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The Harris Todaro Model

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The Harris Todaro model mainly came up due to the rising problems in tropical Africa which was mainly rural urban migration and urban unemployment. The migration was mainly caused due to the differences in the expected wages by the labourers. It was seen that the minimum urban wage had been higher than the rural wages which is the leading reason for growing levels of unemployment. Thus to remove this unemployment , Harris Todaro has introduced the concept of lumpsum tax so as to get a minimum wage.
ASSUMPTIONS
1) There are two sectors in an economy which is the rural sector and the urban sector. The rural sector consists of the agricultural sector whereas the urban sector consists of the manufacturing sector.
2) The rural sector produces Xa …show more content…

U1,2,U3,U4,U5 are the various indifference curves. The level of equilibrium is at point B where the output produced by the Urban sector is OXm. With the help of the graph we can see and note that any point to the right of B will not happen due to the wage differential. At point E it is the wage differential point where OXa output is produced in the rural sectors and OXm level is produced in the urban sector. Due to the equilibrium minimum wage rate at point B it will reduce the output produced in the agricultural sector to OX’a. Thus Harris Todaro suggests that the economy should provide shadow wage or a wage subsidy to the urban sector so that they can reach to a point L which is on the PPC curve and where the indifference curve is tangent to the PPC curve. Thus this point L is a much optimum point as it is on a higher IC curve and also when the shadow wage is implemented in the urban sector than it would increase the output in the …show more content…

At point D the wage rate that is expected in the urban sector is equal to the urban minimum wage. Thus there will be rural urban migration that would prevail. Point D is also not the optimal point because at this point it is within the PPC curve and also at a lower IC. Thus Harris Todaro suggests that the economy should go with providing wage subsidy because with this the economy can move to point L which is on the PPC curve and is also at a higher social welfare curve U5. And with this he says that even though point L is unattainable still the economy should go on with providing wage subsidy because then the economy can achieve point C which is at a higher social welfare curve U3 and will also be preffered over point B. He says that the government should introduce lumpsum taxes so that the initiative of providing subsidy can be implemented so as to reach at a higher point as shown in the

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