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Unemployment, migration, and growth

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  • Valerie R. Bencivenga
  • Bruce D. Smith

Abstract

Economic development is typically accompanied by a very pronounced migration of labor from rural to urban employment. This migration, in turn, is often associated with large scale urban underemployment. Both factors appear to play a very prominent role in the process of development. We consider a model in which rural-urban migration and urban underemployment are integrated into an otherwise conventional neoclassical growth model. Unemployment arises not from any exogenous rigidities, but from an adverse selection problem in labor markets. We demonstrate that, in the most natural case, rural-urban migration - and its associated underemployment - can be a source of multiple, asymptotically stable steady state equilibria, and hence of development traps. They also easily give rise to an indeterminacy of perfect foresight equilibrium, as well as to the existence of a large set of periodic equilibria displaying undamped oscillation. Many such equilibria display long periods of uninterrupted growth and rural-urban migration, punctuated by brief but severe recessions associated with net migration from urban to rural employment. Such equilibria are argued to be broadly consistent with historical U.S. experience.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 561.

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Date of creation: 1995
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Publication status: Published in Journal of Political Economy (Vol. 105, No. 3, June 1997, pp. 582-608)
Handle: RePEc:fip:fedmwp:561

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Keywords: Unemployment;

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  1. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September.
  2. James E. Rauch, 1993. "Economic Development, Urban Underemployment, and Income Inequality," Canadian Journal of Economics, Canadian Economics Association, vol. 26(4), pages 901-18, November.
  3. Bhatia, Kul B, 1979. "Rural-Urban Migration and Surplus Labour," Oxford Economic Papers, Oxford University Press, vol. 31(3), pages 403-14, November.
  4. Hatton, Timothy J & Williamson, Jeffrey G, 1992. "What Explains Wage Gaps between Farm and City? Exploring the Todaro Model with American Evidence, 1890-1941," Economic Development and Cultural Change, University of Chicago Press, vol. 40(2), pages 267-94, January.
  5. Azariadis, Costas, 1981. "Self-fulfilling prophecies," Journal of Economic Theory, Elsevier, vol. 25(3), pages 380-396, December.
  6. Ranis, Gustav, 1988. "Analytics of development: Dualism," Handbook of Development Economics, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 1, chapter 4, pages 73-92 Elsevier.
  7. Reichlin, Pietro, 1986. "Equilibrium cycles in an overlapping generations economy with production," Journal of Economic Theory, Elsevier, vol. 40(1), pages 89-102, October.
  8. Mazumdar, Dipak, 1987. "Rural-urban migration in developing countries," Handbook of Regional and Urban Economics, in: E. S. Mills (ed.), Handbook of Regional and Urban Economics, edition 1, volume 2, chapter 28, pages 1097-1128 Elsevier.
  9. Rosenzweig, Mark R., 1988. "Labor markets in low-income countries," Handbook of Development Economics, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 1, chapter 15, pages 713-762 Elsevier.
  10. Mas-Colell, Andreu & Razin, Assaf, 1973. "A Model of Intersectoral Migration and Growth," Oxford Economic Papers, Oxford University Press, vol. 25(1), pages 72-79, March.
  11. Azariadis, Costas & Drazen, Allan, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 501-26, May.
  12. Drazen, Allan & Eckstein, Zvi, 1988. "On the Organization of Rural Markets and the Process of Economic Development," American Economic Review, American Economic Association, vol. 78(3), pages 431-43, June.
  13. Harris, John R & Todaro, Michael P, 1970. "Migration, Unemployment & Development: A Two-Sector Analysis," American Economic Review, American Economic Association, vol. 60(1), pages 126-42, March.
  14. Benhabib, Jess & Day, Richard H., 1982. "A characterization of erratic dynamics in, the overlapping generations model," Journal of Economic Dynamics and Control, Elsevier, vol. 4(1), pages 37-55, November.
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