Model predicts how much migration and employment levels in both formal and

Model predicts how much migration and employment

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± Model predicts: how much migration and employment levels in both formal and informal urban sectors. See graph; agricultural and formal wage > modern sector in city; above clearing wage. Why high wages in the formal city? - Unions; more organized and concentrated laborers (or insider power), costly to fire - Minimum wages more enforced - Investment in training is compensated with higher wages - Over-pay certain jobs to ensure the right people, talented and motivated ° HT - Equilibrium: Assumptions: no costs of migration and the individual is risk neutral. Downloaded by Vicky Gupta ([email protected]) lOMoARcPSD|3929542
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° Paradox : formal sector job creation may increase urban unemployment if ‘migration effect’ dominates the ‘soak-up effect’. Fewer people in the agricultural sector; increase in wage in agriculture; then there will be an increase in formal sector jobs based on the equations (slide 28). But the informal sector jobs also increases to keep finding a formal sector job constant. The increase in formal sector jobs might be offset by a similar increase in informal sector jobs. Is there really a paradox? No clear empirical evidence. Because; simplified model; people might simply return when they do not find a urban job. There might not be over-payment of urban jobs after supply increases. Appropriate analysis but need to take other things into account as well. Other reasons for migration Downloaded by Vicky Gupta ([email protected]) lOMoARcPSD|3929542
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HC 5. Land markets ° Importance of land markets (a) Inequality of land market and lack of access to land may create strong migration pressures with consequent political, environmental and economic consequences (b) Functioning of credit market depends on functioning of land market (c)Given optimal factor proportions given technology, eg manhour / m2 land, land markets (and labor markets) can improve efficiency of agriculture ± High population density puts limits on inequality. Problems with unequal land holdings (LA, Asia) and ambiguous ownership and command use (Africa). Evidence: cultivation types - Owner-cultivation (no contract) : high in Asia, Latin America, low in Africa - Tenancy (rental contract ): regional variation, fixed rent in LA, sharecropping in Asia Fixed rent : farmers bear (dragen) the risks of cultivation (teelt) Share-cropping : is a system of agriculture in which a landowner allows a tenant to use the land in return for a share of the crops (gewassen) produced on the land. - Squatting or tribal or communal tenure ± Land tenure contracts - General contract form: R = α Y + F Fixed rent: α = 0 , F > 0 Sharecropping: 0 < α < 1 , F = 0 Pure wage contract: α = 1 , F < 0 ° Sharecroppoing inefficient ? Adam Smith, Alfred Marshall : sharecropping inefficient: due to inappropriate provision of incentives - Basic argument: sharecropping is like a tax on output (labour) tenant (huurder) does not receive entire marginal product gives disincentive to work Case 1: ‘Owner cultivation’ - No rental contract - Return = f(L); Costs C(L) = c*L - Profit (net return) = f(L) - C(L) - Marginal profit = f’(L) - C’(L) = f’(L) - c - Farmer maximizes profit: choose L
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