Question

Consider the Harris-Todaro Model with an agricultural sector and a manufacturing sector.

FIGURE 7.12 The Harris-Todaro Migration Model Agricultural wage rate Manufacturing wage rate --XN --- - T LA LA LM Lu Unemployment

A. assume that the demand for agricultural labor decreases and the minimum wage ($\bar{W}$M) in the manufacturing sector remains unchanged. Determine the new equilibrium number of agricultural workers, label it L²_A. What would the new unemployment interval be?

Answer 1

Question :

Solution :

In the Harris - Todaro Migration model , the two main sectors are considered as Agriculture and Manufacturing ( Modern ) ) sector . In both sectors declining marginal productivity exists which shows that demand of labors will be lowered if wages are higher in sectors .

On x-axis the labor forces are given for both sectors which is not depend on the wage rate .The curve AA shows the demand for labor in agriculture and Curve MM shows the demand for Manufacturing sector . The equilibrium wage rate will be set where AA and MM curve intersect to each other i.e., at point E ₁ . Here labor also Labor of both L_A and L _M are worked . If wage rate seems to be high at W _M which is constant then more labor would shift to this sector from agriculture sector .

(New Equilibrito) E, (2) NAF- - Net -

From the above fig. , With the new demand curve ( qq ) in modern sector , equilibrium labor also shift to agriculture sector which means reduction in the labor demand so rise in the wage rate in agriculture sector . Thus , New equilibrium point will be at E ( Z ) where both curves are intersect . Now unemployment interval level is L ₂ A to L _M .

(New Equilibrium) E (2) NA I a 21 NA Om

But when demand for labor in agriculture reduces from this level then new point will be at point E 2 and new labor would be L2A which increases the unemployment rate from L2A to LM which is larger gap then previous level .