, eq. (15), arises as a long run equilibrium result of the agent-based migratory dynamics.
CONCLUSION
In this paper we developed and agent-based computational model which formalizes the rural-urban allocation of workers as a process of social learning by imitation. We analyze a two-sectorial economy composed by adaptative agents, i.e., individuals that grope over time for best sectorial location in terms of earnings. This search is a process of imitation of successful neighbor agents. The dispersed and non-coordinated individual migration decisions, made based on local information, generate aggregate regularities.
Firstly, the crucial assumption of Harris and Todaro, the principle that rural-urban migration will occur while the urban expected wage exceed the rural wage, comes out as spontaneous upshot of interaction among adaptative agents.
Secondly, the migratory dynamics generated by agents that seek to adaptate to the economic environment that they co-create leads the economy toward a long run equilibrium characterized by urban concentration with urban unemployment. When this long run equilibrium is reached, the generalized Harris-Todaro condition is satisfied, i.e., there is a stabilization of the rural-urban expected wage differential.
Thirdly, the impact of the minimum wage and elasticity of terms of trade in a long run equilibrium obtained by simulations are in agreement with the predictions of the original Harris-Todaro model with Cobb-Douglas technology.
Finally, the simulations showed an aggregated pattern not found in the original Harris-Todaro model. There is the possibility of small fluctuations of the urban share around an average value. This phenomenon is known as reverse migration.
REFERENCE
Aquino L. Espíndola thanks CAPES for the financial support. Jaylson J. Silveira acknowledges research grants from CNPq. T. J. P. Penna thanks CNPq for the fellowship.
J. R. Harris and M. P. Todaro, American Economic Review 60, 126 (1970).
M. P. Todaro, American Economic Review 59, 138 (1969).
D. Ray, Development Economics (Princeton: Princeton University Press, 1998).
L. Y. L. Yap, Journal of Development Economics 4, 239 (1977).
D. Mazumdar, Rural-urban Migration in Developing countries. In: Handbook of Regional and Urban Economics, Elsevier, Amsterdam, 1987.
L. Ghatak, P. Levine, and S. Price, Journal of Economics Surveys 10, 159 (1996).
J. G. Willianson, Migration and Urbanization. In: Chenery, H. and Srinivasan, T.N., Handbook of developments economics, Elsevier, Amsterdam, 1988.
J. J. Silveira, A. L. Espíndola, and T. J. P. Penna, physics/0506021, Physica A, to appear.
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.
It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
One of the best known early theoretical models of development that focused on the structural transformation of a primarily subsistence economy was that formulated by Nobel Laureate W. Arthur Lewis in the mid-1950s, and later modified, formalized, and extended by John Fei and Gustav Ranis. The Lewis two-sector model became the general theory of the 1960s and early 1970s, and it is sometimes still applied, particularly to study the recent growth experience in China and labor markets in other developing countries.
The Fei-Ranis model is an improvement over the lewis model. John Fei and Gustav Ranis analyze the transition process through which an underdeveloped economy hopes to move from a condition of stagnation to one of self-sustained growth.
The theory relates to underdeveloped labor surplus and resources; poor economy in which the vast majority of the population is engaged in agriculture amidst widespread unemployment and high rates of population growth.
ASSUMPTIONS OF THE MODEL
1. There is a dual economy divided into a traditional and stagnant agricultural sector and an active industrial sector.
2. The output of the agricultural sector is a function of land and labor alone.
3. There is no accumulation of capital in agriculture except in the form of land reclamation.
4. Land is fixed in supply.
5. Population growth is taken as an exogenous phenomenon.
The real wage in the industrial sector remains fixed and is equal to the initial level of real income in the agricultural sector. It is called an institutional wage.
6. Workers in either sector consume only agricultural products.
Given these assumptions, Fei and Ranis analyze the development of a labor surplus economy into three phases;
In the first phase, the disguised unemployed workers who are not adding to agricultural output are transferred to the industrial sector at a constant institutional wage.
In the second phase, agricultural workers add to agricultural output but produce less than the institutional wage they get. Such workers are shifted to the industrial sector. If the migration of the workers to the industrial sector continues, a point is eventually reached when farmworkers produce output equal to the institutional wage.
In the third phase, which makes the end of the take-of and the beginning of the self-sustained growth when farmworkers produce more than the institutional wage they get. In this phase, the surplus labor is exhausted and the agricultural sector becomes commercialized.
. HARRIS-TODARO AGENT-BASED MODEL
In this section we describe the implementation of the computational model we proposed, as well as the aggregate patterns obtained numerically and the comparison with the respective analytical results.
A. Computational Implementation
Initially, workers are randomly placed in a square lattice with linear dimension L = 500. The reference values of the parameters used for these simulations are the same done to evaluate the equilibrium of the Harris-Todaro model, namely, Aa = 1.0, Am = 1.0, f = 0.3, a = 0.7, r = 1.0 and g = 1.0. The value of the minimum wage used is wm = 0.8 and the initial urban fraction of the total population is nu = 0.2, where nu = Nu/N is the normalized urban population also called urban share. The initial value nu = 0.2 is in agreement with historical data of developing economies. Given these parameters, one can calculate the vector which characterizes temporary equilibrium of the system by using eqs. (7 – 12).
By using eq. (7), the employment level of the urban sector, Nm, is obtained. If nu Nm/N there will be a fraction of Nm/Nu workers employed, which earn the minimum wage, wi = wm, and (1-Nm/Nu) workers unemployed, which earn a wage wi = 0.
Each worker can be selected to review his sectorial location with probability a, called activity . Therefore, in each time step only a fraction of workers becomes potential migrants, going through the sectorial location reviewing process. Potential migrants will determine their satisfaction level of being in the current sector by comparing their earnings, wi, among nearest neighbors.
The potential migrant starts the comparison process with a initial satisfaction level si = 0. When wi > wneighbor the satisfaction level si is added in one unit; if wi < wneighbor, si is diminished in one unit; if wi = wneighbor, si does not change. After the worker has passed through the reviewing process his/her satisfaction level is checked. The migration will occur only if si < 0, what means that the worker's i earnings is less than the most of his/her nearest neighbors.
After all the potential migrants complete the reviewing process and have decided migrate or not, a new configuration of the system is set. Therefore, once again a new temporary equilibrium of the system is calculated by using eqs. (8 – 12). The whole procedure is repeated until a pre-set number of steps is reached. It is important to emphasize that Nm is kept constant throughout the simulation. Its given by eq. (7) which depends on the technological parameters, a,Am, and the minimum wage, wm, which are constants too.
B. Analysis of the Emergent Properties
In this section we develop the analysis of the long run aggregate regularities of Harris-Todaro agent-based computational model. These long run properties will be compared between the solution of the analytical model and simulations.
show the basic characteristics of the transitional dynamics and long run equilibrium generated by simulations. When the economic system has a low initial urban share, nu = 0:2 or nu = 0:3, there is a net migration toward urban sector. This migration takes the urban sector from a full employment situation to an unemployment one. The positive differential of expected wages that pulls workers to the urban sector diminishes. However, if the economic system initiates with a high urban share, nu = 0:8, or nu = 0:9 there is net flow of migration toward rural sector in such a way that the unemployment rate of the urban sector decreases
In this case, the differential of expected wages is negative. In an economy mainly rural (nu < 0:5), the transitional dynamics characterized by a continuous growth of population of the urban sector with a differential of expected wages relatively high is followed by the stabilization of rural-urban differential of expected wages. In other words, the generalized Harris-Todaro condition, eq. (15), arises as a long run equilibrium result of the agent-based migratory dynamics.
Figure 3 also shows that even after the urban share has reached an stable average value, there are small fluctuations around this average. Therefore, differently from the original Harris-Todaro model, our computational model shows in the long run equilibrium the reverse migration. This phenomenon has been observed in developing countries.
for a given value of a, the variation of wm practically does not change the equilibrium values of the urban share, the differential of expected wages and the unemployment rate. However, for a given wm, higher values of a make the urban sector less attractive due the reduction of the employment level. This causes a lower equilibrium urban share, a higher unemployment rate and a gap in the convergence of the expected wages.
The equilibrium values of the urban share, the differential of expected wages and unemployment rate do not have a strong dependence with wm. However, variations in g for a fixedwm, dramatically change the equilibrium values of the variable mentioned before. Higher values of g generate a lower urban concentration, a higher gap in the expected wages and a higher unemployment rate in the equilibrium.
The convergence of migratory dynamics for a urban share, compatible with historical data, is robust in relation to the variation of the key technological parameters, a and f. The impact of the variation of these parameters in the values of the equilibrium differential of expected wages, ( – wa), and the equilibrium urban unemployment rate, (1-Nm=Nu).
CONCLUSION
The dispersed and non-coordinated individual migration decisions, made based on local information, generate aggregate regularities. Firstly, the crucial assumption of Harris and Todaro, the principle that rural-urban migration will occur while the urban expected wage exceed the rural wage, comes out as spontaneous upshot of interaction among adaptative agents.
ODOH CHUKWUNONSO MICHAEL
2017/249541
Name: Ngene Michael C.
Reg no: 2017/246022
Dept: Economies
Email: michaelchinecherem1997@gmail.com
Lewis-Fei-Ranis Model of Economic Growth
Introduction
Lewis (1954) proposed a seminal theory of dualistic economic development for
over-populated and under-developed economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capitala ccumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development. Later, Ranis and Fei (1961) formalised the Lewis theory and defined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to the phase three of the Ranis-Fei model. into which each phase marked three turning points which are :
• The breakout point leads to phase one growth with redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural unemployment.
• The commercialisation point leads to phase three of self-sustaining economic growth with the commercialisation of the agricultural sector.
The Lewis-Ranis-Fei theory of dualistic economic development therefore provides a
suitable theoretical framework for studying the growth path of labour-surplus in developing economies such as China. The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector in the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Fei-Ranis (F-R) Model of Dual Economy:
The two economists John Fei and Gustav Ranis presented their dual economy model. There was a flaw in Lewis model that it did not pay enough attention to the importance of agricultural sector in promoting industrial growth. But Fei-Ranis (F-R) model of dual economy explains how the increased productivity in the agricultural sector would become helpful in promoting the industrial sector. In this respect, it presents three stages whereby a UDC moves from stagnation to self-sustained economic growth. Thus, this model is treated as an improvement over Lewis model of unlimited supply of labor.
Thus the model suggests that:
“Economic development would be taking place if agricultural laborers are transferred to industrial sector where their productivity will increase”.
As we told earlier that it is a dual economy where there is a stagnant agri. sector and dynamic industrial sector. The situation where MPL – 0, labor can be transferred to industrial sector without any loss in agricultural output. The real wages in industrial sector remains fixed and it is equal to the initial level of real income in agri. sector. Such wages are given the name of institutional wages.
Conclusion And Comparison To The Real World.
Having tested the Lewis-Ranis-Fei theory for the Nigerian economy we have found that Nigeria’s economic growth is mainly attributable to the development of the non-agricultural sector. This is driven by rapid capital accumulation as well as
employment growth. The reallocation of labour away from agriculture has made a
positive net contribution to Nigeria’s rapid economic growth by around 1.23 percent.
The rise in the marginal productivity of agricultural labour indicates the absorption of
redundant agricultural labour since the 1978 Economic Reform. However, the marginal
productivity of agricultural labour is still lower than the initial low average productivity
of agricultural labour. This suggests that the Nigerian economy has entered the
Lewis-Ranis-Fei phase two of development but has not yet achieved phase three.
Several policy recommendations are tentatively suggested. First and foremost, more
effort should be made in promoting employment to effectively absorb the remaining
labour surplus and promote Nigeria economic development. Secondly,
agriculture could be promoted by tax breaks, direct subsidies and most importantly, by
removing price controls on agricultural products. Agriculture could thus be commercialised and the economy would enter phase three of economic development.
Haris-Todaro Model of Migration
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
Conclusions
Therefore, migration from rural areas to urban areas will increase in Nigeria if:
Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
INTRODUCTION
The Harris Todaro Model which was named after John R. Harris and Michael Todaro is an economic analytical model developed in 1970 and is used in development economics and welfare economics to explain and analyze some of the issues that concerns rural-urban migration. The main assumption of the Harris Todaro’s model is that the migration decision is mainly based on the expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income. Harris Todaro migration theory is considered one of the starting points of the classic rural-urban migration theory.
The hypothesis and predictions of Harris-Todaro model have been subjected to econometric evaluation and have been corroborated by several studies. The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migraton decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceeds the rural wage. From this crucial assumption, as denominated by Harris-Todaro, is deduced that the migratory dynamics leads the economic system towards equilibrium with urban concentration and high urban unemployment. In our previous works we analyzed the rural-urban migration by means of an agent-based computational model taking into account the influence of the neighborhood in the migration decision. The inclusion of the influence of neighbors was done via an Ising like model. The economic analogous to the external field in the Ising Hamiltonian was the differential of expected wages between urban and rural sectors. Therefore, in theses works the crucial assumption of Harris and Todaro were taken for granted.
Now, we are motivated by the following question: can the crucial assumption and equilibrium with urban concentration and urban unemployment obtained from the original Harris-Todaro model be generated as emergent properties from the interaction among adaptive agents? In order to answer this question we implemented an agent-based computational model in which workers grope for best sectorial location over time in terms of earnings. The economic system simulated is characterized by the assumption originally made by Harris and Todaro.
The paper is arranged as follows. Section describes the analytical Harris-Todaro model showing its basic equilibrium properties. In Section we present the implementation of the computational model via an agent-based simulation and compare its aggregate regularities with the analytical equilibrium properties. Section shows concluding remarks.
THE HARRIS-TODARO MODEL
A. Assumptions
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The differences between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a 0 and g > 0 are a parametric constants. g is the elasticity of p with respect to the ratio Ym/Ya.
The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified:
B. Temporary Equilibrium: Given a parametric constant vector (Aa,Am,f,a,r,g), an initial urban population Nu, and a minimum wage wm one can calculate the temporary equilibrium of the economic system by using eqs. (1 – 6).
From eq. (4) one can find the employment level at the manufacturing sector
Replacing eq. (7) in eq. (2) we get the production level of the manufacturing sector
From eq. (6) one can obtain the relation
which is used with eq. (1) to obtain the agricultural production
By using eqs. (5), (8) and (10) the terms of trade are determined
Finally, by using eqs. (3), (9) and (11), the rural wage in units of manufacturated good is obtained
In sum, the vector (Nm,Ym,Na,Ya,p,wa) configures a temporary equilibrium that might be altered whether occurs a migration of workers, induced by the differential of sectorial wages, which changes the sectorial distribution of overall population.
C. The Long Run Equilibrium: Harris and Todaro, in determining the long run equilibrium, i.e., the absence of a net rural-urban migratory flow, argue that the rural workers, in their decision on migrating to the urban area, estimate the expected urban wage, , defined as:
The ratio Nm/Nu, which is the employment rate, is an estimative of the probability that a worker living at urban sector gets a job in this sector.
As mentioned before, the key assumption of the model of Harris and Todaro is that there will be a migratory flow from the rural to the urban sector while the expected urban wage is higher than the rural wage. Thus, the long run equilibrium is attained when the urban worker population reaches a level such that the expected urban wage equates the rural wage:
This equality is known in the economic literature as the Harris-Todaro condition. Harris and Todaro argue that the differential of expected wages in eq. (14) can be a constant value d ¹ 0. When this differential reaches d, the net migration ceases. This generalized Harris-Todaro condition can be expressed as follows:
The level of the urban population that satisfies the eq. (15), i.e., the equilibrium urban share = /N, is determined from the solution of the equation resulting from substitution of equations (12), (13) in eq. (15):
The solution of eq. (16) is parametrized by the vector (Aa,Am,r,g,a,f,wm).
Harris and Todaro [1], in order to evaluate the stability of the long run equilibrium, postulate a mechanism of adjustment that is based on the following function of sign preservation:
The differential equation that governs the state transition in the model of Harris and Todaro is obtained by replacing equations (12), (13) in eq. (17). Based on this postulated adjustment process, Harris and Todaro show that the long run equilibrium is globally asymptotically stable. This means that the economy would tend to long run equilibrium with unemployment in the urban sector generated by the presence of a relatively high minimum wage for all possible initial conditions. From now on we will refer to the long run equilibrium simply as equilibrium. Based on the numerical solutions of eq. (16) one can evaluate the impact that the variation of the minimum wage and the elasticity of the terms of trade on the equilibrium. In Fig. 1 we see that under the hypothesis of a Cobb-Douglas technology, the equilibrium urban share, , does not depend on the minimum wage wm. However, changes in the value of wm reduces the labor demand on the manufacturing sector what results in higher unemployment rates in the equilibrium.
In turn, as seen in Fig. 2, changes in the elasticity of the terms of trade alter slightly the equilibrium urban share and unemployment rate. A net migration toward urban sector shift the terms of trade to higher values. The greater g the greater this shift, what cause an increase in the rural wage in units of manufacturing good, becoming the urban sector less attractive
APPLICATION OF HARRIS TODARO MODEL OF MIGRATION
Harris Todaro model of migration is applicable to real life economic situation due to the fact that immigrants from rural areas would want to be part of the economic activities of the society and by wanting to make their life much better would move to urban areas and this would lead the economy toward a long run equilibrium characterized by urban concentration with urban unemployment. When this long run equilibrium is reached, the generalized Harris-Todaro condition is satisfied, i.e., there is a stabilization of the rural-urban expected wage differential.
Nigeria government can use this theory of economic growth if they wish to reduce the rural-urban migration which is cause by high urban unemployment. To this, the government can make possible more expansionary fiscal policy on the rural areas in Nigeria. This policy with increase the rate of employment in rural areas and also
will increase the expect income of the rural people.
Name: Ngene Michael C.
Reg no: 2017/246022
Dept: Economies
Email: michaelchinecherem1997@gmail.com
Lewis-Fei-Ranis Model of Economic Growth
Introduction
Lewis (1954) proposed a seminal theory of dualistic economic development for
over-populated and under-developed economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capitala ccumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development. Later, Ranis and Fei (1961) formalised the Lewis theory and defined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to the phase three of the Ranis-Fei model. into which each phase marked three turning points which are :
• The breakout point leads to phase one growth with redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural unemployment.
• The commercialisation point leads to phase three of self-sustaining economic growth with the commercialisation of the agricultural sector.
The Lewis-Ranis-Fei theory of dualistic economic development therefore provides a
suitable theoretical framework for studying the growth path of labour-surplus in developing economies such as China. The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector in the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Fei-Ranis (F-R) Model of Dual Economy:
The two economists John Fei and Gustav Ranis presented their dual economy model. There was a flaw in Lewis model that it did not pay enough attention to the importance of agricultural sector in promoting industrial growth. But Fei-Ranis (F-R) model of dual economy explains how the increased productivity in the agricultural sector would become helpful in promoting the industrial sector. In this respect, it presents three stages whereby a UDC moves from stagnation to self-sustained economic growth. Thus, this model is treated as an improvement over Lewis model of unlimited supply of labor.
Thus the model suggests that:
“Economic development would be taking place if agricultural laborers are transferred to industrial sector where their productivity will increase”.
As we told earlier that it is a dual economy where there is a stagnant agri. sector and dynamic industrial sector. The situation where MPL – 0, labor can be transferred to industrial sector without any loss in agricultural output. The real wages in industrial sector remains fixed and it is equal to the initial level of real income in agri. sector. Such wages are given the name of institutional wages.
Conclusion and policy recommendations
Having tested the Lewis-Ranis-Fei theory for the Nigerian economy we have found that Nigeria’s economic growth is mainly attributable to the development of the non-agricultural sector. This is driven by rapid capital accumulation as well as
employment growth. The reallocation of labour away from agriculture has made a
positive net contribution to Nigeria’s rapid economic growth by around 1.23 percent.
The rise in the marginal productivity of agricultural labour indicates the absorption of
redundant agricultural labour since the 1978 Economic Reform. However, the marginal
productivity of agricultural labour is still lower than the initial low average productivity
of agricultural labour. This suggests that the Nigerian economy has entered the
Lewis-Ranis-Fei phase two of development but has not yet achieved phase three.
Several policy recommendations are tentatively suggested. First and foremost, more
effort should be made in promoting employment to effectively absorb the remaining
labour surplus and promote Nigeria economic development. Secondly,
agriculture could be promoted by tax breaks, direct subsidies and most importantly, by
removing price controls on agricultural products. Agriculture could thus be commercialised and the economy would enter phase three of economic development.
Haris-Todaro Model of Migration
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
Conclusions
Therefore, migration from rural areas to urban areas will increase in Nigeria if:
Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
NAME: UDUMA IKECHUKWU OBASI
REG: 2017/241441
EMAIL: ikechukwuuduma9@gmail.com
LEWIS-RANIS-FEI MODEL:
(SURPLUS LABOUR)
The Lewis (1954) theory of dualistic economic development provides the seminal
contribution to theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to
comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow
the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent (Lewis, 1954, ). The non-agricultural sector accumulates capital by drawing surplus labour out of the agricultural sector. The expansion of the non-agricultural sector takes advantage of the infinitely elastic supply of labour from the agricultural sector due to its labour surplus.
When the surplus labour is exhausted, the labour supply curve in the non-agricultural
sector becomes upward-sloping. Ranis and Fei (1961) formalised Lewis’s theory by combining it with Rostow’s (1956) three “linear-stages-of-growth” theory. They disassembled Lewis’s two-stage economic development into three phases, defined by the marginal productivity of agricultural labour. They assume the economy to be stagnant in its pre-conditioning stage. The breakout point marks the creation of an infant non-agricultural sector and the entry into phase one. Agricultural labour starts to be reallocated to the non-agricultural sector. Due to the abundance of surplus agricultural labour, its marginal productivity is extremely low and average labour productivity defines the agricultural institutional wage. When the redundant agricultural labour force has been reallocated, the agricultural marginal productivity of labour starts to rise but is still lower than the institutional wage. This marks the shortage point at which the economy enters phase two of development. During phase two the remaining agricultural unemployment is gradually absorbed. At the end of this process the economy reaches the commercialisation point and enters phase three where the agricultural labour market is fully commercialised
CONCLUSION AND POLICY RECOMMENDATIONS:
Having tested the Lewis-Ranis-Fei theory for the Chinese economy over 1965-2002 we will in the case of this study substitute the economy of Nigeria to that of China and implement the policy recommendations therein.The test shows that China’s economic growth is mainly attributable to the development of the non-agricultural sector(which is similar to that of Nigeria). This is driven by rapid capital accumulation as well as
employment growth. The reallocation of labour away from agriculture has made a
positive net contribution to China’s rapid economic growth by around 1.23 percent. The
rise in the marginal productivity of agricultural labour indicates the absorption of
redundant agricultural labour since the 1978 Economic Reform. However, the marginal
productivity of agricultural labour is still lower than the initial low average productivity
of agricultural labour. This implies the continued existence of disguised agricultural
unemployment. This suggests that the Chinese economy has entered the
Lewis-Ranis-Fei phase two of development but has not yet achieved phase three. The
continuing widening productivity gap between the two sectors calls for the removal of
market restrictions and government interventions so as to allow the continued
absorption of surplus labour.
Several policy recommendations are tentatively suggested. First and foremost, more
effort should be made in promoting employment to effectively absorb the remaining
labour surplus and promote China’s economic development. This can be achieved by
further relaxing the Hukou restrictions on migration, increasing labour market flexibility
and improving the allocative efficiency of labour. It can also be achieved by
encouraging the development of private enterprise to create more employment
opportunities. Second, China’s government should continue implementing the Sunshine
Policy, initiated in 2003, designed to provide rudimentary job training, recruitment
information and information about conditions in the destination cities to rural migrants.
This will not only help facilitate employment of rural migrants but also satisfy the
increasing demand for skilled labour in the growing non-agricultural sector. Third,
agriculture could be promoted by tax breaks, direct subsidies and most importantly, by
removing price controls on agricultural products. Agriculture could thus be
commercialised and the economy would enter phase three of economic development.
HARRIS TODARO MIGRATION MODEL:
In the 1960s the government of newly independent Kenya faced a difficult situation: Unemployment in Nairobi and other major cities was high and apparently rising. To cope with this problem, Tripartite Agreements were reached in which private-sector and public-sector employers agreed to increase employment in exchange for unions agreeing to hold wages at their current levels. The larger number of jobs was expected to reduce unemployment. However, in the event, urban unemployment appeared to have increased following the Tripartite Agreements rather than decreased, as far as anyone could tell.
In light of these events, John Harris and Michael Todaro formulated the Harris-Todaro model to explain the puzzle. At the core of the Harris-Todaro model were the following features. First, real wages (adjusted for cost-of-living differences) are higher in urban formal-sector jobs than in rural traditional-sector jobs. Second, to be hired for a formal-sector job, one has to be physically present in the urban areas where the formal-sector jobs are located. Third, and as a consequence of the first two features, more workers search for formal-sector jobs than are hired, employers hire some of the job seekers but not all of them, and those not hired end up unemployed. Fourth, for equality to be maintained between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting is characterized by urban unemployment. And fifth, any temporary difference in the expected wages between one sector and another is eroded as workers migrate from the low-expected-wage labor market to the high-expected-wage labor market.
The Harris-Todaro model produced two powerful policy results. The first concerns the policy of formal-sector job creation to employ the unemployed (who, in the Harris-Todaro model, are all in urban areas, because that is where the formal-sector jobs are assumed to be located). Such a policy, they concluded, would increase the formalsector labor force by more than the number of new jobs created, thereby raising the number of urban unemployed. Thus, the solution to urban unemployment is not to create urban employment.
The second policy option that Harris and Todaro considered was a policy of rural development. If such a program could increase the rural traditional-sector wage, unemployment would then fall. Thus, in the Harris-Todaro model, the solution to urban unemployment is rural development.
Soon after the model was published, the government of Kenya followed the Harris-Todaro precepts by putting into place an integrated program of rural development. The result was that unemployment in Kenya fell.
Harris and Todaros fundamental contribution was building a model that fit the stylized facts of the labor market they were analyzing and that was based on sound micro foundations. The fact that the model remains part of the economists intellectual toolkit today is a tribute to its basic insight and enduring analytic power.
The original model has been both simplified for some purposes and expanded for others by later contributors, including Stiglitz, Bell, Khan, Anand and Joshi, Bourguignon, Corden and Findlay, and others (Fields 2005). Harris and Todaro formulated general processes for determining prices of the products produced by the two sectors and also for determining a rural-sector wage that varies inversely with the number of people in the rural sector. A simplified version of the Harris-Todaro model was developed in which product prices and rural-sector wages are taken as constant. Numerous additional analytic and policy results were derived in the simplified Harris-Todaro model. At the same time, some of the assumptions of the Harris-Todaro model were judged to be too restrictive, and so the model was generalized in the years that followed to nest their specific formulation within a broader framework. The initial Harris-Todaro model has been extended to allow for on-the-job search from a rural agriculture setting, the existence of an urban informal sector, preferential hiring of the better-educated, employment fixity, duality of production conditions and earnings levels within the rural sector, capital mobility, endogenous urban wage setting, risk aversion, and a system of demand for goods, among other factors.
As an early multisector labor-market model, the Harris-Todaro model set forth a principal alternative framework for policy analysis. It showed how employment and wage levels in one labor market reflect supply, demand, and institutional conditions not only in that labor market but also in other labor markets.
In terms of pro-poor economic growth, the Harris-Todaro model and other multisector-labor-market models can help policy makers avoid two mistakes. One is to assume that development efforts should be channeled to the sectors where the poor are. The other is to assume that efforts should always be focused on getting the poor out of the sectors in which they now are. Careful cost-benefit analysis based on well-specified
labor-market models is required to decide among such alternatives.
FINDINGS AND RECOMMENDATIONS:
The fundamental contribution of Harris and Todaros rural-urban two sector migration model was to build a model that fit the stylized facts of the labour market. On the lines of the theory, developing countries (e.g Nigeria) adopted program on integrated rural development which could encouraged an increase in the rural traditional sector wage. The theory proves that the higher the unemployment rate, the lower is the probability of new migrants from the countryside actively seeking formal sector employment who are unable to find it. The significant findings of the theory are:
first, if the expected urban wage equals rural income, there is no incentive to migrate.
Second, if the expected urban wage is greater than rural income, there is a great incentive to move from rural to urban area.
Third, if the expected urban wage is less than rural incomes, there would be an incentive to move in other direction.
Fourth, the expected urban wage depends on what type of job migrant is engaged in. Therefore, the Haris Todaros model helps policy-makers to avoid two mistakes. One is to assume that development efforts should necessarily be channeled to the sectors where the poor are. The other is to assume that efforts should necessarily be focused on getting the poor out of the sectors in which they presently are.
Thus, recommended policies should be the ones poised to eradicate both poverty level and unemployment rate among the dwellers of rural areas. Reduction/ eradication of poverty in the form of poor wage gain will on the other hand reduce the incentive of moving to the urban areas for greener pasture search such that the problems of high immigration rate will be avoided.
Anopueme Franklin Ifeanyi
2017/249485
http://www.franklin.anopueme.249485@unn.edu.ng
http://www.franksempire.wordpress.com
1. The Lewis–Fei–Ranis model of economic growth is a dualism model in development economics and welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both sectors co-exist in the economy, and according to the model, development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one.
Features of the Lewis–Fei–Ranis Model
This theory is concerned with a poor economy which has following properties:
(i) There is an abundance of labor and shortage of natural resources.
(ii) The population growth rate is very high which results in mass unemployment in the economy.
(iii) The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labor is zero and negative in agriculture sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy.
Assumptions
(i) The increase in net income in the agricultural sector, and the growth of industrial capital depends on the growth of industrial profits.
(ii)Agricultural growth and industrial growth are both equally important.
(iii)Agricultural growth and industrial growth are balanced.
Conclusion
In examining the initial role of the Agricultural sector in Nigeria, the sector is seen to be an indispensable sector in establishing the framework for national economic growth. Hence, increased agricultural production is expected to be a core pre-requisite for rapid economic growth in a developing nation like Nigeria, and the Lewis–Fei–Ranis growth model acknowledges the Agricultural sector, as a sector responsible for driving rapid, positive economic growth. On the other hand, The Industrial sector is also a worthy sector that drives economic growth, because it houses so many sectors and sub sectors responsible for pushing the economy forward. The Lewis–Fei–Ranis already applies in the Nigerian economy, because there has been a recorded shift of investment and dependency from the Agricultural sector to the industrial sector. Nigeria have undoubtedly prioritized crude oil, which is a product of the industrial sector, to be it’s major source of national revenue.
2. The Harris-Todaro model which was named after John Robert Harris and Michael Todaro, is an economic model developed in 1970 and used in the development of economics and welfare economics to explain some of the issues concerning rural / urban migration. The main assumption of the Harris Todaro model is that the migration decision is based on expected income differences between rural and urban areas rather than just wage distinctive.
Features of the Model
Harris and Todaro subsequently formulated a model to explain rural urban economic preferences to migrate. The distinctive concept in the model is that the rate of migration flow from rural (agricultural) areas as to urban (industrial) areas is determined by the difference between expected urban wages and rural wages.
The rural urban two sector model centrally holds the following features:
(i) Real wages (adjusted for cost of living differences) were higher in urban formal sector jobs than in rural traditional sector jobs.
(ii) To be hired for a formal sector job, it was necessary to be physically present in the urban areas there the formal sector jobs were located.
(iii) Consequently, from the first two features, more workers searched for formal sector jobs than were actually hired. Employers hired some of the researchers but not all of them.
(iv) To maintain equality between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower paying rural job, the equilibrium arising in such a setting would be characterized by urban unemployment.
(v) Any temporary difference in the expected wages between one sector and another would be eroded as workers migrate from the low expected wage labor market to the high expected wage.
General Assumptions of the Model
The assumptions of Haris-Todaro model of migration include the following:
(i) Two sectors; urban (manufacture) and rural (agriculture)
(ii) No migration cost
(iii) Perfect competition
(iv) Cobb Douglas production function
(v) Static approach
(vi) Low risk aversion
Conclusion
The Harris-Todaro model can be applied in Nigeria by determining what causes people to migrate from rural to urban areas. It is no longer news that the salaries paid to workers in cities are higher than the ones paid in the rural areas, and this can be noted as one the reasons making people to migrate into the urban areas hoping to get a lucrative job. The possibility of getting a lucrative job depends on the size of unemployment in relation to the number of employed workers in the industrial sector of the Nigerian economy.
NAME: ANACHUNAM DABERECHI MARYJANE
REG NO: 2017/241448
EMAIL: daberechi.anachunam.241448@unn.edu.ng
BLOG: maryjaneanachunam.wordpress.com
AN ESSAY ON LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY) AND HARRIS-TODARO MODEL OF MIGRATION
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
William Arthur Lewis, in his work, “Economic Development with Unlimited Supplies of Labour” (Manchester School, May 1954) and “The Theory of Economic Growth” (Allen and Unwin, 1955), made a great contribution to the theories of economic development. Based on his findings, Ranis and Fei succeeded to extend the initial Lewis’ model and assessed the changes in the agricultural and industrial labour in more detail. (Ukessays, 2018)
The central idea behind the Lewis model is fairly simple. Lewis divided the labour force into two differentiated groups – “subsistence sector” and “capitalist sector” where the former is assumed to contain unlimited supply and consequently, a pool of surplus labour[1] that sets labour-supply conditions for the latter. The concept of a dual economy is heavily criticised.(Ukessays, 2018)
Subsequently, Ranis’ and Fei’s extension to Lewis’ model can be analysed. They observed the model by reading it from left to right and assessed the changes in the output and wage as more and more people moved from agriculture to the industry. A new concept was added – namely, disguised unemployment, which appears in the traditional subsistence sector. The marginal product of labour, which is observed as the slope of the production function, in the agricultural sector is lower than in industry (Ukessays, 2018)
The Lewis-Ranis-Fei model
The Lewis (1954) theory of dualistic economic development provides the seminal
contribution to theories of economic development particularly for labour-surplus and
resource-poor developing countries. In the Lewis theory, the economy is assumed to
comprise the agricultural and non-agricultural sectors. The agricultural sector is
assumed to have vast amounts of surplus labour that result in an extremely low, close to
zero, marginal productivity of labour. The agricultural wage rate is presumed to follow
the sharing rule and be equal to average productivity, which is also known as the
institutional wage. The non-agricultural sector has an abundance capital and resources
relative to labour. It pursues profit and employs labour at a wage rate higher than the
agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150). The
non-agricultural sector accumulates capital by drawing surplus labour out of the
agricultural sector. The expansion of the non-agric ultural sector takes advantage of the
infinitely elastic supply of labour from the agricultural sector due to its labour surplus.
When the surplus labour is exhausted, the labour supply curve in the non-agricultural
sector becomes upward-sloping.
Ranis and Fei (1961) formalised Lewis’s theory by combining it with Rostow’s
(1956) three “linear-stages-of-growth” theory. They disassembled Lewis’s two-stage
economic development into three phases, defined by the marginal productivity of
agricultural labour. They assume the economy to be stagnant in its pre-conditioning
stage. The breakout point marks the creation of an infant non-agricultural sector and the
entry into phase one. Agricultural labour starts to be reallocated to the non-agricultural
sector. Due to the abundance of surplus agricultural labour, its marginal productivity is
extremely low and average labour productivity defines the agricultural institutional
wage. When the redundant agricultural labour force has been reallocated, the
agricultural marginal productivity of labour starts to rise but is still lower than the
institutional wage. This marks the shortage point a t which the economy enters phase two of development. During phase two the remaining agricultural unemployment is
gradually absorbed. At the end of this process the economy reaches the
commercialisation point and enters phase three where the agricultural labour market is
fully commercialised ( Marco G. Ercolani and Zheng Wei, 2010).
To conclude, having shown the main ideas behind the Lewis-Ranis-Fei model . Using Nigeria as a case study, it is important to invest in both sectors in order to remain on the balanced growth path and maintain the rate of industrialization. The existence of surplus labour in agriculture allows the industry to continue to pay the institutional wage and therefore enjoy further profits and continued investment. At the same time, as more and more people are moving away from agriculture, there will be some amount of agricultural surplus that can be used up to fuel further development. This process continues until the surplus labour is absorbed. Hence, saving and investment are a crucial part in the Lewis-Ranis-Fei to support economic development (Ukessays, 2018).
HARRIS-TODARO MODEL OF MIGRATION
John R. Harris and Michael P. Todaro presented the work Two sector modelin American
Economic Association, 1970. This model is an important study in the field encompassing rural-urban
migration.
The main idea of the Harris-Todaro model is that labour migration in underdeveloped countries is due to rural-urban differences in average expected wages rather than actual wages. The migrants consider the various opportunities of employment available to them in rural and urban sectors and choose the one that maximises their expected wages from migration (Divisha s, 2017).
The minimum urban wage is substantially higher than the rural wage. If more employment opportunities are created in the urban sector at the minimum wage, the expected will rise and rural-urban migration will increase. Expected wages are measured by the difference in real urban income and rural agricultural income and the probability of a migrants getting an urban job.
In fact, a migrant compares his expected income for a given time horizon in the urban sector with his prevailing average rural income and migrates if the former is more than the latter.
Thus migration in the Harris-Todaro modal is viewed as the wage or income gap between the urban and the rural sectors. But all migrants cannot be absorbed in the urban sector at high wages. Many fail to find a job and get employment in the informal urban sector at wages which are even lower than in the rural sector. Thus they join the queue of the underemployed or disguised unemployed in the urban sector (Divisha s, 2017)
Assumptions of the Model:
The Harris-Todaro model is based on the following assumptions:
1. There are two sectors in the economy – the rural or agricultural sector (A) and the urban or manufacturing sector (M).
2. The model operates in the short run.
3. The marginal production of labour in agriculture (MPLA) and of industry (MPLM) are determined by their respective technologies.
4. Capital is available in fixed quantities in the two sectors.
5. There are L workers in economy with LA and LM numbers employed in the rural and urban sectors respectively.
6. The number of urban jobs available (LM) is exogenously fixed. In the rural sector some work is always available. Therefore, the total urban labour force LM comprises L-LAalong with an available supply of rural migrants.
7. The urban wage is fixed at WM and the rural wage at WA, WM>WA.
8. The rural wage equals the rural marginal product of labour and the urban wage is exogenously determined.
9. Rural-urban migration continues so long as the expected urban real income is more that the real agricultural income.
. At the core of the Harris-Todaro model were the following features. First, real wages (adjusted for cost-of-living differences) are higher in urban formal-sector jobs than in rural traditional-sector jobs. Second, to be hired for a formal-sector job, one has to be physically present in the urban areas where the formal-sector jobs are located. Third, and as a consequence of the first two features, more workers search for formal-sector jobs than are hired, employers hire some of the job seekers but not all of them, and those not hired end up unemployed. Fourth, for equality to be maintained between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting is characterized by urban unemployment. And fifth, any temporary difference in the expected wages between one sector and another is eroded as workers migrate from the low-expected-wage labor market to the high-expected-wage labor market.
Starting from the assumption that migration is based primarily on privately rational economic calculations despite the existence of high urban unemployment, the Todaro model postulates that migration proceeds in response to urban-rural differences in expected rather than actual earnings. The fundamental premise is that as decision-makers migrants consider the various labor-market opportunities available to them as, say, between the rural and urban sectors, choosing the one that maximizes their “expected” gains from migration. Expected gains are measured by the difference in real incomes between rural and urban work opportunities and the probability of a new migrant’s obtaining urban job. The “thought process” of the Todaro model can be explained as follows. Suppose the average unskilled or semiskilled rural worker has a choice between being a farm laborer (or working his own land) for an annual average real income of, say, 50 units per year, and migrating to the city where a worker with his skill or educational background can obtain wage employment yielding an annual real income of, say, 100 units. The worker should seek the higher-paying urban job. It is important to recognize, however, that these migration models were developed largely in the context of advanced industrial economies and, as such, implicitly assumed the existence of full or near-full employment in urban areas. In a full-employment environment the decision to migrate can in fact be predicated solely on securing the highest-paying job wherever it becomes available, other factors being held constant. Simple economic theory would then indicate that such migration should lead to a reduction in wage differentials through geographic changes in supply and demand, both in areas of out-migration (where incomes rise) and in points of in-migration (where they fall). Unfortunately, such an analysis is not very realistic in the context of the institutional and economic framework of most Third World nations. First of all, these countries are beset by a chronic and serious problem of urban surplus labor, so that many migrants cannot expect to secure high-paying urban jobs immediately upon arrival. In fact, it is much more likely that upon entering the urban labor market many migrants will either become totally unemployed or will seek casual and parttime employment in the urban traditional sector for some time.
Consequently, in his decision to migrate the individual must in effect balance the probabilities and risks of being unemployed or underemployed for a considerable period of time against the positive urban-rural real-income differential. That it is possible for our hypothetical migrant to earn twice as much annual real income in an urban area as in his rural environment may be of little consequence if his actual probability of securing the higher-paying job within a year is one chance in five. In such a situation the migrant’s actual probability of being successful in securing the higherpaying urban job is 20%, so that his “expected” urban income for the one-year period is in fact 20 units, not the 100 units that a migrant in a full-employment urban environment might expect to receive. Thus, with a one-period time horizon and a probability of success of 20% it would be irrational for this migrant to seek an urban job even though the differential between urban and rural earnings capacity is 100%. On the other hand, if the probability of success were, say, 60%, so that the expected urban income is 60 units, it would be entirely rational for such a migrant with his one-period time horizon to try his luck in the urban job “lottery” even though urban unemployment may be extremely high. Returning now to the more realistic situation of longer time horizons for potential migrants, especially considering that the vast majority are between the ages of 15 and 24, It is argued that the decision to migrate should be represented on the basis of a “permanent income” calculation. If the migrant anticipates a relatively low probability of finding regular wage employment in the initial period but expects this probability to increase over time as he is able to broaden his urban contacts, then it would still be rational for him to migrate even though expected urban income during the initial period or periods might be lower than expected rural income. As long as the present value of the net stream of expected urban income over the migrant’s planning horizon exceeds that of the expected rural income, the decision to migrate is economically justified. Rather than wage adjustments bringing about an equilibrium between urban and rural incomes, as would be the case in a competitive model, it is further argued that rural-urban migration itself must act as the ultimate equilibrating force. With urban wages assumed to be inflexible in a downward direction, rural and urban “expected” incomes can be equalized only by falling urban job probabilities resulting from rising urban unemployment. For example, if average rural wages are 60 units and urban wages are institutionally set at a level of 120 units, then in a one-period model a 50% urban unemployment rate would be necessary to vitiate the private profitability of further migration. Since expected incomes are defined in terms of both wages and employment probabilities, argument is that it is not only possible but likely to have continued migration in spite of the existence of sizable rates of urban unemployment. In the above numerical example, migration would continue even if the urban unemployment rate were 30 or 40%.
Conclusion
In the Harris–Todaro model, the rising urban wage pushes up the expected wage in the urban sector and consequently encourages workers to migrate from the rural sector to the urban sector. If, in the resulting migration, there are more workers than the number of job opportunities created in the urban sector, some will necessarily be unemployed which is the case in Nigeria when people leave rural areas to go to bigger cities like Lagos and end up being unemployed. Occasionally, the increase in unemployment lowers the per-capita income level before the capital is accumulated. This phenomenon is referred to as Todaro paradox.
If there is a necessary and sufficient condition under which the increase in capital stock does not increase unemployment in the urban area. This condition concerns the relationship between the institutionally and legally set minimum wage in the urban area and increased agricultural productivity in the rural area, that is there is an institutionally set minimum wage in urban areas (eg Lagos) that can’t be manipulated while the government works harder to develop the agricultural sector. Unsurprisingly, if agricultural productivity rises and income in the rural area increases, rural workers have no need to migrate to the urban sector to find jobs and face the risk of unemployment.
NAME: ANACHUNAM DABERECHI MARYJANE
REG NO: 2017/241448
EMAIL: daberechi.anachunam.241448@unn.edu.ng
BLOG: maryjaneanachunam.wordpress.com
AN ESSAY ON LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY) AND HARRIS-TODARO MODEL OF MIGRATION
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
William Arthur Lewis, with his most famous published work, “Economic Development with Unlimited Supplies of Labour” (Manchester School, May 1954) and “The Theory of Economic Growth” (Allen and Unwin, 1955), made a great contribution to the theories of economic development. Based on his findings, Ranis and Fei succeeded to extend the initial Lewis’ model and assessed the changes in the agricultural and industrial labour in more detail. (Ukessays, 2018)
The central idea behind the Lewis model is fairly simple. Lewis divided the labour force into two differentiated groups – “subsistence sector” and “capitalist sector” where the former is assumed to contain unlimited supply and consequently, a pool of surplus labour[1] that sets labour-supply conditions for the latter. The concept of a dual economy is heavily criticised.(Ukessays, 2018)
Subsequently, Ranis’ and Fei’s extension to Lewis’ model can be analysed. They observed the model by reading it from left to right and assessed the changes in the output and wage as more and more people moved from agriculture to the industry. A new concept was added – namely, disguised unemployment, which appears in the traditional subsistence sector. The marginal product of labour, which is observed as the slope of the production function, in the agricultural sector is lower than in industry (Ukessays, 2018)
The Lewis-Ranis-Fei model
The Lewis (1954) theory of dualistic economic development provides the seminal
contribution to theories of economic development particularly for labour-surplus and
resource-poor developing countries. In the Lewis theory, the economy is assumed to
comprise the agricultural and non-agricultural sectors. The agricultural sector is
assumed to have vast amounts of surplus labour that result in an extremely low, close to
zero, marginal productivity of labour. The agricultural wage rate is presumed to follow
the sharing rule and be equal to average productivity, which is also known as the
institutional wage. The non-agricultural sector has an abundance capital and resources
relative to labour. It pursues profit and employs labour at a wage rate higher than the
agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150). The
non-agricultural sector accumulates capital by drawing surplus labour out of the
agricultural sector. The expansion of the non-agric ultural sector takes advantage of the
infinitely elastic supply of labour from the agricultural sector due to its labour surplus.
When the surplus labour is exhausted, the labour supply curve in the non-agricultural
sector becomes upward-sloping.
Ranis and Fei (1961) formalised Lewis’s theory by combining it with Rostow’s
(1956) three “linear-stages-of-growth” theory. They disassembled Lewis’s two-stage
economic development into three phases, defined by the marginal productivity of
agricultural labour. They assume the economy to be stagnant in its pre-conditioning
stage. The breakout point marks the creation of an infant non-agricultural sector and the
entry into phase one. Agricultural labour starts to be reallocated to the non-agricultural
sector. Due to the abundance of surplus agricultural labour, its marginal productivity is
extremely low and average labour productivity defines the agricultural institutional
wage. When the redundant agricultural labour force has been reallocated, the
agricultural marginal productivity of labour starts to rise but is still lower than the
institutional wage. This marks the shortage point a t which the economy enters phase two of development. During phase two the remaining agricultural unemployment is
gradually absorbed. At the end of this process the economy reaches the
commercialisation point and enters phase three where the agricultural labour market is
fully commercialised ( Marco G. Ercolani and Zheng Wei, 2010).
To conclude, having shown the main ideas behind the Lewis-Ranis-Fei model . Using Nigeria as a case study, it is important to invest in both sectors in order to remain on the balanced growth path and maintain the rate of industrialization. The existence of surplus labour in agriculture allows the industry to continue to pay the institutional wage and therefore enjoy further profits and continued investment. At the same time, as more and more people are moving away from agriculture, there will be some amount of agricultural surplus that can be used up to fuel further development. This process continues until the surplus labour is absorbed. Hence, saving and investment are a crucial part in the Lewis-Ranis-Fei to support economic development (Ukessays, 2018).
HARRIS-TODARO MODEL OF MIGRATION
John R. Harris and Michael P. Todaro presented the work Two sector modelin American
Economic Association, 1970. This model is an important study in the field encompassing rural-urban
migration.
The main idea of the Harris-Todaro model is that labour migration in underdeveloped countries is due to rural-urban differences in average expected wages rather than actual wages. The migrants consider the various opportunities of employment available to them in rural and urban sectors and choose the one that maximises their expected wages from migration (Divisha s, 2017).
The minimum urban wage is substantially higher than the rural wage. If more employment opportunities are created in the urban sector at the minimum wage, the expected will rise and rural-urban migration will increase. Expected wages are measured by the difference in real urban income and rural agricultural income and the probability of a migrants getting an urban job.
In fact, a migrant compares his expected income for a given time horizon in the urban sector with his prevailing average rural income and migrates if the former is more than the latter.
Thus migration in the Harris-Todaro modal is viewed as the wage or income gap between the urban and the rural sectors. But all migrants cannot be absorbed in the urban sector at high wages. Many fail to find a job and get employment in the informal urban sector at wages which are even lower than in the rural sector. Thus they join the queue of the underemployed or disguised unemployed in the urban sector (Divisha s, 2017)
Assumptions of the Model:
The Harris-Todaro model is based on the following assumptions:
1. There are two sectors in the economy – the rural or agricultural sector (A) and the urban or manufacturing sector (M).
2. The model operates in the short run.
3. The marginal production of labour in agriculture (MPLA) and of industry (MPLM) are determined by their respective technologies.
4. Capital is available in fixed quantities in the two sectors.
5. There are L workers in economy with LA and LM numbers employed in the rural and urban sectors respectively.
6. The number of urban jobs available (LM) is exogenously fixed. In the rural sector some work is always available. Therefore, the total urban labour force LM comprises L-LAalong with an available supply of rural migrants.
7. The urban wage is fixed at WM and the rural wage at WA, WM>WA.
8. The rural wage equals the rural marginal product of labour and the urban wage is exogenously determined.
9. Rural-urban migration continues so long as the expected urban real income is more that the real agricultural income.
At the core of the Harris-Todaro model were the following features. First, real wages (adjusted for cost-of-living differences) are higher in urban formal-sector jobs than in rural traditional-sector jobs. Second, to be hired for a formal-sector job, one has to be physically present in the urban areas where the formal-sector jobs are located. Third, and as a consequence of the first two features, more workers search for formal-sector jobs than are hired, employers hire some of the job seekers but not all of them, and those not hired end up unemployed. Fourth, for equality to be maintained between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting is characterized by urban unemployment. And fifth, any temporary difference in the expected wages between one sector and another is eroded as workers migrate from the low-expected-wage labor market to the high-expected-wage labor market.
Starting from the assumption that migration is based primarily on privately rational economic calculations despite the existence of high urban unemployment, the Todaro model postulates that migration proceeds in response to urban-rural differences in expected rather than actual earnings. The fundamental premise is that as decision-makers migrants consider the various labor-market opportunities available to them as, say, between the rural and urban sectors, choosing the one that maximizes their “expected” gains from migration. Expected gains are measured by the difference in real incomes between rural and urban work opportunities and the probability of a new migrant’s obtaining urban job. The “thought process” of the Todaro model can be explained as follows. Suppose the average unskilled or semiskilled rural worker has a choice between being a farm laborer (or working his own land) for an annual average real income of, say, 50 units per year, and migrating to the city where a worker with his skill or educational background can obtain wage employment yielding an annual real income of, say, 100 units. The worker should seek the higher-paying urban job. It is important to recognize, however, that these migration models were developed largely in the context of advanced industrial economies and, as such, implicitly assumed the existence of full or near-full employment in urban areas. In a full-employment environment the decision to migrate can in fact be predicated solely on securing the highest-paying job wherever it becomes available, other factors being held constant. Simple economic theory would then indicate that such migration should lead to a reduction in wage differentials through geographic changes in supply and demand, both in areas of out-migration (where incomes rise) and in points of in-migration (where they fall). Unfortunately, such an analysis is not very realistic in the context of the institutional and economic framework of most Third World nations. First of all, these countries are beset by a chronic and serious problem of urban surplus labor, so that many migrants cannot expect to secure high-paying urban jobs immediately upon arrival. In fact, it is much more likely that upon entering the urban labor market many migrants will either become totally unemployed or will seek casual and parttime employment in the urban traditional sector for some time.
Consequently, in his decision to migrate the individual must in effect balance the probabilities and risks of being unemployed or underemployed for a considerable period of time against the positive urban-rural real-income differential. That it is possible for our hypothetical migrant to earn twice as much annual real income in an urban area as in his rural environment may be of little consequence if his actual probability of securing the higher-paying job within a year is one chance in five. In such a situation the migrant’s actual probability of being successful in securing the higherpaying urban job is 20%, so that his “expected” urban income for the one-year period is in fact 20 units, not the 100 units that a migrant in a full-employment urban environment might expect to receive. Thus, with a one-period time horizon and a probability of success of 20% it would be irrational for this migrant to seek an urban job even though the differential between urban and rural earnings capacity is 100%. On the other hand, if the probability of success were, say, 60%, so that the expected urban income is 60 units, it would be entirely rational for such a migrant with his one-period time horizon to try his luck in the urban job “lottery” even though urban unemployment may be extremely high. Returning now to the more realistic situation of longer time horizons for potential migrants, especially considering that the vast majority are between the ages of 15 and 24, It is argued that the decision to migrate should be represented on the basis of a “permanent income” calculation. If the migrant anticipates a relatively low probability of finding regular wage employment in the initial period but expects this probability to increase over time as he is able to broaden his urban contacts, then it would still be rational for him to migrate even though expected urban income during the initial period or periods might be lower than expected rural income. As long as the present value of the net stream of expected urban income over the migrant’s planning horizon exceeds that of the expected rural income, the decision to migrate is economically justified. Rather than wage adjustments bringing about an equilibrium between urban and rural incomes, as would be the case in a competitive model, it is further argued that rural-urban migration itself must act as the ultimate equilibrating force. With urban wages assumed to be inflexible in a downward direction, rural and urban “expected” incomes can be equalized only by falling urban job probabilities resulting from rising urban unemployment. For example, if average rural wages are 60 units and urban wages are institutionally set at a level of 120 units, then in a one-period model a 50% urban unemployment rate would be necessary to vitiate the private profitability of further migration. Since expected incomes are defined in terms of both wages and employment probabilities, argument is that it is not only possible but likely to have continued migration in spite of the existence of sizable rates of urban unemployment. In the above numerical example, migration would continue even if the urban unemployment rate were 30 or 40%.
Conclusion
In the Harris–Todaro model, the rising urban wage pushes up the expected wage in the urban sector and consequently encourages workers to migrate from the rural sector to the urban sector. If, in the resulting migration, there are more workers than the number of job opportunities created in the urban sector, some will necessarily be unemployed which is the case in Nigeria when people leave rural areas to go to bigger cities like Lagos and end up being unemployed. Occasionally, the increase in unemployment lowers the per-capita income level before the capital is accumulated. This phenomenon is referred to as Todaro paradox.
If there is a necessary and sufficient condition under which the increase in capital stock does not increase unemployment in the urban area. This condition concerns the relationship between the institutionally and legally set minimum wage in the urban area and increased agricultural productivity in the rural area, that is there is an institutionally set minimum wage in urban areas (eg Lagos) that can’t be manipulated while the government works harder to develop the agricultural sector. Unsurprisingly, if agricultural productivity rises and income in the rural area increases, rural workers have no need to migrate to the urban sector to find jobs and face the risk of unemployment.
NAME:METEKE JOY ORIMUSUE
DEPARTMENT:ECONOMICS
REG.NO:2017/242430
EMAIL:joymetex2000@gmail.com
BLOG WEBSITE:metekejoy01.blogspot.com
LEWIS-FEI-RANIS THEORY(SURPLUS LABOUR THEORY)
Lewis (1954) proposed a seminal theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development.The central idea behind the Lewis model is fairly simple. Lewis divided labour force into two differentiated groups – “subsistence sector” and “capitalist sector” where the former is assumed to contain unlimited supply and consequently, a pool of surplus labour that sets labour-supply conditions for the latter.
Assumptions of the Lewis Model
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion.Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector.
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.Ranis and Fei (1961) formalised the Lewis theory and defined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model. These three phases, illustrated in Diagram 1below, are distinguished by the marginal productivity of agricultural labour. The entry into each phase is marked three turning points:
• The breakout point leads to phase one growth with redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural unemployment.
• The commercialisation point leads to phase three of self-sustaining economic growth with the commercialisation of the agricultural sector.One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development. One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.[4] They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development[5] In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.Phase 3 begins from the point of commercialization which is at K in the Figure. This is the point where the economy becomes completely commercialized in the absence of disguised unemployment. The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor.
The amount of labor that is shifted and the time that this shifting takes depends upon:The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits;
The nature of the industry’s technical progress and its associated bias;
Growth rate of population.
So, the three fundamental ideas used in this model are:
1.Agricultural growth and industrial growth are both equally important;
2.Agricultural growth and industrial growth are balanced;
3. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap.
HARRIS TODARO THEORY OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.migration from rural areas to urban areas will increase if:
1.Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
2.Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
RELATION TO NIGERIA ECONOMY
According to this model migrating workers in developing countries sich as Nigeria are essentially participants in a lottery of relatively high-paid jobs in the towns. When new urban jobs are created the lottery becomes more attractive to potential migrants. Depending on their responsiveness to this improved opportnity, more than one worker are likely to migrate for each job created.
If so, the output foregone may be that of two or more agricultural workers, not just one. If the migrants bring some of their family members to urban areas more output will be lost. The reason is that the wife and children of migrants find fewer employment opportunities in towns than in the rural areas because they do not have land in the towns on which to grow food.
NAME:METEKE JOY ORIMUSUE
DEPARTMENT: ECONOMICS
REG. NO:2017/242430
EMAIL:joymetex2000@gmail.com
WEBSITE:www.metekejoy01.blogspot.com
LEWIS FEI RANIS THEORY (SURPLUS LABOUR THEORY)
Lewis (1954) proposed a seminal theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development.The central idea behind the Lewis model is fairly simple. Lewis divided labour force into two differentiated groups – “subsistence sector” and “capitalist sector” where the former is assumed to contain unlimited supply and consequently, a pool of surplus labour that sets labour-supply conditions for the latter.
Assumptions of the Lewis Model
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion.Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector.
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.Ranis and Fei (1961) formalised the Lewis theory and defined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model. These three phases, illustrated in Diagram 1below, are distinguished by the marginal productivity of agricultural labour. The entry into each phase is marked three turning points:
• The breakout point leads to phase one growth with redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural unemployment.
• The commercialisation point leads to phase three of self-sustaining economic growth with the commercialisation of the agricultural sector.One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development.One of the biggest drawback of the lewis models was the underminig of the role of agriculture in boosting the growth of the industrial sector.In addition to that,he did not acknowledge that the increase in the productivity of labour should take place prior to the laboir shift between two sectors .However,these two ideas were taken into account in the field ranis economic modelof three growth stages:
In phase 1of the model,the elasticity of agricultural labor force is infinite and as a result,suffers from disguised unemployment,that is MPC=0
In phase 2,the agricultural sector sees a rise in the productivity and leads to increased Industrial growth such that a base for the next phase is prepared.Also in phase 2,agricultural surplus may exist as the increasing AP os higher than the MPand not equal to the substitence level of wages .
Phase 3is the point where the economy becomes completely commercialised in the absence of disisguised employment .Lewis fei ranis model according to Chen(2005) should be considered a classical model because of the usage of industrial wage .
RELATING THE MODEL TO NIGERIA’S ECONOMY
The government should invest on activities that promote agricultural gains and leads to pro poor growth.They should broadly align agricultural spending and policy priorities in order to stimulate qualitative growth in the sector of growing financial support to farmers.
HARRIS TODARO MODEL OF MIGRATION
The Harris Todaro model was named after John.R.Harris and Michael Todaro,is an economic model developed in 1970and used in development economics and welfare economics to explain some of the issues concerning rural urban migration.The major assumption of this model is that migration decision is based on expected income differentials between rural urban migration in a context of high urban unemployment can ecomomically rational if expected urban income exceeds expected rural income .Harris Todaro model studied the dual sector:rural and urban sector .The difference between them is the type of good produced,technology of production and the process of wage determination.This can be explained using the cobb douglas production function ;Ya=AaNa′.
The key hypothesis of Harris Todaro are that migrants react mainly to economic incentives ,earnings differencials and the probability of getting a job at the influence on the migration decision.
RELATING MODEL TO NIGERIA ECONOMY
I’m term of pro poor economic growth,the Harris Todaro model and other multi sector labor market can help policy makers avoid two mistakes; one is to assume that development effort should be channled to sectors where the poor are .The other is to assume that effort should always be focused on getting the poor out of the sectors which they now are . Careful cost benefits analysis based on well specified labour market models is required to decide among such alternatives .
NAME:METEKE JOY ORIMUSUE
DEPARTMENT: ECONOMICS
REG. NO:2017/242430
EMAIL:joymetex2000@gmail.com
WEBSITE:www.metekejoy01.blogspot.com
LEWIS FEI RANIS THEORY (SURPLUS LABOUR THEORY)
Lewis (1954) proposed a seminal theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development.The central idea behind the Lewis model is fairly simple. Lewis divided labour force into two differentiated groups – “subsistence sector” and “capitalist sector” where the former is assumed to contain unlimited supply and consequently, a pool of surplus labour that sets labour-supply conditions for the latter.
Assumptions of the Lewis Model
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion.Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector.
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.Ranis and Fei (1961) formalised the Lewis theory and defined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model. These three phases, illustrated in Diagram 1below, are distinguished by the marginal productivity of agricultural labour. The entry into each phase is marked three turning points:
• The breakout point leads to phase one growth with redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural unemployment.
• The commercialisation point leads to phase three of self-sustaining economic growth with the commercialisation of the agricultural sector.One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development.One of the biggest drawback of the lewis models was the underminig of the role of agriculture in boosting the growth of the industrial sector.In addition to that,he did not acknowledge that the increase in the productivity of labour should take place prior to the laboir shift between two sectors .However,these two ideas were taken into account in the field ranis economic modelof three growth stages:
In phase 1of the model,the elasticity of agricultural labor force is infinite and as a result,suffers from disguised unemployment,that is MPC=0
In phase 2,the agricultural sector sees a rise in the productivity and leads to increased Industrial growth such that a base for the next phase is prepared.Also in phase 2,agricultural surplus may exist as the increasing AP os higher than the MPand not equal to the substitence level of wages .
Phase 3is the point where the economy becomes completely commercialised in the absence of disisguised employment .Lewis fei ranis model according to Chen(2005) should be considered a classical model because of the usage of industrial wage .
RELATING THE MODEL TO NIGERIA’S ECONOMY
The government should invest on activities that promote agricultural gains and leads to pro poor growth.They should broadly align agricultural spending and policy priorities in order to stimulate qualitative growth in the sector of growing financial support to farmers.
HARRIS TODARO MODEL OF MIGRATION
The Harris Todaro model was named after John.R.Harris and Michael Todaro,is an economic model developed in 1970and used in development economics and welfare economics to explain some of the issues concerning rural urban migration.The major assumption of this model is that migration decision is based on expected income differentials between rural urban migration in a context of high urban unemployment can ecomomically rational if expected urban income exceeds expected rural income .Harris Todaro model studied the dual sector:rural and urban sector .The difference between them is the type of good produced,technology of production and the process of wage determination.This can be explained using the cobb douglas production function ;Ya=AaNa′.
The key hypothesis of Harris Todaro are that migrants react mainly to economic incentives ,earnings differencials and the probability of getting a job at the influence on the migration decision.
RELATING MODEL TO NIGERIA ECONOMY
I’m term of pro poor economic growth,the Harris Todaro model and other multi sector labor market can help policy makers avoid two mistakes; one is to assume that development effort should be channled to sectors where the poor are .The other is to assume that effort should always be focused on getting the poor out of the sectors which they now are . Careful cost benefits analysis based on well specified labour market models is required to decide among such alternatives .
NAME: CHIGBATA FRANKLIN CHIGOZIE
REG: 2017/242424
EMAIL:FRANKLIN.CHIGBATA.242424@UNN.EDU.NG
ECO 361
Haris-Todaro Model of Migration
The Harris-Todaro Model was promulgated in the 1970 by two economists John R. Harris and Micheal Todaro. This model is used in development economics to understand the issues with rural urban migration. It has been noticed that for an economy to grow, large number of Labours has to be moved from the traditional sector in rural areas. Where the labour productivity is low or zero to a modern manufacturing sector where the productivity of labour is rising due to capital accumulation in that sector. Here we consider time closed economy that consist of two sector corresponding to rural and modern sector. The total population is assume to be one. The mass of residents it should not be surprising therefore that in the literature of development economics dualistic model is gained popularity over the simple-commodity or singular sector theories. A typical dualistic model in development economic constrains two sectors, a traditional sector in a rural area and manufacturing sector in an urban area. One factor of such rural urban migration is the per capital income differential between two rural and urban areas.
Todaro and Harris set up a seminal framework of migration between rural and urban area. They hypothesis that individual migrant to urban sector with the sum of obtaining employment. The formal sector and that informal sector employment is a transitional phase during which migrants balance the probability of employment against the real income differentials between the urban sector and rural sectors.
THE CORE ARGUMENT, ASSUMPTIONS AND DIAGRAMS OF THE HARRIS-TODARO MODEL
The main core argument of Todaro is the introduction of the probability of employment as an element in the decision making process of a potential migrant. He argues that a more realistic view of labour migration is less developed countries is a two stage process. The first stage rural migrant enter urban area settle in the traditional urban sector in a period of time. The second stage is reached when the migrant find a more permanent job in the modern sector. Todaro dual not consider the informal urban sector explicitly, it employee are underemployed or not different from does that are not employed.
Some of the argument and assumption of Harris and Todaro in the formation of this model. Harris and Todaro studied the migration of workers in a two sectors economic system namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the production of agricultural goods. The productive process of the sector can be described by a Cobb-Douglas production function.
Ya = Aa Na
Where Ya is the production level of agricultural good. Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < 9 < 1 are parametric constants. Both market are perfectly competitive. Nevertheless, there is segmentation in the labour market due to a high minimum urban wage politically determined.
In the rural sector the real wage is flexible, is equal to the marginal productivity of labour in the sector.
Wa = Aa
Where Na is the real wage and P is the price of the agricultural good both expressed in the units of manufacture
Wa = aAm such Nm Nu
Where Nu is the amount of workers in the urban sector.
This relative price of agriculture good P with respect to the ratio of Ym/Ya
The Temporary Equilibrium is given by a parametric constant vector (Aa, Am, f, a, r, g) an initial urban population Nu and a minimum wage Wm one can calculate the temporary equilibrium of the economic system Nm =
In sum (Nm, Ym, Na, P, Wa) configures a temporary equilibrium that might be altered whether occurs a migration of worker, induced by the differential of sectorial wage which changes the sectoral distribution of overall population.
The long run equilibrium is determined in the Harris – Todaro model. It will absence of a net rural-urban migratory flow. They argue that the rural workers in their decision on migrating to the urban area, estimate the expected urban wage.
Nm/Mu is the ratio of employment rate, it will estimation of the probability that live in the urban area get job in that area or sector
As mention before the key assumption of the model of Harris-Todaro is that there will be a migratory flow from the rural to the urban sector from the rural to the urban sector while the expected urban wage is higher than the rural wage. Thus, the long run equilibrium is attained when the urban worker population reaches a level such that the expected urban wage equates the rural wage.
This equality is known as the Harris-Todaro condition in the economic literature. Harris and Todaro argue that the differential of expected wage can be constant value. When the differential reader ‘d’ the net migration ceases.
Lewis-Fei-Ranis Model of Economic Growth
According to Rains-Fei point shows the Lewis turning point i.e. the point after which the supply curve of labour in the industrial sector will turn upwards. However Lewis himself did not consider this point as the upward turning point.
For him all labour in the agriculture sector whose marginal productivity was either zero or was less than the institutional wage was available to the industrial sector at the institutional wage (or at a rate a little above it,) Fie never pointed out that as soon as the zero value labour was transferred to the industrial sector (i.e. up to the end of phase I in the present model) the supply curve for labour will start turning upwards. For him some other labour too (whose marginal productivity was less than the institutional wage, was also available at a constant wage rate.The reason for this difference in the views of the authors of two models is that unlike Ranis and Fei, Lewis did not take into account the effect of changing terms on trade on the supply price of labour in the industrial sector. He totally ignored it.
Fie assumed as if the wages to the transferred labour will be paid in agricultural products and as the institutional wages fixed in terms of agricultural produce, the labour transferred to the industrial sector will continue to be available at the constant wage rate i.e. that institutional wage.Ranis and Fei, on the other hand assumed that the labour in the industrial sector will be paid, in terms of the industrial products and they had to bring the hanging terms of trade into the picture. So we find that whereas according to Ranis and Fei, Lewis’ turning point appears as soon as phase in their model ends, according to Lewis himself, the turning point will appear at the end of the phase II. If i.e. upto the point where labour in the agricultural sector is paid institutional wages.
Basic Thesis of the Model:
This theory is concerned with a poor economy which has following properties:
(i) There is an abundance of labor in such UDC and shortage of natural resources.
(ii) The population growth rate is very high which results in mass unemployment in the economy.
(iii) The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labor is zero and negative in agriculture sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy.
Thus the model suggests that, "Economic development would be taking place if agricultural laborers are transferred to industrial sector where their productivity will increase".As we told earlier that it is a dual economy where there is a stagnant agri. sector and dynamic industrial sector. The situation where MPL – 0, labor can be transferred to industrial sector without any loss in agricultural output. The real wages in industrial sector remains fixed and it is equal to the initial level of real income in agri. sector. Such wages are given the name of institutional wages.
Stages of Fei-Ranis Model:
Fei and Ranis develop their dual economy model with the help of three stages of economic growth. They are presented as:
The investment in industrial sector (with the surplus earned) will shift the MP curve outward right as from aa to bb and then to cc. In this way agri. sector will be able to get rid of labor until the MPL = real wages = AB =constant institutional wage (CIW) which is obtained by dividing the total agri. output ORX (b part of Fig) by AD amount of labor. In other words, the slope of ORX curve represents real wage rate. Thus the MPL = CIW where the tangent to the total output line ORX at X is parallel to OX. In the second phase DK amount of labor were employed. But still MPL MPL. It means that in this phase still a certain amount of labor is surplus or they are prey to disguised unemployment.
A. The first stage of FR model is very similar to Lewis. Disguised unemployment comes into being because the supply of labor is perfectly elastic and MPL = 0. Therefore, such disguised unemployed are to be transferred to industrial sector at the constant institutional wage.
B. In the second stage of FR model (phase) agri. workers add to agri. output but they produce less than institutional wage they get. In other words, in the second stage the labor surplus exists where APL > MPL, but it is not equal to subsistence (institutional) wages. Accordingly, such disguised unemployed also have to be transferred to industrial sector. If the migration to industrial sector continues a situation is eventually reached where the farm workers produce output equal to institutional wages. This would mean that productivity in agri. sector has gone up. With this the third phase (stage) starts.
C. In the third stage of FR model the take-off situation comes to an end and there begins the era of self-sustained growth where the farm workers produce more than the institutional wage they get. In this stage of economic growth the surplus labor comes to an end and the agri. sector becomes commercialized sector. All such is explained with the Fig.
The amount and time to re-allocate labor will depend upon:
(i) The rate of growth of industrial capital which depends upon the growth of profits in industrial sector and growth of surplus generated within the agri. sector.
(ii) The nature and bias of technical progress in industry.
(iii) The rate of growth of population. It means that the rate of labor transfer must be in excess of the rate of growth of population.
The three phases of labor transfer are summarized as:
In phase I: MPL = 0 and there exists the surplus labor equal to AD.
In phase II: CIW > MPL > 0 and there exists the open and disguised unemployment equal to AK.
In phase III: MPL > CIW and the economy is fully commercialized and disguised unemployment is exhausted. The supply of labor curve becomes steeper and both agri. and industrial sector compete with each other to get labor.
Thus we find that whereas Lewis had failed to offer a satisfactory explanation of this subsistence sector and ignored the real impact of population growth on the choice of capital intensity on the process of surplus labor absorption. Moreover, FR model emphasized upon the simultaneous growth of agri. and industrial sectors. Thus FR model believes in ‘Balanced Growth’ in the take-off stage. It means that there should be a simultaneous investment in both agri, sector and industrial sector. According to FR model in the beginning the surplus rises; such surplus will bo available as a capital in the take-offstage. Some part of this surplus will be used in agri. development, while some part will be reploughed in industrial development. As a result, both agri. and industrial sectors will grow under ‘Balanced Growth’ pattern.
Thus, three major points are highlighted in the FR mode:
(i) Growth of agri. is as important as the growth of industry.
(ii) There should be a balanced growth of agri and industrial sectors.
(iii) The rate of labor absorption must be higher than the rate of population growth to get out of the “Malthusian Nightmare”.
Criticism:
The FR model is considered to be an improvement over Lewis. This model presents a balanced growth of both the sectors of the economy, the most notable thing for the growth of UDCs. Despite this fact, this model has following shortcomings:
(i) Marginal Productivity of Labor in Phase I: The FR model is of the view that MFL = 0 in the first phase of growth, and the transfer of labor from agri. would not reduce output in the agri. sector in phase I. But the economists like Berry and Soligo are of the view that agri. output in phase I of FR model will not remain constant and may fell under different systems of land tenure, i.e., the peasant proprietorship and share cropping etc.
(ii) Marginal Productivity of Labor is Not Zero: Prof. Jorgenson who has also presented a model of ‘dual economy’ has object FR model’s contention of zero MP in phase I. He says whether MPL will be zero is an empirical issue. During the seasons of sowing and harvesting the MPL > 0. Jorgenson concluded on the basis of Japanese data even for the pre I world war period the supply of labor was not unlimited. Then how MPL can be zero.
(iii) Ignoring The Role of Capital: The FR model concentrated upon land and labor as the determinants of output, ignoring the role of capital. But Profs. Brown, Byres, Frankel, Griffen, Ghatak and Ingersent are of the view that in the UDCs there has occurred what is known as ‘Green Revolution’ in agri. which has promoted the greater use of capital and technology on lands. Consequently, there has been a greater increase in the agri. productivity and agri. incomes.
(iv) Open Economy: FR model ignored the role of foreign trade as it assumed a closed economy model. In the 2nd phase when agri. product decreases the TOT goes against industrial sector. This would occur in the presence of closed economy. But if the model is made open such would not happen as the goods could be imported in the presence of then-scarcity. This was especially observed in case of Japan which imported cheap farm products to improve her TOT (terms of trade).
(v) Supply of Land in Long Run: FR model assumed that in the process of economic development the supply of land remained fixed. But it is not true. The supply of land can be increased in case of long run.
(vi) Commercialization Of Agri. And Inflation: According to FR model when 3rd phase starts the agri. sector becomes commercialized. But it is criticized by saying that this phase does not start so easily The shifting of labor to industrial sector will create labor shortage in agri. sector. This will create shortage of food stuff leading to increase their prices. In this way, the inflation will generate which may obstruct the process of development.
(vii) Low Productivity in Agri Sector: According to Jorgenson it has been observed that there has been a very slow rise in the productivity of agri. sector. Consequently, the surplus will hardly be created in agri. sector. Accordingly, agri. sector will not contribute to development Thus the growth requires that the surplus must be generated and it should persist.
CONCLUSION
We analyse a two-sectorial economy composed by adaptive agent such as the individual that struggle over time for best sectorial location in term of earnings. First the basic assumption that of Harris-Todaro model that rural urban migration will occur while the urban expected wage exceed the rural wage. This on my view is visible or can be seen in the real world when individuals or economic agents see potential in a geographical area, they find to move to migrate in those area. Secondly the migratory dynamics generated by agents that seeking to adapt to the economic environment that they co-create lead the economy toward a long run equilibrium. This is also applicable in the real world were the effect of migration are felt.
Lastly the impact of the minimum wage and elasticity of terms of term in a long run equilibrium obtained by simulations are in agreement with the prediction of the original Harris-Todaro model with the application of the Cobb-Douglas technology.The harris-todaro model is visible in the real world because it applies the neutral principle of rural-urban migration and this make it more application in the real world.
NAME: CHIGBATA FRANKLIN CHIGOZIE
REG: 2017/242424
EMAIL:FRANKLIN.CHIGBATA.242424@UNN.EDU.NG
ECO 361
Haris-Todaro Model of Migration
The Harris-Todaro Model was promulgated in the 1970 by two economists John R. Harris and Micheal Todaro. This model is used in development economics to understand the issues with rural urban migration. It has been noticed that for an economy to grow, large number of Labours has to be moved from the traditional sector in rural areas. Where the labour productivity is low or zero to a modern manufacturing sector where the productivity of labour is rising due to capital accumulation in that sector. Here we consider time closed economy that consist of two sector corresponding to rural and modern sector. The total population is assume to be one. The mass of residents it should not be surprising therefore that in the literature of development economics dualistic model is gained popularity over the simple-commodity or singular sector theories. A typical dualistic model in development economic constrains two sectors, a traditional sector in a rural area and manufacturing sector in an urban area. One factor of such rural urban migration is the per capital income differential between two rural and urban areas.
Todaro and Harris set up a seminal framework of migration between rural and urban area. They hypothesis that individual migrant to urban sector with the sum of obtaining employment. The formal sector and that informal sector employment is a transitional phase during which migrants balance the probability of employment against the real income differentials between the urban sector and rural sectors.
THE CORE ARGUMENT, ASSUMPTIONS AND DIAGRAMS OF THE HARRIS-TODARO MODEL
The main core argument of Todaro is the introduction of the probability of employment as an element in the decision making process of a potential migrant. He argues that a more realistic view of labour migration is less developed countries is a two stage process. The first stage rural migrant enter urban area settle in the traditional urban sector in a period of time. The second stage is reached when the migrant find a more permanent job in the modern sector. Todaro dual not consider the informal urban sector explicitly, it employee are underemployed or not different from does that are not employed.
Some of the argument and assumption of Harris and Todaro in the formation of this model. Harris and Todaro studied the migration of workers in a two sectors economic system namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the production of agricultural goods. The productive process of the sector can be described by a Cobb-Douglas production function.
Ya = Aa Na
Where Ya is the production level of agricultural good. Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < 9 < 1 are parametric constants. Both market are perfectly competitive. Nevertheless, there is segmentation in the labour market due to a high minimum urban wage politically determined.
In the rural sector the real wage is flexible, is equal to the marginal productivity of labour in the sector.
Wa = Aa
Where Na is the real wage and P is the price of the agricultural good both expressed in the units of manufacture
Wa = aAm such Nm Nu
Where Nu is the amount of workers in the urban sector.
This relative price of agriculture good P with respect to the ratio of Ym/Ya
The Temporary Equilibrium is given by a parametric constant vector (Aa, Am, f, a, r, g) an initial urban population Nu and a minimum wage Wm one can calculate the temporary equilibrium of the economic system Nm =
In sum (Nm, Ym, Na, P, Wa) configures a temporary equilibrium that might be altered whether occurs a migration of worker, induced by the differential of sectorial wage which changes the sectoral distribution of overall population.
The long run equilibrium is determined in the Harris – Todaro model. It will absence of a net rural-urban migratory flow. They argue that the rural workers in their decision on migrating to the urban area, estimate the expected urban wage.
Nm/Mu is the ratio of employment rate, it will estimation of the probability that live in the urban area get job in that area or sector
As mention before the key assumption of the model of Harris-Todaro is that there will be a migratory flow from the rural to the urban sector from the rural to the urban sector while the expected urban wage is higher than the rural wage. Thus, the long run equilibrium is attained when the urban worker population reaches a level such that the expected urban wage equates the rural wage.
This equality is known as the Harris-Todaro condition in the economic literature. Harris and Todaro argue that the differential of expected wage can be constant value. When the differential reader ‘d’ the net migration ceases.
Lewis-Fei-Ranis Model of Economic Growth
According to Rains-Fei point shows the Lewis turning point i.e. the point after which the supply curve of labour in the industrial sector will turn upwards. However Lewis himself did not consider this point as the upward turning point.
For him all labour in the agriculture sector whose marginal productivity was either zero or was less than the institutional wage was available to the industrial sector at the institutional wage (or at a rate a little above it,) Fie never pointed out that as soon as the zero value labour was transferred to the industrial sector (i.e. up to the end of phase I in the present model) the supply curve for labour will start turning upwards. For him some other labour too (whose marginal productivity was less than the institutional wage, was also available at a constant wage rate.The reason for this difference in the views of the authors of two models is that unlike Ranis and Fei, Lewis did not take into account the effect of changing terms on trade on the supply price of labour in the industrial sector. He totally ignored it.
Fie assumed as if the wages to the transferred labour will be paid in agricultural products and as the institutional wages fixed in terms of agricultural produce, the labour transferred to the industrial sector will continue to be available at the constant wage rate i.e. that institutional wage.Ranis and Fei, on the other hand assumed that the labour in the industrial sector will be paid, in terms of the industrial products and they had to bring the hanging terms of trade into the picture. So we find that whereas according to Ranis and Fei, Lewis’ turning point appears as soon as phase in their model ends, according to Lewis himself, the turning point will appear at the end of the phase II. If i.e. upto the point where labour in the agricultural sector is paid institutional wages.
Basic Thesis of the Model:
This theory is concerned with a poor economy which has following properties:
(i) There is an abundance of labor in such UDC and shortage of natural resources.
(ii) The population growth rate is very high which results in mass unemployment in the economy.
(iii) The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labor is zero and negative in agriculture sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy.
Thus the model suggests that, "Economic development would be taking place if agricultural laborers are transferred to industrial sector where their productivity will increase".As we told earlier that it is a dual economy where there is a stagnant agri. sector and dynamic industrial sector. The situation where MPL – 0, labor can be transferred to industrial sector without any loss in agricultural output. The real wages in industrial sector remains fixed and it is equal to the initial level of real income in agri. sector. Such wages are given the name of institutional wages.
Stages of Fei-Ranis Model:
Fei and Ranis develop their dual economy model with the help of three stages of economic growth. They are presented as:
The investment in industrial sector (with the surplus earned) will shift the MP curve outward right as from aa to bb and then to cc. In this way agri. sector will be able to get rid of labor until the MPL = real wages = AB =constant institutional wage (CIW) which is obtained by dividing the total agri. output ORX (b part of Fig) by AD amount of labor. In other words, the slope of ORX curve represents real wage rate. Thus the MPL = CIW where the tangent to the total output line ORX at X is parallel to OX. In the second phase DK amount of labor were employed. But still MPL MPL. It means that in this phase still a certain amount of labor is surplus or they are prey to disguised unemployment.
A. The first stage of FR model is very similar to Lewis. Disguised unemployment comes into being because the supply of labor is perfectly elastic and MPL = 0. Therefore, such disguised unemployed are to be transferred to industrial sector at the constant institutional wage.
B. In the second stage of FR model (phase) agri. workers add to agri. output but they produce less than institutional wage they get. In other words, in the second stage the labor surplus exists where APL > MPL, but it is not equal to subsistence (institutional) wages. Accordingly, such disguised unemployed also have to be transferred to industrial sector. If the migration to industrial sector continues a situation is eventually reached where the farm workers produce output equal to institutional wages. This would mean that productivity in agri. sector has gone up. With this the third phase (stage) starts.
C. In the third stage of FR model the take-off situation comes to an end and there begins the era of self-sustained growth where the farm workers produce more than the institutional wage they get. In this stage of economic growth the surplus labor comes to an end and the agri. sector becomes commercialized sector. All such is explained with the Fig.
The amount and time to re-allocate labor will depend upon:
(i) The rate of growth of industrial capital which depends upon the growth of profits in industrial sector and growth of surplus generated within the agri. sector.
(ii) The nature and bias of technical progress in industry.
(iii) The rate of growth of population. It means that the rate of labor transfer must be in excess of the rate of growth of population.
The three phases of labor transfer are summarized as:
In phase I: MPL = 0 and there exists the surplus labor equal to AD.
In phase II: CIW > MPL > 0 and there exists the open and disguised unemployment equal to AK.
In phase III: MPL > CIW and the economy is fully commercialized and disguised unemployment is exhausted. The supply of labor curve becomes steeper and both agri. and industrial sector compete with each other to get labor.
Thus we find that whereas Lewis had failed to offer a satisfactory explanation of this subsistence sector and ignored the real impact of population growth on the choice of capital intensity on the process of surplus labor absorption. Moreover, FR model emphasized upon the simultaneous growth of agri. and industrial sectors. Thus FR model believes in ‘Balanced Growth’ in the take-off stage. It means that there should be a simultaneous investment in both agri, sector and industrial sector. According to FR model in the beginning the surplus rises; such surplus will bo available as a capital in the take-offstage. Some part of this surplus will be used in agri. development, while some part will be reploughed in industrial development. As a result, both agri. and industrial sectors will grow under ‘Balanced Growth’ pattern.
Thus, three major points are highlighted in the FR mode:
(i) Growth of agri. is as important as the growth of industry.
(ii) There should be a balanced growth of agri and industrial sectors.
(iii) The rate of labor absorption must be higher than the rate of population growth to get out of the “Malthusian Nightmare”.
Criticism:
The FR model is considered to be an improvement over Lewis. This model presents a balanced growth of both the sectors of the economy, the most notable thing for the growth of UDCs. Despite this fact, this model has following shortcomings:
(i) Marginal Productivity of Labor in Phase I: The FR model is of the view that MFL = 0 in the first phase of growth, and the transfer of labor from agri. would not reduce output in the agri. sector in phase I. But the economists like Berry and Soligo are of the view that agri. output in phase I of FR model will not remain constant and may fell under different systems of land tenure, i.e., the peasant proprietorship and share cropping etc.
(ii) Marginal Productivity of Labor is Not Zero: Prof. Jorgenson who has also presented a model of ‘dual economy’ has object FR model’s contention of zero MP in phase I. He says whether MPL will be zero is an empirical issue. During the seasons of sowing and harvesting the MPL > 0. Jorgenson concluded on the basis of Japanese data even for the pre I world war period the supply of labor was not unlimited. Then how MPL can be zero.
(iii) Ignoring The Role of Capital: The FR model concentrated upon land and labor as the determinants of output, ignoring the role of capital. But Profs. Brown, Byres, Frankel, Griffen, Ghatak and Ingersent are of the view that in the UDCs there has occurred what is known as ‘Green Revolution’ in agri. which has promoted the greater use of capital and technology on lands. Consequently, there has been a greater increase in the agri. productivity and agri. incomes.
(iv) Open Economy: FR model ignored the role of foreign trade as it assumed a closed economy model. In the 2nd phase when agri. product decreases the TOT goes against industrial sector. This would occur in the presence of closed economy. But if the model is made open such would not happen as the goods could be imported in the presence of then-scarcity. This was especially observed in case of Japan which imported cheap farm products to improve her TOT (terms of trade).
(v) Supply of Land in Long Run: FR model assumed that in the process of economic development the supply of land remained fixed. But it is not true. The supply of land can be increased in case of long run.
(vi) Commercialization Of Agri. And Inflation: According to FR model when 3rd phase starts the agri. sector becomes commercialized. But it is criticized by saying that this phase does not start so easily The shifting of labor to industrial sector will create labor shortage in agri. sector. This will create shortage of food stuff leading to increase their prices. In this way, the inflation will generate which may obstruct the process of development.
(vii) Low Productivity in Agri Sector: According to Jorgenson it has been observed that there has been a very slow rise in the productivity of agri. sector. Consequently, the surplus will hardly be created in agri. sector. Accordingly, agri. sector will not contribute to development Thus the growth requires that the surplus must be generated and it should persist.
CONCLUSION
We analyse a two-sectorial economy composed by adaptive agent such as the individual that struggle over time for best sectorial location in term of earnings. First the basic assumption that of Harris-Todaro model that rural urban migration will occur while the urban expected wage exceed the rural wage. This on my view is visible or can be seen in the real world when individuals or economic agents see potential in a geographical area, they find to move to migrate in those area. Secondly the migratory dynamics generated by agents that seeking to adapt to the economic environment that they co-create lead the economy toward a long run equilibrium. This is also applicable in the real world were the effect of migration are felt.
Lastly the impact of the minimum wage and elasticity of terms of term in a long run equilibrium obtained by simulations are in agreement with the prediction of the original Harris-Todaro model with the application of the Cobb-Douglas technology.The harris-todaro model is visible in the real world because it applies the neutral principle of rural-urban migration and this make it more application in the real world.
NAME: NNANYELUGO CHIDERA MICHAEL.
REG. NO: 2017/245023
DEPT: ECONOMICS
Email: chiderannanyelugo@gmail.com
HARRIS-TODARO MODEL OF MIGRATION.
LEWIS – FEI-RANIS MODEL OF MIGRATION OF SURPLUS LABOUR
Harris Todaro Model of Migration
Introduction
The model was an academic investigation to throw light on the events following ‘Tripartite Agreement’ in Kenya. The newly independent Kenya in the 1960s was increasingly facing serious situation of unemployment in the major urban cities. To cope with the situation of unemployment, Tripartite Agreement was signed between the government public sector and the private sector. The agreement increased employment in the industrial jobs in exchange for unions agreeing to hold wages at their current levels. The larger number of employment was expected to reduce unemployment, but it appeared that the urban unemployment had increased following the government’s agreement. Harris and Todaro subsequently formulated a model to explain rural-urban economic preferences to migrate. The distinctive concept in the model is that the rate of migration flow from rural (agricultural) areas to urban (industrial) areas is determined by the difference between expected urban wages and rural wages.
The rural-urban two-sector model centrally holds the following futures: 1) Real wages (adjusted for cost-of-living differences) were higher in urban formal sector jobs than in rural traditional sector jobs. 2) To be hired for a formal sector job, it was necessary to be physically present in the urban areas where the formal sector jobs were located. 3) Consequently, from the first two features, more workers searched for formal sector jobs than were actually hired. Employers hired some of the searchers but not all of them. 4) To maintain equality between the expected wage associated with searching for an urban job and the expected wage associated with taking up a lower-paying rural job, the equilibrium arising in such a setting would be characterized by urban unemployment.
History
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
THE HARRIS-TODARO MODEL
A. Assumptions
Harris and Todaro [1] studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors is the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < 0 and 0 < 0 and > 0 are a parametric constants. is the elasticity of p with respect to the ratio Ym/Ya.
The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified:
B. Temporary Equilibrium
Given a parametric constant vector (Aa,Am,,,,), an initial urban population Nu, and a minimum wage wm one can calculate the temporary equilibrium of the economic system by using eqs. (1 – 6).
From eq. (4) one can find the employment level at the manufacturing sector
Replacing eq. (7) in eq. (2) we get the production level of the manufacturing sector
From eq. (6) one can obtain the relation
Which is used with eq. (1) to obtain the agricultural production?
By using. Eqs. (5), (8) and (10) the terms of trade are determined
Finally, by using eqs. (3), (9) and (11), the rural wage in units of manufacturated good is obtained
In sum, the vector (Nm,Ym,Na,Ya,p,wa) configures a temporary equilibrium that might be altered whether occurs a migration of workers, induced by the differential of sectorial wages, which changes the sectorial distribution of overall population.
C. The Long Run Equilibrium
Harris and Todaro, in determining the long run equilibrium, i.e., the absence of a net rural-urban migratory flow, argue that the rural workers, in their decision on migrating to the urban area, estimate the expected urban wage, defined as:
The ratio Nm/Nu, which is the employment rate, is an estimative of the probability that a worker living at urban sector gets a job in this sector.
As mentioned before, the key assumption of the model of Harris and Todaro is that there will be a migratory flow from the rural to the urban sector while the expected urban wage is higher than the rural wage. Thus, the long run equilibrium is attained when the urban worker population reaches a level such that the expected urban wage equates the rural wage:
Harris and Todaro [1], in order to evaluate the stability of the long run equilibrium, postulate a mechanism of adjustment that is based on the following function of sign preservation:
The differential equation that governs the state transition in the model of Harris and Todaro is obtained by replacing equations (12), (13) in eq. (17). Based on this postulated adjustment process, Harris and Todaro [1] show that the long run equilibrium is globally asymptotically stable. This means that the economy would tend to long run equilibrium with unemployment in the urban sector generated by the presence of a relatively high minimum wage for all possible initial conditions. From now on we will refer to the long run equilibrium simply as equilibrium.
Based on the numerical solutions of eq. (16) one can evaluate the impact that the variation of the minimum wage and the elasticity of the terms of trade on the equilibrium. In Fig. 1 we see that under the hypothesis of a Cobb-Douglas technology, the equilibrium urban share, , does not depend on the minimum wage wm. However, changes in the value of wm reduces the labor demand on the manufacturing sector what results in higher unemployment rates in the equilibrium.
HARRIS-TODARO AGENT-BASED MODEL
In this section we describe the implementation of the computational model we proposed, as well as the aggregate patterns obtained numerically and the comparison with the respective analytical results.
A. Computational Implementation
Initially, workers are randomly placed in a square lattice with linear dimension L = 500. The reference values of the parameters used for these simulations are the same done to evaluate the equilibrium of the Harris-Todaro model, namely, Aa = 1.0, Am = 1.0, = 0.3, = 0.7, r = 1.0 and = 1.0. The value of the minimum wage used is wm = 0.8 and the initial urban fraction of the total population is nu = 0.2, where nu = Nu/N is the normalized urban population also called urban share. The initial value nu = 0.2 is in agreement with historical data of developing economies. Given these parameters, one can calculate the vector which characterizes temporary equilibrium of the system by using eqs. (7 – 12).
By using eq. (7), the employment level of the urban sector, Nm, is obtained. If nu Nm/N there will be a fraction of Nm/Nu workers employed, which earn the minimum wage, wi = wm, and (1-Nm/Nu) workers unemployed, which earn a wage wi = 0.
Each worker can be selected to review his sectorial location with probability a, called activity [11]. Therefore, in each time step only a fraction of workers becomes potential migrants, going through the sectorial location reviewing process. Potential migrants will determine their satisfaction level of being in the current sector by comparing their earnings, wi, among nearest neighbors.
The potential migrant starts the comparison process with a initial satisfaction level si = 0. When wi > wneighbor the satisfaction level si is added in one unit; if wi < wneighbor, si is diminished in one unit; if wi = wneighbor, si does not change. After the worker has passed through the reviewing process his/her satisfaction level is checked. The migration will occur only if si < 0, what means that the worker's i earnings is less than the most of his/her nearest neighbors.
After all the potential migrants complete the reviewing process and have decided migrate or not, a new configuration of the system is set. Therefore, once again a new temporary equilibrium of the system is calculated by using eqs. (8 – 12). The whole procedure is repeated until a pre-set number of steps is reached. It is important to emphasize that Nm is kept constant throughout the simulation. It’s given by eq. (7) which depends on the technological parameters, ,Am, and the minimum wage, wm, which are constants too.
B. Analysis of the Emergent Properties
In this section we develop the analysis of the long run aggregate regularities of Harris-Todaro agent-based computational model. These long run properties will be compared between the solution of the analytical model and simulations we ran.
Figures 3, 4 and 5 show the basic characteristics of the transitional dynamics and long run equilibrium generated by simulations. When the economic system has a low initial urban share, nu = 0:2 or nu = 0:3, there is a net migration toward urban sector. This migration takes the urban sector from a full employment situation to an unemployment one. The positive differential of expected wages that pulls workers to the urban sector diminishes. However, if the economic system initiates with a high urban share, nu = 0:8, or nu = 0:9 there is net flow of migration toward rural sector in such a way that the unemployment rate of the urban sector decreases.
In this case, the differential of expected wages is negative. In an economy mainly rural (nu < 0:5), the transitional dynamics characterized by a continuous growth of population of the urban sector with a differential of expected wages relatively high is followed by the stabilization of rural-urban differential of expected wages. In other words, the generalized Harris-Todaro condition, eq. (15), arises as a long run equilibrium result of the agent-based migratory dynamics.
COMPARISON OF THE MODEL
The models are: 1. Lewis’s Model of Rural-Urban Migration 2. The Fei-Ranis Model on Rural-Urban Migration 3. Harris-Todaro Model of Rural-Urban Migration.
1. Lewis’s Model of Rural-Urban Migration:
Prof. W. Arthur Lewis in his article, “Unlimited Supplies of Labour” has explained the process of migration from rural to urban areas in an underdeveloped economy.An underdeveloped economy is a dual economy having two sectors:
a modern sector, and
an indigenous sector.
Out of these two, the latter is the predominant sector. The capitalist sector is defined as “that part of the economy which uses reproducible capital, pays capitalists for the use thereof and employs wage labour for profit making purposes.”
2. The Fei-Ranis Model on Rural-Urban Migration:
John Fei and Gustav Ranis have presented in an article entitled, “A Theory of Economic Development”, the process of rural-urban migration in underdeveloped countries.
The model is related to an underdeveloped economy having surplus labour but scarcity of capital. The major part of the population is engaged in agriculture which is stagnant. Non-agricultural occupations use small capital. There also exists an industrial sector.
3. Harris-Todaro Model Of Rural-Urban Migration:
Prof. J.R. Harris and P. M. Todaro in an article “Migration, Unemployment and Development: A Two-Sector Analysis” in 1970 presented a model on rural-urban migration in underdeveloped countries.
The main idea of the Harris-Todaro model is that labour migration in underdeveloped countries is due to rural-urban differences in average expected wages rather than actual wages. The migrants consider the various opportunities of employment available to them in rural and urban sectors and choose the one that maximizes their expected wages from migration.
Conclusion
An important aspect of urban unemployment in developing countries is that it is predominantly open. The massive influx of rural migrants in the cities has been instrumental in fostering an overwhelmingly faster population growth in urban areas than in the rural ones. Rural workers are lured to migrate by economic incentives as well as by other attractions of an urbane life. While some of the migrants do manage to secure jobs in industries, the less-fortunate ones get absorbed only in the urban informal sector and the rest wait for their chance to get employment and thus swell the number of open urban unemployment. A substantial portion of the urban population in a country like India is engaged in the informal sector.
LEWIS – FEI-RANIS MODEL OF MIGRATION OF SURPLUS LABOUR
History
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Basic of the Model
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development in phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
Using the help of the figure on the left, we see that after AD, MP begins to rise, and industrial labor rises from zero to a value equal to AD. AP of agricultural labor is shown by BYZ and we see that this curve falls downward after AD. This fall in AP can be attributed to the fact that as agricultural laborers shift to the industrial sector, the real wage of industrial laborers decreases due to shortage of food supply, since less laborers are now working in the food sector. The decrease in the real wage level decreases the level of profits, and the size of surplus that could have been re-invested for more industrialization. However, as long as surplus exists, growth rate can still be increased without a fall in the rate of industrialization. This re-investment of surplus can be graphically visualized as the shifting of MP curve outwards. In Phase2 the level of disguised unemployment is given by AK. This allows the agricultural sector to give up a part of its labor-force until
{\displaystyle {\text{Phase 1}}:AL({\text{from figure}})=MP=0{\text{ and }}AB({\text{from figure}})=AP\,}
Depiction of phase1, phase2 and phase 3 of the dual economy model using average output
After AD, MP begins to rise, and industrial labor rises from zero to a value equal to AD. AP of agricultural labor is shown by BYZ and we see that this curve falls downward after AD. This fall in AP can be attributed to the fact that as agricultural laborers shift to the industrial sector, the real wage of industrial laborers decreases due to shortage of food supply, since less laborers are now working in the food sector. The decrease in the real wage level decreases the level of profits, and the size of surplus that could have been re-invested for more industrialization. However, as long as surplus exists, growth rate can still be increased without a fall in the rate of industrialization. This re-investment of surplus can be graphically visualized as the shifting of
MP curve outwards. In Phase2 the level of disguised unemployment is given by AK. This allows the agricultural sector to give up a part of its labor-force until the amount of labor that is shifted and the time that this shifting takes depends upon:
The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits;
The nature of the industry's technical progress and its associated bias;
Growth rate of population.
So, the three fundamental ideas used in this model are:
Agricultural growth and industrial growth are both equally important;
Agricultural growth and industrial growth are balanced;
Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap.
This shifting of labor can take place by the landlords' investment activities and by the government's fiscal measures. However, the cost of shifting labor in terms of both private and social cost may be high, for example transportation cost or the cost of carrying out construction of buildings. In addition to that, per capita agricultural consumption can increase, or there can exist a wide gap between the wages of the urban and the rural people. These three occurrences- high cost, high consumption and high gap in wages are called as leakages, and leakages prevent the creation of agricultural surplus. In fact, surplus generation might be prevented due to a backward-sloping supply curve of labor as well, which happens when high income-levels are not consumed. This would mean that the productivity of laborers with rise in income will not rise. However, the case of backward-sloping curves is mostly unpractical.
Critism of the Model
Fei–Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries' efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.
It has been asserted that Fei and Ranis did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed.
Fei and Ranis say, "It has been argued that money is not a simple substitute for physical capital in an aggregate production function. There are reasons to believe that the relationship between money and physical capital could be complementary to one another at some stage of economic development, to the extent that credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry." This indicates that in the process of development they neglect the role of money and prices. They fail to differ between wage labor and household labor, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
Fei and Ranis assume that MPPL is zero during the early phases of economic development, which has been criticized by Harry T.Oshima and some others on the grounds that MPPL of labor is zero only if the agricultural population is very large, and if it is very large, some of that labor will shift to cities in search of jobs. In the short run, this section of labor that has shifted to the cities remains unemployed, but over the long run it is either absorbed by the informal sector, or it returns to the villages and attempts to bring more marginal land into cultivation. They have also neglected seasonal unemployment, which occurs due to seasonal change in labor demand and is not permanent.
To understand this better, we refer to the graph in this section, which shows Food on the vertical axis and Leisure on the horizontal axis. OS represents the subsistence level of food consumption, or the minimum level of food consumed by agricultural labor that is necessary for their survival. I0 and I1 between the two commodities of food and leisure (of the agriculturists). The origin falls on G, such that OG represents maximum labor and labor input would be measured from the right to the left. The transformation curve SAG falls from A, which indicates that more leisure is being used to same units of land. At A, the marginal transformation between food and leisure and MPL = 0 and the indifference curve I0 is also tangent to the transformation curve at this point. This is the point of leisure satiation.
Name: Agbo Jennifer Amarachi
Reg No: 2017/249476
E-mail: jenniferamarachi.agbo@gmail.com
Blog Address: https://agbojenniferamarachi.blogspot.com/?m=1
FIRST TOPIC: HARRIS TODARO MODEL OF MIGRATION.
ANSWER:- HARRIS-TODARO MODEL MIGRATION
INTRODUCTION
In reality, it has been confirmed that an economy can develop effectively by transferring a huge amount of its labour from its subsistence otherwise called Agricultural, backward, and informal sector in the rural region to the modern sector or industry. The Rural sector is known to be a sector where the marginal productivity of labour is very low, or even zero, whereas in the modern sector, the marginal productivity of labour is higher, very much positive and greater than zero. The Harris-Todaro model is a model that explains the little dialogue above, and because it deals with two sector in the economy, it is also referred to as a Dualistic Model. According to the Literature of Development Economics, typical dualistic models became popular in the 1950’s. A Dualistic model in development economics contains, two sectors, which are Traditional/ rural or agricultural sector and a modern or manufacturing sector in the urban area.
However, the ground-breaking work of Harris and Todaro in 1970, was brought as a result of what Todaro called “a curious economic phenomenon” in tropical Africa. The phenomenon was a regular and increasing rural urban migration regardless, the existence or presence of higher positive marginal products in agriculture.
MAJOR CONTRIBUTION OF MICHAEL P. TODARO
The introduction of the probability of employment as an element in the decision making process of a potential migrant is considered the main contribution of Todaro. He called his proposal “a more realistic picture of labour migration in less developed countries” that is, a two-stage process.
The First Stage: is where the rural migrant enters the urban area and settles down in traditional urbans sector (the informal sector) for a given or certain period of time.
The Second Stage: it is reached when the migrant finds a more permanent job in the modern sector. Although Todaro and some other authors did not consider the employees of the informal sector, they were seen to be the same with unemployed people in the society, this is because to them they make no income of their own and always have to rely on their relatives for survival.
According to Todaro, the probability of getting a Job is dependent on:
The number of newly recent or newly created jobs in the formal or modern sector/.
The Size of the population Unemployed in the Modern sector.
The length of time a migrant has been in the urban area. It happens that the longer one stays, the greater the chance of finding Job in the urban sector.
HARRIS-TODARO MODEL – AN EXTENSION OF THE TODARO MODEL.
The Harris-Todaro Model is an extension of the Todaro Model. Prof. J.R. Harris and P. Michael Todaro in an article “Migration, Unemployment and Development: A two-Sector Analysis” in 1970 presented a model on rural-urban migration in underdeveloped countries. The core notion of Harris Todaro’s model is that the migration of labour in less developed countries is due to the rural-urban differences in average expected wages rather than actual wages. This means that the migrants will have to consider and weigh the numerous job opportunities that are provided to them in the rural and urban sectors and they will choose the one that gives the highest expected wage from Migration.
The minimum wage which is obtainable in the Urban sector is significantly higher than the rural wage. Therefore, if more job opportunities are created in the urban sector at the minimum wage, the expected wage will rise and rural-urban migration will increase. Expected wages are measured by the differences in real urban income and rural agricultural income and the probability of a migrant’s getting an Urban Job. Thus, migration in the Harris-Todaro model is seen as the wage or income gap between the rural and the urban sectors. However, all the migrants cannot be absorbed simultaneously in the urban sector at that prevailing high wage. So many of them fail to find a job and get employment in the informal urban sector at wages which are even lower than in the rural sector, this means that the number of unemployment will increase in the Urban sector.
The unique concept in the migration flow from rural(Agricultural) areas to urban (Industrial) areas is determined by the difference between expected urban wages and rural wages.
MAIN DISCUSSION OF HARRIS-TODARO MODEL
The ultimate contribution of the Harris-Todaro rural-urban two-sector migration model was to build a model that fit the schematic facts of the labour market. Developing countries implemented program on incorporated rural development which encouraged an increase in the rural traditional sector wage. The theory proves that the higher the Unemployment rate, the lower is the probability of new migrants from the country side actively seeking formal sector employment who are unable to find it.
THE NOTABLE FINDINGS
There is no incentive to migrate if the expected urban wage equals rural income.
There is a great incentive to move from rural to urban area if the expected urban wage is greater than rural income,
There would be an incentive to move in other direction if the expected urban wage is less than rural income.
The expected urban wage depends on what type of Job the migrant is engaged in.
ASSUMPTIONS OF THE HARRIS TODARO MODEL
There are two sectors in the Economy – The rural or agricultural sector (A) and the urban or manufacturing sector (M).
The Model operates in the short run.
The Marginal production of Labour in agriculture (MPLA) and of Industry (MPLM) are determined by their respective technologies.
Available Capital in the two sectors are in fixed quantities.
The number of Urban Jobs available (Lm) is exogenously fixed. In the rural sector some work is always available. Therefore, the total urban labour force Lm comprises L-LA along with an available supply of rural Migrants.
The Urban wage is fixed at Wm and the rural wage at WA , Wm> WA
The rural wage equals the rural marginal product of labour and the urban wage is exogenously determined.
Rural-Urban Migration continues so long as the expected urban real income is more that the real agricultural income.
MAJOR CRITICISMS
The lottery style of Job allocation ignores investment in Job search on the part of the migrants and the informal sector is not clearly modelled.
The assumption of a rigid wage in the modern sector cannot be supported due to lack of evidence. Besides trade union pressure or minimum wage legislation, the wage differentials among sectors could be explained as well by, say. Firm specific training costs.
The issue of discount rates and rational migrants is overlooked and the influence on decision making of risk and risk attitudes on the part of potential migrants is not included.
Differentials in skill levels among the migrants are not accounted for.
Further. Some of the assumptions of the Harris-Todaro model were judged to be too restrictive. The model also assumes that potential migrants are risk neutral where poor migrants will likely be risk averse, as in they are indifferent between a certain expected rural income and uncertain expected urban income of the same magnitude. Also, the assumption that there exist a perfect competition in rural agriculture is not realistic.
However, the main drawback of this model is that it does not incorporate the costs of rural-urban migration or the relatively higher costs of urban living which the migrants have to incur in the urban sector.
CONCLUSION
The Harris-Todaro Model elucidates the issues of rural-urban migration. The equilibrium condition of this model occurs is when the expected urban wage is equal to rural wage. For instance, when government decides to subsidize manufacturing sector Harris-Todaro Paradox may happen. According to the authors job creation instead of dealing with unemployment problem actually may cause increase of unemployment. This happens when urban–rural wage gap is high enough; so rural workers move to the cities hoping to find Job with high wage. However, not all these workers succeed in finding Jobs which leads to Unemployment.
SECOND TOPIC: LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
The Arthur Lewis (1954) theory of dualistic economic development provides the seminal contribution of theories of economic development particularly for labour surplus and resource for poor developing countries. The Economy in the Lewis theory, comprises the agricultural and non-agricultural sectors.
The Agricultural sector is assumed to have huge amounts of surplus labour that results in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is pressured to follow the sharing rule and be equal to the average productivity, that is the institutional wage.
The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30%. It accumulates capital by drawing surplus labour out of the agricultural sector. The expansion of the agricultural sector takes advantage of the infinite elastic supply of labour from the agricultural sector due to its labour surplus. When the surplus labour is exhausted, the labour supply curve in the non-agricultural sector becomes upward sloping. This model is also called Utilization of manpower
Furthermore, Gustav Ranis and John Fei in 1961, formalised and developed Lewis’ theory by combining it with Rostow’s (1956) three “linear stages of growth ” theory. Their significant contribution was the dissembling of Lewis’ two-stage Economic development into 3 phase; defined by the marginal productivity of agricultural labour.
ASSUMPTIONS
The Economy is assumed to be constant in the preconditioning stage. The break out point marks the creation of an infant non-agricultural sector and the entry into phase one.
Agricultural labour starts to be reallocated to the non-agricultural sector. Due to the abidance of surplus agricultural labour, it’s marginal productivity is extremely low and average productivity defines the agricultural institutional wage. When. The redundant agricultural labour force has been reallocated, the agricultural marginal productivity of labour starts to rise but is still lower than the institutional wage.
This marks the shortage point at which the Economy enters phase two of development. During phase two the remaining agricultural unemployment is gradually absorbed.
At the end of this process the Economy reaches the commercialization point and enters phase three where the agricultural labour market is fully commercialised.
Modern Urban industrial sector is characterised by high productivity and employment opportunities.
Output expansion leads labour transfer and Urban employment growth.
The speed which they occur is given by the rate of investment or capital accumulation in the modern sector.
Urban wages would have be at least 30% higher than average rural income to induce workers to migrate from their home areas.
Level of wages in industrial sector is assumed constant. But at this constant wage, the supply of rural labour is considered perfectly elastic.
CRITICISMS OF THE MODEL
It fails to explain the underdevelopment in third world countries in under three aspect:
✓ The model assumes that, the rate of labour transferred employment creation is proportional to the rate of capital accumulation, the faster the rate of capital accumulation, the higher the growth rate of the modern sector and the faster the rate of job creation. Although total Gross National Product would rise, all the extra income and output growth is distributed to the few owners of capital while income levels of the masses of workers remain unchanged, hence no improvement in social welfare.
✓ The model assumes that surplus labour occurs in rural areas while there is full employment in Urban areas, but this is not true with third world countries. There is substantial open unemployment in Urban areas but almost no general surplus labour in rural locations.
✓ The model assumes constant constant real wages in Urban areas, this however is not the case with the developing countries where in most cases real wages both in absolute and relative terms tends to increase.
This model has been applied to analysis for instance the dualistic economic development of China and many other countries.
CONCLUSION
According to this theory, the primitive sector consist of the existing agricultural sector, the modern sector which is rapidly emerging and a small industrial sector. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy such that there is augmentation of industrial output.
This is done by transfer of labour from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labour supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole Economy with food and raw materials.
Agbo Jennifer Amarachi
2017/249476
jenniferamarachi.agbo@gmail.com
https://agbojenniferamarachi.blogspot.com/?m=1
FIRST TOPIC: HARRIS TODARO MODEL OF MIGRATION.
ANSWER:- HARRIS-TODARO MODEL MIGRATION
INTRODUCTION
In reality, it has been confirmed that an economy can develop effectively by transferring a huge amount of its labour from its subsistence otherwise called Agricultural, backward, and informal sector in the rural region to the modern sector or industry. The Rural sector is known to be a sector where the marginal productivity of labour is very low, or even zero, whereas in the modern sector, the marginal productivity of labour is higher, very much positive and greater than zero. The Harris-Todaro model is a model that explains the little dialogue above, and because it deals with two sector in the economy, it is also referred to as a Dualistic Model. According to the Literature of Development Economics, typical dualistic models became popular in the 1950’s. A Dualistic model in development economics contains, two sectors, which are Traditional/ rural or agricultural sector and a modern or manufacturing sector in the urban area.
However, the ground-breaking work of Harris and Todaro in 1970, was brought as a result of what Todaro called “a curious economic phenomenon” in tropical Africa. The phenomenon was a regular and increasing rural urban migration regardless, the existence or presence of higher positive marginal products in agriculture.
MAJOR CONTRIBUTION OF MICHAEL P. TODARO
The introduction of the probability of employment as an element in the decision making process of a potential migrant is considered the main contribution of Todaro. He called his proposal “a more realistic picture of labour migration in less developed countries” that is, a two-stage process.
The First Stage: is where the rural migrant enters the urban area and settles down in traditional urbans sector (the informal sector) for a given or certain period of time.
The Second Stage: it is reached when the migrant finds a more permanent job in the modern sector. Although Todaro and some other authors did not consider the employees of the informal sector, they were seen to be the same with unemployed people in the society, this is because to them they make no income of their own and always have to rely on their relatives for survival.
According to Todaro, the probability of getting a Job is dependent on:
The number of newly recent or newly created jobs in the formal or modern sector/.
The Size of the population Unemployed in the Modern sector.
The length of time a migrant has been in the urban area. It happens that the longer one stays, the greater the chance of finding Job in the urban sector.
HARRIS-TODARO MODEL – AN EXTENSION OF THE TODARO MODEL.
The Harris-Todaro Model is an extension of the Todaro Model. Prof. J.R. Harris and P. Michael Todaro in an article “Migration, Unemployment and Development: A two-Sector Analysis” in 1970 presented a model on rural-urban migration in underdeveloped countries. The core notion of Harris Todaro’s model is that the migration of labour in less developed countries is due to the rural-urban differences in average expected wages rather than actual wages. This means that the migrants will have to consider and weigh the numerous job opportunities that are provided to them in the rural and urban sectors and they will choose the one that gives the highest expected wage from Migration.
The minimum wage which is obtainable in the Urban sector is significantly higher than the rural wage. Therefore, if more job opportunities are created in the urban sector at the minimum wage, the expected wage will rise and rural-urban migration will increase. Expected wages are measured by the differences in real urban income and rural agricultural income and the probability of a migrant’s getting an Urban Job. Thus, migration in the Harris-Todaro model is seen as the wage or income gap between the rural and the urban sectors. However, all the migrants cannot be absorbed simultaneously in the urban sector at that prevailing high wage. So many of them fail to find a job and get employment in the informal urban sector at wages which are even lower than in the rural sector, this means that the number of unemployment will increase in the Urban sector.
The unique concept in the migration flow from rural(Agricultural) areas to urban (Industrial) areas is determined by the difference between expected urban wages and rural wages.
MAIN DISCUSSION OF HARRIS-TODARO MODEL
The ultimate contribution of the Harris-Todaro rural-urban two-sector migration model was to build a model that fit the schematic facts of the labour market. Developing countries implemented program on incorporated rural development which encouraged an increase in the rural traditional sector wage. The theory proves that the higher the Unemployment rate, the lower is the probability of new migrants from the country side actively seeking formal sector employment who are unable to find it.
THE NOTABLE FINDINGS
There is no incentive to migrate if the expected urban wage equals rural income.
There is a great incentive to move from rural to urban area if the expected urban wage is greater than rural income,
There would be an incentive to move in other direction if the expected urban wage is less than rural income.
The expected urban wage depends on what type of Job the migrant is engaged in.
ASSUMPTIONS OF THE HARRIS TODARO MODEL
There are two sectors in the Economy – The rural or agricultural sector (A) and the urban or manufacturing sector (M).
The Model operates in the short run.
The Marginal production of Labour in agriculture (MPLA) and of Industry (MPLM) are determined by their respective technologies.
Available Capital in the two sectors are in fixed quantities.
The number of Urban Jobs available (Lm) is exogenously fixed. In the rural sector some work is always available. Therefore, the total urban labour force Lm comprises L-LA along with an available supply of rural Migrants.
The Urban wage is fixed at Wm and the rural wage at WA , Wm> WA
The rural wage equals the rural marginal product of labour and the urban wage is exogenously determined.
Rural-Urban Migration continues so long as the expected urban real income is more that the real agricultural income.
MAJOR CRITICISMS
The lottery style of Job allocation ignores investment in Job search on the part of the migrants and the informal sector is not clearly modelled.
The assumption of a rigid wage in the modern sector cannot be supported due to lack of evidence. Besides trade union pressure or minimum wage legislation, the wage differentials among sectors could be explained as well by, say. Firm specific training costs.
The issue of discount rates and rational migrants is overlooked and the influence on decision making of risk and risk attitudes on the part of potential migrants is not included.
Differentials in skill levels among the migrants are not accounted for.
Further. Some of the assumptions of the Harris-Todaro model were judged to be too restrictive. The model also assumes that potential migrants are risk neutral where poor migrants will likely be risk averse, as in they are indifferent between a certain expected rural income and uncertain expected urban income of the same magnitude. Also, the assumption that there exist a perfect competition in rural agriculture is not realistic.
However, the main drawback of this model is that it does not incorporate the costs of rural-urban migration or the relatively higher costs of urban living which the migrants have to incur in the urban sector.
CONCLUSION
The Harris-Todaro Model elucidates the issues of rural-urban migration. The equilibrium condition of this model occurs is when the expected urban wage is equal to rural wage. For instance, when government decides to subsidize manufacturing sector Harris-Todaro Paradox may happen. According to the authors job creation instead of dealing with unemployment problem actually may cause increase of unemployment. This happens when urban–rural wage gap is high enough; so rural workers move to the cities hoping to find Job with high wage. However, not all these workers succeed in finding Jobs which leads to Unemployment.
SECOND TOPIC: LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
The Arthur Lewis (1954) theory of dualistic economic development provides the seminal contribution of theories of economic development particularly for labour surplus and resource for poor developing countries. The Economy in the Lewis theory, comprises the agricultural and non-agricultural sectors.
The Agricultural sector is assumed to have huge amounts of surplus labour that results in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is pressured to follow the sharing rule and be equal to the average productivity, that is the institutional wage.
The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30%. It accumulates capital by drawing surplus labour out of the agricultural sector. The expansion of the agricultural sector takes advantage of the infinite elastic supply of labour from the agricultural sector due to its labour surplus. When the surplus labour is exhausted, the labour supply curve in the non-agricultural sector becomes upward sloping. This model is also called Utilization of manpower
Furthermore, Gustav Ranis and John Fei in 1961, formalised and developed Lewis’ theory by combining it with Rostow’s (1956) three “linear stages of growth ” theory. Their significant contribution was the dissembling of Lewis’ two-stage Economic development into 3 phase; defined by the marginal productivity of agricultural labour.
ASSUMPTIONS
The Economy is assumed to be constant in the preconditioning stage. The break out point marks the creation of an infant non-agricultural sector and the entry into phase one.
Agricultural labour starts to be reallocated to the non-agricultural sector. Due to the abidance of surplus agricultural labour, it’s marginal productivity is extremely low and average productivity defines the agricultural institutional wage. When. The redundant agricultural labour force has been reallocated, the agricultural marginal productivity of labour starts to rise but is still lower than the institutional wage.
This marks the shortage point at which the Economy enters phase two of development. During phase two the remaining agricultural unemployment is gradually absorbed.
At the end of this process the Economy reaches the commercialization point and enters phase three where the agricultural labour market is fully commercialised.
Modern Urban industrial sector is characterised by high productivity and employment opportunities.
Output expansion leads labour transfer and Urban employment growth.
The speed which they occur is given by the rate of investment or capital accumulation in the modern sector.
Urban wages would have be at least 30% higher than average rural income to induce workers to migrate from their home areas.
Level of wages in industrial sector is assumed constant. But at this constant wage, the supply of rural labour is considered perfectly elastic.
CRITICISMS OF THE MODEL
It fails to explain the underdevelopment in third world countries in under three aspect:
✓ The model assumes that, the rate of labour transferred employment creation is proportional to the rate of capital accumulation, the faster the rate of capital accumulation, the higher the growth rate of the modern sector and the faster the rate of job creation. Although total Gross National Product would rise, all the extra income and output growth is distributed to the few owners of capital while income levels of the masses of workers remain unchanged, hence no improvement in social welfare.
✓ The model assumes that surplus labour occurs in rural areas while there is full employment in Urban areas, but this is not true with third world countries. There is substantial open unemployment in Urban areas but almost no general surplus labour in rural locations.
✓ The model assumes constant constant real wages in Urban areas, this however is not the case with the developing countries where in most cases real wages both in absolute and relative terms tends to increase.
This model has been applied to analysis for instance the dualistic economic development of China and many other countries.
CONCLUSION
According to this theory, the primitive sector consist of the existing agricultural sector, the modern sector which is rapidly emerging and a small industrial sector. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy such that there is augmentation of industrial output.
This is done by transfer of labour from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labour supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole Economy with food and raw materials.
Name: Ezeakudo Chinyere Stellamaris
Reg no:2017/249334
E-mail :mariskudos @gmail. Com
Blog address: mariskudos @blogger. Com
Lewis- Fei Ranis model of economic is a growth of a dualism model in developmental economics that has been developed by John. C. H. Fei and Gustavus Ranis. It is also known as the surplus labour model. Which recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and under employment of resources into account, unlike many other growth models that consider under developed countries to be homogeneous in nature. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output . This is done by transfer of labour from the agricultural sector to the industrial one, showing that under developed countries do not suffer from constraints of labour supply.
How this can be applied to the Nigerian economy
1. Improving the standard of living of citizen
2. Promoting the economic growth of the country.
3. Providing equal infrastructural facilities to the both the rural and urban areas of the country.
Harris – Todaro model named after John R. Harris and Michael Todaro is an economic model developed in 1970 and used in development economics and welfare Economics to explain some of the issues concerning rural – urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
How it can be applied to the Nigerian economy
Nigeria favor rural -urban migration. Also Nigerian economy is largely dependent on oil revenue. Which encourage a net movement of people from the rural to urban. The key to resolving issues of rural push is the provision of alternatives that would make rural areas independent of the cities and function more as supporting structure to the cities. Eh Agricultural productivity. Policy development should encourage rural areas to have access to basic amenities and thus allow them to provide value -added services in food security.
Name: Ezeakudo Chinyere Stellamaris
Reg no:2017/249334
E-mail :mariskudos @gmail. Com
Blog address: mariskudos WordPress. Com
Lewis- Fei Ranis model of economic is a growth of a dualism model in developmental economics that has been developed by John. C. H. Fei and Gustavus Ranis. It is also known as the surplus labour model. Which recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and under employment of resources into account, unlike many other growth models that consider under developed countries to be homogeneous in nature. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output . This is done by transfer of labour from the agricultural sector to the industrial one, showing that under developed countries do not suffer from constraints of labour supply.
How this can be applied to the Nigerian economy
1. Improving the standard of living of citizen
2. Promoting the economic growth of the country.
3. Providing equal infrastructural facilities to the both the rural and urban areas of the country.
Harris – Todaro model named after John R. Harris and Michael Todaro is an economic model developed in 1970 and used in development economics and welfare Economics to explain some of the issues concerning rural – urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
How it can be applied to the Nigerian economy
Nigeria favor rural -urban migration. Also Nigerian economy is largely dependent on oil revenue. Which encourage a net movement of people from the rural to urban. The key to resolving issues of rural push is the provision of alternatives that would make rural areas independent of the cities and function more as supporting structure to the cities. Eh Agricultural productivity. Policy development should encourage rural areas to have access to basic amenities and thus allow them to provide value -added services in food security.
LEWIS-FEI-RANIS MODEL OF ECONOMIC GROWTH
The Fei–Ranis model of economic growth is a dualism model in developmental economics or economic welfare that has been developed by John CH FEI and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. Rostow Ranis and Fei (1961) formalized Lewis’s theory by combining it with Rostow’s (1956) three “linear-stages-of-growth” theory. They assume the economy to be stagnant in its pre-conditioning stage. The breakout point marks the creation of an infant non-agricultural sector and the entry into phase one. Agricultural labor starts to be reallocated to the non-agricultural sector. Due to the abundance of surplus agricultural labor, its marginal productivity is
Extremely low and average labor productivity defines the agricultural institutional
Wage.
The features of this model is; capital accumulation fuels development of the industrial sector and movement of surplus labor from agriculture sector to industrial
They disassembled Lewis’s two-stage Economic development into three phases, defined by the marginal productivity of Agricultural labor. They assume the economy to be stagnant in its pre-conditioning Stage The capitalist sector can either be private or public in nature
In his model Lewis divides the economy in an underdeveloped country in two sectors namely the Subsistence sector and the capitalist sector. Subsistence is identified with the agricultural sector of the economy while the capitalist sector implies mainly the manufacturing sector of the economy.
The model Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there can be compared to the Harrold Domar model saving and investment become the driving forces when it comes to economic development of underdeveloped countries but the Fei Ranis model is augmentation of industrial output
it affects the Nigeria economy in the sense that industrial sector should get attention more as the world is driving towards industrialization and for one to focus on agricultural sector would be bad best to focus on both sectors to increase labor supply cause an increase in both sectors would reduce unemployment by creating more industrial and agricultural cause the flow of labor to the city and to the industrial sector provides a new gain to society and once surplus labor is exhausted, wages are driven up in both sectors.
And it can be in turn seen that this model can be related to the economy of Nigeria as an increase investment in industry would lead to surplus increase in employment which is one of the major lacking factors in Nigeria and this would in turn lead to an increase in the economy of Nigeria
HARIS-TODARO MODEL OF MIGRATION
The Harris-Todaro model of the rural-urban migration process is revisited under an agent-based approach. … Such an equilibrium is characterized by stabilization of rural-urban expected wages differential (generalized Harris-Todaro equilibrium condition), urban concentration and urban unemployment. The model assumes that unemployment is non-existent in the rural agricultural sector. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. In the Harris–Todaro model, the rising urban wage pushes up the expected wage in the urban sector and consequently encourages workers to migrate from the rural sector to the urban sector.
The model therefore believed that , migration from rural areas to urban areas will increase if:
Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
However, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris–Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
this model can be related to the Nigerian economy in the sense that people would prefer to move from rural to urban areas cause of the income differences and a better life hood and this would lead to a development of urban areas creating avenue for economic growth through development of infrastructure, industries etc. and would in turn lead to economic growth
NAME: METEKE JOY ORIMUSUE
DEPARTMENT:ECOMOMICS
REG. NO:2017/242430
LEWIS -FEI-RANIS THEORY(SURPLUS LABOUR THEORY)
Lewis (1954) proposed a seminal theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector. In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development.The central idea behind the Lewis model is fairly simple. Lewis divided labour force into two differentiated groups – “subsistence sector” and “capitalist sector” where the former is assumed to contain unlimited supply and consequently, a pool of surplus labour that sets labour-supply conditions for the latter.
Assumptions of the Lewis Model
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion.Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector.
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.Ranis and Fei (1961) formalised the Lewis theory and defined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model. These three phases, illustrated in Diagram 1below, are distinguished by the marginal productivity of agricultural labour. The entry into each phase is marked three turning points:
• The breakout point leads to phase one growth with redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural unemployment.
• The commercialisation point leads to phase three of self-sustaining economic growth with the commercialisation of the agricultural sector.One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages.They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development.
Under competitive assumptions, the real wage rate would fall to zero, but due to the presence of institutional or non-market forces, the institutional wage is sustained. Therefore, there are gains to be had by switching resources away to the industrial sector. Nevertheless, it is generally not likely to happen because the market, left on its own, does not change. If the industrial sector does pay according to marginal product, then, as noted by Ray (1998), there would efficiency gains available as long as the marginal product of the agricultural labour is Gless than the wage, whether it is zero or not. By decreasing the labour force in agriculture by a small amount (whilst still remaining in the surplus labour area), provided that the wage in agriculture does not rise. Since output does not fall, the reduction in the total wage bill gives an economy an agricultural surplus.
RELATING THE MODEL TO NIGERIA ECONOMY
Nigeria has both rural and urban sectors that provide for each forward and backward linkages and as such, the two sectors are not mutually exclusive in promoting the economic growth of the country and improving the standard of living of citizens. However, the Federal Government of Nigeria does not necessarily have to move surplus labour that exists in the rural areas to the urban areas but instead infrastructural facilities should be provided equally to both the rural and urban areas of the country.
HARRIS-TODARO THEORY OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration.
The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migraton decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage. From this crucial assumption as denominated by Harris-Todaro , is deduced that the migratory dynamics leads the economic system toward an equilibrium with urban concentration and high urban unemployment.
ASSUMPTIONS OF THE MODEL
i. Two sectors: urban (manufacture) and rural (agriculture)
ii. Rural-urban migration condition: when urban real wage exceeds real agricultural product
iii.No migration cost
iv. Perfect competition
e. Cobb-Douglas production function.
RELATING THE MODEL TO NIGERIA’S ECONOMY
In cases of pro-poor economic growth, the Harris-Todaro model and other multisector-labor-market models can help policy makers avoid two mistakes. One is to assume that development efforts should be channeled to the sectors where the poor are. The other is to assume that efforts should always be focused on getting the poor out of the sectors in which they now are.
Ngwu Osita Enoch
2017/242022
Ositangwu95@gmail.com
Education Economics
Lewis-Fei-Ranis Model (Surplus labour theory)
INTRODUCTION
The Lewis (1954) theory of dualistic economic development provides the seminal contribution to theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150).
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output.
HISTORY OF SURPLUS LABOUR THEORY
The historical emergence of surplus labour is, according to Marx, also closely associated with the growth of trade (the economic exchange of goods and services) and with the emergence of a society divided into social classes. As soon as a permanent surplus product can be produced, the moral-political question arises as to how it should be distributed, and for whose benefit surplus-labour should be performed. The strong defeat the weak, and it becomes possible for a social elite to gain control over the surplus-labour and surplus product of the working population; they can live off the labour of others.
Labour which is sufficiently productive so that it can perform surplus labour is, in a cash economy, the material foundation for the appropriation of surplus-value from that labour. How exactly this appropriation will occur, is determined by the prevailing relations of production and the balance of power between social classes.
THE CONCEPT OF SURPLUS LABOUR
The concept of surplus labour is widely discussed among development economics but its specific meaning needs to be defined, especially in technical terms, as many neoclassical economists still doubt the existence of surplus labour in an economy. Defining the source and the extent of surplus labour is then a prerequisite for further study. This section considers the various definitions of surplus labour and clarifies them.
The simple definition of surplus labour implies the existence of a point at which the marginal product of labour becomes zero and labour can be transferred out of the traditional sector without reducing the quantity of output, as noted by Wellisz (1968: 22): The (disguised-unemployment or the Unlimited Supply of Labour) hypothesis claims that in poor, densely populated countries, more people are employed than needed to produce the prevailing output with the existing techniques and the existing supply of non-labour inputs. The ‘surplus’ labour constitutes ‘hidden’ or ‘disguised’ unemployment. Many of the proponents of the hypothesis make the further claim that agricultural output will not decrease, and industrial output will increase, if measures are taken to re-allocate labour from subsistence agriculture (where the surplus is supposed to exist) to industry (where there is no surplus labour).
ASSUMPTIONS OF THE LEWIS-FEI-RANIS MODEL
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion. Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc of those in the capitalist sector. Lewis in fact so much fascinated by the higher propensity to save of the capitalist sector that he even advocates a transfer of income from the subsistence sector to the capitalist sector. He feels that steps have to be taken to raise the rate of savings from 10% to 15% if the development of the economy has to be smooth.
COMPARISONS OF THE THEORY OF SURPLUS LABOUR
Surplus labor models are a class of models for analyzing developing countries as dual economies with a modern capitalist sector and a traditional precapitalist sector. The precapitalist sector is viewed as having a large pool (“unlimited supplies”) of labor from which the capitalist sector may draw at constant cost. While these models are often described as finding their inspiration in the old classical economists and Karl Marx, the 1954 model of W. Arthur Lewis and its extensions are technically more neoclassical than truly classical. The Lewis model was elaborated and formalized by many others, most notably John C. H. Fei and Gustav Ranis (1964), with important theoretical contributions from Amartya Sen (1966) and Stephen Marglin (1976). Questions have been raised as to the historical relevance of the neoclassical labor surplus models (Schultz 1964; Myint 1971; Arrighi 1973; Williamson 1985).
CRITICISM
Lewis-Fei-Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.
It has been asserted that the Lewis-Fei-Ranis model did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed.
The Lewis-Fei-Ranis model say, “It has been argued that money is not a simple substitute for physical capital in an aggregate production function. There are reasons to believe that the relationship between money and physical capital could be complementary to one another at some stage of economic development, to the extent that credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry.” This indicates that in the process of development they neglect the role of money and prices. They fail to differ between wage labor and household labor, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
The Lewis-Fei-Ranis model assume that MPPL is zero during the early phases of economic development, which has been criticized by Harry T.Oshima and some others on the grounds that MPPL of labor is zero only if the agricultural population is very large, and if it is very large, some of that labor will shift to cities in search of jobs. In the short run, this section of labor that has shifted to the cities remains unemployed, but over the long run it is either absorbed by the informal sector, or it returns to the villages and attempts to bring more marginal land into cultivation.
CONCLUSIONS AND RECOMMENDATIONS
Lewis-Fei-Ranis model can be grouped under three instruments; labour force, capital accumulation and integration to the world economy. The main focus in Lewis-Fei-Ranis model was on the reallocation of labour until the turning point is reached, i.e., the time when labour reallocation has outstripped population growth long enough for dualism to atrophy and the economy to become fully commercialized. The model implicitly showed that the traditional sector do not produce any capital accumulation as they are very small and poor. Trade between agriculture and industry as the supply or marketed food falls or the demand for it rises, or both causing the value of marginal product of labour in agriculture to rise.
In sum up, there are several weaknesses of Lewis-Fei-Ranis model that are underlined by many economists. The first and most important is that if marginal productivity of labour in agricultural sector is negligible, zero. Schultz (1964), Sen (1967), Harris and Todaro (1970) and Fields (1975) proved with their empirical results that this cannot happen in agriculture sector. It is obvious that there is a disguised unemployment in agriculture. Particularly, agricultural sector should be considered in two ways: during harvest time and post harvest. If the agricultural surplus is solely considered for the regions where there can be seen harsh winter conditions, it could be accepted of the doctrine of Lewis, otherwise it is irrelevant to say there is a zero marginal productivity for agriculture labours. Also, there are positive opportunity costs, e.g. loss of crops in times of peak harvesting season, labour transfer will reduce agricultural output.
Second, the model employed mostly for the closed economies and gave relatively less information on open economies. Lewis-Fei-Ranis model was criticized as it neglects international trade. The model was to a certain extent supply-oriented, which does not foresee any trade between capital and other sectors. Also it was criticized advocating industrialization and ignores agriculture. If a section of the profit made by the capitalists is not devoted to agricultural development, the process of industrialization would be jeopardized.
Third, Lewis-Fei-Ranis model believed that the more the rate of labour transfer to urban employment, the more the economic grows and more jobs are created. But this is not a common applicable in practice if industrial development involves more intensive use of capital than labour, then the flow of labour from agriculture to industry will simply create more unemployment.
Fourth, the Lewis-Fei-Ranis model would imply that aggregate living standards should not rise as rapidly as productivity until surplus labour is eliminated. However, the evidence on living standards in Latin America during the twentieth century indicates that these have risen in line with productivity, and that the ‘indirect’ components of the real wage (health and education) have actually risen more rapidly that average incomes.
Fifth, the Lewis-Fei-Ranis model stated the wage in industrial sector does not increase before labour surplus is absorbed. But this does not happen in any way in reality as the development of the urban, or industrial, or formal sector can itself lead to the creation of pressure groups and swing the balance of power towards those in that sector, to the detriment of those remaining outside it. The wage in the industrial sector in reality outstandingly rises long before the labour surplus is absorbed.
Haven tested the Lewis-Ranis-Fei theory for developing economy over 1965-2002 we have found that the developing economic growth is mainly attributable to the development of the non-agricultural sector. This is driven by rapid capital accumulation as well as employment growth. The reallocation of labour away from agriculture has made a positive net contribution to rapid economic of the developing economy. The rise in the marginal productivity of agricultural labour indicates the absorption of redundant agricultural labour since the 1978 Economic Reform. However, the marginal productivity of agricultural labour is still lower than the initial low average productivity of agricultural labour. This implies the continued existence of disguised agricultural unemployment. This suggests that the these developing economy has entered the Lewis-Ranis-Fei phase two of development but has not yet achieved phase three. The continuing widening productivity gap between the two sectors calls for the removal of market restrictions and government interventions so as to allow the continued absorption of surplus labour. Several policy recommendations are tentatively suggested. First and foremost, more effort should be made in promoting employment to effectively absorb the remaining labour surplus and promote economic development. This can be achieved by further relaxing the Hukou restrictions on migration, increasing labour market flexibility and improving the allocative efficiency of labour. It can also be achieved by encouraging the development of private enterprise to create more employment opportunities. Second, Government of developing economy should continue implementing the Sunshine Policy, initiated in 2003, designed to provide rudimentary job training, recruitment information and information about conditions in the destination cities to rural migrants. This will not only help facilitate employment of rural migrants but also satisfy the increasing demand for skilled labour in the growing non-agricultural sector. Third, agriculture could be promoted by tax breaks, direct subsidies and most importantly, by removing price controls on agricultural products. Agriculture could thus be commercialised and the economy would enter phase three of economic development.
REFERENCE
Sadik-Zada, Elkhan Richard (2020). “Natural resources, technological progress, and economic modernization”. Review of Development Economics. doi:10.1111/rode.12716.
“Economnics4Development Website”. Surplus Labor Model of Economic Development. Archived from the original on 16 October 2011. Retrieved 12 October 2011.
Thirlwall, A.P (2006). Growth and Development: With Special Reference to Developing Economies. Palgrave Macmillan. ISBN 1-4039-9600-8.
Subrata, Ghatak (2003). Introduction to Developmental Economics. London: Routledge. ISBN 0-415-09722-3.
“Ranis-Fei model vs. Lewis Model” (PDF). Developmentafrique.com. Archived from the original (PDF) on 30 May 2012. Retrieved 14 October 2011.
“American Economic Review”. The Ranis-Fei Model of Economic Development: Comment. 53: 448–452. JSTOR 1809172.
Ranis, Gustav. “Paper on Labor Surplus Economies” (PDF). Retrieved 4 October 2011.
J. Choo, Hakchung. “American Economic Review”. On the Empirical Relevancy of the Rans-Fei Model of Economic Development: Comment. 61: 695–703. JSTOR 1811863.
Misra, Puri, S.K, V.K (2010). Economics of Development and Planning. Mumbai, India: Himalaya Publishing House. pp. 270–279. ISBN 978-81-8488-829-4.
Harris-Todaro Model of Migration
INTRODUCTION
Harris and Todaro work, is considered one of the starting points of the classic rural-urban migration theory. The hypothesis and predictions of Harris-Todaro model have been subjected to econometric evaluation and have been corroborated by several studies. The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migraton decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage. From this crucial assumption, as denominated by Harris-Todaro, is deduced that the migratory dynamics leads the economic system toward an equilibrium with urban concentration and high urban unemployment.
THE HARRIS-TODARO MODEL
Assumptions
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function: where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a < 1 are parametric constants. Both goods and labor markets are perfectly competitive. Nevertheless, there is segmentation in the labor market due to a high minimum urban wage politically determined. In the rural sector, the real wage, perfectly flexible, is equal to the marginal productivity of labor in this sectors where wa is the real wage and p is the price of the agricultural good, both expressed in units of manufactured good.
HARRIS-TODARO AGENT-BASED MODEL
Computational Implementation
Initially, workers are randomly placed in a square lattice with linear dimension L = 500. The reference values of the parameters used for these simulations are the same done to evaluate the equilibrium of the Harris-Todaro model, namely, Aa = 1.0, Am = 1.0, f = 0.3, a = 0.7, r = 1.0 and g = 1.0. The value of the minimum wage used is wm = 0.8 and the initial urban fraction of the total population is nu = 0.2, where nu = Nu/N is the normalized urban population also called urban share. The initial value nu = 0.2 is in agreement with historical data of developing economies. Given these parameters, one can calculate the vector which characterizes temporary equilibrium of the system by using eqs. (7 – 12). By using eq. (7), the employment level of the urban sector, Nm, is obtained. If nu Nm/N there will be a fraction of Nm/Nu workers employed, which earn the minimum wage, wi = wm, and (1-Nm/Nu) workers unemployed, which earn a wage wi = 0. Each worker can be selected to review his sectorial location with probability a, called activity. Therefore, in each time step only a fraction of workers becomes potential migrants, going through the sectorial location reviewing process. Potential migrants will determine their satisfaction level of being in the current sector by comparing their earnings, wi, among nearest neighbors. The potential migrant starts the comparison process with a initial satisfaction level si = 0. When wi > wneighbor the satisfaction level si is added in one unit; if wi < wneighbor, si is diminished in one unit; if wi = wneighbor, si does not change. After the worker has passed through the reviewing process his/her satisfaction level is checked. The migration will occur only if si < 0, what means that the worker's i earnings is less than the most of his/her nearest neighbors. After all the potential migrants complete the reviewing process and have decided migrate or not, a new configuration of the system is set. Therefore, once again a new temporary equilibrium of the system is calculated by using eqs. (8 – 12). The whole procedure is repeated until a pre-set number of steps is reached. It is important to emphasize that Nm is kept constant throughout the simulation. Its given by eq. (7) which depends on the technological parameters, a,Am, and the minimum wage, wm, which are constants too.
In this case, the differential of expected wages is negative. In an economy mainly rural (nu < 0:5), the transitional dynamics characterized by a continuous growth of population of the urban sector with a differential of expected wages relatively high is followed by the stabilization of rural-urban differential of expected wages. In other words, the generalized Harris-Todaro condition, eq. (15), arises as a long run equilibrium result of the agent-based migratory dynamics.
CONCLUSION
In this paper we developed and agent-based computational model which formalizes the rural-urban allocation of workers as a process of social learning by imitation. We analyze a two-sectorial economy composed by adaptative agents, i.e., individuals that grope over time for best sectorial location in terms of earnings. This search is a process of imitation of successful neighbor agents. The dispersed and non-coordinated individual migration decisions, made based on local information, generate aggregate regularities.
Firstly, the crucial assumption of Harris and Todaro, the principle that rural-urban migration will occur while the urban expected wage exceed the rural wage, comes out as spontaneous upshot of interaction among adaptative agents.
Secondly, the migratory dynamics generated by agents that seek to adaptate to the economic environment that they co-create leads the economy toward a long run equilibrium characterized by urban concentration with urban unemployment. When this long run equilibrium is reached, the generalized Harris-Todaro condition is satisfied, i.e., there is a stabilization of the rural-urban expected wage differential.
Thirdly, the impact of the minimum wage and elasticity of terms of trade in a long run equilibrium obtained by simulations are in agreement with the predictions of the original Harris-Todaro model with Cobb-Douglas technology.
Finally, the simulations showed an aggregated pattern not found in the original Harris-Todaro model. There is the possibility of small fluctuations of the urban share around an average value. This phenomenon is known as reverse migration.
REFERENCE
Aquino L. Espíndola thanks CAPES for the financial support. Jaylson J. Silveira acknowledges research grants from CNPq. T. J. P. Penna thanks CNPq for the fellowship.
J. R. Harris and M. P. Todaro, American Economic Review 60, 126 (1970).
M. P. Todaro, American Economic Review 59, 138 (1969).
D. Ray, Development Economics (Princeton: Princeton University Press, 1998).
L. Y. L. Yap, Journal of Development Economics 4, 239 (1977).
D. Mazumdar, Rural-urban Migration in Developing countries. In: Handbook of Regional and Urban Economics, Elsevier, Amsterdam, 1987.
L. Ghatak, P. Levine, and S. Price, Journal of Economics Surveys 10, 159 (1996).
J. G. Willianson, Migration and Urbanization. In: Chenery, H. and Srinivasan, T.N., Handbook of developments economics, Elsevier, Amsterdam, 1988.
J. J. Silveira, A. L. Espíndola, and T. J. P. Penna, physics/0506021, Physica A, to appear.
NGWU OSITA ENOCH
2017/242022
OSITANGWU95@GMAIL.COM
EDUCATION ECONOMICS
Lewis-Fei-Ranis Model (Surplus labour theory).
INTRODUCTION
The Lewis (1954) theory of dualistic economic development provides the seminal contribution to theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150).
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output.
HISTORY OF SURPLUS LABOUR THEORY
The historical emergence of surplus labour is, according to Marx, also closely associated with the growth of trade (the economic exchange of goods and services) and with the emergence of a society divided into social classes. As soon as a permanent surplus product can be produced, the moral-political question arises as to how it should be distributed, and for whose benefit surplus-labour should be performed. The strong defeat the weak, and it becomes possible for a social elite to gain control over the surplus-labour and surplus product of the working population; they can live off the labour of others.
Labour which is sufficiently productive so that it can perform surplus labour is, in a cash economy, the material foundation for the appropriation of surplus-value from that labour. How exactly this appropriation will occur, is determined by the prevailing relations of production and the balance of power between social classes.
THE CONCEPT OF SURPLUS LABOUR
The concept of surplus labour is widely discussed among development economics but its specific meaning needs to be defined, especially in technical terms, as many neoclassical economists still doubt the existence of surplus labour in an economy. Defining the source and the extent of surplus labour is then a prerequisite for further study. This section considers the various definitions of surplus labour and clarifies them.
The simple definition of surplus labour implies the existence of a point at which the marginal product of labour becomes zero and labour can be transferred out of the traditional sector without reducing the quantity of output, as noted by Wellisz (1968: 22): The (disguised-unemployment or the Unlimited Supply of Labour) hypothesis claims that in poor, densely populated countries, more people are employed than needed to produce the prevailing output with the existing techniques and the existing supply of non-labour inputs. The ‘surplus’ labour constitutes ‘hidden’ or ‘disguised’ unemployment. Many of the proponents of the hypothesis make the further claim that agricultural output will not decrease, and industrial output will increase, if measures are taken to re-allocate labour from subsistence agriculture (where the surplus is supposed to exist) to industry (where there is no surplus labour).
ASSUMPTIONS OF THE LEWIS-FEI-RANIS MODEL
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion. Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc of those in the capitalist sector. Lewis in fact so much fascinated by the higher propensity to save of the capitalist sector that he even advocates a transfer of income from the subsistence sector to the capitalist sector. He feels that steps have to be taken to raise the rate of savings from 10% to 15% if the development of the economy has to be smooth.
COMPARISONS OF THE THEORY OF SURPLUS LABOUR
Surplus labor models are a class of models for analyzing developing countries as dual economies with a modern capitalist sector and a traditional precapitalist sector. The precapitalist sector is viewed as having a large pool (“unlimited supplies”) of labor from which the capitalist sector may draw at constant cost. While these models are often described as finding their inspiration in the old classical economists and Karl Marx, the 1954 model of W. Arthur Lewis and its extensions are technically more neoclassical than truly classical. The Lewis model was elaborated and formalized by many others, most notably John C. H. Fei and Gustav Ranis (1964), with important theoretical contributions from Amartya Sen (1966) and Stephen Marglin (1976). Questions have been raised as to the historical relevance of the neoclassical labor surplus models (Schultz 1964; Myint 1971; Arrighi 1973; Williamson 1985).
CRITICISM
Lewis-Fei-Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries’ efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.
It has been asserted that the Lewis-Fei-Ranis model did not have a clear understanding of the sluggish economic situation prevailing in the developing countries. If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to the institutional structure, primarily the system of feudalism that prevailed.
The Lewis-Fei-Ranis model say, “It has been argued that money is not a simple substitute for physical capital in an aggregate production function. There are reasons to believe that the relationship between money and physical capital could be complementary to one another at some stage of economic development, to the extent that credit policies could play an important part in easing bottlenecks on the growth of agriculture and industry.” This indicates that in the process of development they neglect the role of money and prices. They fail to differ between wage labor and household labor, which is a significant distinction for evaluating prices of dualistic development in an underdeveloped economy.
The Lewis-Fei-Ranis model assume that MPPL is zero during the early phases of economic development, which has been criticized by Harry T.Oshima and some others on the grounds that MPPL of labor is zero only if the agricultural population is very large, and if it is very large, some of that labor will shift to cities in search of jobs. In the short run, this section of labor that has shifted to the cities remains unemployed, but over the long run it is either absorbed by the informal sector, or it returns to the villages and attempts to bring more marginal land into cultivation.
CONCLUSIONS AND RECOMMENDATIONS
Lewis-Fei-Ranis model can be grouped under three instruments; labour force, capital accumulation and integration to the world economy. The main focus in Lewis-Fei-Ranis model was on the reallocation of labour until the turning point is reached, i.e., the time when labour reallocation has outstripped population growth long enough for dualism to atrophy and the economy to become fully commercialized. The model implicitly showed that the traditional sector do not produce any capital accumulation as they are very small and poor. Trade between agriculture and industry as the supply or marketed food falls or the demand for it rises, or both causing the value of marginal product of labour in agriculture to rise.
In sum up, there are several weaknesses of Lewis-Fei-Ranis model that are underlined by many economists. The first and most important is that if marginal productivity of labour in agricultural sector is negligible, zero. Schultz (1964), Sen (1967), Harris and Todaro (1970) and Fields (1975) proved with their empirical results that this cannot happen in agriculture sector. It is obvious that there is a disguised unemployment in agriculture. Particularly, agricultural sector should be considered in two ways: during harvest time and post harvest. If the agricultural surplus is solely considered for the regions where there can be seen harsh winter conditions, it could be accepted of the doctrine of Lewis, otherwise it is irrelevant to say there is a zero marginal productivity for agriculture labours. Also, there are positive opportunity costs, e.g. loss of crops in times of peak harvesting season, labour transfer will reduce agricultural output.
Second, the model employed mostly for the closed economies and gave relatively less information on open economies. Lewis-Fei-Ranis model was criticized as it neglects international trade. The model was to a certain extent supply-oriented, which does not foresee any trade between capital and other sectors. Also it was criticized advocating industrialization and ignores agriculture. If a section of the profit made by the capitalists is not devoted to agricultural development, the process of industrialization would be jeopardized.
Third, Lewis-Fei-Ranis model believed that the more the rate of labour transfer to urban employment, the more the economic grows and more jobs are created. But this is not a common applicable in practice if industrial development involves more intensive use of capital than labour, then the flow of labour from agriculture to industry will simply create more unemployment.
Fourth, the Lewis-Fei-Ranis model would imply that aggregate living standards should not rise as rapidly as productivity until surplus labour is eliminated. However, the evidence on living standards in Latin America during the twentieth century indicates that these have risen in line with productivity, and that the ‘indirect’ components of the real wage (health and education) have actually risen more rapidly that average incomes.
Fifth, the Lewis-Fei-Ranis model stated the wage in industrial sector does not increase before labour surplus is absorbed. But this does not happen in any way in reality as the development of the urban, or industrial, or formal sector can itself lead to the creation of pressure groups and swing the balance of power towards those in that sector, to the detriment of those remaining outside it. The wage in the industrial sector in reality outstandingly rises long before the labour surplus is absorbed.
Haven tested the Lewis-Ranis-Fei theory for developing economy over 1965-2002 we have found that the developing economic growth is mainly attributable to the development of the non-agricultural sector. This is driven by rapid capital accumulation as well as employment growth. The reallocation of labour away from agriculture has made a positive net contribution to rapid economic of the developing economy. The rise in the marginal productivity of agricultural labour indicates the absorption of redundant agricultural labour since the 1978 Economic Reform. However, the marginal productivity of agricultural labour is still lower than the initial low average productivity of agricultural labour. This implies the continued existence of disguised agricultural unemployment. This suggests that the these developing economy has entered the Lewis-Ranis-Fei phase two of development but has not yet achieved phase three. The continuing widening productivity gap between the two sectors calls for the removal of market restrictions and government interventions so as to allow the continued absorption of surplus labour. Several policy recommendations are tentatively suggested. First and foremost, more effort should be made in promoting employment to effectively absorb the remaining labour surplus and promote economic development. This can be achieved by further relaxing the Hukou restrictions on migration, increasing labour market flexibility and improving the allocative efficiency of labour. It can also be achieved by encouraging the development of private enterprise to create more employment opportunities. Second, Government of developing economy should continue implementing the Sunshine Policy, initiated in 2003, designed to provide rudimentary job training, recruitment information and information about conditions in the destination cities to rural migrants. This will not only help facilitate employment of rural migrants but also satisfy the increasing demand for skilled labour in the growing non-agricultural sector. Third, agriculture could be promoted by tax breaks, direct subsidies and most importantly, by removing price controls on agricultural products. Agriculture could thus be commercialised and the economy would enter phase three of economic development.
REFERENCE
Sadik-Zada, Elkhan Richard (2020). “Natural resources, technological progress, and economic modernization”. Review of Development Economics. doi:10.1111/rode.12716.
“Economnics4Development Website”. Surplus Labor Model of Economic Development. Archived from the original on 16 October 2011. Retrieved 12 October 2011.
Thirlwall, A.P (2006). Growth and Development: With Special Reference to Developing Economies. Palgrave Macmillan. ISBN 1-4039-9600-8.
Subrata, Ghatak (2003). Introduction to Developmental Economics. London: Routledge. ISBN 0-415-09722-3.
“Ranis-Fei model vs. Lewis Model” (PDF). Developmentafrique.com. Archived from the original (PDF) on 30 May 2012. Retrieved 14 October 2011.
“American Economic Review”. The Ranis-Fei Model of Economic Development: Comment. 53: 448–452. JSTOR 1809172.
Ranis, Gustav. “Paper on Labor Surplus Economies” (PDF). Retrieved 4 October 2011.
J. Choo, Hakchung. “American Economic Review”. On the Empirical Relevancy of the Rans-Fei Model of Economic Development: Comment. 61: 695–703. JSTOR 1811863.
Misra, Puri, S.K, V.K (2010). Economics of Development and Planning. Mumbai, India: Himalaya Publishing House. pp. 270–279. ISBN 978-81-8488-829-4.
NGWU OSITA ENOCH
2017/242022
OSITANGWU95@GMAIL.COM
EDUCATION ECONOMICS .
Harris-Todaro Model of migration.
INTRODUCTION
Harris and Todaro work, is considered one of the starting points of the classic rural-urban migration theory. The hypothesis and predictions of Harris-Todaro model have been subjected to econometric evaluation and have been corroborated by several studies. The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migraton decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage. From this crucial assumption, as denominated by Harris-Todaro, is deduced that the migratory dynamics leads the economic system toward an equilibrium with urban concentration and high urban unemployment.
THE HARRIS-TODARO MODEL
Assumptions
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function: where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a < 1 are parametric constants. Both goods and labor markets are perfectly competitive. Nevertheless, there is segmentation in the labor market due to a high minimum urban wage politically determined. In the rural sector, the real wage, perfectly flexible, is equal to the marginal productivity of labor in this sectors where wa is the real wage and p is the price of the agricultural good, both expressed in units of manufactured good.
HARRIS-TODARO AGENT-BASED MODEL
Computational Implementation
Initially, workers are randomly placed in a square lattice with linear dimension L = 500. The reference values of the parameters used for these simulations are the same done to evaluate the equilibrium of the Harris-Todaro model, namely, Aa = 1.0, Am = 1.0, f = 0.3, a = 0.7, r = 1.0 and g = 1.0. The value of the minimum wage used is wm = 0.8 and the initial urban fraction of the total population is nu = 0.2, where nu = Nu/N is the normalized urban population also called urban share. The initial value nu = 0.2 is in agreement with historical data of developing economies. Given these parameters, one can calculate the vector which characterizes temporary equilibrium of the system by using eqs. (7 – 12). By using eq. (7), the employment level of the urban sector, Nm, is obtained. If nu Nm/N there will be a fraction of Nm/Nu workers employed, which earn the minimum wage, wi = wm, and (1-Nm/Nu) workers unemployed, which earn a wage wi = 0. Each worker can be selected to review his sectorial location with probability a, called activity. Therefore, in each time step only a fraction of workers becomes potential migrants, going through the sectorial location reviewing process. Potential migrants will determine their satisfaction level of being in the current sector by comparing their earnings, wi, among nearest neighbors. The potential migrant starts the comparison process with a initial satisfaction level si = 0. When wi > wneighbor the satisfaction level si is added in one unit; if wi < wneighbor, si is diminished in one unit; if wi = wneighbor, si does not change. After the worker has passed through the reviewing process his/her satisfaction level is checked. The migration will occur only if si < 0, what means that the worker's i earnings is less than the most of his/her nearest neighbors. After all the potential migrants complete the reviewing process and have decided migrate or not, a new configuration of the system is set. Therefore, once again a new temporary equilibrium of the system is calculated by using eqs. (8 – 12). The whole procedure is repeated until a pre-set number of steps is reached. It is important to emphasize that Nm is kept constant throughout the simulation. Its given by eq. (7) which depends on the technological parameters, a,Am, and the minimum wage, wm, which are constants too.
In this case, the differential of expected wages is negative. In an economy mainly rural (nu < 0:5), the transitional dynamics characterized by a continuous growth of population of the urban sector with a differential of expected wages relatively high is followed by the stabilization of rural-urban differential of expected wages. In other words, the generalized Harris-Todaro condition, eq. (15), arises as a long run equilibrium result of the agent-based migratory dynamics.
CONCLUSION
In this paper we developed and agent-based computational model which formalizes the rural-urban allocation of workers as a process of social learning by imitation. We analyze a two-sectorial economy composed by adaptative agents, i.e., individuals that grope over time for best sectorial location in terms of earnings. This search is a process of imitation of successful neighbor agents. The dispersed and non-coordinated individual migration decisions, made based on local information, generate aggregate regularities.
Firstly, the crucial assumption of Harris and Todaro, the principle that rural-urban migration will occur while the urban expected wage exceed the rural wage, comes out as spontaneous upshot of interaction among adaptative agents.
Secondly, the migratory dynamics generated by agents that seek to adaptate to the economic environment that they co-create leads the economy toward a long run equilibrium characterized by urban concentration with urban unemployment. When this long run equilibrium is reached, the generalized Harris-Todaro condition is satisfied, i.e., there is a stabilization of the rural-urban expected wage differential.
Thirdly, the impact of the minimum wage and elasticity of terms of trade in a long run equilibrium obtained by simulations are in agreement with the predictions of the original Harris-Todaro model with Cobb-Douglas technology.
Finally, the simulations showed an aggregated pattern not found in the original Harris-Todaro model. There is the possibility of small fluctuations of the urban share around an average value. This phenomenon is known as reverse migration.
REFERENCE
Aquino L. Espíndola thanks CAPES for the financial support. Jaylson J. Silveira acknowledges research grants from CNPq. T. J. P. Penna thanks CNPq for the fellowship.
J. R. Harris and M. P. Todaro, American Economic Review 60, 126 (1970).
M. P. Todaro, American Economic Review 59, 138 (1969).
D. Ray, Development Economics (Princeton: Princeton University Press, 1998).
L. Y. L. Yap, Journal of Development Economics 4, 239 (1977).
D. Mazumdar, Rural-urban Migration in Developing countries. In: Handbook of Regional and Urban Economics, Elsevier, Amsterdam, 1987.
L. Ghatak, P. Levine, and S. Price, Journal of Economics Surveys 10, 159 (1996).
J. G. Willianson, Migration and Urbanization. In: Chenery, H. and Srinivasan, T.N., Handbook of developments economics, Elsevier, Amsterdam, 1988.
J. J. Silveira, A. L. Espíndola, and T. J. P. Penna, physics/0506021, Physica A, to appear.
NAME: OZUEM DEBORAH OGHENEKEVWE
REG NO: 2017/249572
EMAIL: deborah.ozuem.249572@unn.edu.ng
BLOG: favourdebbie.blogger.com
HARRIS-TODARO MODEL OF MIGRATION
The Harris-Todaro model was named after Prof. John R. Harris and Michael. P. Todaro. It is an economic model developed in 1970 to explain issues concerning rural-urban migration in underdeveloped countries. It generally discusses migration in a two-sector economy i.e. when migration starts and when it will end from a low opportunity area (rural area) to a high opportunity environment (urban area). The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. It emphasizes the role of economic incentives in the decision of workers to migrate. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials.
Harris-Todaro model unlike the above models brings into focus the role of economic incentives in the decision of workers to migrate. The migrants consider the various opportunities of employment available to them in rural and urban sectors and choose the one that maximizes their expected wages from migration. The minimum urban wage is substantially higher than the rural wage. If more employment opportunities are created in the urban sector at the urban minimum wage, the expected wage will rise and rural-urban migration will increase. Expected wages are measured by the difference in real urban income and rural agricultural income and the probability of a migrant getting an urban job. In fact, a migrant compares his expected income for a given time horizon in the urban sector with his prevailing average rural income and migrates if the former is more than the latter.
Thus migration in the Harris-Todaro model is viewed as the wage or income gap between the urban and the rural sectors. But all migrants cannot be absorbed in the urban sector at high wages. Many fail to find a job and get employment in the informal urban sector at wages which are even lower than in the rural sector. Thus they join the queue of the underemployment or disguised unemployed in the urban sector.
Some of its basic assumptions include:
1. There are two sectors in the economy – the rural or agricultural sector (A) and the urban or manufacturing sector (M).
2. The model operates in the short run.
3. The marginal production of labour in agriculture and of industry are determined by their respective technologies.
4. Capital is available in fixed quantities in the two sectors.
5. The number of urban jobs available is exogenously fixed. In the rural sector some work is always available.
6. The rural wage equals the rural marginal product of labour and the urban wage is exogenously determined.
7. Rural-urban migration continues so long as the expected urban real income is more that the real agricultural income.
8. Every migrant from the village will not find a job. Because this is the condition, he will always compare the expected urban wage rate with the rural wage rate.
We see that the Harris-Todaro model of migration makes some realistic sense when compared to an actual life scenario. Using the Nigerian economy as a case study, we see that workers in the villages (rural areas) are always optimistic about moving to the towns (urban areas) due to their expectations of urban wage. They usually expect that the difference between their rural wage and the expected urban wage would be high enough to cover their cost of migration (which could be monetary cost or cost measured in terms of opportunity cost e.g. cost of leaving behind families, loved ones and acquaintances). A high expected wage difference between the rural and urban areas will force more workers to migrate to the urban areas and vice versa.
In a situation where the expected wage differential is high, the urban areas will experience excess supply of labour which would consequently lead to a reduction in the actual urban wage. Excess supply of labour pushes down the prevailing wage rate in the urban area and indirectly increases underemployment in the town. Also, there is a very high possibility that not all migrants would find a job in the town. This is because the existing jobs in the town would be unable to go round and absorb the additional supply of labour.
There would be disguised unemployment, underemployment and various social implications such as overpopulation, inadequate social amenities and consequently increased crime rates. When compared to our Nigerian case study, we see that this is an actual representation of the real life situation.
LEWIS-FEI-RANIS MODEL OF ECONOMIC GROWTH (SURPLUS LABOUR THEORY)
William Arthur Lewis, with his most famous published work, “Economic Development with Unlimited Supplies of Labour” and “The Theory of Economic Growth” made a great contribution to the theories of economic development. Based on his findings, Ranis and Fei succeeded to extend the initial Lewis’ model and assessed the changes in the agricultural and industrial labour in more detail.The central idea behind the Lewis model is fairly simple. Lewis divided labour force into two differentiated groups – “subsistence sector” and “capitalist sector” where the former is assumed to contain unlimited supply and consequently, a pool of surplus labour that sets labour-supply conditions for the latter. Subsequently, Ranis’ and Fei’s extension to Lewis’ model can be analysed. They observed the model by assessing the changes in the output and wage as more and more people moved from agriculture to the industry. A new concept was added – namely, disguised unemployment, which appears in the traditional subsistence sector.
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply.
This theory is concerned with a poor economy which has following properties:
(i) There is an abundance of labor in such underdeveloped countries and shortage of natural resources.
(ii) The population growth rate is very high which results in mass unemployment in the economy.
(iii) The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labor is zero and negative in agriculture sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy.
Thus the model suggests that “Economic development would be taking place if agricultural laborers are transferred to industrial sector where their productivity will increase”. Fei and Ranis emphasized strongly on the industry-agriculture inter-dependency and said that a robust connectivity between the two would encourage and speedup development. If agricultural laborers look for industrial employment, and industrialists employ more workers by use of larger capital good stock and labor-intensive technology, this connectivity can work between the industrial and agricultural sector. Also, if the surplus owner invests in that section of industrial sector that is close to soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized. They took the example of Japan’s dualistic economy in the 19th century and said that connectivity between the two sectors of Japan was heightened due to the presence of a decentralized rural industry which was often linked to urban production. According to them, economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision-making powers and use industrial capital and consumer goods for agricultural practices.
Fei and Ranis develop their dual economy model with the help of three stages of economic growth and these three stages are explained below:
The first stage of Fei-Ranis model is very similar to Lewis. Disguised unemployment comes into being because the supply of labor is perfectly elastic and MPL = 0. Therefore, such disguised unemployed are to be transferred to industrial sector at the constant institutional wage.
In the second stage of Fei-Ranis model (phase) agricultural workers add to agricultural output but they produce less than the institutional wage they get. In other words, in the second stage the labor surplus exists where APL > MPL, but it is not equal to subsistence (institutional) wages. Accordingly, such disguised unemployed also have to be transferred to industrial sector. If the migration to industrial sector continues a situation is eventually reached where the farm workers produce output equal to institutional wages. This would mean that productivity in agricultural sector has gone up. With this the third phase (stage) starts.
In the third stage of Fei-Ranis model the take-off situation comes to an end and there begins the era of self-sustained growth where the farm workers produce more than the institutional wage they get. In this stage of economic growth the surplus labor comes to an end and the agricultural sector becomes commercialized sector.
CONCLUSION:
With the Nigerian economy in view, we find that whereas Lewis had failed to offer a satisfactory explanation of this subsistence sector and ignored the real impact of population growth on the choice of capital intensity on the process of surplus labor absorption. Fei-Ranis model emphasized upon the simultaneous growth of agriculture and industrial sectors. Thus FR model believes in ‘Balanced Growth’ in the take-off stage. It means that there should be a simultaneous investment in both agricultural sector and industrial sector. According to Fei-Ranis model, in the beginning the surplus rises; such surplus will be available as a capital in the take-offstage. Some part of this surplus will be used in agricultural development, while some part will be re-ploughed in industrial development. As a result, both agricultural and industrial sectors will grow under ‘Balanced Growth’ pattern. if the government can simultaneously invest in both sectors, then Nigeria can attain economic development.
NAME: NWOBODO IFEANYICHUKWU VICTOR
Reg no: 2017/249535
Email: nwobodope@gmail.com
HARRIS-TODARO MODEL
According to the Harris-Todaro Model, migration is stimulated primarily by rational economic considerations of relative benefits and costs, mostly financial but also psychological. The decision to migrate depends on expected rather than actual urban-rural real wage differential. Expected urban-rural real wage differential depends not only on the actual differential, but also on the probability to find jobs in the urban sector. Rural-Urban migration is an equilibrium phenomenon which equates rural real income to expected urban real income. Policies designed to reduce urban unemployment may increase it. Migration rates in excess of urban job opportunity growth rates are not only possible but also rational.
For example: the Nigeria migration history has been characterized by rural-urban migration due to dearth of needed infrastructural facilities in the rural areas and alleged prospects of a better life in the urban areas. Such movements contribute to and worsen the unemployment situation in urban centres. Cities such as Lagos, Port Harcourt, Kaduna, Enugu, Benin, and Warri among others, remain chosen destinations for Nigerian labour force, both old and young. Influx into the urban centres leads to population explosion and unintended consequences. Nigerian urban centres are projected to be home to over 200 million people in the next 40 years. Lagos as one of the fastest growing urban centre in the world is expected to take in the biggest chunk of these new arrivals.And this will lead to a negative labour mismatch in these urban areas.
LEWIS-FEI-RANIS MODEL
This model on structural transformation of the subsistence economy. It was formulated by Aurthur Lewis and modified by John Fei and Gustav Ranis. The model assumes the existence of a dual economy consisting of agricultural sector(rural ) and manufacturing sector (urban). According to the model, development can be brought about by complete shift in the focal point from the rural sector to the urban sector such that there is an augmentation of industrial output. This can be achieved by transferring labour from agricultural sector to the manufacturing sector so that there can be no glut in Labour supply in the developing countries and the agricultural sector can in turn produce food and raw material to support the economy as a whole. For example: since precolonial times there has been an influx of labour from agricultural sector to industrial sector. Instead of relying on foreign labour supply, the labour that was once invested in underdeveloped economy go on to gain skills applicable in more industralized sector. That is why there has been a huge increase in indeginous participation in urban economies.
Name: IRUEFORUM JOSEPH EMEKA
Reg No: 2017/249519
Department: ECONOMICS
Email: Josephirueforum@gmail.com
Course: DEVELOPMENT ECONOMICS ASSGIMENT
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
One of the early known theory of development focused on structural transformation of subsistence economy formulated by a Nobel laureate W. Arthur Lewis in the mid-1950s. The Fei–Ranis model of economic growth is a dualism model in developmental economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model.
The surplus labor models advanced by Lewis (1954), and expanded upon by Ranis and Fei, described a two-sector economy depicting an initially large traditional sector and a relatively small commercialized sector, with the key feature that the traditional sector does not adhere to the neoclassical full employment labor market clearing assumption. It was sufficient to assume that labor was in excess supply relative to cooperating factors at the prevailing wage and technology, and thus that the commercialized sector faced an essentially infinitely elastic labor supply at any moment in time.
The definition of “labor surplus” does not mean that a substantial portion of the agricultural labor force can be withdrawn without loss of output, i.e., that they have a marginal productivity of zero. Indeed, as Sen and Fei-Ranis outlined, when some workers with low marginal productivity are withdrawn, those who remain are likely to work harder and other technology changes of the reorganization variety are likely to result. As Fei and Ranis emphasized, in addition to this organizational dimension of dualism, there is also an important product dualism to be analyzed, focused on the exchange between the food produced by the non-commercialized agricultural sector and the goods produced by the commercialized non-agricultural sector. The key point here is that agricultural and nonagricultural products cannot really be substituted for each other; in the closed economy, food producing agriculture becomes a necessary condition for industry while the converse does not hold.
The first stage of FEI-RANIS model is closely related to Lewis. Disguised unemployment comes into being because the supply of labor is perfectly elastic and MPL = 0. Therefore, such disguised unemployed are to be transferred to industrial sector at the constant institutional wage.
In the second stage of FEI-RANIS (phase) agricultural workers add to agricultural output but they produce less than institutional wage they get. In other words, in the second stage the labor surplus exists where APL > MPL, but it is not equal to subsistence (institutional) wages. Accordingly, such disguised unemployed also have to be transferred to industrial sector. If the migration to industrial sector continues a situation is eventually reached where the farm workers produce output equal to institutional wages. This would mean that productivity in agricultural sector has gone up.
In the third stage of FEI-RANIS model the take-off situation comes to an end and there begins the era of self-sustained growth where the farm workers produce more than the institutional wage they get. In this stage of economic growth the surplus labor comes to an end and the agricultural sector becomes commercialized sector. All such is explained with the Figures.
Accordingly, they have to be shifted to industrial sector. As labor are transferred to industrial sector a shortage of labor will develop in agricultural sector. In other words, it will be difficult for the industrial sector to get the labor at same prevailing constant wages.
Thus, three major points are highlighted in the surplus labour model:
(i) Growth of agriculture is as important as the growth of industry.
(ii) There should be a balanced growth of agricultural industrial sectors.
(iii) The rate of labor absorption must be higher than the rate of population growth to get out of the “Malthusian population trap”.
This model can be applicable to Nigeria economy, early post independence that is during that time the colonial masters had just introduced a vibrant manufacturing sector and the subsistence agriculture had been fully employed. It was of no use that new school leavers would be employed in the subsistence agricultural sector when there is underemployment in the manufacturing sector. So instead government made policies like increment of scholarship opportunities to increase skilled labour and human capital to meet the need of the manufacturing sector.
HARRIS-TODARO MODEL OF MIGRATION
The economic development of western Europe and the United States was closely associated with the movement of labor from rural to urban areas. For the most part, with a rural sector dominated by agricultural activities and an urban sector focusing on industrialization, overall economic development in these countries was characterized by the gradual reallocation of labor out of agriculture and into industry through rural-urban migration, both internal and international. Urbanization and industrialization were in essence synonymous. This historical model served as a blueprint for structural change in developing countries.
One theory to explain the apparently paradoxical relationship of accelerated rural-urban migration in the context of rising urban unemployment has come to be known as the Todaro migration model and in its equilibrium form as the Harris-Todaro model.
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
the Todaro model postulates that migration proceeds in response to urban-rural differences in expected income rather than actual earnings. The fundamental premise is that migrants consider the various labor market opportunities available to them in the rural and urban sectors and choose the one that maximizes their expected gains from migration. In essence, the theory assumes that members of the labor force, both actual and potential, compare their expected incomes for a given time horizon in the urban sector (the difference between returns and costs of migration) with prevailing average rural incomes and migrate if the former exceeds the latter
It is important to recognize, however, that these migration models were developed largely in the context of advanced industrial economies and hence implicitly assume the existence of full or near-full employment. In a full-employment environment, the decision to migrate can be based solely on the desire to secure the highest-paid job wherever it becomes available. Simple economic theory would then indicate that such migration should lead to a reduction in wage differentials through the interaction of the forces of supply and demand, in areas of both emigration and immigration. Unfortunately, such an analysis is not realistic in the context of the institutional and economic framework of most developing nations. First, these countries are beset by a chronic unemployment problem, which means that a typical migrant cannot expect to secure a high-paying urban job immediately. In fact, it is much more likely that on entering the urban labor market, many uneducated, unskilled migrants will either become totally unemployed or will seek casual and part-time employment as vendors, hawkers, repairmen, and itinerant day laborers in the urban traditional or informal sector, where ease of entry, small scale of operation, and relatively competitive price and wage determination prevail. In the case of migrants with considerable human capital in the form of a secondary or university certificate, opportunities are much better, and many will find formal-sector jobs relatively quickly. But they constitute only a small proportion of the total migration stream. Consequently, in deciding to migrate, the individual must balance the probabilities and risks of being unemployed or underemployed for a considerable period of time against the positive urban-rural real income differential. The fact that a typical migrant who gains a modern-sector job can expect to earn twice the annual real income in an urban area than in a rural environment may be of little consequence if the actual probability of his securing the higher-paying job within, say, a one-year period is one chance in five.
To sum up, the Todaro migration model has four basic characteristics: 1. Migration is stimulated primarily by rational economic considerations of relative benefits and costs—mostly financial but also psychological. 2. The decision to migrate depends on expected rather than actual urban-rural real-wage differentials, where the expected differential is determined by the interaction of two variables, the actual urban-rural wage differential and the probability of successfully obtaining employment in the urban sector. 3. The probability of obtaining an urban job is directly related to the urban employment rate and thus inversely related to the urban unemployment rate.
4. Migration rates in excess of urban job opportunity growth rates are not only possible but also rational and even likely in the face of wide urbanrural expected income differentials. High rates of urban unemployment are therefore inevitable outcomes of the serious imbalance of economic opportunities between urban and rural areas in most underdeveloped countries.
The movement from rural area to urban area lead to unemployment in the urban area. This movement is as a result of rational economic decisions makinging by migrants from the rural areas that is they believe that there is higher employment opportunities in this urban area for example, it has become a norm for families in rural parts of Eastern Nigeria to sell family lands and try to accumulate wealth and savings to move one of their male child to an urban area (greener pasture) in other to claim the social mobility ladder but this influx lead to a negative match in the labour market.
NAME: Ogumba Joy Chidinma
REG NO: 2017/242028
EMAIL: williamsjoy77@gmail.com
BLOG ADDRESS: exclusivejoy1.blogspot.com
DEPARTMENT: Education Economics
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR) AND HOW IT APPLIES TO THE NIGERIAN ECONOMY
ANSWER
The Fei–Ranis model of economic growth is a developmental or welfare economics dualism model developed by John C. H. Fei and Gustav Ranis (1961, 1964, 1997), and can be thought of as an extension of the Lewis model (1954). The Surplus Labour model is another name for it.
Unlike several other growth models that consider underdeveloped countries to be homogeneous in nature, it recognizes the existence of a dual economy that involves both the industrial and primitive markets, as well as the economic situation of unemployment and underemployment of resources. The primitive sector, according to this theory, is the economy’s current agricultural sector, while the modern sector is the rapidly developing yet limited industrial sector. In the economy, all sectors coexist, which is the crux of the development crisis. Only a complete change in the focus of progress from the agricultural to the industrial economy, with an increase in industrial production, will bring about growth. This is accomplished by transferring labour from the agricultural to the manufacturing sectors, demonstrating that developing countries do not face labour shortages. At the same time, agricultural sector growth must not be marginal, and its production must be adequate to provide food and raw materials to the entire economy. When it comes to the economic growth of underdeveloped countries, saving and spending become the guiding forces, just as they do in the Harrod–Domar model.
Basic Arguments of the Lewis-Fei-Ranis Model:
Lewis model is a classical type model which states that unlimited supplies of labour can be had at the prevailing subsistence wages. The industrial and advanced modern sector can be developed on the basis of agriculture to the traditional sector. This can be done by transferring labour from the traditional sector and the modern sector.
Lewis says that the wages in the industrial sector remain constant. Consequently, the capitalists will earn a ‘surplus’. Such surplus will be re-invested in the modern sector leading to absorb the labour which is migrated from the subsistence sector. In this way, the surplus-labour or the labour which were prey to disguised unemployment will get the employment. Thus, both the labour transfer and modern sector employment growth are brought about by output expansion in that sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector. Though the wages have been assumed constant, yet Lewis says that the urban wages are at least 30% higher than average rural income to induce the workers to migrate from their home areas.
CONTRIBUTIONS OF THE MODEL
• Fei – Ranis model enables the economy to move smoothly into self-sustained growth.
• Fei and Ranis have further shown that their model satisfies the conditions of balanced growth during the take-off process. Balanced growth requires simultaneous investment in both the agricultural and industrial sectors of the economy.
CRITICISM OF THE MODEL
Amartya Sen critically appraised that, Fei and Ranis do not distinguish between units of labour hours and units of a number of men, which is crucial for peasant agriculture.
Amartya Sen further said that following W. A. Lewis, Fei and Ranis assume a horizontal supply curve for labour in the initial phase.
They develop Nurske’s analysis of “hidden rural savings” in disguised unemployment. What the transferred labourers were consuming prior to their shift from disguised unemployment in the rural sector is now saved and used to provide the wage bill in the industrial sector.
The commercialisation of Agriculture leads to inflationary pressures in the economy.
Berry and Solingo in their 1968 paper have criticized this model for its MPL = 0 assumption, and for the assumption that the transfer of labour from the agricultural sector leaves the output in that sector unchanged Phase 1.
Fei and Ranis assume a close model hence there is no presence of foreign trade in the economy, which is very unrealistic as food or raw materials can not be imported. If we take the example of Japan, the country imported cheap farm products from other countries and this made better the country’s term of trade.
HOW IT APPLIES TO NIGERIA AND CONCLUSION
Having studied the Lewis-Fei-Ranis Model (Surplus Labour) it can be said surplus labour can be gotten when the Agricultural sector is not overlooked or undermined. A country can have surplus labour when the available labour force in its large proportion contributes less input in the economy without any significant increase in the output. A country like this suffers from underdevelopment as its citizens would overtime suffer from underemployment and unemployment thereby affecting the standard of living of the citizens.
A country such as Nigeria is experiencing surplus labour as the number of the willing labour force is greater than the available Industries for production of goods with the available raw materials which has declined over the years as a result of the Rural to Urban Migration over the years and also the Insurgencies in most parts of the country is limiting her agricultural production in the rural areas as the farmers are being chased and killed out of their farms with their crops being destroyed by cattle, thereby reducing its agricultural surplus causing inflation and denying the country the ability to export its products but rather, import goods at a higher rate.
Izuogu Chiamaka Goodluck
2017/242101
Economics Education
chiamaka.izuogu.242101@unn.edu.ng
Unncareerinfo
LEWIS FEI- RANIS MODEL OF ECONOMIC GROWTH
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics hithat was developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes into account the economic situation of unemployment and underemployment of resources unlike many other growth models that consider underdeveloped countries to be homogenous in nature.
According to this theory, the primitive sector consists of the existing agricultural sector and the modern sector which is rapidly emerging beginning as small industrial sector. Both the sectors co-exist in the economy and therein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is an augmentation of industrial output. This is done by transfer of labour from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from limitations of labour supply. At the same time, growth in the agricultural sector must not be neglected and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economics of underdeveloped countries.
Thus we find that whereas Lewis had failed to offer a satisfactory explanation of this subsistence sector and ignored the real impact of population growth on the choice of capital intensity on the process of surplus labour absorption. Moreover, FR model emphasized upon the simultaneous growth of agri. and industrial sectors. Thus FR model believes in ‘Balanced Growth’ in the take-off stage. It means that there should be a simultaneous investment in both agri, sector and industrial sector. According to FR model in the beginning the surplus rises; such surplus will be available as a capital in the take-off stage. Some part of this surplus will be used in agri. development, while some part will be reploughed in industrial development. As a result, both agri. and industrial sectors will grow under ‘Balanced Growth’ pattern
Basics of the model
This model is treated as an improvement over Lewis model of unlimited supply of labor.
This theory is concerned with a poor economy which has following properties:
(i) There is an abundance of labour in such UDC and shortage of natural resources.
(ii) The population growth rate is very high which results in mass unemployment in the economy.
(iii) The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence, the marginal productivity of labour is zero and negative in agriculture sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy.
Thus the model suggests that:
“Economic development would be taking place if agricultural laborers are transferred to industrial sector where their productivity will increase”.
As we told earlier that it is a dual economy where there is a stagnant agri. sector and dynamic industrial sector. The situation where MPL – 0, labor can be transferred to industrial sector without any loss in agricultural output. The real wages in industrial sector remains fixed and it is equal to the initial level of real income in agri. sector. Such wages are given the name of institutional wages.
Fei and Ranis emphasized strongly on the industry-agriculture interdependency and said that a robust connectivity between the two would encourage and speedup development. If agricultural labourers look for industrial employment, and industrialists employ more workers by use of larger capital good stock and labour-intensive technology, this connectivity can work between the industrial and agricultural sector. Also, if the surplus owner invests in that section of industrial sector that is close to soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized. Looking at the example of Japan’s dualistic economy in the 19th century the connectivity between the two sectors of Japan was heightened due to the presence of a decentralized rural industry which was often linked to urban production. According to them, economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision-making powers and use industrial capital and consumer goods for agricultural practices.
The Lewis model is criticised on the grounds that it neglects agriculture. Fei–Ranis model goes a step beyond and states that agriculture has a very major role to play in the expansion of the industrial sector Thus, this model is treated as an improvement over Lewis model of unlimited supply of labor. The biggest drawback of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labour should take place prior to the labour shift between the two sectors. However, They further argued that the model lacked proper application of concentrated analysis to the change that takes place with agricultural development but improvements in agriculture and land use are fundamental to achieving food security, poverty alleviation and overall sustainable development in the Nigeria’s economy
Harris- TODARO Model of Migration
The Harris–Todaro model was named after John R. Harris and Michael Todaro. It is an economic model established in 1970 which was used in development economics and welfare economics to explain some of the issues surrounding rural-urban migration. The model was propounded on the basis of the migration decision on the expected income differentials between rural and urban areas rather than just wage differentials. This depicts that rural-urban migration is the cause of high urban unemployment and can be economically logical if expected urban income exceeds expected rural income. According to Brazilian Journal of Physics, it considered Harris and Todaro’s work together as the starting point of classic rural-urban migration theory which underwent Econometrics evaluation and other several studies.
The H-T model is a pioneering general equilibrium model that describes the labour migration from rural to urban areas due to a wage gap and the existence of urban unemployment and underemployment in developing countries such as Nigeria. Since the publication of Todaro (1969), Harris and Todaro (1970), the model has been used as a basis for further research by mainly theoretical economists concerned with both development economics and international economics.
The most important attribute of this model is that it made it possible for analysts to deal with unemployment, within the framework of general equilibrium, by including unemployed workers who were still waiting for jobs in the urban sector, a factor that had previously been difficult to assess. It gave rise to a more realistic description of developing economies and helped to unfold migration between urban and rural areas theoretically. The H-T model is a particular form of the ‘‘neo-classical two sectors model’’, represented by the ‘‘Heckscher, Ohlin and Samuelson model’’ (known as HOS model), and it can be understood as a ‘‘specific factor model’’ (known as S-F model), established by Jones (1971). In the S-F model, each sector has its own specific production factor which cannot swerve between sectors, and the specific factor endowments are also constant. It has been pin- pointed out by many that economic considerations, or urban-rural wage differentials play a vital role in determining the extent of labor migration and the higher the competitive urban wage is due to a combination of trade-union pressure, nationalistic government pressure on foreign enterprises, and the new social conscience of big entrepreneurs (Lewis 1965).
The Harris-Todaro (1970) model’s major contribution to the field of development economics was by making the migration process a rational choice based on expected earnings. The Harris-Todaro (H-T) model took most of Lewis models’ assumptions as given, such as the rural sector being characterized by subsistence agriculture, and the urban sector being characterized by modernized industries. The Harris-Todaro model takes a standard two sector model and imposes a higher wage in the urban sector which is higher than equilibrium clearing, while wage in agriculture is flexible (Chen,2012).
This model has some characteristics which are:
1. Migration is stimulated by rational economic considerations of relative benefits and costs.
2. Migration depends on expected rather than actual Urban real wage differentials where the expected differential is determined by the interactions of two variables, actual Urban real wage differential and probability of gaining enjoyment in Urban sector.
: 3. Probably of gaining an urban job is directly related to Urban employment rate and inversely to Urban unemployment.
4. Migration rate in excess of Urban job opportunity growth rates are not only possible but also rational. The equation is defined as:
Wa = ( Lf /Lf + Li)Wf + ( Li /Lf + Li)Wi.
Inspite of its popularity among economists, some of the assumptions of the HT model have been subjected to criticism since it was developed. The main critiques are summarized by Williamson (1988) as:
1. The lottery style job allocation excludes investment in job search on the part of the immigrants;
2. The informal sector is not explicitly modelled;
3. There is not enough evidence to support the assumption of a rigid wage in the modern sector. Moreover, besides trade union pressure or minimum wage legislation, the wage differentials among sectors could be explained as well by, say, firm- specific training costs.
4. The issue of discount rates and rational migrants is ignored;
5. The influence on decision making of risk and risk attitudes on the part of the potential immigrants is not included; and
6. Differentials in skill levels among the migrants are not accounted for.
Potential migrants may take a long-term view in arriving at a decision. They may consider that their desireness of obtaining an urban job will be higher after a waiting period of some months. Thus they will compare the present value of the sum of expected urban earnings with that of expected rural earnings. They may be content to accept a low wage in the urban informal sector for some time. This might be a rational decision on a long-term basis. The root of the problem is the large difference between earnings in the modern industrial sector and those in the rural areas. Often the former are well above the market clearing levels for varies reasory. The long-term solution to the problem lies in adopting policies for both urban and rural areas which reduces the real income differences between the two areas. Countries like China, India, Pakistan,,etc makes use of this model and that is why it is labeled as “orthodox” by Corden and Findlay (1971).
I suggest that more juicy paying job opportunities be established in the rural areas by building more industries. The wage rate should be increased in the rural sector which will help reduce the unemployment in the urban areas due to migration especially in Nigeria.
Conclusion
The Harris-Todaro model was a much more difficult model to program. The programmed model solves the wage differential between rural and urban sectors . As an tenet in the Harris-Todaro model, migration decision is derived from the difference between agricultural wage and urban expected wage. The most interesting outcome is without a doubt derived from the H-T experiment where the inter-sectoral terms of trade is explored. Manipulations of terms of trade do not affect migration much at all, which is identical to the findings of the Lewis.
NAME: CHIDERA NICOLE UMELO
REGISTERATION NUMBER: 2017/249589
EMAIL: nicoleumelo@gmail,com
THE HARRIS- TODARO MODEL OF MIGRATION.
The Harris Todaro model is named after John. R. Harris and Michael Todaro. It was developed in1970. It has been used in development economics and welfare economics to explain some of the issues concerned with rural-urban migration. Its main assumption is that migration decision is based on expected income differences between rural and urban areas and not just wage differences. To them, rural- urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
THE HISTORICAL CONTEXT OF THE MODEL.
In the 1960’s, the government of Kenya, a newly independent country at the time, faced serious difficulties concerning employment. The unemployment levels in the Kenyan capital city- Nairobi, and other major cities of Kenya at the time had been high and rising. To solve this burgeoning problem agreements were reached in the effect that private and public sector employers in Kenya, agreed to increase their levels of employment if labor unions agreed to hold wages at their current levels as at the time. The expectation of this agreement was that urban unemployment in Kenya would be eradicated or even decreased. However, a cobra effect of this policy agreement was noted in the country. Rather than reduce the high levels of unemployment in Kenya, what these agreements served to achieve was a greater increase in the unemployment levels witnessed in the urban sectors of Kenya. It was as a result of this occurrence that John Harris and Michael Todaro formulated what I now known as the Harris- Todaro model or more formally, the rural- urban migration model.
Apart from the problem of rising unemployment in Kenya, there was also the problem of urban migration. The migration was as a result of the differences in expected wages of the laborers. It was seen that the urban wage was much higher than the rural wages and this was considered as the major cause of unemployment.
AN INDEPTH DISCUSSION OF THE HARRIS TODARO MODEL.
As a result of the Kenyan Paradox, John Harris and Michael Todaro formulated the Harris- Todaro model in 1979. First, the model assumes that the real wages i.e. wages adjusted for the cost of living differences in the country, are higher in urban sector jobs than in rural traditional sector jobs. Again, to be hired in the formal sector jobs, one has to be physically present in the urban sector. As a result of this, more workers search for formal sector jobs than are hired since employers employ a few workers but not all. Hence, the model sought to answer the question of why rural-urban migration is still taking place in spite of the high level of unemployment in the urban sector.
In the model, migration is seen as an economic model that is made based on wages and the probability of unemployment. To make this decision, migrants in the rural areas calculate the expected real income of the urban areas and decide to move if it exceeds the expected real income of the rural areas. The idea behind this model is that the urban minimum wage is higher than the minimum wage paid to the rural labor. This results in a wage difference between both sectors of the economy. To answer the question, rural works continue to migrate to urban areas, despite urban unemployment, as a result of the possibility of higher wages/ earnings in the urban sectors. This migration continues in so far as there is a possibility for workers to increase their earnings in the urban sector. The model is further supported by the fact that some individuals might obtain arranged employment before they leave the rural sector for the urban sector, and even those who do not have an arranged employment may decide to leave the rural sector with the hopes of finding jobs in the urban sector, although most of them would still join the pool of unemployed individuals in the urban sector. This explains the high rate of rural- urban migrants despite the high rate of urban unemployment.
ASSUMPTIONS OF THE HARRIS- TODARO MODEL
The Harris-Todaro model has the following assumptions:
• The economy is a small open economy
• The economy consists of two sectors
a. The agricultural rural sector (sector 1)
b. The manufacturing urban sector (sector 2)
• There are three types of production factors (i.e. factors of production) in the economy;
a. Specific production factor in sector 1 (k1)
b. Specific production factor in sector 2 (k2)
c. Labor (L), which is employed by bot factors and mobile between factors
Note: the specific production factors in each sector (i.e. k1 and k2) are immobile between sectors and k2 consists of not just plants, equipment and machinery, but also social infrastructure such as good roads, airports etc., so that as the social infrastructure increases, k2 also increases.
• Marginal productivity of labor equals the real wage in each sector
• There is mobility of labor between sectors due to the wage gap between sectors.
• The expected wage in each sector is obtained by multiplying the actual wage of each sector (i.e. w1 and w2) by the probability of finding a job in the sector.
• In the model, the probability of finding a job is equal to the rate of employment.
• I the rural sector, it is assumed that wages are flexible. Hence, there is no unemployment I the rural sector and so the probability of obtaining a job in the rural sector is equal to 1 or unity, whereas, in the urban sector, the probability of obtaining a job is less than 1 (or unity). This situation in the urban sector is caused by unemployment.
EXPLANATION OF THE BASIC FORMALISM OF THE HARRIS TODARO MODEL.
Stating the Harris Todaro model in mathematical connotations;
1. Let wA be the real wage rate (also marginal productivity of labor) in the rural agricultural sector.
2. Let wM be the actual real wage rate in the urban manufacturing sector of the economy.
3. Let Le be the number of jobs available in the urban sector, which should be equal to the number of employed urban workers.
4. Let LU, be the total number of job seekers in the urban sector- both employed and unemployed.
5. Let wu be the wage rate in the urban sector that is set by the government, using a minimum wage law (it should be noted that wu is expected to be greater than wu)
Based on the Harris Todaro model, rural-urban migration will only occur if
Wr (Le /LU) × Wu
This means that when the expected rural wage rate is greater than the employment rate (or probability of obtaining an urban job) multiplied by the actual real urban wage rate, then there is greater incentive to work in the rural area than the urban area. Hence, urban-rural migration occurs.
Again, equilibrium occurs when;
Wr = (Le /LU) × Wu
This means that when the expected rural wage rate is equal to the employment rate (or probability of obtaining an urban job) multiplied by the actual real urban wage rate, then the equilibrium condition in the economy has been reached. i.e. there is no incentive for workers to move from urban-rural areas or from rural-urban areas.
THE LEWIS FEI- RANIS MODEL.
The Lewis Fei-Ranis model was developed by John. C.H Fei and Gustav Ranis. The model is believed to e an extension of the Lewis model. The model is also called the surplu labor theory and it emphasizes the presence of a dual economy (i.e. the principle of dualism). this principle states that there are only two sectors of the economy i.e. the modern industrial sector and the primitive agricultural sector. This model also takes into consideration the problems of unemployment and the underemployment of scarce resources. In this theory, the two sectors of the economy coexist together and development of the economy occurs only when there is focus on the development of the modern sector over the rural sector. This development is achieved by transferring labor from the agricultural sector to the industrial sector to increase the industrial output.
The Lewis Fei- Ranis model was developed in 1958 by Lewis and later extended in 1961 by Fei and Ranis. The model assumed a dual economy, comprising of the traditional and the modern sectors. The traditional sector (according to the model), comprises of the agricultural sector with surplus labors, whereas the modern sector comprises of the urban industrial sector with industrial output. According to the model, because the modern sector attracts workers from the rural sector, there is a high rate of rural –urban migration. This is because workers believe that there are better wages, higher incomes and more savings in the urban areas than is attainable in the rural areas. This causes them to move from the rural- urban areas in order to enjoy these advantages. The ensuing migration generates surplus foods, more incomes and more savings and investments among the rural people.
More formally, the Lewis model believed that surplus labor in the developing economies should be reallocated to the capitalist sector i.e. to industries.
Name: Idu Ifeanyi Peculiar
Reg No: 2017/249511
Email: ifeanyipeculiaridu@gmail.com
Blog: iduifeanyi.blogspot.com
1. LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
The Fei–Ranis model of economic growth is a dualism model that has been developed by John C.H. Fei and Gustav Rani’s and can be understood as an extension of the lewis model. He takes into account the economic situation of underdeveloped and underemployment of resources. There is surplus labour(marginal productivity is zero) in the agricultural sector and this labour is made available for the industrial and urban sector but at a constant wage. later on, if the surplus labour is been exhausted then only a rising wage rate will draw more labour out of agriculture.
ASSUMPTION (ARGUMENTS)
An economy starts with 2 sectors:A rural agricultural sector and urban industrial sector.
Agriculture generally under-employs workers and marginal productivity of labour is virtually zero.
Transferring workers out of agriculture doesn’t reduce productivity in the whole economy.
Labour is then released for work in the more productive urban sector.
Industrialization is now possible,given the increase in supply of workers who have moved from the land.
Industrial firms starts to make profit which can be re-invested into more industrialization and capital starts to accumulate.
As soon as capital accumulate further economy development can sustain itself.
CRITICISM
Fei-Ranis model was criticized on multiple grounds one of which is that they didn’t pay attention to the slow economic situation in developing countries, they also failed to distinguish between wage labour and household labour which is important in evaluating prices in an underdeveloped economy, they also neglected seasonal unemployment which occurs as a result of seasonal change in labour demand.
In conclusion, the Fei-Ranis model is a dualism model. They are of the view that both the agricultural and the industrial sectors are necessary in order to spur economic development in a developing country. The agricultural sector supplies excess labour to the industrial sector to boost industrial output in order to satisfy the demand. Despite this model lagging in some areas like not having a clear understanding of the sluggish economic situation prevailing in developing countries, its still a realistic model of economic development as its application is seen in our world today, surplus labour in the agricultural sector is reallocated to the industrial sector to enhance productivity without neglecting the agricultural sector, so these two sectors as we can see co-exist in our economy as they both have major roles to play in order to achieve economic development. Hence, the dualistic nature of the model.
2. HARRIS -TODARO MODEL OF MIGRATION
Also known as the structural change model. It focuses on the mechanism by which underdeveloped economy transform their domestic economic structure from heavy emphasis on traditional subsistence agriculture to a more modern urbanized and industrial diverse manufacturing service economy. It also apply tool of neo classical prices and resource allocation theory and modern econometrics to describe how transformation processes take place. By structural transformation that is a way that the contribution to national income by the manufacturing sector surpasses the contribution by agricultural sector.
Michael Todaro (1969) and John Harris (Harris and Todaro 1970) propounded the most notable modern thinking. The Harris-Todaro Model is an equilibrium version of the Todaro Migration Model which explains the rural-urban migration as an economically rational process despite the high urban unemployment. The importance of this was as a result of the Keynesian Revolution which says “equilibrium could occur or come about even when there is a chronic level of unemployment in the urban sector”. This implies that the economy could still be in balance even with the existence of a severe urban unemployment. It has also been deduced that the most important factor why urban population was more than of the rural sector was due to the fact that labour from the rural sector moved to the urban sector to search for better opportunities.
In the situation of a dualistic model, the rural sector is letting go of much labour too quickly while the urban sector is hiring or accepting labour too slowly as it is assumed that the urban sector is capital-intensive (Lewis 1965). Unemployed in the urban area is the cause of poverty and underemployment in the Third World Countries (Lubell 1988). The contribution of Todaro is the introduction of the possibility of employment as a factor in the decision-making process of a potential migrant. He devised what he called a two-stage process in the less-developed countries.
The first stage is characterized by where the labour migrant decides to move from the rural sector for a period of time. The second stage is then reached when that labour migrant has gotten a more permanent job in the modern or urban sector.
According to Todaro, the probability or tendency of getting a job depends on the size of the urban population that is employed, number of newly created jobs in the urban sector, as well as the length or duration a labour migrant has been in that sector. Consequently it implied that according to Todaro, the longer a labour migrant has been in the manufacturing sector, the more likely he or she is to get a job there. An extension of this was done by Harris and Todaro (1970), where they explained that the urban wage is equal to the expected value of the urban wage and this formed the notable Harris-Todaro Equation which is of the form:
Wa = βWm where,
Wa = Flexible wage in the agricultural sector is equal to the value of the marginal product in that sector, β = Probability of employment (dependent on the three (3) factors listed earlier), and Wm = Wage in the manufacturing sector which is assumed fixed or constant institutionally either because of the involvement of the union’s activities or a friendly government towards the workers in the modern sector.
THE BASIC MODEL
The Harris-Todaro Model would be referred to as the H – T Model from henceforth, assume that migration from the rural to the urban areas depends primarily on the difference in wages between the rural and urban labour markets. That is the expected urban wage is the actual urban wage multiplied by the probability of getting a job, or Weu = PWu where,
Weu = Expected Urban Wage and P = Probability of getting a job where P is expressed as: P = where,
Eu = Urban Employment, Uu = Urban Unemployment and L = Total Labour Force. Another assumption of the Harris-Todaro is that all the members of the urban labour force have equal chances of obtaining or getting the jobs available for them. So Weu = Urban Wage multiplied by the Urban Employment Rate.
POLICY IMPLICATIONS OF THE H – T MODEL
The H – T Model has some impressing implications from the policy point of view. Let’s take for an instance, if the government of a country is concerned with fostering industrial development in an urban area, employment would increase and this would lead to an increase in productive of getting urban employment in the minds of the rural inhabitants. Migration to the urban area would then increase and the outcome would be that the unemployment rate in the urban areas would rise more than how it was before the development occurred. Due to this, labour migrants would prefer to accept the wage in the urban informal sector than going back to wait for long for jobs that would not come in time as urban employment is now in equilibrium. However, the effect of this is that the earnings in the urban modern industrial sectors would be more or higher than those in the rural traditional sectors. The long-term solution to this issue would be to fix a wage policy for the two sectors that would reduce the real income differences between the two sectors.
THE ASSUMPTIONS OF THE MODEL
In analyzing the H – T Model, there are some assumptions alongside those listed before which include:
There is fixed amounts of labour (L) and capital (K) factor inputs.
Capital is fully employed but labour unemployment exists in the urban sector due to the fixed urban wage, W is higher than the flexible rural wage, w.
In conclusion, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris-Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
Another issue is that inducing minimum wages creates labour market distortions. Therefore, policy makers should not set the minimum wage rate. In addition, simulations showed that different policies’ outcomes depend on elasticity of labour demand in different sectors and on marginal product of labour.
As Harris and Todaro suggested the first-best policy would be subsidizing manufacturing along with restrictions of rural migration.
Name: Idu Ifeanyi Peculiar
Reg No: 2017/249511
Email: ifeanyipeculiaridu@gmail.com
Blog: iduifeanyi1999.blogspot.com
1. LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
The Fei–Ranis model of economic growth is a dualism model that has been developed by John C.H. Fei and Gustav Rani’s and can be understood as an extension of the lewis model. He takes into account the economic situation of underdeveloped and underemployment of resources. There is surplus labour(marginal productivity is zero) in the agricultural sector and this labour is made available for the industrial and urban sector but at a constant wage. later on, if the surplus labour is been exhausted then only a rising wage rate will draw more labour out of agriculture.
ASSUMPTION (ARGUMENTS)
An economy starts with 2 sectors:A rural agricultural sector and urban industrial sector.
Agriculture generally under-employs workers and marginal productivity of labour is virtually zero.
Transferring workers out of agriculture doesn’t reduce productivity in the whole economy.
Labour is then released for work in the more productive urban sector.
Industrialization is now possible,given the increase in supply of workers who have moved from the land.
Industrial firms starts to make profit which can be re-invested into more industrialization and capital starts to accumulate.
As soon as capital accumulate further economy development can sustain itself.
CRITICISM
Fei-Ranis model was criticized on multiple grounds one of which is that they didn’t pay attention to the slow economic situation in developing countries, they also failed to distinguish between wage labour and household labour which is important in evaluating prices in an underdeveloped economy, they also neglected seasonal unemployment which occurs as a result of seasonal change in labour demand.
In conclusion, the Fei-Ranis model is a dualism model. They are of the view that both the agricultural and the industrial sectors are necessary in order to spur economic development in a developing country. The agricultural sector supplies excess labour to the industrial sector to boost industrial output in order to satisfy the demand. Despite this model lagging in some areas like not having a clear understanding of the sluggish economic situation prevailing in developing countries, its still a realistic model of economic development as its application is seen in our world today, surplus labour in the agricultural sector is reallocated to the industrial sector to enhance productivity without neglecting the agricultural sector, so these two sectors as we can see co-exist in our economy as they both have major roles to play in order to achieve economic development. Hence, the dualistic nature of the model.
2. HARRIS -TODARO MODEL OF MIGRATION
Also known as the structural change model. It focuses on the mechanism by which underdeveloped economy transform their domestic economic structure from heavy emphasis on traditional subsistence agriculture to a more modern urbanized and industrial diverse manufacturing service economy. It also apply tool of neo classical prices and resource allocation theory and modern econometrics to describe how transformation processes take place. By structural transformation that is a way that the contribution to national income by the manufacturing sector surpasses the contribution by agricultural sector.
Michael Todaro (1969) and John Harris (Harris and Todaro 1970) propounded the most notable modern thinking. The Harris-Todaro Model is an equilibrium version of the Todaro Migration Model which explains the rural-urban migration as an economically rational process despite the high urban unemployment. The importance of this was as a result of the Keynesian Revolution which says “equilibrium could occur or come about even when there is a chronic level of unemployment in the urban sector”. This implies that the economy could still be in balance even with the existence of a severe urban unemployment. It has also been deduced that the most important factor why urban population was more than of the rural sector was due to the fact that labour from the rural sector moved to the urban sector to search for better opportunities.
In the situation of a dualistic model, the rural sector is letting go of much labour too quickly while the urban sector is hiring or accepting labour too slowly as it is assumed that the urban sector is capital-intensive (Lewis 1965). Unemployed in the urban area is the cause of poverty and underemployment in the Third World Countries (Lubell 1988). The contribution of Todaro is the introduction of the possibility of employment as a factor in the decision-making process of a potential migrant. He devised what he called a two-stage process in the less-developed countries.
The first stage is characterized by where the labour migrant decides to move from the rural sector for a period of time. The second stage is then reached when that labour migrant has gotten a more permanent job in the modern or urban sector.
According to Todaro, the probability or tendency of getting a job depends on the size of the urban population that is employed, number of newly created jobs in the urban sector, as well as the length or duration a labour migrant has been in that sector. Consequently it implied that according to Todaro, the longer a labour migrant has been in the manufacturing sector, the more likely he or she is to get a job there. An extension of this was done by Harris and Todaro (1970), where they explained that the urban wage is equal to the expected value of the urban wage and this formed the notable Harris-Todaro Equation which is of the form:
Wa = βWm where,
Wa = Flexible wage in the agricultural sector is equal to the value of the marginal product in that sector, β = Probability of employment (dependent on the three (3) factors listed earlier), and Wm = Wage in the manufacturing sector which is assumed fixed or constant institutionally either because of the involvement of the union’s activities or a friendly government towards the workers in the modern sector.
THE BASIC MODEL
The Harris-Todaro Model would be referred to as the H – T Model from henceforth, assume that migration from the rural to the urban areas depends primarily on the difference in wages between the rural and urban labour markets. That is the expected urban wage is the actual urban wage multiplied by the probability of getting a job, or Weu = PWu where,
Weu = Expected Urban Wage and P = Probability of getting a job where P is expressed as: P = where,
Eu = Urban Employment, Uu = Urban Unemployment and L = Total Labour Force. Another assumption of the Harris-Todaro is that all the members of the urban labour force have equal chances of obtaining or getting the jobs available for them. So Weu = Urban Wage multiplied by the Urban Employment Rate.
POLICY IMPLICATIONS OF THE H – T MODEL
The H – T Model has some impressing implications from the policy point of view. Let’s take for an instance, if the government of a country is concerned with fostering industrial development in an urban area, employment would increase and this would lead to an increase in productive of getting urban employment in the minds of the rural inhabitants. Migration to the urban area would then increase and the outcome would be that the unemployment rate in the urban areas would rise more than how it was before the development occurred. Due to this, labour migrants would prefer to accept the wage in the urban informal sector than going back to wait for long for jobs that would not come in time as urban employment is now in equilibrium. However, the effect of this is that the earnings in the urban modern industrial sectors would be more or higher than those in the rural traditional sectors. The long-term solution to this issue would be to fix a wage policy for the two sectors that would reduce the real income differences between the two sectors.
THE ASSUMPTIONS OF THE MODEL
In analyzing the H – T Model, there are some assumptions alongside those listed before which include:
There is fixed amounts of labour (L) and capital (K) factor inputs.
Capital is fully employed but labour unemployment exists in the urban sector due to the fixed urban wage, W is higher than the flexible rural wage, w.
In conclusion, even though this migration creates unemployment and induces informal sector growth, this behavior is economically rational and utility-maximizing in the context of the Harris-Todaro model. As long as the migrating economic agents have complete and accurate information concerning rural and urban wage rates and probabilities of obtaining employment, they will make an expected income-maximizing decision.
Another issue is that inducing minimum wages creates labour market distortions. Therefore, policy makers should not set the minimum wage rate. In addition, simulations showed that different policies’ outcomes depend on elasticity of labour demand in different sectors and on marginal product of labour.
As Harris and Todaro suggested the first-best policy would be subsidizing manufacturing along with restrictions of rural migration.
NAME: OKEKE JUDE CHIMOBI
REG NO: 2017/249556
MAIL: chimobiokeke@gmail.com
The Lewis-Fei-Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis. It can also be understood as an extension of the Lewis model. The model is also known as the Surplus Labour model that recognizes the presence of a dual economy comprising both the modern and the primitive sectors, and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labour from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labour supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials.
The Lewis model is criticized on the grounds that it neglects agriculture. Fei–Ranis model goes a step beyond and states that agriculture has a very major role to play in the expansion of the industrial sector. In fact, it says that the rate of growth of the industrial sector depends on the amount of total agricultural surplus and on the amount of profits that are earned in the industrial sector. So, larger the amount of surplus and the amount of
surplus put into productive investment and larger the amount of industrial profits earned, the larger will be the rate of growth of the industrial economy. As the model focuses on the shifting of the focal point of progress from the agricultural to the industrial sector, Fei and Ranis believe that the ideal shifting takes place when the investment funds from surplus and industrial profits are sufficiently large so as to purchase industrial capital goods like plants and machinery. These capital goods are needed for the creation of employment opportunities. Hence, the condition put by Fei and Ranis for a successful transformation is that the rate of increase of capital stock & rate of employment opportunities should be greater than the rate of population growth.
ASSUMPTIONS OF THE LEWIS-FEI-RAINIS MODEL
The model assumes that a developing economy has a surplus of unproductive labour in the agricultural sector.
Labourers are attracted to the growing manufacturing sector where higher wages are offered.
Entrepreneurs in the manufacturing sector make profit because they charge a price above the fixed wage rate.
The model assumes that these profits will be reinvested in the business as a fixed capital.
An advanced manufacturing sector means an economy has moved from a traditional to an industrialized one.
According to Lewis, the supply of labour is perfectly elastic. In other words, the supply of labour is greater than demand for labour.
There is a duel economy i.e., the economy is characterized by a traditional, over-populated rural subsistence sector furnished with zero MPL, and the high productivity modern industrial sector.
STUDY OBSERVATION
Based on the observation of this study, Lewis-Fei-Ranis model of economic growth is considered to be more realistic in comparison to other economic growth models and based on the the fact that some of its assumptions are realistic in an actual economy. The model assumes that a developing economy has a surplus of unproductive labour in the agricultural sector which is true if we consider Nigeria as a case study and some other developing economies like Ghana, Gambia, etc
The model also assume a duel economy i.e., the Industrial and agricultural sector. Lewis believe that workers will move from Agricultural sector to the industrial sector as a result of high wage rate in the industrial sector. this movement or transfer of a good percentage labour force from agricultural to industrial sector is a sign of development and economic growth which is true in many countries like China, India, Turkey etc. In the case Nigeria the Federal Government of Nigeria does not necessarily have to move surplus labour that exists in the rural areas to the urban areas but instead infrastructural facilities should be provided equally to both the rural and urban areas of the country (Balance Growth Theory).
HARRIS TADORA MODEL OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labour market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
ASSUMPTIONS OF THE HARRIS-TODAROS MODEL
1. There are two sectors in the economy: the rural or agricultural sector (A) and the urban or manufacturing sector (M).
2. The model operates in the short run.
3. Capital is available in fixed quantities in the two sectors.
4. The number of urban/manufacturing jobs available is exogenously fixed.
5. Rural-urban migration continues so long as the expected urban real income is more than the real agricultural income.
6. The rural wage equals the rural marginal product of labor and the urban wage is exogenously determined.
7. There is perfect competition among producers in both sectors.
MODEL APPLICATION:
The model is applicable to real life economic situation considering that the migratory dynamics generated by agents that seek to adaptate to the economic environment that they co-create leads the economy toward a long run equilibrium characterized by urban concentration with urban unemployment. When this long run equilibrium is reached, the generalized Harris-Todaro condition is satisfied, i.e., there is a stabilization of the rural-urban expected wage differential.
Nigeria government can adopt this theory of economic growth is they wish to reduce the rural-urban migration which is cause by high urban unemployment. To this, the Federal government must carryout more expansionary fiscal policy on the rural areas in Nigeria. This policy with increase the rate of employment in rural areas and also
will increase the expect income of the rural people.
NAME: FERDINAND DANIEL NWEKE
Reg No: 2017/245020
Email: bookn1991@gmail.com
Lewis- Fei- Ranis model of Economic Growth
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
CONCLUSION AND DRAW OPINIONS
Base on this model we can see that nation like Nigeria should invest in both sector to increase it productivity and ensure rapid development of the nation through stopping of transfer of labour from one sector to another , the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply.
Haris Todara model of migration
INTRODUCTION
In this work will are looking at the Harris -Todara Model of migration theory. The hypothesis and predictions of Harris-Todaro model have been subjected to econometric evaluation and have been corroborated by several studies .The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migration decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage. From this crucial assumption, as denominated by Harris-Todaro , is deduced that the migratory dynamics leads the economic system toward an equilibrium with urban concentration and high urban unemployment
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker.
Assumption
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 0 are a parametric constants. g is the elasticity of p with respect to the ratio Ym/Ya.
The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified.
Relating to the Nigerian economy,In terms of pro-poor economic growth, the Harris-Todaro model and other multisector-labor-market models can help policy makers avoid two mistakes. One is to assume that development efforts should be channeled to the sectors where the poor are. The other is to assume that efforts should always be focused on getting the poor out of the sectors in which they now are. Careful cost-benefit analysis based on well-specified labor-market models is required to decide among such alternatives.
At equilibrium With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.
COMPARISON WITH THE REAL WORLD
The successful East Asian Countries of Taiwan, Korea, and Singapore, as well as the not-so successful countries like Brazil, Chile, and several others, is usually the example that is given to explain the comparison of this model with the real world. It is argued (Balassa 1989) that the import-substitution policies in many less-developed countries are based against the primary agricultural sector which is the exporting sector while the export-oriented polices provide similar incentives to the two sectors. Countries that adopt inward-looking strategies, the limitation of the domestic markets and the lack of competition leads to the allocative and technological inefficiency. As in contrast with the onward-looking countries which are able to mobilize domestic resources effectively in the production if goods that are in competition in the wide markets worldwide which would result in technology. It is now in our own opinion that majority of the less-developed countries have approached what is said to be the take-off stage as described by Lewis (1954) and Fei and Ranis (1961) characterized by the rapidly growing economies, transfer of labour from the traditional sector, and the persistent or continuous problems of the high urban unemployment and underemployment rates.
CONCUSSION
1). Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
2). Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
NAME: FERDINAND DANIEL NWEKE
Reg No: 2017/245020
Email: bookn1991@gmail.com
Lewis- Fei- Ranis model of Economic Growth
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
CONCLUSION AND DRAW OPINIONS
Base on this model we can see that nation like Nigeria should invest in both sector to increase it productivity and ensure rapid development of the nation through stopping of transfer of labour from one sector to another , the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply.
Haris Todara model of migration
INTRODUCTION
In this work will are looking at the Harris -Todara Model of migration theory. The hypothesis and predictions of Harris-Todaro model have been subjected to econometric evaluation and have been corroborated by several studies .The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migration decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage. From this crucial assumption, as denominated by Harris-Todaro , is deduced that the migratory dynamics leads the economic system toward an equilibrium with urban concentration and high urban unemployment
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker.
Assumption
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 0 are a parametric constants. g is the elasticity of p with respect to the ratio Ym/Ya.
The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified.
Relating to the Nigerian economy,In terms of pro-poor economic growth, the Harris-Todaro model and other multisector-labor-market models can help policy makers avoid two mistakes. One is to assume that development efforts should be channeled to the sectors where the poor are. The other is to assume that efforts should always be focused on getting the poor out of the sectors in which they now are. Careful cost-benefit analysis based on well-specified labor-market models is required to decide among such alternatives.
At equilibrium With the random matching of workers to available jobs, the ratio of available jobs to total job seekers gives the probability that any person moving from the agricultural sector to the urban sector will be able to find a job. As a result, in equilibrium, the agricultural wage rate is equal to the expected urban wage rate, which is the urban wage multiplied by the employment rate.
COMPARISON WITH THE REAL WORLD
The successful East Asian Countries of Taiwan, Korea, and Singapore, as well as the not-so successful countries like Brazil, Chile, and several others, is usually the example that is given to explain the comparison of this model with the real world. It is argued (Balassa 1989) that the import-substitution policies in many less-developed countries are based against the primary agricultural sector which is the exporting sector while the export-oriented polices provide similar incentives to the two sectors. Countries that adopt inward-looking strategies, the limitation of the domestic markets and the lack of competition leads to the allocative and technological inefficiency. As in contrast with the onward-looking countries which are able to mobilize domestic resources effectively in the production if goods that are in competition in the wide markets worldwide which would result in technology. It is now in our own opinion that majority of the less-developed countries have approached what is said to be the take-off stage as described by Lewis (1954) and Fei and Ranis (1961) characterized by the rapidly growing economies, transfer of labour from the traditional sector, and the persistent or continuous problems of the high urban unemployment and underemployment rates.
CONCUSSION
1). Urban wages (wu) increase in the urban sector (le), increasing the expected urban income.
2). Agricultural productivity decreases, lowering marginal productivity and wages in the agricultural sector (wr), decreasing the expected rural income.
Ikechukwu Chizoba Peace
2017/249617
Economics
HARRIS-TODARO MODEL OF MIGRATION
INTRODUCTION
Harris Todaro model was named after John R-Harris and Michael Todaro developed on 1970 and it is used in welfare and development Economics to explain some of the rural-urban migration issues. This model is developed to explain rural-urban migration and it is based on two sector the rural and urban migration. His migration is studied under the context of employment and unemployment in developing countries. The Major scenario in this model is that the determinant of migration process is the differential features between the expected urban and rural wages. Based on the assumption that migration is based primarily on privately rational Economic calculations despite the existence of high urban unemployment, the Harris Todaro model posits that migration happens just in response to urban-rural differences in expected income than the actual earnings. And again that what causes this migration is an increase in a country’s urban population; the natural growth rate of the urban population, the re-classification of rural rural settlements as they grow and hit the magic number that makes them cities and towns, and rural-urban migration. Todaro’s model of migration does not advocate simply the rural-urban wage differences as the basis of migration as is claimed in all migration theories. According to him the migrants are rational in nature and calculative in their decision to shift to a particular city. He did not only take into consideration the wage differences but also the probability of getting a job in the urban area, so to him migration is determined more by rural-urban differences in expected income than the actual earnings.
H-T MODEL;
The model process is revisited under an agent based approach, that some factors are behind the migration of workers. Such factors like social learning by imitation. Todaro model posits that migration decision is based on expected income differentials. The high rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income is much more higher than expected rural income. Migration here depends primarily on the difference in wages between rural and urban labour markets. Where H-T takes urban employment to be Eu, urban unemployment Uu and L the total urban labour force. Put together W superscript ‘e’ and subscript ‘u’ becomes the urban wage times the urban employment rate (W x Eu)
To him there is nothing like unemployment in the rural area which is dominated by agricultural sector, so based on this assumption of rural agricultural production and the subsequent labour market is perfectly competitive, their agricultural wage is said to be equal to their agricultural marginal productivity. Todaro accepts the logistics of Lewis model but only with reservation. He alternates Lewis model based on his assumption that there would exist constant real urban wages until that of rural surplus exhausts. Because he discovered that in almost all the developing countries that the urban wages have been on the rise.
ASSUMPTIONS/ FEATURES
1.Migration decision is based on expected income differentials.
2. Rural labour market is perfectly competitive
3. Rural-urban migration process is revisited under an agent based approach
4. Probability of obtaining urban job is inversely related to the urban unemployment rate.
5. Migration is stimulated primarily by rational Economic consideration.
CRITICISM
Francis Cherunilam commenting on Todaro migration model, writes that while the model is correct holding that there’s no possibility of full employment in urban areas Francis was slightly against this claims and he was like it is not correct to believe that the act of migration is always rational and well calculated. And he also said that Todaro is also wrong in not giving factors in the migration process.
Secondly, the model assumes that employment transfer evolve at the same rate as capital accumulates in the modern sector.
Thirdly, Cole and Sanders (1985) have criticized the Harris Todaro model for not explicitly modelling the subsistence sector employing uneducated migrants, arguing that it flawed the job selection process and expected income calculations if, by lack of qualification, uneducated migrants could not find a job in the modern urban sector.
LEWIS-FEI-RANIS MODEL OF ECONOMIC GROWTH
The Lewis-fei-Ranis model of Economic growth is a dualism model in developmental or welfare Economics that has been developed by John C.H. fei and Gustav Rannis. It is also known as the surplus labour model.
Surplus labour is the key point Karl Marx used in critique of political economy. The term surplus labour means labour performed in excess of the labour needed to produce the means of livelihood of the workers, and surplus in this context means the additional labour a worker has to do in their job beyond earning their keep. This also explains the instability of the capital system, the capitalist pays his workers less than the marginal value of the goods usually only enough to maintain the workers at a subsistence Level.
Lewis model divided the economy of underdeveloped countries into two sectors namely the subsistence and capitalist sector. Capitalist sector is defined as that part of the economy which makes use of reproducible capital and pays capitalist for the use thereof. It is also known as capital intensive system. It also implies mainly the manufacturing sector of the economy
While the subsistence sector is all that part of the economy which does not make use of reproducible capital, it is identified with the agricultural sector of the economy, including petty retail trading, domestic service and the whole range of casual jobs. To Lewis transition from subsistence sector to the capitalist sector does not necessarily involve rural-urban migration. The new version of Lewis model of migration has been coined in terms of sectors of activity rather than the areas of residence, so this did not address the notion of rural-urban migration directly. The subsistence sector is characterized by zero or very low productivity ‘surplus ‘ labour and there is a high productivity in urban industrial sector into which labour from the subsistence sector is generally transferred.
Lewis feels that if a wage higher than the the institutional wage prevailing in the subsistence sector by a certain proportion of the institutional wage is fixed in the capitalist sector will be able to attract an unlimited quantity, the labour from subsistence sector and this will enable the capitalist sector to expand. And this in turns leads to generation of more savings in the capitalist sector.
The model assumed that there exists surplus labour in the subsistence sector. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage.
ASSUMPTIONS
1. Modern sector employment creation and labour transfer rate is proportional to the rate of capital accumulation in the sector. That is MPL is positive in the modern sector and that labour could be transferred to this sector at zero cost.
2. Surplus labour exists in rural areas while the urban areas is said to have full employment
3. Reinvestment of local economy capitalist profits instead of the profits being sent abroad
4. Assumption of diminishing returns in the modern sector; mostly the industrial areas
5. That if a modern labour sector was competitive it is guaranteed a continuous existence of real urban wages to be a point that surplus labour is exhausted in the real sector.
CRITICISM
If marginal productivity of labour in agricultural sector is negligible, zero or negative, it’s obvious that there is a disguised unemployment in agriculture. Surplus labour, wage determination and the mechanism of labour mobility are unclear, and because of this development could not move further, and this has prevented it’s use in empirical research.
Lewis assertion that subsistence sector has surplus labour and capital sector have full employment is not necessarily true because in developing countries, capital sector do not provide full employment.
NAME: Ogbonnaya Victor Nnanna
Reg no: 2017/249544
Department: Economics
Email: nnanna.ogbonnaya.249544@unn.edu.ng
ANSWER:
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
This model was propounded by two economists Gustav Rani’s and John Fei in the article “The theory of Economic Development” also known as the surplus labour model. The theory relates to underdeveloped labour surplus and resources, poor economy in which the vast majority of the population is engaged in agriculture admits widespread unemployment and high rates of population growth. There exist surplus labour in the subsistence sector and this labour is made available for the industrial and urban sector but at a constant wage determined by minimum level of existence in traditional family farming because of disguised unemployment in agriculture.
ASSUMPTIONS:
They assume the economy has two sectors which are rural and urban sector.
They assume that there is surplus labour in subsistence sector.
They emphasize on the importance of saving in both sector.
Land has no role as a factor of production.
They assume that population growth is an exogenous phenomenon.
They assume that the output in agricultural sector is a function of land and labour only.
CRITICISM
The model ignored the cost involved in training the unskilled workers transferred from the subsistence sector.
The model assumed that besides labour there is an unlimited supply of entrepreneur in the capitalist sector and this is not true in most developed countries.
When labour is transferred from the subsistence sector, share of agricultural output falling to each one left in the agricultural sector will start rising.
The assumption that disguised unemployment exists in the agricultural sector were not accepted by many economists, according to them the production in the subsistence sector will be affected when labour is withdrawn from it.
The model assumed that there already exists a market for the industrial products in the country which is wrong as people of an underdeveloped country may not be able to purchase the products.
It is not easy to transfer labour from the subsistence sector to the capitalist sector by offering them an incentive of a little higher wage and the mobility of labour is very low.
COMPARISON OF THE FEI-RANIS MODEL TO THE REAL WORLD.
The model failed to recognize and put into consideration the sluggish economic situation present in less developed countries (eg Nigeria). If they had considered that they would find out that the agricultural backwardness was a result of the institutional structure that prevailed.
The model also assumed a closed model i.e there is absence of foreign trade in the economy which is unrealistic as raw materials and other products can’t be imported, an example is Japan.
CONCLUSION
These limitations do not undermine the importance of the Fei-Ranis model for the economic development of labour surplus countries. It systematically analyses the development process from the take-off to self sustained growth through the interaction of the agricultural sectors of an underdeveloped economy.
THE HARRIS-TODARO MODEL OF MIGRATION
The Harris-Todaro model is named after John R. Harris and Michael Todaro and was developed in 1970. The model assumes that the migration decision is based on expected income differential between rural and urban areas rather than just wage differential. In this model, an equilibrium is reached when the expected wage in urban areas is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labour market is perfectly competitive, and this results in equality in the agricultural rural wage and agricultural marginal productivity.
ASSUMPTIONS OF THE HARRIS-TODARO MODEL
There are two sectors in the economy which are the rural and urban sector
The number of urban/manufacturing jobs available is exogenously fixed.
The model operates in the short run.
Capital is available in fixed quantities in the two sectors.
There is perfect competition among producers in both sectors.
The rural wage equals the rural marginal product of labour and the urban wage is exogenously determined.
CRITICISM OF THE HARRIS-TODARO MODEL
This model ignored the cost of rural-urban migration or the relatively higher costs of urban living which the migrants have to incur in the urban sector.
The model ignored the generation of savings as a source of financing subsidy.
The model does not specify alternate policy prescription such as giving a wage subsidy to the urban sector.
The model suggest non-distortionary lump sum tax to finance subsidy, but a lump sum tax is not usually non-distortionary
CONCLUSION
The migratory dynamics generated by agents that seek to adapt to the economic environment that they co-create leads the economy towards a long run equilibrium characterized by urban concentration with urban unemployment. When this is reached, the generalized Harris-Todaro condition is satisfied which is there will be stabilized rural-urban wage differential.
NAME: IWU IFEANYI JULIAN
REG.NO. 2017/249354
DEPARTMENT: CSS(Economics/Political Science)
EMAIL: iwujulian@gmail.com
Good morning Mr. President and the honourable members of this parliament.
FEI-RANIS MODEL
The Fei-Ranis model assumed a closed economy and from my perspective this hinders growth especially in the industrial sector. And my opinion the the economy should be opened is based on the fact that exports would improve the country’s terms of trade. The Fei-Ranis model also doesn’t take capital into account and does not indicate that the supply of land could be increased in the long run.
HARRIS-TODARO MODEL OF MIGRATION
The Harris-Todaro model of migration believes that the migration decision is based on expected income differentials between rural and urban areas. In my opinion, this model is flawed in that it assumes potential migrants are indifferent between a certain expected rural income and an uncertain expected urban income of the same magnitude and this model doesn’t take into account the urban unemployed living on a zero wage.
Ogbonna Anthony
2017/243368
Lewis-Fei-Ranis Model of Economic Growth.
One of the best known early theoretical models of development that focused on the structural transformation of a primarily subsistence economy was that formulated by Nobel Laureate W. Arthur Lewis in the mid-1950s, and later modified, formalized, and extended by John Fei and Gustav Ranis. The Lewis two-sector model became the general theory of the 1960s and early 1970s, and it is sometimes still applied, particularly to study the recent growth experience in China and labor markets in other developing countries.
The Fei-Ranis model is an improvement over the lewis model. John Fei and Gustav Ranis analyze the transition process through which an underdeveloped economy hopes to move from a condition of stagnation to one of self-sustained growth.
The theory relates to underdeveloped labor surplus and resources; poor economy in which the vast majority of the population is engaged in agriculture amidst widespread unemployment and high rates of population growth.
ASSUMPTIONS OF THE MODEL
1. There is a dual economy divided into a traditional and stagnant agricultural sector and an active industrial sector.
2. The output of the agricultural sector is a function of land and labor alone.
3. There is no accumulation of capital in agriculture except in the form of land reclamation.
4. Land is fixed in supply.
5. Population growth is taken as an exogenous phenomenon.
The real wage in the industrial sector remains fixed and is equal to the initial level of real income in the agricultural sector. It is called an institutional wage.
6. Workers in either sector consume only agricultural products.
Given these assumptions, Fei and Ranis analyze the development of a labor surplus economy into three phases;
In the first phase, the disguised unemployed workers who are not adding to agricultural output are transferred to the industrial sector at a constant institutional wage.
In the second phase, agricultural workers add to agricultural output but produce less than the institutional wage they get. Such workers are shifted to the industrial sector. If the migration of the workers to the industrial sector continues, a point is eventually reached when farmworkers produce output equal to the institutional wage.
In the third phase, which makes the end of the take-of and the beginning of the self-sustained growth when farmworkers produce more than the institutional wage they get. In this phase, the surplus labor is exhausted and the agricultural sector becomes commercialized.
. HARRIS-TODARO AGENT-BASED MODEL
In this section we describe the implementation of the computational model we proposed, as well as the aggregate patterns obtained numerically and the comparison with the respective analytical results.
A. Computational Implementation
Initially, workers are randomly placed in a square lattice with linear dimension L = 500. The reference values of the parameters used for these simulations are the same done to evaluate the equilibrium of the Harris-Todaro model, namely, Aa = 1.0, Am = 1.0, f = 0.3, a = 0.7, r = 1.0 and g = 1.0. The value of the minimum wage used is wm = 0.8 and the initial urban fraction of the total population is nu = 0.2, where nu = Nu/N is the normalized urban population also called urban share. The initial value nu = 0.2 is in agreement with historical data of developing economies. Given these parameters, one can calculate the vector which characterizes temporary equilibrium of the system by using eqs. (7 – 12).
By using eq. (7), the employment level of the urban sector, Nm, is obtained. If nu Nm/N there will be a fraction of Nm/Nu workers employed, which earn the minimum wage, wi = wm, and (1-Nm/Nu) workers unemployed, which earn a wage wi = 0.
Each worker can be selected to review his sectorial location with probability a, called activity . Therefore, in each time step only a fraction of workers becomes potential migrants, going through the sectorial location reviewing process. Potential migrants will determine their satisfaction level of being in the current sector by comparing their earnings, wi, among nearest neighbors.
The potential migrant starts the comparison process with a initial satisfaction level si = 0. When wi > wneighbor the satisfaction level si is added in one unit; if wi < wneighbor, si is diminished in one unit; if wi = wneighbor, si does not change. After the worker has passed through the reviewing process his/her satisfaction level is checked. The migration will occur only if si < 0, what means that the worker's i earnings is less than the most of his/her nearest neighbors.
After all the potential migrants complete the reviewing process and have decided migrate or not, a new configuration of the system is set. Therefore, once again a new temporary equilibrium of the system is calculated by using eqs. (8 – 12). The whole procedure is repeated until a pre-set number of steps is reached. It is important to emphasize that Nm is kept constant throughout the simulation. Its given by eq. (7) which depends on the technological parameters, a,Am, and the minimum wage, wm, which are constants too.
B. Analysis of the Emergent Properties
In this section we develop the analysis of the long run aggregate regularities of Harris-Todaro agent-based computational model. These long run properties will be compared between the solution of the analytical model and simulations.
show the basic characteristics of the transitional dynamics and long run equilibrium generated by simulations. When the economic system has a low initial urban share, nu = 0:2 or nu = 0:3, there is a net migration toward urban sector. This migration takes the urban sector from a full employment situation to an unemployment one. The positive differential of expected wages that pulls workers to the urban sector diminishes. However, if the economic system initiates with a high urban share, nu = 0:8, or nu = 0:9 there is net flow of migration toward rural sector in such a way that the unemployment rate of the urban sector decreases
In this case, the differential of expected wages is negative. In an economy mainly rural (nu < 0:5), the transitional dynamics characterized by a continuous growth of population of the urban sector with a differential of expected wages relatively high is followed by the stabilization of rural-urban differential of expected wages. In other words, the generalized Harris-Todaro condition, eq. (15), arises as a long run equilibrium result of the agent-based migratory dynamics.
Figure 3 also shows that even after the urban share has reached an stable average value, there are small fluctuations around this average. Therefore, differently from the original Harris-Todaro model, our computational model shows in the long run equilibrium the reverse migration. This phenomenon has been observed in developing countries.
for a given value of a, the variation of wm practically does not change the equilibrium values of the urban share, the differential of expected wages and the unemployment rate. However, for a given wm, higher values of a make the urban sector less attractive due the reduction of the employment level. This causes a lower equilibrium urban share, a higher unemployment rate and a gap in the convergence of the expected wages.
The equilibrium values of the urban share, the differential of expected wages and unemployment rate do not have a strong dependence with wm. However, variations in g for a fixedwm, dramatically change the equilibrium values of the variable mentioned before. Higher values of g generate a lower urban concentration, a higher gap in the expected wages and a higher unemployment rate in the equilibrium.
The convergence of migratory dynamics for a urban share, compatible with historical data, is robust in relation to the variation of the key technological parameters, a and f. The impact of the variation of these parameters in the values of the equilibrium differential of expected wages, ( – wa), and the equilibrium urban unemployment rate, (1-Nm=Nu).
CONCLUSION
The dispersed and non-coordinated individual migration decisions, made based on local information, generate aggregate regularities. Firstly, the crucial assumption of Harris and Todaro, the principle that rural-urban migration will occur while the urban expected wage exceed the rural wage, comes out as spontaneous upshot of interaction among adaptative agents.
OGBONNA ANTHONY CHUKWUDUBEM
2017/243368
Comments
Email *
ogbonnatony54@gmail.com
INTRODUCTION
The Harris-Todaro (1970) model’s key contribution to the field of development economics is by making the migration process a rational choice based on expected earnings. The Harris-Todaro (H-T) model takes most of Lewis models’ assumptions as given, such as the rural sector being characterized by subsistence agriculture, and the urban sector being characterized by modernized industries. The Harris-Todaro model takes a standard two sector model and imposes a higher wage in the urban sector which is higher than equilibrium clearing, while wage in agriculture is flexible. Equilibrium clearing is simply when wage across both sectors equalize, minus movement costs or natural advantages (such as better living environment) in 1 or the other sector. By imposing this higher wage in the urban sector, we no longer have market clearing wage which gives the workers in the rural sector an incentive to migrate to the urban sector. These migrant workers are not guaranteed to find a job in the urban sector. There is a probability that they will end being unemployed or in the informal sector. For modeling simplicity, it is usually assumed that only 1 of these two sectors are in the model. It fits the situation in LDC’s better to assume that an informal sector exists in the urban sector than unemployment. LDC’s are unlikely to have good social safety nets such as welfare benefits, unemployment benefits, and old age security. Without these benefits, workers in urban sector must do some work to keep themselves alive. If they were unable to find a job in the urban formal sector, which is the modern industrial sector, they would be forced to work in the informal sector to keep themselves alive. The informal sector is very primitive; work in this sector is labour intensive with little or no capital endowment. The equilibrium condition of the Harris-Todaro model can be described as the wage in agriculture must be equal to the expected wage in the urban sector. The model in its most basic form ignores disutility from not being at home farm, or cost of mobility, but these omissions do not change the essence of the model, the only implication of this is a downward shift of the urban sector’s expected returns.
The main idea of the Harris-Todaro model is that labour migration in underdeveloped countries is due to rural-urban differences in average expected wages rather than actual wages. The migrants consider the various opportunities of employment available to them in rural and urban sectors and choose the one that maximises their expected wages from migration.The minimum urban wage is substantially higher than the rural wage. If more employment opportunities are created in the urban sector at the minimum wage, the expected will rise and rural-urban migration will increase. Expected wages are measured by the difference in real urban income and rural agricultural income and the probability of a migrant’s getting an urban job.In fact, a migrant compares his expected income for a given time horizon in the urban sector with his prevailing average rural income and migrates if the former is more than the latter.
Thus migration in the Harris-Todaro modal is viewed as the wage or income gap between the urban and the rural sectors. But all migrants cannot be absorbed in the urban sector at high wages. Many fail to find a job and get employment in the informal urban sector at wages which are even lower than in the rural sector. Thus they join the queue of the underemployed or disguised unemployed in the urban sector.
ASSUMPTIONS OF THE MODEL
The Harris-Todaro model is based on the following assumptions:
1. There are two sectors in the economy – the rural or agricultural sector (A) and the urban or manufacturing sector (M).
2. The model operates in the short run.
3. The marginal production of labour in agriculture (MPLA) and of industry (MPLM) are determined by their respective technologies.
4. Capital is available in fixed quantities in the two sectors.
5. There are L workers in economy with LA and LM numbers employed in the rural and urban sectors respectively.
6. The number of urban jobs available (LM) is exogenously fixed. In the rural sector some work is always available. Therefore, the total urban labour force LM comprises L-LAalong with an available supply of rural migrants.
7. The urban wage is fixed at WM and the rural wage at WA, WM> WA.
8. The rural wage equals the rural marginal product of labour and the urban wage is exogenously determined.
9. Rural-urban migration continues so long as the expected urban real income is more that the real agricultural income.
10. The assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector.
It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
Conclusion
The Harris-Todaro in essence is an extension of the Lewis model. It simply endogenizes migration decision along with the introduction of a second urban sector. It does not change from the Lewis model in that the fundamental driving force of growth is still technological growth.
For economic development in LDCs, capital accumulation in the urban sector is a crucial element. The accumulated capital forms many production bases and creates job opportunities in the urban sector. At the same time, the increase in employment raises the wage level in the urban sector. In the Harris–Todaro model, the rising urban wage pushes up the expected wage in the urban sector and consequently encourages workers to migrate from the rural sector to the urban sector. If, in the resulting migration, there are more workers than the number of job opportunities created in the urban sector, some will necessarily be unemployed. Occasionally, the increase in unemployment lowers the per-capita income level before the capital is accumulated. This phenomenon is referred to as Todaro paradox. Previous studies have not, however, determined what effect an increase in capital stock in the urban sector has on urban unemployment.
NAME:UGWOKE NGOZI CHRISTABEL
REGNO:2017/244942
EMAIL:ngozi.ugeoke.244942@unn.edu.ng
BLOG ADDRESS: ngchrist.blogspot.com
LEWIS- FEI – RANIS MODEL
In the mid-1950s, W. Arthur Lewis outlined a model of economic development. At the heart of the model were the dynamics of labour reallocation in a ‘dual economy’ composed of a traditional or subsistence sector and a modern or industrial or capitalist sector. The Lewis model has since become one of the most influential models in development economics and its creator was awarded the Nobel prize in appreciation of it.
Lewis argued that the driver of capital accumulation was a sectoral movement of the factor of production abundant in developing countries, labour, from the ‘traditional’ or ‘non-capitalist’ sector (of low productivity, low wage, priced to average product not marginal product, and thus with widespread disguised unemployment) to the ‘modern’ or ‘capitalist’ sector (of higher productivity and where wages are set by productivity in the ‘subsistence sector’). Crucial is the existence of surplus labour in the traditional or non-capitalist sector. Because of this, wages are set just above subsistence across the whole economy, leading to the transfer of labour over time from traditional or non-capitalist to modern or capitalist sectors and the capture of labour productivity gains to capitalists as profits as these are the source of growth via reinvestment. The floor for wages is institutionally set at subsistence. When the surplus labour disappears an integrated labour market and economy emerge and wages will then start to rise.
In 1954. In his model Lewis divides the economy in an underdeveloped country in two sectors namely the Subsistence sector and the capitalist sector. Subsistence is identified with the agricultural sector of the economy while the capitalist sector implies mainly the manufacturing sector of the economy. Capitalist sector also includes plantations and mining where hired labour is employed for purposes of production. The capitalist sector can either be private or public in nature. Subsistence sector, that the agricultural sector is considered to be labour intensive. It does not use reproducible capital. It uses poor techniques of production and has very low productivity.
The Lewis model was intended as a critique of the neoclassical approach in that labour is available to the modern or capitalist sector of an economy not in a perfectly elastic supply but upward sloping rather than flat, and with a distinction between surplus-producing labour and subsistence labour (the latter of which was a negligible source of net profits for reinvestment, which Lewis saw as the driver for growth). Lewis also rejected the assumptions of neoclassical economists of perfect competition, market clearing and full employment and Lewis made the distinction, noted above, between productive labour, which produced a surplus, and unproductive labour, which did not.
ASSUMPTION OF LEWIS MODEL
(A) Surplus labour in substance sector:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women. The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
(B) Important of saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion.Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector. Lewis so much fascinated by the higher propensity to save of the capitalist sector that he even advocates a transfer of income from the subsistence sector to the capitalist sector. He feels that steps have to be taken to raise the rate of savings from 10% to 15% if the development of the economy has to be smooth.
HOW IT RELATE TO NIGERIA ECONOMY
The Lewis theory of development to the Nigerian economy. Nigeria has both rural and urban sectors that provide for each forward and backward linkages and as such, the two sectors are not mutually exclusive in promoting the economic growth of the country and improving the standard of living of citizens. However, the Federal Government of Nigeria does not necessarily have to move surplus labour that exists in the rural areas to the urban areas but instead infrastructural facilities should be provided equally to both the rural and urban areas of the country.
HARRIS TADORA MODEL OF MIGRATION
The Harris-Todaro model of the rural-urban migration process is revisited under an agent-based approach. The migration of the workers is interpreted as a process of social learning by imitation, formalized by a computational model. By simulating this model, we observe a transitional dynamics with continuous growth of the urban fraction of overall population toward an equilibrium. Such an equilibrium is characterized by stabilization of rural-urban expected wages differential (generalized Harris-Todaro equilibrium condition), urban concentration and urban unemployment. These classic results obtained originally by Harris and Todaro are emergent properties of our model.Todaro is considered one of the starting points of the classic rural-urban migration theory . The hypothesis and predictions of Harris-Todaro model have been subjected to econometric evaluation and have been corroborated by several studies. The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migraton decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage. From this crucial assumption as denominated by Harris-Todaro , is deduced that the migratory dynamics leads the economic system toward an equilibrium with urban concentration and high urban unemployment.
The Harris-Tadora model of the rural-urban migration is a means of an agent-based computational model taking into account the influence of the neighborhood in the migration decision. The inclusion of the influence of neighbors was done via an Ising like model. The economic analogous to the external field in the Ising hamiltonian was the differential of expected wages between urban and rural sectors
ASSUMPTIONS OF HARRIS-TADOR MODEL OF MIGRATION.
A. Assumption.
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < 0 and 0 < 0 and > 0 are a parametric constants. is the elasticity of p with respect to the ratio Ym/Ya.
The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified:
B. Temporary equilibrium.
Given a parametric constant vector (Aa,Am,,,,), an initial urban population Nu, and a minimum wage wm one can calculate the temporary equilibrium of the economic system by using eqs. (1 – 6).
From eq. (4) one can find the employment level at the manufacturing sector
Replacing eq. (7) in eq. (2) we get the production level of the manufacturing sector
From eq. (6) one can obtain the relation
which is used with eq. (1) to obtain the agricultural production
By using eqs. (5), (8) and (10) the terms of trade are determined
Finally, by using eqs. (3), (9) and (11), the rural wage in units of manufacturated good is obtained
In sum, the vector (Nm,Ym,Na,Ya,p,wa) configures a temporary equilibrium that might be altered whether occurs a migration of workers, induced by the differential of sectorial wages, which changes the sectorial distribution of overall population.
NAME:UGWOKE, NGOZI CHRISTABEL
DEPT: LIBRARY AND INFORMATION SCIENCE
REG NO:2017/244942
LEWIS- FEI – RANIS MODEL
In the mid-1950s, W. Arthur Lewis outlined a model of economic development. At the heart of the model were the dynamics of labour reallocation in a ‘dual economy’ composed of a traditional or subsistence sector and a modern or industrial or capitalist sector. The Lewis model has since become one of the most influential models in development economics and its creator was awarded the Nobel prize in appreciation of it.
Lewis argued that the driver of capital accumulation was a sectoral movement of the factor of production abundant in developing countries, labour, from the ‘traditional’ or ‘non-capitalist’ sector (of low productivity, low wage, priced to average product not marginal product, and thus with widespread disguised unemployment) to the ‘modern’ or ‘capitalist’ sector (of higher productivity and where wages are set by productivity in the ‘subsistence sector’). Crucial is the existence of surplus labour in the traditional or non-capitalist sector. Because of this, wages are set just above subsistence across the whole economy, leading to the transfer of labour over time from traditional or non-capitalist to modern or capitalist sectors and the capture of labour productivity gains to capitalists as profits as these are the source of growth via reinvestment. The floor for wages is institutionally set at subsistence. When the surplus labour disappears an integrated labour market and economy emerge and wages will then start to rise.
In 1954. In his model Lewis divides the economy in an underdeveloped country in two sectors namely the Subsistence sector and the capitalist sector. Subsistence is identified with the agricultural sector of the economy while the capitalist sector implies mainly the manufacturing sector of the economy. Capitalist sector also includes plantations and mining where hired labour is employed for purposes of production. The capitalist sector can either be private or public in nature. Subsistence sector, that the agricultural sector is considered to be labour intensive. It does not use reproducible capital. It uses poor techniques of production and has very low productivity.
The Lewis model was intended as a critique of the neoclassical approach in that labour is available to the modern or capitalist sector of an economy not in a perfectly elastic supply but upward sloping rather than flat, and with a distinction between surplus-producing labour and subsistence labour (the latter of which was a negligible source of net profits for reinvestment, which Lewis saw as the driver for growth). Lewis also rejected the assumptions of neoclassical economists of perfect competition, market clearing and full employment and Lewis made the distinction, noted above, between productive labour, which produced a surplus, and unproductive labour, which did not.
ASSUMPTION OF LEWIS MODEL
(A) Surplus labour in substance sector:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women. The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
(B) Important of saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion.Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector. Lewis so much fascinated by the higher propensity to save of the capitalist sector that he even advocates a transfer of income from the subsistence sector to the capitalist sector. He feels that steps have to be taken to raise the rate of savings from 10% to 15% if the development of the economy has to be smooth.
HOW IT RELATE TO NIGERIA ECONOMY
The Lewis theory of development to the Nigerian economy. Nigeria has both rural and urban sectors that provide for each forward and backward linkages and as such, the two sectors are not mutually exclusive in promoting the economic growth of the country and improving the standard of living of citizens. However, the Federal Government of Nigeria does not necessarily have to move surplus labour that exists in the rural areas to the urban areas but instead infrastructural facilities should be provided equally to both the rural and urban areas of the country.
HARRIS TADORA MODEL OF MIGRATION
The Harris-Todaro model of the rural-urban migration process is revisited under an agent-based approach. The migration of the workers is interpreted as a process of social learning by imitation, formalized by a computational model. By simulating this model, we observe a transitional dynamics with continuous growth of the urban fraction of overall population toward an equilibrium. Such an equilibrium is characterized by stabilization of rural-urban expected wages differential (generalized Harris-Todaro equilibrium condition), urban concentration and urban unemployment. These classic results obtained originally by Harris and Todaro are emergent properties of our model.Todaro is considered one of the starting points of the classic rural-urban migration theory . The hypothesis and predictions of Harris-Todaro model have been subjected to econometric evaluation and have been corroborated by several studies. The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migraton decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage. From this crucial assumption as denominated by Harris-Todaro , is deduced that the migratory dynamics leads the economic system toward an equilibrium with urban concentration and high urban unemployment.
The Harris-Tadora model of the rural-urban migration is a means of an agent-based computational model taking into account the influence of the neighborhood in the migration decision. The inclusion of the influence of neighbors was done via an Ising like model. The economic analogous to the external field in the Ising hamiltonian was the differential of expected wages between urban and rural sectors
ASSUMPTIONS OF HARRIS-TADOR MODEL OF MIGRATION.
A. Assumption.
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < 0 and 0 < 0 and > 0 are a parametric constants. is the elasticity of p with respect to the ratio Ym/Ya.
The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified:
B. Temporary equilibrium.
Given a parametric constant vector (Aa,Am,,,,), an initial urban population Nu, and a minimum wage wm one can calculate the temporary equilibrium of the economic system by using eqs. (1 – 6).
From eq. (4) one can find the employment level at the manufacturing sector
Replacing eq. (7) in eq. (2) we get the production level of the manufacturing sector
From eq. (6) one can obtain the relation
which is used with eq. (1) to obtain the agricultural production
By using eqs. (5), (8) and (10) the terms of trade are determined
Finally, by using eqs. (3), (9) and (11), the rural wage in units of manufacturated good is obtained
In sum, the vector (Nm,Ym,Na,Ya,p,wa) configures a temporary equilibrium that might be altered whether occurs a migration of workers, induced by the differential of sectorial wages, which changes the sectorial distribution of overall population.
NAME: Obodo chisom jessica
REG NO: 2017/249538
EMAIL: chisom.obodo.249538@unn.edu.ng
WEBSITE: teddy-cilia.simplesite.com
ANSWER:
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
The Lewis (1954) theory of dualistic economic development provides the seminal contribution of theories of economic development particularly for labour-surplus and resource-poor developing countries. In the Lewis theory, the economy is assumed to comprise the agricultural and non-agricultural sectors. The agricultural sector is assumed to have vast amounts of surplus labour that result in an extremely low, close to zero, marginal productivity of labour. The agricultural wage rate is presumed to follow the sharing rule and be equal to average productivity, which is also known as the institutional wage. The non-agricultural sector has an abundance capital and resources relative to labour. It pursues profit and employs labour at a wage rate higher than the agricultural institutional wage by approximately 30 percent (Lewis, 1954, p.150). The non-agricultural sector accumulates capital by drawing surplus labour out of the agricultural sector. The expansion of the non-agricultural sector takes advantage of the infinitely elastic supply of labour from the agricultural sector due to its labour surplus.
The Fei-Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the surplus labour model. It recognizes the presence of a dual economy comprising both of the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the economic development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial sector, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod-Domars model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Ranis and Fei (1961) formalized Lewis’s theory by combining it with Rostow’s (1956) three “linear-stages-of-growth” theory. They disassembled Lewis’s two-stage economic development into three phases, defined by the marginal productivity of agricultural labor. They assume the economy to be stagnant in its pre-conditioning stage. The breakout point marks the creation of an infant non-agricultural sector and the entry into phase one. Agricultural labour starts to be reallocated to the non-agricultural sector.
ASSUMPTIONS OF THE MODEL
Some assumptions of the model are; firstly, the modern sector employment creation and labour transfer the rate if capital accumulation in the modern sector. Marginal productivity of labour, henceforth MPL, is positive in the modern sector. Labour could be transferred from the agricultural sector to the modern sector at zero cost, yielding net profits in the industry leading to a higher rate of investment: countries can thus develop rapidly (Todaro and Smith, 2009 pp 118). Secondly, was the notion that surplus labour exists in rural areas, while the urban areas were said to have full employment. This, Todaro said, was because there was over-population in the rural area where MPL is zero. Actual output of labour was used to determine their wages (Todaro and Smith, 2009,pp 118). A popular economist Ishikawa (1975) approves the theory of minimum subsistence level of existence. This is one of the institutional real wages and he defined it as income distribution and principle of employment which says that every family is entitled to at least a minimum wage (Ranis, 2004). Hayami and Kikuchi (1982), using a Neo-classical approach, found that, in Indonesia, wages will never adjust based on labour marginal product but through social conventions.
Thirdly, another important assumption that Lewis made is about savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests its entire savings for its further expansion. Those in subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery and for construction of temples and so on. The propensity to save of the people in subsistence sector is also lower when compared with that of those in capitalist sector. Lewis in fact so much fascinated by the higher propensity to save of the capitalist sector that he even advocates a transfer of income from the subsistence sector to the capitalist sector. He feels that steps to be taken to raise the rate of savings from 10% to 15% if the development of the economy has to be smooth.
In conclusion, I have shown the main ideas behind the Lewis-Ranis-Fei model and used the consecutive analysis of the model to explain why it is important to invest in both sectors in order to remain on the balanced growth path and maintain the rate of industrialization. Relating this to the Nigerian economy, the existence of surplus labour in agriculture allows the industry to continue to pay the institutional wage and therefore enjoy further profits and continued investment. Also at the same time, as more and more people are moving away from agriculture, there will be some amount of agricultural surplus that can be used up to fuel or lead to further development. This process continues until the surplus labour is absorbed. Hence, saving and investment are a crucial part in the Lewis-Ranis-Fei to support economic development.
HARRIS-TODARO MODEL OF MIGRATION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector.
Assumptions
Harris and Todaro [1] studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a 0 and g > 0 are a parametric constants. g is the elasticity of p with respect to the ratio Ym/Ya.
The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified.
Relating to the Nigerian economy,In terms of pro-poor economic growth, the Harris-Todaro model and other multisector-labor-market models can help policy makers avoid two mistakes. One is to assume that development efforts should be channeled to the sectors where the poor are. The other is to assume that efforts should always be focused on getting the poor out of the sectors in which they now are. Careful cost-benefit analysis based on well-specified labor-market models is required to decide among such alternatives.
NAME: ONYEKANMA CHIDINMA CYNTHIA
REG.NO. 2017/249569
DEPARTMENT: ECONOMICS
EMAIL: cchidinma96@gmail.com
BLOG ADDRESS: cchidinma96@blogspot.com
Answer:
HARRIS-TODARO’S MIGRATION THEORY
John R. Harris and Michael P. Todaro developed the Theory of migration. This theory is used in development economics and it illustrates a migrants’ decision on his expected income difference between a rural(agriculture) and urban(manufacturing) areas. The model of rural-urban migration is typically studied in the context of employment and unemployment situation in developing countries. The need of the model is to explain the critical urban unemployment problem in developing countries using Nigeria as case study.
ASSUMPTIONS OF THE MODEL
a. Two sectors: urban (manufacture) and rural (agriculture)
b. Rural-urban migration condition: when urban real wage exceeds real agricultural product
c. No migration cost
d. Perfect competition
e. Cobb-Douglas production function
f. Static approach
g. Low risk
THE DISCOURSE
The fundamental contribution of Harris and Todaro’s rural-urban two sector migration model was to build a model that fit the stylized facts of the labor market. On the lines of the theory, developing countries adopted program on integrated rural development which encouraged an increase in the rural traditional sector wage. The theory proves that the higher the unemployment rate, the lower is the probability of new migrants from the countryside actively seeking formal sector employment who are unable to find it.
SIGNIFICANT FINDINGS OF THE THEORY:
First, if the expected urban wage equals rural income, there is no incentive to migrate.
Second, if the expected urban wage is greater than rural income, there is a great incentive to move from rural to urban area.
Third, if the expected urban wage is less than rural incomes, there would be an incentive to move in other direction.
Fourth, the expected urban wage depends on what type of job migrant is engaged in.
IMPACT OF THE THEORY IN NIGERIA
Using Nigeria as a case study, Rural-urban migration is one of the most distressing problems facing the Nigerian socio- economic development. A situation where the desire for better employment, business opportunities and education pushes both young and old out of the rural areas to the urban areas. Rural-urban migration represents a phenomenon of unprecedented movement of people from the rural countryside to the urban cities. Historically, migration existed internally across city boundaries to enable excess labor to be taken slowly from the rural areas to provide workforce for industries in the urban areas and therefore aid industrialization and economic growth. However, over time, the rate of rural-urban migration has rapidly outweighed the rate of job creation in developing and underdeveloped countries( Harris-Todaros’ finding) overstretched available social and infrastructural facilities in the urban areas.
The Haris Todaro’s model will helps policy-makers in Nigeria to avoid two mistakes:
a). One is to assume that development efforts should necessarily be channeled to the sectors where the poor are.
b.) The other is to assume that efforts should necessarily be focused on getting the poor out of the sectors in which they presently are.
FIRST-BEST POLICY
According to the first-best solution labor should be allocated such that:
a) marginal products in agriculture and manufacturing must be equal
b) no unemployment
As Harris and Todaro stated the first –best solution is to subsidize manufacturing (at the rate ZZ’ per man) and restrict migration out of agriculture. Or, subsidize both sectors equally by ZZ’ per man. To finance this subsidy we need to find some sectors that are taxable either directly, or indirectly through trade policy, so that it will not affect supplies of the taxed factors as a result.
CONCLUSION
Harris Todaro model explains some issues of rural-urban migration. This migration happens in case when expected urban income is higher than rural wages. In this case economy may have high rates of unemployment. The equilibrium condition of this model is when expected urban wage is equal to rural wage. When government subsidize manufacturing sector Harris Todaro paradox may happen.
According to the Harris and Todaro, job creation instead of dealing with unemployment problem actually may cause increase of unemployment. This happens when urban-rural wage differential is high enough, so rural workers move to the cities hoping to find a job with high wage. Obviously, not all these workers succeed in finding jobs which leads to unemployment. Another issue is that inducing minimum wages creates labor market distortions. Therefore, policy makers in Nigeria should not set the minimum wage rates. In addition, simulations showed that different policies’ outcomes depend on elasticity of labor demand in different sectors and on marginal product of labor. As Harris and Todaro suggested the first-best policy would be subsidizing manufacturing along with restrictions of rural migration.
2. LEWIS FEI-RANIS MODEL
INTRODUCTION
The Fei–Ranis model of economic growth is a dualism model developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
SIGNIFICANCE OF AGRICULTURE IN FEI-RANIS MODEL
The Lewis model is criticized on the grounds that it neglects agriculture. Fei– Ranis model goes a step beyond and states that agriculture has a very major role to play in the expansion of the industrial sector. In fact, it says that the rate of growth of the industrial sector … depends on the amount of total agricultural surplus and on the amount of profit that are earned in the industrial sector. So, larger the amount of surplus and the amount of surplus put into productive investment and larger the amount of industrial profits earned, the larger will be the rate of growth of the industrial economy. As the model focuses on the shifting of the focal point of progress from the agricultural to the industrial sector, Fei and Ranis believe that the ideal shifting takes place when the investment funds from surplus and industrial profits are significantly large so as to purchase industrial capital goods like plants and machinery. These capital goods are needed for the creation of employment opportunities. Hence, the condition put by Fei and Ranis for a successful transformation is that Rate of increase of capital stock & rate of employment opportunities > Rate of population growth
IN SUMMARY
For economies in the early stages of development or still developing, such as Nigeria, the rural agricultural sector consists of family farming units, with a hiring principle that is different from that of the firm. Family members work together and share the value of their output. They are paid not the marginal product but the average product of labor. Thus, it is possible that there exists surplus labor in Nigeria and other developing countries. The notions of surplus labor and disguised unemployment have been a central part of development economics since Lewis (1954). With the presence of surplus labor in the traditional sector, the modern sector can expand without increasing labor costs. This process will continue until the surplus labor in the traditional sector is used up. After this point is reached, wages begin to rise consistent with rising marginal productivity, in which the workers in the traditional sector would also be paid in accordance with their marginal product rather than the subsistence wage. At this stage, the dualistic economic structure disappears, replaced by a competitive one-sector economy that can be explained by the neoclassical model.
Nwankpa Lilian Ugomma
Reg no:2017/244743
Dept:Social science Education(Economics Edu)
HARRIS-TODARO MODEL OF MIGRATION
INTRODUCTION
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration.
In this easy we turn upon the seminal Harris and Todaro work, which together with Todaro is considered one of the starting points of the classic rural-urban migration theory. The hypothesis and predictions of Harris-Todaro model have been subjected to econometric evaluation and have been corroborated by several studies. The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migraton decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage. From this crucial assumption, as denominated by Harris-Todaro, is deduced that the migratory dynamics leads the economic system toward an equilibrium with urban concentration and high urban unemployment.
In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However, in this equilibrium there will be positive unemployment in the urban sector. The model explains internal migration in China as the regional income gap has been proved to be a primary drive of rural-urban migration, while urban unemployment is local governments’ main concern in many cities.
COMPARISON OF THIS MODEL TO LEWIS-FEY MODEL
Here, we will discuss about the model of labour migration and reallocation.
Employment policy in developing countries like India cannot be formulated and implemented without answering a basic question, viz., how can underutilised labour be used in a development strategy? Ragnar Nurkse and W. A. Lewis asserted that large numbers of people remain engaged in work which adds nothing to national output. Nurkse saw the reallocation of a surplus labour to more productive uses, especially labour-intensive construction projects, as a major source of capital formation and economic growth.
Lewis envisaged a similar reallocation process but he pictured the ‘capitalist sector’, essentially industry, as the principal employer of surplus labour. Both theories regarded the labour reallocation process as nearly costless but they worried about how to capture from the agricultural sector the food necessary to feed the transferred workers.
While criticising the Lewis model J. R. Harris and M. P. Todaro have developed a new model of economic development which is relevant for labour surplus countries like India. It is the best known model of internal migration in the context of present-day developing countries. The model has focused on migration of labour from rural to urban areas induced by certain incentives. They have referred to two types of migration—induced migration and internal migration.
According to this model migrating workers are essentially participants in a lottery of relatively high-paid jobs in the towns. When new urban jobs are created the lottery becomes more attractive to potential migrants. Depending on their responsiveness to this improved opportunity, more than one worker are likely to migrate for each job created. If so, the output foregone may be that of two or more agricultural workers, not just one. If the migrants bring some of their family members to urban areas more output will be lost. The reason is that the wife and children of migrants find fewer employment opportunities in towns than in the rural areas because they do not have land in the towns on which to grow food.
MODELS AND ASSUMPTIONS
The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income.
CRITIQUES OF THE STANDARD HARRIS-TODARO MODEL AND ITS POLICY IMPLICATIONS
The Todaro Paradox conveyed the message that internal migration can be harmful because it exacerbates urban unemployment. Given the high unemployment rates and significant migration to cities in developing countries, this idea has certainly inspired many governments to implement restrictive policies even though the empirical validity of the Harris-Todaro model and of the Todaro paradox are not clearly established. In any case, the Harris-Todaro model suffers from theoretical oversimplifications, among which several are likely to overestimate the link between migration and urban unemployment. The critiques revolve around six major points:
1. The Harris-Todaro framework is only a static model describing migration, which is a dynamic phenomenon by nature. Even though the model can be thought of as representing a steady state equilibrium, this is a limitation. Furthermore, the formalization is made in a partial equilibrium context which greatly weakens the justifications for policy recommendations.
2. Important aspects are absent from the standard Harris-Todaro model, including the probable heterogeneity of migrants which is not accounted for, risk aversion which could dampen migration incentives and render the Todaro paradox even less likely to occur, the possibility of job search in the urban area from the rural area, the possibility of return migration, or the existence of rural unemployment. In fact, the Harris-Todaro is almost silent about what happens in the rural areas.
3. The assumption that urban workers are either employed in the manufacturing sector or unemployed has been criticized as too simplistic even though, in the authors’ minds, it was implicit that unemployment could also be interpreted as underemployment in the informal sector. Cole and Sanders (1985) have criticized the Harris-Todaro model for not explicitly modeling the subsistence sector employing uneducated migrants, arguing that it flawed the job selection process and expected income calculations if, by lack of qualification, uneducated migrants could not find a job in the modern urban sector.
4. The job rationing mechanism or hiring model hypothesized is not realistic. In particular, assuming random job selection in each period overestimates the likelihood of finding a job. Stieglitz (1974) suggests that the employment probability might vary in a non-monotonic way with the duration of the stay in the city: it could increase in the first periods when migrants form social networks in the city, and then decrease in the later periods because of deteriorating human capital or because of bad signaling.
5. The Harris-Todaro model assumes that the urban wage is exogenously set above the endogenous rural wage since it must be that w > f’a(L’a) for (2.3) to hold. The assumption that wages are high find several explanations ranging from the existence of trade unions to the agglomeration of economic activities. It is confirmed in practice,since wages are often reported three to four times higher in urban areas than in rural areas (Todaro, 2000). What is more problematic, however, is the assumption that the urban wage is fixed, especially in the presence of an informal sector as typical of many developing economies. In fact, the argument of a minimum wage should only hold for low wages in the formal sector, unless remunerations in the informal sector align themselves with those in the formal sector (due to the competition for labor between employers).14 In addition, the wage in the Harris-Todaro model is not related to unemployment in any manner. If the urban wage tends to decrease with an increase in the unemployment rate as argued by Hoddinott (1996) in his study on urban African labor markets, then this would tend to reduce the expected earnings differential in the transition towards the equilibrium in the model. This gives another reason why migration flows could be overestimated, making the Todaro paradox even less likely to occur.
6. The assumption of migration led by expected income differentials may overlook other important elements in the migration decision. In particular, it has been observed that migration can occur even when the urban expected income is below the rural income, which is clearly inconsistent with the income differential approach adopted by the Harris-Todaro model (see Katz and Stark 1986a). In view of these critiques, the policy implications derived from the Harris-Todaro model i.e. to restrict the rural to urban migration are much weaker. In particular, there are several reasons that qualify the justifications of restrictive migration policies. First, Todarian models only focus on urban labor markets whereas national governments should be concerned with whether overall national employment (i.e. including rural areas) has improved. Second, as observed by Stark (1991), in a general equilibrium perspective, the migration of labor between rural and urban areas may reflect a disequilibrium in another market, for instance poorly-functioning capital markets in rural areas, which can induce migration and should therefore be addressed. Third, it cannot be ruled out that migration may have a positive impact on rural areas, possibly by raising productivity, allowing exchanges with urban areas, and generating income for rural development.
CONCLUSION
What policies can be adopted to make a dent on the problem of employment? The preceding analysis suggests a two pronged policy strategy. The first component of the policy framework must deal with the adoption, enactment and implementation of a set of measures that can significantly reduce the wage gap. Since the wage gap can be reduced in either of two ways, i.e. by decreasing the urban wage, holding the average rural income constant; or by increasing rural incomes faster than the urban real wage, the question would arise as to which of these is more desirable. There are many reasons, I wish to argue, to recommend the latter, i.e. narrowing the wage gap by increasing rural incomes and not by reducing urban incomes. First, the increase in rural incomes while holding urban wages from falling would impart an overall impetus to the levels of aggregate demand in the economy. This will be beneficial in sustaining rapid economic growth in the macroeconomy, as has been pointed by other scholars (Nagaraj, 2017). Second, the relative increase in rural incomes will reduce levels of overall inequality in the distribution of income even as average incomes of the poorest and most vulnerable rise. This would be construed as an overall increase in economic welfare by most economists and policy makers.
Name: OKPOR MARTHA ASHINEDU
Reg No: 2017/241430
Email: marthaokpor2017@gmail.com
Answer:
THE LEWIS-FEI-RANIS SURPLUS LABOUR THEORY
The two economists John Fei and Gustav Ranis presented the dual economy model in this article “The theory of Economic Development”, also known as the surplus labour model. There was a flaw in Lewis model that it did not pay attention to the importance of agricultural sector in promoting industrial growth. But Fei- Ran is model of dual economy explains how the increased productivity in agricultural sector would become helpful in promoting industrial sector. In this respect, it presents three stages whereby underdeveloped countries move from stagnation to self- sustained economic growth.
ASSUMPTIONS OF THE FEI-RANIS MODEL INCLUDE;
1) Supply of labour is fixed.
2) Population growth is an exogenous phenomenon
3) Constant return to scale with labour works as a variable factor.
4) No accumulation of capital in agricultural sector except land reclamation
5) The output in agricultural sector is a function of land and labour only.
6) Industrial sector is a function of capital and labour alone.
7) Land has no role as a factor of production.
8) Marginal product of labour becomes zero at some point. If the population is excess the quantity where MPL becomes zero, then labour can be transfered to industrial sector without any loss of agricultural production.
On the basis of the above cited assumptions, the development of labour surplus can be divided into three phases;
a) In the first phase, there are disguised unemployed workers who are not contributing to agricultural production and can be easily shifted to industrial sector at a constant institutional wage.
b) In the second stage, agricultural workers who are adding to agricultural output but produce less than the institutional wage they get. This type of workers can be transferred to industrial sector.
c) The third stage is the stage of self- sustained growth, it starts where workers are adding to agricultural output and produce more than the institutional wages they get.
COMPARISON OF THE FEI-RANIS MODEL TO THE REAL WORLD
The Fei-Ranis model assume a close model and hence there is no presence of foreign trade in the economy, which is unrealistic as food or raw materials can not be imported. Like in Japan, the country imported cheap farm materials from other countries and this made better the country’s terms of trade. Also the model failed to recognize the sluggish economic situation prevailing in the developing countries(eg Nigeria). If they had thoroughly scrutinized the existing nature and causes of it, they would have found that the existing agricultural backwardness was due to institutional structure, primarily the system of feudalism that prevailed. While mentioning the role of agricultural productivity for economic development, the model failed to mention the need for capital. Although it is important to create surplus, it is equally important to maintain it through technical progress, which is possible through capital accumulation, but the Fei- Ranis model considers only labour and output as factors of production. The model assumes the MPL=0. The underdeveloped countries mostly exhibit seasonality on food production especially during favourable climatic conditions, say that of harvesting or sowing, MPL would definitely be greater than zero. The model assumed that the supply of land is fixed, but this is not try as supply of land can be increased in the long-run.
HARRIS- TODARO THEORY OF MIGRATION
John R. Harris and Michael P. Todaro presented this model of migration in 1970. The main assumption of this model is that the migration decision is based on expected wage differentials between rural and urban areas rather than actual wage differentials. In the model, an equilibrium is reached when the expected wage in urban areas is equal to the marginal product of an agricultural labour. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that the rural agricultural production and the subsequent labour market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal production.
In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. However there will be positive unemployment in the urban sector.
For the formal statement of the Harris- Todaro model let;
wr= wage rate in rural sector
wu= wage rate in urban area
le= number of jobs available in urban sector
lus= Total number of jobs seekers in the urban sectors.
Rural to urban migration will take place if; wr (le/lus)wu
There for equilibrium is established where; wr = (le/ lus)wu
No rural to urban migration will take place in this condition.
COMPARISON OF HARRIS- TODARO MODEL OF MIGRATION TO THE REAL WORLD
We have derived one necessary and sufficient condition under which the increase in capital stock does not increase unemployment in the urban area. This condition concerns he relationship between the institutionally and legally set minimum wage in the urban area and agricultural productivity in the rural area. Unsurprisingly, if agricultural productivity rises as well as income in rural aras, rural workers have no need to migrate to the urban sector to find jobs and face the risk of unemployment.
It has been observed in Asian countries that, particularly in the urban sector, concentrated improvement of social capital such as harbors, roads, and industrial parks gives rise to Todaro paradox. In the case of Metro Cebu, the Philippines, the Todaro paradox occurred in the 1990s. As the Metro Cebu economy developed with ODA projects supported by the Japanese Government, workers from surrounding areas migrated to the region and increased urban unemployment. Therefore, when social infrastructure improvement is implemented, improvement of the agricultural infrastructure should be carried out simultaneously to increase agricultural productivity. By so doing, it becomes possible to avoid a disruptive influx of workers from rural to urban areas.
LIMITATIONS OF THE MODEL
a) It assumes potential migrants are risk neutral, as they are indifferent between a certain expected rural income and an uncertain expected urban income of the same magnitude.
b) The model assumes that labour has perfect information about market wages in rural and urban sectors, which is impractical given the prevalent illiteracy among rural people.
c) The reflection of economic realities by this assumption is questionable; poor migrants will likely be risk averse and require a significantly greater expected urban income to migrate.
The Harris–Todaro model, named after John R. Harris and Michael Todaro, is an economic model developed in 1970 and used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main assumption of the model is that the migration decision is based on expected income differentials between rural and urban areas rather than just wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income
Harris-Todaro model of the rural-urban migration process is revisited under an agent-based approach. The migration of the workers is interpreted as a process of social learning by imitation, formalized by a computational model. By simulating this model, we observe a transitional dynamics with continuous growth of the urban fraction of overall population toward an equilibrium. Such an equilibrium is characterized by stabilization of rural-urban expected wages differential (generalized Harris-Todaro equilibrium condition), urban concentration and urban unemployment. These classic results obtained originally by Harris and Todaro are emergent properties of our model.
I. INTRODUCTION
we turn upon the seminal Harris and Todaro work, which together with Todaro is considered one of the starting points of the classic rural-urban migration theory hypothesis and predictions of Harris-Todaro model have been subjected to econometric evaluation and have been corroborated by several studies The key hypothesis of Harris and Todaro are that migrants react mainly to economic incentives, earnings differentials, and the probability of getting a job at the destination have influence on the migraton decision. In other words, these authors posit that rural-urban migration will occur while the urban expected wage exceed the rural wage. From this crucial assumption, as denominated by Harris-Todaro is deduced that the migratory dynamics leads the economic system toward an equilibrium with urban concentration and high urban unemployment.
We analyzed the rural-urban migration by means of an agent-based computational model taking into account the influence of the neighborhood in the migration decision. The inclusion of the influence of neighbors was done via an Ising like model. The economic analogous to the external field in the Ising hamiltonian was the differential of expected wages between urban and rural sectors.
Now, we are motivated by the following question: can the crucial assumption and equilibrium with urban concentration and urban unemployment obtained from the original Harris-Todaro model be generated as emergent properties from the interaction among adaptative agents? In order to answer this question we implemented an agent-based computational model in which workers grope for best sectorial location over time in terms of earnings. The economic system simulated is characterized by the assumption originally made by Harris and Todaro.
THE HARRIS-TODARO MODEL
A. Assumptions
Harris and Todaro studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a 0 and g > 0 are a parametric constants. g is the elasticity of p with respect to the ratio Ym/Ya.
The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified
B. Temporary Equilibrium
Given a parametric constant vector (Aa,Am,f,a,r,g), an initial urban population Nu, and a minimum wage wm one can calculate the temporary equilibrium of the economic system by using eqs. (1 – 6).
From eq. (4) one can find the employment level at the manufacturing sector
Replacing eq. (7) in eq. (2) we get the production level of the manufacturing sector
From eq. (6) one can obtain the relation
which is used with eq. (1) to obtain the agricultural production
By using eqs. (5), (8) and (10) the terms of trade are determined
Finally, by using eqs. (3), (9) and (11), the rural wage in units of manufacturated good is obtained
In sum, the vector (Nm,Ym,Na,Ya,p,wa) configures a temporary equilibrium that might be altered whether occurs a migration of workers, induced by the differential of sectorial wages, which changes the sectorial distribution of overall population.
C. The Long Run Equilibrium
Harris and Todaro, in determining the long run equilibrium, i.e., the absence of a net rural-urban migratory flow, argue that the rural workers, in their decision on migrating to the urban area, estimate the expected urban wage, , defined as:
The ratio Nm/Nu, which is the employment rate, is an estimative of the probability that a worker living at urban sector gets a job in this sector.
As mentioned before, the key assumption of the model of Harris and Todaro is that there will be a migratory flow from the rural to the urban sector while the expected urban wage is higher than the rural wage. Thus, the long run equilibrium is attained when the urban worker population reaches a level such that the expected urban wage equates the rural wage:
This equality is known in the economic literature as the Harris-Todaro condition. Harris and Todaro argue that the differential of expected wages in eq. (14) can be a constant value d ¹ 0. When this differential reaches d, the net migration ceases. This generalized Harris-Todaro condition can be expressed as follows:
The level of the urban population that satisfies the eq. (15), i.e., the equilibrium urban share = /N, is determined from the solution of the equation resulting from substitution of equations (12), (13) in eq. (15):
The solution of eq. (16) is parametrized by the vector (Aa,Am,r,g,a,f,wm).
Harris and Todaro [1], in order to evaluate the stability of the long run equilibrium, postulate a mechanism of adjustment that is based on the following function of sign preservation:
The differential equation that governs the state transition in the model of Harris and Todaro is obtained by replacing equations (12), (13) in eq. (17). Based on this postulated adjustment process, Harris and Todaro [1] show that the long run equilibrium is globally asymptotically stable. This means that the economy would tend to long run equilibrium with unemployment in the urban sector generated by the presence of a relatively high minimum wage for all possible initial conditions. From now on we will refer to the long run equilibrium simply as equilibrium.
Based on the numerical solutions of eq. (16) one can evaluate the impact that the variation of the minimum wage and the elasticity of the terms of trade on the equilibrium. In Fig. 1 we see that under the hypothesis of a Cobb-Douglas technology, the equilibrium urban share, , uses the labor demand on the manufacturing sector what results in higher unemployment rates in the equilibrium.
nges in the elasticity of the terms of trade alter slightly the equilibrium urban share and unemployment rate. A net migration toward urban sector shift the terms of trade to higher values. The greater g the greater this shift, what cause an increase in the rural wage in units of manufacturing good, becoming the urban sector less attractive.
III. HARRIS-TODARO AGENT-BASED MODEL
In this section we describe the implementation of the computational model we proposed, as well as the aggregate patterns obtained numerically and the comparison with the respective analytical results.
A. Computational Implementation
Initially, workers are randomly placed in a square lattice with linear dimension L = 500. The reference values of the parameters used for these simulations are the same done to evaluate the equilibrium of the Harris-Todaro model, namely, Aa = 1.0, Am = 1.0, f = 0.3, a = 0.7, r = 1.0 and g = 1.0. The value of the minimum wage used is wm = 0.8 and the initial urban fraction of the total population is nu = 0.2, where nu = Nu/N is the normalized urban population also called urban share. The initial value nu = 0.2 is in agreement with historical data of developing economies. Given these parameters, one can calculate the vector which characterizes temporary equilibrium of the system by using eqs. (7 – 12).
By using eq. (7), the employment level of the urban sector, Nm, is obtained. If nu Nm/N there will be a fraction of Nm/Nu workers employed, which earn the minimum wage, wi = wm, and (1-Nm/Nu) workers unemployed, which earn a wage wi = 0.
Each worker can be selected to review his sectorial location with probability a, called activity . Therefore, in each time step only a fraction of workers becomes potential migrants, going through the sectorial location reviewing process. Potential migrants will determine their satisfaction level of being in the current sector by comparing their earnings, wi, among nearest neighbors.
The potential migrant starts the comparison process with a initial satisfaction level si = 0. When wi > wneighbor the satisfaction level si is added in one unit; if wi < wneighbor, si is diminished in one unit; if wi = wneighbor, si does not change. After the worker has passed through the reviewing process his/her satisfaction level is checked. The migration will occur only if si < 0, what means that the worker's i earnings is less than the most of his/her nearest neighbors.
After all the potential migrants complete the reviewing process and have decided migrate or not, a new configuration of the system is set. Therefore, once again a new temporary equilibrium of the system is calculated by using eqs. (8 – 12). The whole procedure is repeated until a pre-set number of steps is reached. It is important to emphasize that Nm is kept constant throughout the simulation. Its given by eq. (7) which depends on the technological parameters, a,Am, and the minimum wage, wm, which are constants too.
B. Analysis of the Emergent Properties
In this section we develop the analysis of the long run aggregate regularities of Harris-Todaro agent-based computational model. These long run properties will be compared between the solution of the analytical model and simulations.
show the basic characteristics of the transitional dynamics and long run equilibrium generated by simulations. When the economic system has a low initial urban share, nu = 0:2 or nu = 0:3, there is a net migration toward urban sector. This migration takes the urban sector from a full employment situation to an unemployment one. The positive differential of expected wages that pulls workers to the urban sector diminishes. However, if the economic system initiates with a high urban share, nu = 0:8, or nu = 0:9 there is net flow of migration toward rural sector in such a way that the unemployment rate of the urban sector decreases
In this case, the differential of expected wages is negative. In an economy mainly rural (nu < 0:5), the transitional dynamics characterized by a continuous growth of population of the urban sector with a differential of expected wages relatively high is followed by the stabilization of rural-urban differential of expected wages. In other words, the generalized Harris-Todaro condition, eq. (15), arises as a long run equilibrium result of the agent-based migratory dynamics.
Figure 3 also shows that even after the urban share has reached an stable average value, there are small fluctuations around this average. Therefore, differently from the original Harris-Todaro model, our computational model shows in the long run equilibrium the reverse migration. This phenomenon has been observed in developing countries.
for a given value of a, the variation of wm practically does not change the equilibrium values of the urban share, the differential of expected wages and the unemployment rate. However, for a given wm, higher values of a make the urban sector less attractive due the reduction of the employment level. This causes a lower equilibrium urban share, a higher unemployment rate and a gap in the convergence of the expected wages.
The equilibrium values of the urban share, the differential of expected wages and unemployment rate do not have a strong dependence with wm. However, variations in g for a fixedwm, dramatically change the equilibrium values of the variable mentioned before. Higher values of g generate a lower urban concentration, a higher gap in the expected wages and a higher unemployment rate in the equilibrium.
The convergence of migratory dynamics for a urban share, compatible with historical data, is robust in relation to the variation of the key technological parameters, a and f. The impact of the variation of these parameters in the values of the equilibrium differential of expected wages, ( – wa), and the equilibrium urban unemployment rate, (1-Nm=Nu).
CONCLUSION
The dispersed and non-coordinated individual migration decisions, made based on local information, generate aggregate regularities. Firstly, the crucial assumption of Harris and Todaro, the principle that rural-urban migration will occur while the urban expected wage exceed the rural wage, comes out as spontaneous upshot of interaction among adaptative agents.
Secondly, the migratory dynamics generated by agents that seek to adaptate to the economic environment that they co-create leads the economy toward a long run equilibrium characterized by urban concentration with urban unemployment. When this long run equilibrium is reached, the generalized Harris-Todaro condition is satisfied, i.e., there is a stabilization of the rural-urban expected wage differential.
Thirdly, the impact of the minimum wage and elasticity of terms of trade in a long run equilibrium obtained by simulations are in agreement with the predictions of the original Harris-Todaro model with Cobb-Douglas technology.
Finally, the simulations showed an aggregated pattern not found in the original Harris-Todaro model. There is the possibility of small fluctuations of the urban share around an average value. This phenomenon is known as reverse migration.
Acknowledgments
Aquino L. Espíndola thanks CAPES for the financial support. Jaylson J. Silveira acknowledges research grants from CNPq. T. J. P. Penna thanks CNPq for the fellowship.
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Name: chukwu mmesoma faith
Reg no: 2017/243807
Department: education and economics
Lewis-Fei-Ranis surplus labour theory
Lewis (1954) proposed a seminal theory of dualistic economic development for over-populated and under-developed economies with vast amounts of surplus agricultural labour for which he was later to be awarded the 1979 Nobel Prize in Economics. Economic growth in such an economy can be achieved by rapid capital accumulation in the non-agricultural (industrial and service) sector, facilitated by drawing surplus labour in the agricultural sector.
Throughout the paper we refer to the two sectors as agricultural and non-agricultural. Various authors have used different terms interchangeably for these two sectors. Lewis (1954) originally named the two sectors as the subsistence and the capitalistic sectors and later on in Lewis (1979) referred to them as the traditional and modern sectors.
In the Lewis theory, an economy transits from the first, labour-surplus “stage” to the second, labour-scarce “stage” of development.
Later, Ranis and Fei (1961) formalized the Lewis theory and defined three “phases” of dualistic economic development by sub-dividing the first stage in the Lewis model into two phases. Thus, the second labour-scarce stage of the Lewis model corresponds to phase three of the Ranis-Fei model. These three phases, illustrated in the diagram below, which are distinguished by the marginal productivity of agricultural labour. The entry into each phase is marked three turning points:
• The breakout point leads to phase one growth with redundant agricultural labour.
• The shortage point leads to phase two growth with disguised agricultural
unemployment.
• The commercialisation point leads to phase three of self-sustaining economic
growth with the commercialisation of the agricultural sector.
ASSUMPTIONS OF THE MODEL
1) Dual economy 1 active industrial sector, 2 traditional agriculture sector which is stagnant
2) Supply of land is fixed
3) Population growth is an exogenous phenomenon
4) Constant return to scale with labour works as variable factor
5) No accumulation of capital in agricultural sector except land reclamation
6) The output in agricultural sector is function of land and labour only
7) Industrial sector is function of capital and labour alone
8) Land has no role as a factor of production
MP of labour becomes zero at some point. if the population is excess the quantity where MPL becomes zero, then labour can be transferred to industrial sector without any loss of agricultural production.
On the basis of the above sited assumptions, the development of labour surplus can be divided into the following phases;
In the first phase, they are disguised unemployed worker who are not contributing to agricultural production and can be easily shifted to industrial sector at a constant institutional wage rate.
In the second phase, they are agricultural worker who are adding to agricultural output but produce less than the institutional wages they get. This type of workers can also be transferred to industrial sector.
In the third phase, this is the stage of self-sustained growth, starting from where workers are adding to agricultural output and producing more than the institutional wages they get.
USING CHINA AS REAL LIFE EXAMPLE
China’s 1.3 billion inhabitants account for a fifth of the world’s population. Over 50 percent of the Chinese population is engaged in the rural agricultural sector. China’s agricultural labour productivity is very low due to the presence of surplus labour relative to other scarce resources. The agricultural wage rate is lower than the non-agricultural one. The 1978 Economic Reform propelled the Chinese economy into a path of rapid economic growth, at the rate of approximately eight percent per annum.
In systematically assessing the Lewis (1954) theory and its formalization by Ranis and Fei (1961) for China. We address the three core questions:
(1) Is the main source of economic growth non-agricultural capital accumulation?
(2) What is the net effect of agricultural to non-agricultural labour reallocation?
(3) What phase of economic development is the Chinese economy in? In other words, has China passed the commercialization point signified by the exhaustion of surplus labour, as discussed by Cai (2007) and Knight (2007)?
To answer these questions, we estimate Cobb-Douglas production functions for China’s agricultural and non-agricultural sectors, using time-series national-level data over 1965-2002. Our results show that China’s overall economic growth is driven by the rapid development of the non-agricultural sector, which results from the fast accumulation of non-agricultural capital. As capital accumulates, employment expands and contributes almost as much as capital to economic growth in the non-agricultural sector. This confirms the answer to our first question that capital accumulation is the main source of economic growth in the non-agricultural sector.
Secondly, we evaluate the effect of labour reallocation away from agriculture to non-agriculture by comparing the labour productivities of the two sectors. In addition, we repeat the exercise by applying the Labour Reallocation Effects (LRE) equation specified by the World Bank (1996). Both approaches suggest that labour reallocation has a positive impact on China’s economic growth, accounting for 1 to 2 percent per annum of GDP growth. We find the effect of labour reallocation has declined since the mid-1990s because of less absorption of the surplus rural labour in the non-agricultural sector, particularly in industry. Our result coincides with the findings of Kuijs and Wang (2005), Woo (1998), and World Bank (1996).
Thirdly, we identify the phase of China’s economic development by examining the evolution of labour productivities over time as indicated in the Lewis-Ranis-Fei model. We find that the Chinese economy has fully absorbed the redundant agricultural labour, as shown by the rising marginal productivity of labour since the 1978 Economic Reform, but has not yet completely reallocated the disguised unemployment, as shown by the marginal labour productivity being still lower than the institutional wage defined by the initial low average productivity of labour. All this indicates that, following the 1978 Economic Reform, China entered phase two of economic development defined in the Lewis-Ranis-Fei model. However, it has not reached phase three marked by the exhaustion of the disguised agricultural unemployment. Furthermore, we find that the gap of labour productivities between the two sectors is widening, which is at odds with the theoretical expectation. This reflects the effects of market imperfections and government intervention. A “critical minimum effort” is required for China to release the remaining disguised agricultural unemployment and enter phase three of economic development.
CRITICISMS OF THE MODEL
1) Capital accumulation: this model assumes that the rate of the labour transfer, employment creation and output expansion depends on the rate of capital accumulated in the modern sector.
2) Surplus labour: this model assumes that there is a surplus labour in the rural economy and full employment in the urban sector
3) Competitive labour market in the morden sector: this model implies that the supply of labour is perfectly elastic.
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Lewis-Fei-Ranis Model of Economic Growth
One of the best known early theoretical models of development that focused on the structural transformation of a primarily subsistence economy was that formulated by Nobel Laureate W. Arthur Lewis in the mid-1950s, and later modified, formalized, and extended by John Fei and Gustav Ranis. The Lewis two-sector model became the general theory of the 1960s and early 1970s, and it is sometimes still applied, particularly to study the recent growth experience in China and labor markets in other developing countries.
The Fei-Ranis model is an improvement over the lewis model. John Fei and Gustav Ranis analyze the transition process through which an underdeveloped economy hopes to move from a condition of stagnation to one of self-sustained growth.
The theory relates to underdeveloped labor surplus and resources; poor economy in which the vast majority of the population is engaged in agriculture amidst widespread unemployment and high rates of population growth.
ASSUMPTIONS OF THE MODEL
1. There is a dual economy divided into a traditional and stagnant agricultural sector and an active industrial sector.
2. The output of the agricultural sector is a function of land and labor alone.
3. There is no accumulation of capital in agriculture except in the form of land reclamation.
4. Land is fixed in supply.
5. Population growth is taken as an exogenous phenomenon.
The real wage in the industrial sector remains fixed and is equal to the initial level of real income in the agricultural sector. It is called an institutional wage.
6. Workers in either sector consume only agricultural products.
Given these assumptions, Fei and Ranis analyze the development of a labor surplus economy into three phases;
In the first phase, the disguised unemployed workers who are not adding to agricultural output are transferred to the industrial sector at a constant institutional wage.
In the second phase, agricultural workers add to agricultural output but produce less than the institutional wage they get. Such workers are shifted to the industrial sector. If the migration of the workers to the industrial sector continues, a point is eventually reached when farmworkers produce output equal to the institutional wage.
In the third phase, which makes the end of the take-of and the beginning of the self-sustained growth when farmworkers produce more than the institutional wage they get. In this phase, the surplus labor is exhausted and the agricultural sector becomes commercialized.
CRITICISMS OF FEI-RANIS MODEL
1. Commercialization of agriculture leads to inflation. According to the model, when the agricultural sector enters the third phase, it becomes commercialized, but the economy is not likely to move smoothly into a self-sustained growth because inflationary pressure will start.
2. Supply of land is not fixed. Fei-Ranis begins with the assumption that the supply of land is fixed during the development process. In the long run, the amount of land is not fixed, as the statistics of crop average in many Asian countries reveal.
3. Institutional wage not constant in the agricultural sector. The model assumes that the institutional wage remains constant in the first two phases even when agricultural productivity increases. This is unrealistic because with a general rise in agricultural productivity farm wages also tend to rise.
CONCLUSION
However, these limitations do not undermine the importance of the Fei-Ranis model for the economic development of labor surplus countries. It systematically analyses the development process from the take-off to self-sustained growth through the interaction of the agricultural and industrial sectors of an underdeveloped economy.
THE HARRIS-TODARO MODEL OF MIGRATION
The Harris-Todaro model is based on the experiences of tropical African facing the problems of rural-urban migration and urban unemployment. The labor migration is due to rural-urban differences in average expected wages. The minimal urban wage is substantially higher than the rural wages. If more employment opportunities are created in the urban sector at the minimum wage, the expected wage shall tend to rise and rural-urban migration shall be induced leading to growing levels of urban unemployment. To remove urban unemployment, Harris and Todaro suggests a subsized minimal wage through a lump sum tax.
ASSUMPTIONS OF THE HARRIS-TODAROS MODEL
1. There are two sectors in the economy: the rural or agricultural sector (A) and the urban or manufacturing sector (M).
2. The model operates in the short run.
3. Capital is available in fixed quantities in the two sectors.
4. The number of urban/manufacturing jobs available is exogenously fixed.
5. Rural-urban migration continues so long as the expected urban real income is more than the real agricultural income.
6. The rural wage equals the rural marginal product of labor and the urban wage is exogenously determined.
7. There is perfect competition among producers in both sectors.
MATHEMATICAL EXPRESSION OF THE HARRIS-TODARO MODEL
Output in the rural sector is suppose to be a function of labour so that the production function for agricultural good is;
Xa = f (Na, L-bar, K-bar) f’>0; f”0; f ” 0.
P is the price of agricultural good in terms of the price of manufactured good which is a function (p) of the relative output of agricultural and manufactured goods.
The agricultural wage equals the value of marginal product (MP) of labor expressed in terms of the manufactured good,
Wa = f’a (Na) = p(f’m).
In the urban sector the producers are wage- takers and they aim at profit maximization which means that the urban market wage is;
Wa = f’m (Nm).
The urban expected wage which leads to the migration of workers from the rural to the urban sector is given as;
Wu = W-bar m x Nm/Nu, Nm/Nu ≤ 1.
Where the expected real wage (Wu) in the urban sector is equal to the urban real minimum wage (Wm) adjusted for the proportion of the total urban labor force (Nu) actually employed.
POLICY IMPLICATIONS OF THE H-T MODEL
Harris-Todaro have drawn a few important policy implications of their model. According to them, the payment of minimum wage to the additional industrial worker will induce more rural-urban migration. To solve this problem of an institutional determined wage that is higher than the equilibrium level, labor should be employed according to a shadow wage and /or at a payroll subsidy wage. Since the opportunity cost (I.e shadow wage) of an agricultural worker is lower than the marginal product of an industrial worker, the implementation of shadow wage criterion will have important effects on the level of agricultural output and on urban unemployment.
CRITICISM OF THE HARRIS-TODARO MODEL
1. The Harris-Todaro model does not specify alternate policy prescriptions such as giving a wage subsidy to the urban sector and at the same time restricting the migration of those rural workers who are not able to find jobs in the urban sector.
2. Harris-Todaro suggest non-distortionary lump sum tax to finance subsidy, but a lump sum tax is seldom non-distortionary.
3. This model does not consider or incorporate the cost of rural-urban migration or the relatively higher costs of urban living which the migrants have to incur in the urban sector.
4. The model does not take into consideration the generation of savings as a source of financing subsidy. Though savings are low in LDCs, yet they are an important source of non-distortionary finance to subsidise wages.
CONCLUSION
Despite these criticisms, the Harris-Todaro model is more realistic than the other dual economy models because it tries to tackle the problem of rural-urban migration that actually exists in LDCs. For instance the Lewis model assumes that there is no unemployment in the urban sector and when rural-urban migration takes place, the number of new jobs created in the urban sector exactly equals the number of migrants. This is unrealistic.
Name : ASIKA JOY OGECHUKWU
REG NO: 2017/242025 ECONOMICS DEPT
EMAIL ADDRESS: Joy.asika.242025@unn.edu.ng
Website: http://www.joybloggers.com
Answer:
1. LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
The Fei–Ranis model of economic growth is a dualism model that has been developed by John C.H. Fei and Gustav Rani’s and can be understood as an extension of the lewis model. He takes into account the economic situation of underdeveloped and underemployment of resources,unlike many other growth models that consider underdeveloped countries to be homogenous in nature. There exist surplus labour(marginal productivity is zero) in the subsistence sector and this labour is made available for the industrial and urban sector but at a constant wage determine by minimum level of existence in traditional family farming because of disguised unemployment in agriculture. At some later point,if the surplus labour is been exhausted then only a rising wage rate will draw more labour out of agriculture.
ASSUMPTION (ARGUMENTS)
An economy starts with 2 sectors:A rural agricultural sector and urban industrial sector.
Agriculture generally under-employs workers and marginal productivity of labour is virtually zero.
Transferring workers out of agriculture doesn’t reduce productivity in the whole economy.
Labour is then released for work in the more productive urban sector.
Industrialization is now possible,given the increase in supply of workers who have moved from the land.
Industrial firms starts to make profit which can be re-invested into more industrialization and capital starts to accumulate.
As soon as capital accumulate further economy development can sustain itself.
CRITICISM
No distinction is made between labor through family and labor through wages.
There is uneven distribution of income due the migration among two sectors.
There is complete negligence of terms of trade between agriculture and industry,foreign exchange,money and price and assume a close model, which is very unrealistic.
2. HARRIS -TODARO MODEL OF MIGRATION
Known as the structural change model. It focuses on mechanism by which underdeveloped economy transform their domestic economic structure from heavy emphasis on traditional subsistence agriculture to a more modern urbanized and industrial diverse manufacturing service economy. It also apply tool of neo classical prices and resource allocation theory and modern econometrics to describe how transformation processes take place. By structural transformation that is a way that the contribution to national income by the manufacturing sector surpasses the contribution by agricultural sector.
The new or modern thinking were later brought up of the notable was the one propounded by Michael Todaro (1969) and John Harris (Harris and Todaro 1970). The Harris-Todaro Model is an equilibrium version of the Todaro Migration Model which forecasts and explains the rural-urban migration as an economically rational process despite the high urban unemployment. The migrants calculate the value of the urban expected income or its equivalent and move of it is more than the average rural income. The importance of this was as a result of the Keynesian Revolution is that “equilibrium could occur or come about even when there is a chronic level of unemployment in the urban sector”. This implies that the economy would still or could still be in balance even with the existence of a severe urban unemployment. It has also been deduced that the most important factor why urban population was more than of the rural sector was due to the fact that labour from the rural sector moved to the urban sector in search of “greener pastures”.
In the situation of a dualistic model, the rural sector is letting go of much labour too quickly while the urban sector is hiring or accepting labour too slowly as it is assumed that the urban sector is capital-intensive (Lewis 1965). The manifestations of the employment problem in the urban areas as much labour get unemployed is the outcome of the poverty and underemployment in the Third World Countries (Lubell 1988). It has also been recognized that labour migration was due to the fact that the rural-urban wages were different compared to each other. The contribution of Todaro is the introduction of the possibility of employment as a factor in the decision-making process of a potential migrant. He devised what he called a two-stage process in the less-developed countries.
The first stage is characterized by where the labour migrant decides to move from the rural sector for a period of time (that is, from the traditional informal sector). The second stage is then reached when that labour migrant has gotten a more permanent job in the modern or urban sector. So the two-stage process is simply involving first, when the labour migrant resolves to leave his place in the rural sector for a certain time period and second, the labour migrant finds a more permanent job in the urban sector. However, Todaro and some others did not take into consideration the informal urban sector explicitly as its employees were usually underemployed as they were not distinguished from the unemployed as they made no income of their own but relied on their relatives as explained of the informal sector by Lewis (1954).
According to Todaro, the probability or tendency of getting a job depends on the size of the urban population that is employed, number of newly created jobs in the urban sector, as well as the length or duration a labour migrant has been in that sector. Consequently it implied that according to Todaro, the longer a labour migrant has been in the manufacturing sector, the more likely he or she is to get a job there. An extension of this was done by Harris and Todaro (1970), where they explained that the urban wage is equal or equivalent to the expected value of the urban wage and this formed the notable Harris-Todaro Equation which is of the form:
Wa = βWm where,
Wa = Flexible wage in the agricultural sector is equal to the value of the marginal product in that sector, β = Probability of employment (dependent on the three (3) factors listed earlier), and Wm = Wage in the manufacturing sector which is assumed fixed or constant institutionally either because of the involvement of the union’s activities or a friendly government towards the workers in the modern sector. This is unlike in the orthodox models where the wage difference in the rural-urban sectors is not fixed or constant.
THE BASIC MODEL
The Harris-Todaro Model would be referred to as the H – T Model from henceforth, assume that migration from the rural to the urban areas depends primarily on the difference in wages between the rural and urban labour markets (which is the wage differential). That is the expected urban wage is the actual urban wage multiplied by the probability of getting a job, or Weu = PWu where,
Weu = Expected Urban Wage and P = Probability of getting a job where P is expressed as: P = where,
Eu = Urban Employment, Uu = Urban Unemployment and L = Total Labour Force. Another assumption of the Harris-Todaro is that all the members of the urban labour force have equal chances of obtaining or getting the jobs available for them. So Weu = Urban Wage multiplied by the Urban Employment Rate.
POLICY IMPLICATIONS OF THE H – T MODEL
The H – T Model has some impressing implications from the policy point of view. Let’s take for an instance, if the government of a country is concerned with fostering industrial development in an urban area, employment would increase and this would lead to an increase in productive of getting urban employment in the minds of the rural inhabitants. Migration to the urban area would then increase and the outcome would be that the unemployment rate in the urban areas would rise more than how it was before the development industrially occurred. Due to this, labour migrants would prefer to accept the wage in the urban informal sector than going back to wait for long for jobs that would not come in time as urban employment is now in equilibrium. However, the effect of this is that the earnings in the urban modern industrial sectors would be more or higher than those in the rural traditional sectors. The long-term solution to this issue would be to fix a wage policy for the two sectors that would reduce the real income differences between the two sectors.
THE ASSUMPTIONS OF THE MODEL
In analyzing the H – T Model, there are some assumptions alongside those listed before which include:
There is fixed amounts of labour (L) and capital (K) factor inputs.
Capital is fully employed but labour unemployment exists in the urban sector due to the fixed urban wage, W is higher than the flexible rural wage, w.
The economy is small and imports the urban output, X and exports the agricultural output, Y which is used as a numeraire.
Name : ASIKA JOY OGECHUKWU
DEPT: ECONOMICS
REG NO: 2017/242025
LEWIS-FEI-RANIS MODEL (SURPLUS LABOUR THEORY)
The Fei–Ranis model of economic growth is a dualism model that has been developed by John C.H. Fei and Gustav Rani’s and can be understood as an extension of the lewis model. He takes into account the economic situation of underdeveloped and underemployment of resources,unlike many other growth models that consider underdeveloped countries to be homogenous in nature. There exist surplus labour(marginal productivity is zero) in the subsistence sector and this labour is made available for the industrial and urban sector but at a constant wage determine by minimum level of existence in traditional family farming because of disguised unemployment in agriculture. At some later point,if the surplus labour is been exhausted then only a rising wage rate will draw more labour out of agriculture.
ASSUMPTION (ARGUMENTS)
An economy starts with 2 sectors:A rural agricultural sector and urban industrial sector.
Agriculture generally under-employs workers and marginal productivity of labour is virtually zero.
Transferring workers out of agriculture doesn’t reduce productivity in the whole economy.
Labour is then released for work in the more productive urban sector.
Industrialization is now possible,given the increase in supply of workers who have moved from the land.
Industrial firms starts to make profit which can be re-invested into more industrialization and capital starts to accumulate.
As soon as capital accumulate further economy development can sustain itself.
CRITICISM
No distinction is made between labor through family and labor through wages.
There is uneven distribution of income due the migration among two sectors.
There is complete negligence of terms of trade between agriculture and industry,foreign exchange,money and price and assume a close model, which is very unrealistic.
TODARO’S HARRIS MODEL OF MIGRATION
Also knows as the structural change model. It focuses on mechanism by which underdeveloped economy transform their domestic economic structure from heavy emphasis on traditional subsistence agriculture to a more modern, urbanized and industrial diverse manufacturing and service economy. It also apply tool of neo classical prices and resource allocation theory and modern econometrics to describe how transformation processes take place.
By structural transformation that is a way that the contribution to national income by the manufacturing sector surpasses the contribution by agricultural sector.
INTRODUCTION
Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Basic of the model
Depiction of Phase1, Phase2 and Phase3 of the dual economy model using average output.
One of the biggest setbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development. In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
Using the figure above:
Phase 1: AL (from figure) = MP = 0 and AB (from figure) = AP
According to Fei and Ranis, AD amount of labor (see figure) can be shifted from the agricultural sector without any fall in output. Hence, it represents surplus labor.
Phase 2: AP MP
After AD, MP begins to rise, and industrial labor rises from zero to a value equal to AD. AP of agricultural labor is shown by BYZ and we see that this curve falls downward after AD. This fall in AP can be attributed to the fact that as agricultural laborers shift to the industrial sector, the real wage of industrial laborers decreases due to shortage of food supply, since less laborers are now working in the food sector. The decrease in the real wage level decreases the level of profits, and the size of surplus that could have been re-invested for more industrialization. However, as long as surplus exists, growth rate can still be increased without a fall in the rate of industrialization. This re-investment of surplus can be graphically visualized as the shifting of MP curve outwards. In Phase2 the level of disguised unemployment is given by AK. This allows the agricultural sector to give up a part of its labor-force until
MP = Real wages = AB = Constant institutional wages (CIW)
Phase 3 begins from the point of commercialization which is at K in the Figure. This is the point where the economy becomes completely commercialized in the absence of disguised unemployment. The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor.
Phase 3: MP CIW
The amount of labor that is shifted and the time that this shifting takes depends upon:
1. The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits
2. The nature of the industry’s technical progress and its associated bias
3. Growth rate of population.
So, the three fundamental ideas used in this model are:
1. Agricultural growth and industrial growth are both equally important
2. Agricultural growth and industrial growth are balanced;
3. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap.
However, this shifting of labor can take place by the landlords’ investment activities and by the government’s fiscal measures. However, the cost of shifting labor in terms of both private and social cost may be high, for example transportation cost or the cost of carrying out construction of buildings. In addition to that, per capita agricultural consumption can increase, or there can exist a wide gap between the wages of the urban and the rural people. These three occurrences- high cost, high consumption and high gap in wages, are called as leakages, and leakages prevent the creation of agricultural surplus. In fact, surplus generation might be prevented due to a backward-sloping supply curve of labor as well, which happens when high income-levels are not consumed. This would mean that the productivity of laborers with rise in income will not rise. However, the case of backward-sloping curves is mostly unpractical.
ASSUMPTIONS OF THE LEWIS MODEL
(A). Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural laborers, petty traders’ domestic servants and women.
The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wage. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
Lewis calls it as institutional wage because every worker gets this wage because of some institutional arrangements. This wages is equal to an average share of each worker in the total output in the subsistence sector. If market forces were allowed to operate in the subsistence sector labourers with zero margin productivity or those with a very low marginal productivity would not have received this wage.
(B). Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests its entire savings for its further expansion.
Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery and for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector.
Lewis in fact so much fascinated by the higher propensity to save of the capitalist sector that he even advocates a transfer of income from the subsistence sector to the capitalist sector. He feels that steps have to be taken to raise the rate of savings from 10% to 15% if the development of the economy has to be smooth.
CRITICISM OF THE MODEL
1. The assumption that disguised unemployment exists in the agriculture sector has not been accepted by many economists. Schultz, Viner, Heberler and Hopper are few of such economists. According to them, the production in the subsistence sector will be affected when labour is withdrawn from it.
2. Lewis ignored the cost involved in training the unskilled worker transferred from the subsistence sector. Even if it is obtained at a constant wage rate, so for as its transfer from the subsistence sector is concerned, the supply curve may slope upwards so far as the capitalist, sector is concerned if the cost of training rises as more and more labour is transferred.
3. When labour is transferred from the subsistence sector share of agricultural output falling to each one left in the agricultural sector will go a rising. This means the institutional wage will go on rising with every transfer and so will be the wages paid in the capitalist sector.
4. The model assumes that, besides labour, there is unlimited supply of entrepreneurs in the capitalist sector. This is not true in the case of many of the underdeveloped countries.
5. It is wrong to assume that a capitalist will always re-invest their profits. They too can indulge in un-productive pursuits. They can use their profits for speculative purposes.
6. It is also wrong to assume that landlords always squander away their savings. The role of landlords of Japan in industrialization of the country is well known.
7. The model assumes that there already exists a market for the industrial products in the country. This is wrong. People of an underdeveloped country may not be able to purchase the products perturbed by the expanding capitalist sector. Foreign markets, too, may not be available to the capitalist sector in the beginning.
8. Inflation is not liquidating, as has been assumed by Lewis, Experience of various, countries shows that if once prices start rising, it becomes difficult to control them.
9. It is not easy to transfer labour from the subsistence Sector to the capitalist sector by offering them an incentive of a little higher wage. Mobility of labour is very low. Many factors like family affection, difference in language, caste, religion etc. affect it adversely.
10. Every underdeveloped country does not have surplus labour in the subsistence sector. As such, the model does not apply to countries which are sparsely populated.
The only positive point in the model is its ‘general’ emphasis on the role of saving in economic development and on the potential that overpopulated countries have in developing themselves with the help of surplus labour.
CONCLUSION
This model divides the economy in an underdeveloped country in two sectors which are the Subsistence sector and the capitalist sector. Subsistence sector is identified with the agricultural sector of the economy while the capitalist sector implies mainly the manufacturing sector of the economy. Capitalist sector also includes plantations and mining where hired labour is employed for purposes of production. The capitalist sector can either be private or public in nature. Subsistence sector, that the agricultural sector is considered to be labour intensive. It does not use reproducible capital. It uses poor techniques of production and has very low productivity. Therefore, when the subsistence (rural area) sector produces, its sent it surplus to the capitalist sector (urban area) for further production. This can provide employment in both sectors when more workers are employed in the subsistence sector so as to produce more agricultural surplus which will also lead to increase in labour in the capitalist sector. In my opinion this can work in real life if there is a limited number of labour that migrate from the rural area to the urban area.
University of nigeria nsukka
Faculty of Education
Department of library and information science (lis)
An assignment to be submitted in partial fulfilment of the requirement of the course
Development economics (Eco 361)
Topic
Discuss Lewis Fei Ranis model (surplus labor theory)
Name
Utoh Joshua odinaka
Reg no: 2017/243123
Date
March, 2021
Discuss Lewis Fei Ranis model (surplus labor theory)
Lewis Fei Ranis model (surplus labor theory)
Introduction
Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.
It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.
Basics of the model
Depiction of Phase1, Phase2 and Phase3 of the dual economy model using average output.
One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.
According to Fei and Ranis, AD amount of labor (see figure) can be shifted from the agricultural sector without any fall in output. Hence, it represents surplus labor. After AD, MP begins to rise, and industrial labor rises from zero to a value equal to AD. AP of agricultural labor is shown by BYZ and we see that this curve falls downward after AD. This fall in AP can be attributed to the fact that as agricultural laborers shift to the industrial sector, the real wage of industrial laborers decreases due to shortage of food supply, since less laborers are now working in the food sector. The decrease in the real wage level decreases the level of profits, and the size of surplus that could have been re-invested for more industrialization. However, as long as surplus exists, growth rate can still be increased without a fall in the rate of industrialization. This re-investment of surplus can be graphically visualized as the shifting of MP curve outwards. In Phase2 the level of disguised unemployment is given by AK. [4] This allows the agricultural sector to give up a part of its labor-force until
Phase 3 begins from the point of commercialization which is at K in the Figure. This is the point where the economy becomes completely commercialized in the absence of disguised unemployment. The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor.
The amount of labor that is shifted and the time that this shifting takes depends upon:
1. The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits;
2. The nature of the industry’s technical progress and its associated bias;
3. Growth rate of population.
So, the three fundamental ideas used in this model are:
1. Agricultural growth and industrial growth are both equally important;
2. Agricultural growth and industrial growth are balanced;
3. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap .
This shifting of labor can take place by the landlords’ investment activities and by the government’s fiscal measures. However, the cost of shifting labor in terms of both private and social cost may be high, for example transportation cost or the cost of carrying out construction of buildings. In addition to that, per capita agricultural consumption can increase, or there can exist a wide gap between the wages of the urban and the rural people. These three occurrences- high cost, high consumption and high gap in wages, are called as leakages , and leakages prevent the creation of agricultural surplus. In fact, surplus generation might be prevented due to a backward-sloping supply curve of labor as well, which happens when high income-levels are not consumed. This would mean that the productivity of laborers with rise in income will not rise. However, the case of backward-sloping curves is mostly unpractical.
Comparison with other models
According to Ranis-Fei’s point, it shows the Lewis turning point i.e. the point after which the supply curve of labour in the industrial sector will turn upwards. However Lewis himself did not consider this point as the upward turning point.
For him all labour in the agriculture sector whose marginal productivity was either zero or was less than the institutional wage was available to the industrial sector at the institutional wage (or at a rate a little above it,) Fie never pointed out that as soon as the zero value labour was transferred to the industrial sector (i.e. up to the end of phase I in the present model) the supply curve for labour will start turning upwards. For him some other labour too (whose marginal productivity was less than the institutional wage, was also available at a constant wage rate.
The reason for this difference in the views of the authors of two models is that unlike Ranis and Fei, Lewis did not take into account the effect of changing terms on trade on the supply price of labour in the industrial sector. He totally ignored it.
Fei assumed as if the wages to the transferred labour will be paid in agricultural products and as the institutional wages fixed in terms of agricultural produce, the labour transferred to the industrial sector will continue to be available at the constant wage rate i.e. that institutional wage.
Ranis and Fei, on the other hand assumed that the labour in the industrial sector will be paid, in terms of the industrial products and they had to bring the hanging terms of trade into the picture. the turning point will appear at the end of the phase II. If i.e. upto the point where labour in the agricultural sector is paid institutional wages.
Assumptions of the Lewis Model:
(A) Surplus Labour in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labour in the subsistence sectors. It includes labour whose marginal productivity is zero as well as that whose marginal productivity is positive but is less than the institutional wage. This labour comprises farmers, agricultural labourers, petty traders domestic servants and women.
The surplus labour in the agriculture sector acts as a source of unlimited supply of labour for the manufacturing sector. By unlimited supply of labour. Lewis means that the supply of labour is perfectly elastic at a particular wages. This particular wage is somewhat higher than the institutional wage which each worker in the agricultural sector gets.
Lewis calls it as institutional wage because every worker gets this wage because of some institutional arrangements. This wages is equal to an average share of each worker in the total output in the subsistence sector. If market forces were allowed to operate in the subsistence sector labourers with zero margin productivity or those with a very low marginal productivity would not have received this wage.
(B) Importance of Saving:
Another important assumption that Lewis makes is about the savings generated in the capitalist sector and in the subsistence sector. The capitalist sector invests all its savings for its further expansion. Those in the subsistence sector, on the other hand squander away their savings, if any in purchase of jewellery & for construction of temples etc. The propensity to save of the people in subsistence sector is also lower when compared with that of those in the capitalist sector. Lewis in fact so much fascinated by the higher propensity to save of the capitalist sector that he even advocates a transfer of income from the subsistence sector to the capitalist sector. He feels that steps have to be taken to raise the rate of savings from 10% to 15% if the development of the economy has to be smooth.
Impact of the Open Economy:
The open economy can encourage the immigration of labour. If this happens, it will help in the expansion of the capitalist sector. But immigration may not be so easy. If in that case the pace of expansion of the capitalist sector slows down, capital may move out of the country as the economy is an open one. This may in turn lead to balance of payments problems and the problem of stability of rate of exchange.
Some of the objections against Lewis’s model are as follows:
(1) The assumption that disguised unemployment exists in the agriculture sector has not been accepted by many economists. Schultz, Viner, Heberler and Hopper are a few of such economists. According to them, the production in the subsistence sector will be affected when labour is withdrawn from it.
(2) Lewis ignored the cost involved in training the unskilled worker transferred from the subsistence sector. Even if it is obtained at a constant wage rate, so for as its transfer from the subsistence sector is concerned, the supply curve may slope upwards so far as the capitalist, sector is concerned if the cost of training rises as more and more labour is transferred.
(3) When labour is transferred from the subsistence sector share of agricultural output falling to each one left in the agricultural sector will go a rising. This means the institutional wage will go on rising with every transfer and so will be the wages paid in the capitalist sector.
(4) The model assumes that, besides labour, there is unlimited supply of entrepreneurs in the capitalist sector. This is not true in the case of many of the underdeveloped countries.
(5) It is wrong to assume that a capitalist will always re-invest their profits. They to can indulge in un-productive pursuits. They can use their profits for speculative purposes.
Conclusion
In conclusion to the Lewis Ranis-Fei’s model (surplus labour theory), taking it to the real life situation, Stagnation has not been taken into consideration, and no distinction is made between labor through family and labor through wages. There is also no explanation of the process of self-sustained growth, or of the investment function. There is complete negligence of terms of trade between agriculture and industry, foreign exchange, money and price.
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.[1] It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.[2] According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector.[3] Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Surplus value, Marxian economic concept that professed to explain the instability of the capitalist system. Adhering to David Ricardo’s labour theory of value, Karl Marx held that human labour was the source of economic value. The capitalist pays his workers less than the value their labour has added to the goods, usually only enough to maintain the worker at a subsistence level. Of the total worth of the worker’s labour, however, this compensation, in Marxian theory, accounts for only a mere portion, equivalent to the worker’s means of subsistence. The remainder is “surplus labour,” and the value it produces is “surplus value.” To make a profit, Marx argued, the capitalist appropriates this surplus value, thereby exploiting the labour.II. THE HARRIS-TODARO MODEL
A. Assumptions
Harris and Todaro [1] studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a 0 and g > 0 are a parametric constants. g is the elasticity of p with respect to the ratio Ym/Ya.
The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified:
B. Temporary Equilibrium
Given a parametric constant vector (Aa,Am,f,a,r,g), an initial urban population Nu, and a minimum wage wm one can calculate the temporary equilibrium of the economic system by using eqs. (1 – 6).
From eq. (4) one can find the employment level at the manufacturing sector
Replacing eq. (7) in eq. (2) we get the production level of the manufacturing sector
From eq. (6) one can obtain the relation
which is used with eq. (1) to obtain the agricultural production
By using eqs. (5), (8) and (10) the terms of trade are determined
Finally, by using eqs. (3), (9) and (11), the rural wage in units of manufacturated good is obtained
In sum, the vector (Nm,Ym,Na,Ya,p,wa) configures a temporary equilibrium that might be altered whether occurs a migration of workers, induced by the differential of sectorial wages, which changes the sectorial distribution of overall population.
C. The Long Run Equilibrium
Harris and Todaro, in determining the long run equilibrium, i.e., the absence of a net rural-urban migratory flow, argue that the rural workers, in their decision on migrating to the urban area, estimate the expected urban wage, , defined as:
The ratio Nm/Nu, which is the employment rate, is an estimative of the probability that a worker living at urban sector gets a job in this sector.
As mentioned before, the key assumption of the model of Harris and Todaro is that there will be a migratory flow from the rural to the urban sector while the expected urban wage is higher than the rural wage. Thus, the long run equilibrium is attained when the urban worker population reaches a level such that the expected urban wage equates the rural wage:
This equality is known in the economic literature as the Harris-Todaro condition. Harris and Todaro argue that the differential of expected wages in eq. (14) can be a constant value d ¹ 0. When this differential reaches d, the net migration ceases. This generalized Harris-Todaro condition can be expressed as follows:
The level of the urban population that satisfies the eq. (15), i.e., the equilibrium urban share = /N, is determined from the solution of the equation resulting from substitution of equations (12), (13) in eq. (15):
The solution of eq. (16) is parametrized by the vector (Aa,Am,r,g,a,f,wm).
Harris and Todaro [1], in order to evaluate the stability of the long run equilibrium, postulate a mechanism of adjustment that is based on the following function of sign preservation:
The differential equation that governs the state transition in the model of Harris and Todaro is obtained by replacing equations (12), (13) in eq. (17). Based on this postulated adjustment process, Harris and Todaro [1] show that the long run equilibrium is globally asymptotically stable. This means that the economy would tend to long run equilibrium with unemployment in the urban sector generated by the presence of a relatively high minimum wage for all possible initial conditions. From now on we will refer to the long run equilibrium simply as equilibrium.
Based on the numerical solutions of eq. (16) one can evaluate the impact that the variation of the minimum wage and the elasticity of the terms of trade on the equilibrium. In Fig. 1 we see that under the hypothesis of a Cobb-Douglas technology, the equilibrium urban share, , does not depend on the minimum wage wm. However, changes in the value of wm reduces the labor demand on the manufacturing sector what results in higher unemployment rates in the equilibrium.
In turn, as seen in Fig. 2, changes in the elasticity of the terms of trade alter slightly the equilibrium urban share and unemployment rate. A net migration toward urban sector shift the terms of trade to higher values. The greater g the greater this shift, what cause an increase in the rural wage in units of manufacturing good, becoming the urban sector less attractive.
III. HARRIS-TODARO AGENT-BASED MODEL
In this section we describe the implementation of the computational model we proposed, as well as the aggregate patterns obtained numerically and the comparison with the respective analytical results.
A. Computational Implementation
Initially, workers are randomly placed in a square lattice with linear dimension L = 500. The reference values of the parameters used for these simulations are the same done to evaluate the equilibrium of the Harris-Todaro model, namely, Aa = 1.0, Am = 1.0, f = 0.3, a = 0.7, r = 1.0 and g = 1.0. The value of the minimum wage used is wm = 0.8 and the initial urban fraction of the total population is nu = 0.2, where nu = Nu/N is the normalized urban population also called urban share. The initial value nu = 0.2 is in agreement with historical data of developing economies. Given these parameters, one can calculate the vector which characterizes temporary equilibrium of the system by using eqs. (7 – 12).
By using eq. (7), the employment level of the urban sector, Nm, is obtained. If nu Nm/N there will be a fraction of Nm/Nu workers employed, which earn the minimum wage, wi = wm, and (1-Nm/Nu) workers unemployed, which earn a wage wi = 0.
Each worker can be selected to review his sectorial location with probability a, called activity [11]. Therefore, in each time step only a fraction of workers becomes potential migrants, going through the sectorial location reviewing process. Potential migrants will determine their satisfaction level of being in the current sector by comparing their earnings, wi, among nearest neighbors.
The potential migrant starts the comparison process with a initial satisfaction level si = 0. When wi > wneighbor the satisfaction level si is added in one unit; if wi < wneighbor, si is diminished in one unit; if wi = wneighbor, si does not change. After the worker has passed through the reviewing process his/her satisfaction level is checked. The migration will occur only if si < 0, what means that the worker's i earnings is less than the most of his/her nearest neighbors.
After all the potential migrants complete the reviewing process and have decided migrate or not, a new configuration of the system is set. Therefore, once again a new temporary equilibrium of the system is calculated by using eqs. (8 – 12). The whole procedure is repeated until a pre-set number of steps is reached. It is important to emphasize that Nm is kept constant throughout the simulation. Its given by eq. (7) which depends on the technological parameters, a,Am, and the minimum wage, wm, which are constants too.
B. Analysis of the Emergent Properties
In this section we develop the analysis of the long run aggregate regularities of Harris-Todaro agent-based computational model. These long run properties will be compared between the solution of the analytical model and simulations we ran.
Figures 3, 4 and 5 show the basic characteristics of the transitional dynamics and long run equilibrium generated by simulations. When the economic system has a low initial urban share, nu = 0:2 or nu = 0:3, there is a net migration toward urban sector. This migration takes the urban sector from a full employment situation to an unemployment one. The positive differential of expected wages that pulls workers to the urban sector diminishes. However, if the economic system initiates with a high urban share, nu = 0:8, or nu = 0:9 there is net flow of migration toward rural sector in such a way that the unemployment rate of the urban sector decreases.
As is well known, the rebirth of the sub-discipline of development economics coincided
more or less with the early post-World War II era. It is also relevant to recall that this revival of development theory and policy heavily emphasized the breaking of colonial ties which were associated, somewhat erroneously, with the workings of the market and, consequently, placed major emphasis on the role of the state in the newly independent countries of the Third World. Unfortunately, the tool kit available to development economists of the day was also fairly limited. On the one hand, there was the Harrod-Domar (Harrod 1939, Domar 1957) model, focusing basically on the steady state properties of the developed economy, with little possibility for alternative technology choice and even less for the role of prices, relying heavily instead on savings-pushed growth competing with population growth. Full employment, market clearance, and perfect competition were assumed. On the other hand, there was the Keynesian (1936) model, focusing on advanced economy cyclical issues. Although, as Albert Hirschman (1982) has pointed out, Keynes deviated from the neoclassical mono-economics, full employment orthodoxy of the day, he focused on the temporary unemployment of both capital and labor in the advanced economy, not the secular underemployment of labor in the developing world. Clearly, savings-oriented one-sector models were all the vogue, incorporated in both approaches,
The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model.[1] It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.[2] According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector.[3] Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply. At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Surplus value, Marxian economic concept that professed to explain the instability of the capitalist system. Adhering to David Ricardo’s labour theory of value, Karl Marx held that human labour was the source of economic value. The capitalist pays his workers less than the value their labour has added to the goods, usually only enough to maintain the worker at a subsistence level. Of the total worth of the worker’s labour, however, this compensation, in Marxian theory, accounts for only a mere portion, equivalent to the worker’s means of subsistence. The remainder is “surplus labour,” and the value it produces is “surplus value.” To make a profit, Marx argued, the capitalist appropriates this surplus value, thereby exploiting the labour.II. THE HARRIS-TODARO MODEL
A. Assumptions
Harris and Todaro [1] studied the migration of workers in a two-sector economic system, namely, rural sector and urban sector. The difference between these sectors are the type of goods produced, the technology of production and the process of wage determination. The rural sector is specialized in the production of agricultural goods. The productive process of this sector can be described by a Cobb-Douglas production function:
where Ya is the production level of the agricultural good, Na is the amount of workers used in the agricultural production, Aa > 0 and 0 < f 0 and 0 < a 0 and g > 0 are a parametric constants. g is the elasticity of p with respect to the ratio Ym/Ya.
The overall population of workers in the economy is N, which is kept constant during the whole period of analysis. By assumption there are only two sectors and rural prices are wholly flexible, which implies that there is full employment in the rural area, i.e., all workers living at the rural sector are employed at any period. Then at any period the following equality is verified:
B. Temporary Equilibrium
Given a parametric constant vector (Aa,Am,f,a,r,g), an initial urban population Nu, and a minimum wage wm one can calculate the temporary equilibrium of the economic system by using eqs. (1 – 6).
From eq. (4) one can find the employment level at the manufacturing sector
Replacing eq. (7) in eq. (2) we get the production level of the manufacturing sector
From eq. (6) one can obtain the relation
which is used with eq. (1) to obtain the agricultural production
By using eqs. (5), (8) and (10) the terms of trade are determined
Finally, by using eqs. (3), (9) and (11), the rural wage in units of manufacturated good is obtained
In sum, the vector (Nm,Ym,Na,Ya,p,wa) configures a temporary equilibrium that might be altered whether occurs a migration of workers, induced by the differential of sectorial wages, which changes the sectorial distribution of overall population.
C. The Long Run Equilibrium
Harris and Todaro, in determining the long run equilibrium, i.e., the absence of a net rural-urban migratory flow, argue that the rural workers, in their decision on migrating to the urban area, estimate the expected urban wage, , defined as:
The ratio Nm/Nu, which is the employment rate, is an estimative of the probability that a worker living at urban sector gets a job in this sector.
As mentioned before, the key assumption of the model of Harris and Todaro is that there will be a migratory flow from the rural to the urban sector while the expected urban wage is higher than the rural wage. Thus, the long run equilibrium is attained when the urban worker population reaches a level such that the expected urban wage equates the rural wage:
This equality is known in the economic literature as the Harris-Todaro condition. Harris and Todaro argue that the differential of expected wages in eq. (14) can be a constant value d ¹ 0. When this differential reaches d, the net migration ceases. This generalized Harris-Todaro condition can be expressed as follows:
The level of the urban population that satisfies the eq. (15), i.e., the equilibrium urban share = /N, is determined from the solution of the equation resulting from substitution of equations (12), (13) in eq. (15):
The solution of eq. (16) is parametrized by the vector (Aa,Am,r,g,a,f,wm).
Harris and Todaro [1], in order to evaluate the stability of the long run equilibrium, postulate a mechanism of adjustment that is based on the following function of sign preservation:
The differential equation that governs the state transition in the model of Harris and Todaro is obtained by replacing equations (12), (13) in eq. (17). Based on this postulated adjustment process, Harris and Todaro [1] show that the long run equilibrium is globally asymptotically stable. This means that the economy would tend to long run equilibrium with unemployment in the urban sector generated by the presence of a relatively high minimum wage for all possible initial conditions. From now on we will refer to the long run equilibrium simply as equilibrium.
Based on the numerical solutions of eq. (16) one can evaluate the impact that the variation of the minimum wage and the elasticity of the terms of trade on the equilibrium. In Fig. 1 we see that under the hypothesis of a Cobb-Douglas technology, the equilibrium urban share, , does not depend on the minimum wage wm. However, changes in the value of wm reduces the labor demand on the manufacturing sector what results in higher unemployment rates in the equilibrium.
In turn, as seen in Fig. 2, changes in the elasticity of the terms of trade alter slightly the equilibrium urban share and unemployment rate. A net migration toward urban sector shift the terms of trade to higher values. The greater g the greater this shift, what cause an increase in the rural wage in units of manufacturing good, becoming the urban sector less attractive.
III. HARRIS-TODARO AGENT-BASED MODEL
In this section we describe the implementation of the computational model we proposed, as well as the aggregate patterns obtained numerically and the comparison with the respective analytical results.
A. Computational Implementation
Initially, workers are randomly placed in a square lattice with linear dimension L = 500. The reference values of the parameters used for these simulations are the same done to evaluate the equilibrium of the Harris-Todaro model, namely, Aa = 1.0, Am = 1.0, f = 0.3, a = 0.7, r = 1.0 and g = 1.0. The value of the minimum wage used is wm = 0.8 and the initial urban fraction of the total population is nu = 0.2, where nu = Nu/N is the normalized urban population also called urban share. The initial value nu = 0.2 is in agreement with historical data of developing economies. Given these parameters, one can calculate the vector which characterizes temporary equilibrium of the system by using eqs. (7 – 12).
By using eq. (7), the employment level of the urban sector, Nm, is obtained. If nu Nm/N there will be a fraction of Nm/Nu workers employed, which earn the minimum wage, wi = wm, and (1-Nm/Nu) workers unemployed, which earn a wage wi = 0.
Each worker can be selected to review his sectorial location with probability a, called activity [11]. Therefore, in each time step only a fraction of workers becomes potential migrants, going through the sectorial location reviewing process. Potential migrants will determine their satisfaction level of being in the current sector by comparing their earnings, wi, among nearest neighbors.
The potential migrant starts the comparison process with a initial satisfaction level si = 0. When wi > wneighbor the satisfaction level si is added in one unit; if wi < wneighbor, si is diminished in one unit; if wi = wneighbor, si does not change. After the worker has passed through the reviewing process his/her satisfaction level is checked. The migration will occur only if si < 0, what means that the worker's i earnings is less than the most of his/her nearest neighbors.
After all the potential migrants complete the reviewing process and have decided migrate or not, a new configuration of the system is set. Therefore, once again a new temporary equilibrium of the system is calculated by using eqs. (8 – 12). The whole procedure is repeated until a pre-set number of steps is reached. It is important to emphasize that Nm is kept constant throughout the simulation. Its given by eq. (7) which depends on the technological parameters, a,Am, and the minimum wage, wm, which are constants too.
B. Analysis of the Emergent Properties
In this section we develop the analysis of the long run aggregate regularities of Harris-Todaro agent-based computational model. These long run properties will be compared between the solution of the analytical model and simulations we ran.
Figures 3, 4 and 5 show the basic characteristics of the transitional dynamics and long run equilibrium generated by simulations. When the economic system has a low initial urban share, nu = 0:2 or nu = 0:3, there is a net migration toward urban sector. This migration takes the urban sector from a full employment situation to an unemployment one. The positive differential of expected wages that pulls workers to the urban sector diminishes. However, if the economic system initiates with a high urban share, nu = 0:8, or nu = 0:9 there is net flow of migration toward rural sector in such a way that the unemployment rate of the urban sector decreases.
As is well known, the rebirth of the sub-discipline of development economics coincided
more or less with the early post-World War II era. It is also relevant to recall that this revival of development theory and policy heavily emphasized the breaking of colonial ties which were associated, somewhat erroneously, with the workings of the market and, consequently, placed major emphasis on the role of the state in the newly independent countries of the Third World. Unfortunately, the tool kit available to development economists of the day was also fairly limited. On the one hand, there was the Harrod-Domar (Harrod 1939, Domar 1957) model, focusing basically on the steady state properties of the developed economy, with little possibility for alternative technology choice and even less for the role of prices, relying heavily instead on savings-pushed growth competing with population growth. Full employment, market clearance, and perfect competition were assumed. On the other hand, there was the Keynesian (1936) model, focusing on advanced economy cyclical issues. Although, as Albert Hirschman (1982) has pointed out, Keynes deviated from the neoclassical mono-economics, full employment orthodoxy of the day, he focused on the temporary unemployment of both capital and labor in the advanced economy, not the secular underemployment of labor in the developing world. Clearly, savings-oriented one-sector models were all the vogue, incorporated in both approaches,
Good morning Mr. President and the honourable members of this parliament. To begin with the Surplus Labour theory was proposed by Arthur Lewis and was later modified by Fei and Ranis. The model describes a dual system of economy in which the Agricultural sector was seen as dominant in any developing nation and the Industrial sector was taken to be dominant in the developed nation. Lewis and Fei – Ranis model assumed that the agricultural sector has a surplus unproductive labour, and that this surplus labour is absorbed by the industrial sector due to it better wage rate. This added labour continually expands the industrial sector until all the surplus labour is absorbed. Thus, the industrial sector becomes the dominant sector and the nation according to there model is assumed to be developed.
LEWIS-FEI-RANIS MODEL OF SURPLUS LABOUR
This growth model further explains that the traditional sector comprises of the agricultural sector which is existent, and the modern sector comprises of the fast-growing but small industrial or manufacturing sector. It is also said that the two sectors (traditional and modern) both exist in the dual economy which lays the basis for the problem of development. How these two sectors would interact in order to yield economic development is the major issue here. This therefore forms the foundation for development too be that economic development can only occur or happen or evolve if and only if the resources in the traditional agricultural sector can be shifted to the modern industrial sector such that the industrial sector is advanced or increased or even taken to another level (higher) in the economy. This then can only be achieved when the labour factor resource is transferred from the traditional agricultural sector to the modern industrial sector. However, this does not imply that the traditional agricultural sector should be neglected because it is this sector that supplies the raw materials needed by the modern industrial sector as well as food.
ARGUMENTS OF THE FEI – RANIS GROWTH MODEL
Like in the Harrod – Domar Growth Model, we have that savings and investment are the key instruments that are used to drive economic development when it comes to the less-developed countries. Lewis argued that, economic growth in a less-developed or under-developed economy could only be achieved by capital accumulation in the modern industrial sector, which is done by taking or shifting excess or surplus labour from the traditional agricultural sector to the modern industrial sector. So, Lewis advocated that an economy like that transits or moves from the first stage (excess labour) to the second stage (scarce labour) of economic development.
Later on, Fei and Ranis formalized the three stages of dualistic economic development by dividing the first two stages of Lewis Model into the first two stages of the Fei – Ranis Growth Model and the second stage of Lewis Model forming the third stage of the Fei – Ranis Growth Model.
Okonkwo Chidinma Alisa
2017/243086
decenteconomistalisa@gmail.com
chidimmalisa.blogspot.com
AN ESSAY ON THE HARRIS – TODARO MODEL OF MIGRATION
INTRODUCTION
It has been observed that for an economy to grow and advance, it must shift her labour force (most of it or some of it) from the traditional or subsistence part of the economy to the modern or commercial part of the economy. That is, labour has to be moved from the sector of the economy where production is low to the sector where production is high in order to increase production and then create more goods and services which would ensure increased economic growth. Development Economics has also however given more credit to the dualistic models than the single models. The dualistic growth models usually consisted of a rural-traditional or agricultural sector alongside with an urban-modern or manufacturing sector. The famous single-sector model is the growth theory of Harrod-Domar (Harrod 1939 and 1948, Domar 1946) brought up by two economists Sir Roy Harrod of England and Professor Evesey Domar of the United States. They were of the view that a country’s level of output was being influenced or determined directly by the net-savings ratio (s) and inversely by the capital-output ratio (c). That is, ∆Y/Y = s/c. This growth model was however criticized in the issue that it only focused on the capital-output ratio which is how many units of capital could be used to produce a unit of output. It did not take into consideration those poor countries with low capital formation as their growth was actually limited to the amount or level of capital that country had or could raise. These growth models were known as or referred to as “orthodox” by Corden and Findley (1971).
Asides this model, there is also the most influential dualistic framework which is that of Lewis (1954). The idea of surplus labour, subsistence wages in the development of a dualistic economy in Lewis (1954) was later diagrammatically formalized by Ranis and Fei (1961). These two also showed how agricultural surplus could lead to the growth of industries. The common characteristics of the dualistic theories brought up as well as other alike models include the following:
No unemployment in the modern sector.
The sectoral wage differential is assumed fixed or proportional to the wage level in the urban sector.
The new or modern thinking were later brought up of the notable was the one propounded by Michael Todaro (1969) and John Harris (Harris and Todaro 1970). The Harris-Todaro Model is an equilibrium version of the Todaro Migration Model which forecasts and explains the rural-urban migration as an economically rational process despite the high urban unemployment. The migrants calculate the value of the urban expected income or its equivalent and move of it is more than the average rural income. The importance of this was as a result of the Keynesian Revolution is that “equilibrium could occur or come about even when there is a chronic level of unemployment in the urban sector”. This implies that the economy would still or could still be in balance even with the existence of a severe urban unemployment. It has also been deduced that the most important factor why urban population was more than of the rural sector was due to the fact that labour from the rural sector moved to the urban sector in search of “greener pastures”.
In the situation of a dualistic model, the rural sector is letting go of much labour too quickly while the urban sector is hiring or accepting labour too slowly as it is assumed that the urban sector is capital-intensive (Lewis 1965). The manifestations of the employment problem in the urban areas as much labour get unemployed is the outcome of the poverty and underemployment in the Third World Countries (Lubell 1988). It has also been recognized that labour migration was due to the fact that the rural-urban wages were different compared to each other. The contribution of Todaro is the introduction of the possibility of employment as a factor in the decision-making process of a potential migrant. He devised what he called a two-stage process in the less-developed countries.
The first stage is characterized by where the labour migrant decides to move from the rural sector for a period of time (that is, from the traditional informal sector). The second stage is then reached when that labour migrant has gotten a more permanent job in the modern or urban sector. So the two-stage process is simply involving first, when the labour migrant resolves to leave his place in the rural sector for a certain time period and second, the labour migrant finds a more permanent job in the urban sector. However, Todaro and some others did not take into consideration the informal urban sector explicitly as its employees were usually underemployed as they were not distinguished from the unemployed as they made no income of their own but relied on their relatives as explained of the informal sector by Lewis (1954).
According to Todaro, the probability or tendency of getting a job depends on the size of the urban population that is employed, number of newly created jobs in the urban sector, as well as the length or duration a labour migrant has been in that sector. Consequently it implied that according to Todaro, the longer a labour migrant has been in the manufacturing sector, the more likely he or she is to get a job there. An extension of this was done by Harris and Todaro (1970), where they explained that the urban wage is equal or equivalent to the expected value of the urban wage and this formed the notable Harris-Todaro Equation which is of the form:
Wa = βWm where,
Wa = Flexible wage in the agricultural sector is equal to the value of the marginal product in that sector, β = Probability of employment (dependent on the three (3) factors listed earlier), and Wm = Wage in the manufacturing sector which is assumed fixed or constant institutionally either because of the involvement of the union’s activities or a friendly government towards the workers in the modern sector. This is unlike in the orthodox models where the wage difference in the rural-urban sectors is not fixed or constant.
THE BASIC MODEL
The Harris-Todaro Model would be referred to as the H – T Model from henceforth, assume that migration from the rural to the urban areas depends primarily on the difference in wages between the rural and urban labour markets (which is the wage differential). That is the expected urban wage is the actual urban wage multiplied by the probability of getting a job, or Weu = PWu where,
Weu = Expected Urban Wage and P = Probability of getting a job where P is expressed as: P = where,
Eu = Urban Employment, Uu = Urban Unemployment and L = Total Labour Force. Another assumption of the Harris-Todaro is that all the members of the urban labour force have equal chances of obtaining or getting the jobs available for them. So Weu = Urban Wage multiplied by the Urban Employment Rate.
POLICY IMPLICATIONS OF THE H – T MODEL
The H – T Model has some impressing implications from the policy point of view. Let’s take for an instance, if the government of a country is concerned with fostering industrial development in an urban area, employment would increase and this would lead to an increase in productive of getting urban employment in the minds of the rural inhabitants. Migration to the urban area would then increase and the outcome would be that the unemployment rate in the urban areas would rise more than how it was before the development industrially occurred. Due to this, labour migrants would prefer to accept the wage in the urban informal sector than going back to wait for long for jobs that would not come in time as urban employment is now in equilibrium. However, the effect of this is that the earnings in the urban modern industrial sectors would be more or higher than those in the rural traditional sectors. The long-term solution to this issue would be to fix a wage policy for the two sectors that would reduce the real income differences between the two sectors.
THE ASSUMPTIONS OF THE MODEL
In analyzing the H – T Model, there are some assumptions alongside those listed before which include:
There is fixed amounts of labour (L) and capital (K) factor inputs.
Capital is fully employed but labour unemployment exists in the urban sector due to the fixed urban wage, W is higher than the flexible rural wage, w.
The economy is small and imports the urban output, X and exports the agricultural output, Y which is used as a numeraire.
MATHEMATICAL EXPRESSION OF THE MODEL
Let Lj and Kj represent the labour and capital factor inputs employed in the sectors respectively, we then have the output of the urban manufacturing sector to be of the form: X = F (Lx, Kx) and the output of the rural agricultural sector to be of the form: Y = G (Ly, Ky).
Due to the wage inflexibility in the manufacturing sector, some form of unemployment would exist in the urban sector. The profit of the urban sector would therefore equal: Πx = PF – WLX – rKx, where P = Producer’s price of the urban output and W = Fixed value of urban wage. The profit of the rural sector would be of the form: Πy = G – wLY – rKY, where w = Flexible value of rural wage and the price of the numeraire Y is unity or equal to one (1). The first-order conditions for the optimal labour employment are: PFL – W = 0; GL – w = 0. These give the conditional labour demand functions: Lx = Lx (Kx, P, W) and LY = LY (KY, P, w).
The rural wage w = the expected urban wage. Therefore, the relationship between the two wages in the two sectors is explained by the H – T conditions which are:
w = βW = where β = which is the probability of getting
employed and λ = Lu/Lx = Relative Unemployment in the urban sector.
COMPARISON WITH THE REAL WORLD
The successful East Asian Countries of Taiwan, Korea, and Singapore, as well as the not-so successful countries like Brazil, Chile, and several others, is usually the example that is given to explain the comparison of this model with the real world. It is argued (Balassa 1989) that the import-substitution policies in many less-developed countries are based against the primary agricultural sector which is the exporting sector while the export-oriented polices provide similar incentives to the two sectors. Countries that adopt inward-looking strategies, the limitation of the domestic markets and the lack of competition leads to the allocative and technological inefficiency. As in contrast with the onward-looking countries which are able to mobilize domestic resources effectively in the production if goods that are in competition in the wide markets worldwide which would result in technology. It is now in our own opinion that majority of the less-developed countries have approached what is said to be the take-off stage as described by Lewis (1954) and Fei and Ranis (1961) characterized by the rapidly growing economies, transfer of labour from the traditional sector, and the persistent or continuous problems of the high urban unemployment and underemployment rates.