Volume 31, Issue 4. Emigration promotion and urban unemployment

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1 Volme 3, Isse 4 Emigration promotion and rban nemployment Shigemi Yabchi Aichi University Abstract Unemployment is present in many developing contries. Ths, the government of a contry that sffers from chronic nemployment often wants to emigrate some workers to foreign contries. This paper investigates whether sch a policy is sccessfl for redcing domestic nemployment. The athor is gratefl to an anonymos referee and Professor Falvey for their insightfl comments. Financial spport from the Japan Society for the Promotion of Science (Grants-in-Aid for Scientific Research, a-4303 and c-95300) is grateflly acknowledged. Citation: Shigemi Yabchi, (0) ''Emigration promotion and rban nemployment'', Economics Blletin, Vol. 3 No. 4 pp Contact: Shigemi Yabchi - yabchi@aichi-.ac.p. Sbmitted: September 0, 0. Pblished: October 05, 0.

2 Economics Blletin, 0, Vol. 3 No. 4 pp Introdction Unemployment is a significant problem in many developing contries. In those contries, rral workers are attracted to the city lights, and they migrate to rban areas at the risk of nemployment, even thogh they can be flly employed in rral areas at the prevailing rral wage rate. Harris and Todaro (970) formlated this labor allocation mechanism between the rral and rban areas in developing contries. Varios aspects of the Harris-Todaro model (HT, hereafter) have been discssed by several trade theorists, sch as Bhagwati and Srinivasan (974), Corden and Findlay (975), Khan (980), Batra and Naqvi (987), Beladi and Naqvi (988), Hazari and Sgro (99), Marit and Beladi (003), Neary (99), Gpta (993), Yabchi (993), Chao and Y (996), Chadhri (005), Marit and Kar (005), and Beladi et al. (008) An extensive movement of labor contines to occr among contries: for example, immigration from African contries to EU contries, that from Soth Asian contries to Astralia, and so on. Ths, the governments of contries that sffer from chronic nemployment want to emigrate some of their workers to foreign contries in order to redce the pressre of nemployment. Sch a policy has deep historical roots: for example, the Irish migrated to the United States, and the Japanese migrated to Brazil in the early 0 th centry. Two factors may inflence changes in the nmber of migrant workers. On the one hand, ) emigration tends to increase if the contry of emigrant origin provides a sbsidy or easing qantity control. ) On the other hand, some developed contries restrict foreign immigration for social or political considerations. If the foreign wage rate increases and/or if the host contries decide to accept more immigrants, then emigration from the sorce contry increases. In any case, an important concern for the policy makers of the developing contry with a labor srpls is how to mitigate the pressre of nemployment. Ths, this paper investigates whether sch policies are sccessfl for redcing domestic nemployment.. The model and assmptions Let s consider a small open economy in which there are two sectors. One sector prodces good, and the other sector prodces good. For simplicity, we label sectors and as agricltral and manfactring sectors, respectively. The prodction of goods and reqires labor and capital. The following symbols will be sed in the formal presentation of the model. 87

3 Economics Blletin, 0, Vol. 3 No. 4 pp X : otpt of sector (=,) L : nemployment L*: foreign migrants p : price of good (=,) w : wage rate in sector (=,) w*: foreign wage rate r : rate of retrn to capital L: labor endowment K: capital endowment. Variables w, L*, are endogenos. p, w*, L, and K are fixed, while the other variables, X, Under perfect competition, we have L, w, and r p a w a r, () L K p a w a r, () L K where a i is the amont of the ith factor sed in the th indstry to prodce one nit of the otpt. We assme that all goods are tradable and, therefore, that their prices are exogenosly given. In the standard HT model, it is assmed that the wage rate in (manfactring) sector ( w ) is set at a relatively high level and that it is rigid de to some political and/or instittional considerations, whereas the wage rate in (agricltral) sector ( w ) is flexible. In addition, there is a possibility of emigrating abroad. We assme that emigration is possible only from the rban area becase of instittional or geographical restrictions. It is assmed that the foreign wage rate (w*) is fixed becase the contry is assmed to be small. Ths, a fixed nmber of workers, chosen randomly from the rban labor force, are allocated to migrating temporarily and earning wage w* with certainty. Hence, the labor movement is temporary migration nder a work permit scheme, rather than permanent migration. It is natral to assme that the foreign wage rate (w*) is higher than the rban wage rate ( w ) of the developing contry. In this sitation, the rral workers have two alternatives: staying in rral areas in order to obtain a secre ob at a low wage rate, or migrating to rban areas or 88

4 Economics Blletin, 0, Vol. 3 No. 4 pp foreign contries in order to seek a high wage income at the risk of nemployment. Ths, the labor allocation mechanism between the sectors is shown as follows: w w L / ( L L L*) w* L*/( L L L*), (3) where L ( alx ), L and L* are the employed, the nemployed labor in the rban area, and the foreign migrants, respectively. In the labor market eqilibrim, therefore, the wage rate in sector ( w ) eqals the expected wage income in the rban area, which eqals the manfactring wage rate ( w ), times the probability of finding a ob in the rban manfactring sector, pls the foreign wage rate (w*), times the probability of obtaining a ob in the foreign contry. According to the standard HT labor allocation mechanism, it is implicitly assmed that nemployed labor is spported by employed labor, sch as other members of the family, or that a ob is allocated daily (or monthly and so on) to all applicants by lottery. Otherwise, nemployed labor cannot srvive since an nemployment allowance is not considered in the standard HT model. Exogenosly given endowments impose the following resorce constraints: a X a X L L L, (4) L L * a X a X K. (5) K K This completes the specification of or model with the fixed endowment of factors and the internationally determined prices. We have five nknown variables w, r, X, X, and L, which are solved by eqations () (5) for given parameters, w, w*, p, p L*.,L, K, and In the following discssion, the factor intensities between factors play an important role. Ths, we make the following assmption: Assmption : Sector is capital-intensive relative to labor compared to sector in the vale sense, i.e., rk / w L rk / w L w w 0, L K L K 89

5 Economics Blletin, 0, Vol. 3 No. 4 pp where k / K L, ( =,), and i is the allocative share of the ith factor in the th indstry (e.g., X K ). K a K / This assmption is the Khan-Neary stability condition, which is well known in the literatre. 3. Emigration and nemployment Now let s examine the effect of promoting emigration on rban nemployment. Migrant workers increase either becase of a sbsidy from the home contry or from an exogenos increase in the foreign wage rate. Immigrants will also increase if foreign governments relax immigration reglations or if the home contry imposes migration limits. These sitations can be captred by an increase in the foreign wage rate (w*) or an increase in the nmber of migrants (L*). It can be seen that the model is decomposable between price side and qantity side. Ths, the price variables, w and r are fixed from () and () nder the constants w, p, and p. This implies that all inpt coefficients, a i, are also constant in or model. Totally differentiating (3) (5), we obtain ˆ L L l X l* 0 ˆ ˆ ˆ K K 0 X 0 L* 0 w*, (6) w ˆ L wl 0 L w* l * w* l * where Aˆ da / A for any variable A, l L / L and l* L*/ L. It is assmed that the foreign wage rate (w*) is higher than the rban wage rate ( w ). Ths, it can be expressed as w aw ( ) w*, 0. By solving (6) with respect to L*, we obtain Lˆ / Lˆ * l *( w w*)( ) /, (7) L K L K 80

6 Economics Blletin, 0, Vol. 3 No. 4 pp Lˆ / wˆ * w* l *( ) /, (8) L K L K where l w L K w LK l ( ) 0,expressing the vale of the determinant of the coefficient matrix of (6). It can be shown that w w w { w ( ) w*} L K L K L K L K w( ) ( ) w* 0 L K L K L K. Then, it holds that w ( L K L K) ( ) w* LK 0. Also, we have ( ) ( w w ) 0, L K L K L K L K since w w. Ths, it can be shown that Lˆ / Lˆ * 0 and Lˆ / w * 0. Ths, the reslts are smmarized in the following proposition. Proposition. In an economy with rban nemployment, emigration-promotion policy increases nemployment. At first sight, the increase in foreign emigration (L*) may be considered to be beneficial to the economy as an effective policy to redce nemployment. However, it indces a large amont of domestic migration from rral to rban areas, which exceeds the increase in both rban employment and foreign migration, reslting in an increase in rban nemployment. An increase in the foreign wage rate (w*) also has a similar effect on the labor movement. Ths, a policy aimed at promoting migration and/or exogenos changes in favor of emigration cannot solve the problem of nemployment. Thogh the reslt is very pessimistic, or reslt shows the possibility of an nexpected otcome by focsing on the indirect effect throgh the domestic labor movement from rral to rban areas. Contrary to 8

7 Economics Blletin, 0, Vol. 3 No. 4 pp expectation, one implication of these reslts is that restriction on temporary migration will redce nemployment. Frthermore, or reslts depend crcially on the assmption that in order to migrate, a worker has to be a part of the rban labor force. This sggests the importance of examining the isse nder the assmption that migrants are taken from the agricltral labor force. In addition, policy makers need to consider some other policies for example, wage and prodction sbsidies, and capital inflow from abroad. Or model provides a sefl framework for examining the effectiveness of these alternative policies in an economy with nemployment and foreign migration. References Batra, R. N. and N. Naqvi (987) Urban Unemployment and the Gains from Trade, Economica 54, Beladi, Hamid, Chadhri Sarbait, and Shigemi Yabchi (008) Can International Factor Mobility Redce Wage Ineqality in a Dal Economy? Review of International Economics 6, Bhagwati, J. N. and T. N. Srinivasan (974) On Reanalysing the Harris-Todaro Model: Policy Rankings in the Case of Sector-Specific Sticky Wages, American Economic Review 64, Chao, C. C. and E. S. H. Y (996) International Capital Mobility, Urban Unemployment and Welfare, Sothern Economic Jornal 6, Chadhri, S. (005) Labor Market Distortion, Technology Transfer and Gainfl Effects of Foreign Capital, The Manchester School 73, 4-7. Corden, W. M. and R. Findlay (975) Urban Unemployment, Intersectoral Capital Mobility and Development Policy in a Dal Economy, Economica 4, Gpta, M. R. (993) Rral-rban Migration, Informal Sector and Development Policies, Jornal of Development Economics 4, Harris, J. R. and M. Todaro (970) Migration, Unemployment and Development: A Two-Sector Analysis, American Economic Review 60, 6-4. Hazari, B. R. and P. M. Sgro (99) Urban-Rral Strctral Adstment, Urban Unemployment with Traded and Non-traded Goods, Jornal of Development Economics 35,

8 Economics Blletin, 0, Vol. 3 No. 4 pp Khan, M. A. (980) Dynamic Stability, Wage Sbsidies and the Generalized Harris-Todaro Model, Pakistan Economic Review 9, -4. Marit, S. and H. Beladi (003) Possibility or Impossibility of Paradoxes in the Small Contry Harris-Todaro Framework: A Unified Analysis, Jornal of Developing Economics 7, Marit, Sgata and Saibal Kar (005) Emigration and Wage Ineqality, Economics Letters 88, Neary, J. P. (98) On the Harris-Todaro Model with Intersectoral Capital Mobility, Economica 48, Yabchi, S. (993) Urban Unemployment, International Capital Mobility and Development Policy, Jornal of Development Economics 4,

Immigration and Unemployment of Skilled and Unskilled Labor

Journal of Economic Integration 2(2), June 2008; -45 Immigration and Unemployment of Skilled and Unskilled Labor Shigemi Yabuuchi Nagoya City University Abstract This paper discusses the problem of unemployment