Neoclassical theories of migration
For a long period of time, neoclassical theory was the dominating paradigm in economics. In neoclassical theory, it is assumed that individuals are rational, risk-neutral and that they maximize their utility (which typically implies maximizing their income). Under these assumptions, it has been possible to establish different hypotheses, which explain migration from both a micro- and a macroeconomic perspective.
The early microeconomic neoclassical theories of migration state that individuals migrate when the wage is higher elsewhere than at their current residence (Sjaastad, 1962). Todaro (1969) and Harris and Todaro (1970), which are two of the most significant contributions to neoclassical migration theory, extend this proposition by suggesting that instead of actual wage differentials, migration is de facto driven by the expected wage differences between regions. To illustrate this point, assume an individual considers migrating in order to increase her income. If she evaluates that the benefits exceeds the costs, she migrates. Assume she has a real wage of 10 dollars at her current profession and residence. Further assume that if she chooses to migrate, she has a chance to double her real wage to 20 dollars. However, migrating could also result in unemployment. Let p denote the probability of being employed if she migrates and, consequently, (1 â p) the probability of being unemployed. The expected income from migrating equals p Ă 20 + (1 â p) Ă 0. If this expected income exceeds her present income of 10 dollars she migrates, otherwise she does not. This simple calculation can be made more complicated by, for example, adding the costs of migration. If migrating is associated with traveling expenses, the expected income from migrating equals p Ă 20 + (1 â p) Ă 0 â traveling costs. Her migration choice is consequently based on her perceived probability of being employed at the destination, her expected income if employed and the costs of traveling to the destination. The greater the probability of employment and the lower the traveling cost, the higher incentives to migrate. The higher the costs to migrate, the fewer who will be able to afford to move. This means that individuals who arguably have the highest incentives to migrate (i.e. the poor) may end up staying at home.
At the macroeconomic level, the neoclassical models shift focus from the individual toward supply-side growth theories. At the macroeconomic level, migration is an essential part of a developing countryâs transition toward a developed economy. According to neoclassical growth models, there are three main sources of growth: technology advancement, capital accumulation and labor accumulation. Lewis (1954) and Ranis and Fei (1961) expand the neoclassical growth model to take into account the initial development stages that transition countries go through in their transformation toward a developed economy. A large part of the labor force is employed in agriculture at the initial stages of the transition period. The agricultural sector is assumed to be overpopulated with surplus labor, and the amount of land available is not enough to occupy the available labor in farming. Agricultural wages are thus driven down to a subsistence wage. Wages in the industry are higher, but limited capital availability restricts the expansion of this sector. Capital accumulation in the industry sector generates an increased labor demand. Because the industry sector offers higher wages than the traditional sector, labor migrates from agriculture to industry. This way, labor migration constitutes an essential part of the growth process in developing countries and the accumulation of capital is fundamental for sustained economic growth.
Certainly, the Lewis model is relevant from many aspects but is still unable to explain the population movements from rural to urban areas that occur âdespite the existence of positive marginal products in agriculture and significant levels of urban unemploymentâ.1 In the Lewis model, the urban sector is assumed to be able to absorb all labor coming from rural areas, and therefore there should be no urban unemployment, which is clearly unrealistic. By introducing the concept of minimum wages in the urban sector, the Harris-Todaro model is able to explain how urban unemployment arises. Harris and Todaro state that the legally determined minimum wage in many countries is considerably higher than the wage that otherwise arises when the labor markets are unregulated. Firms in the industrial sector, therefore, cannot afford to absorb all ruralâurban migrants.
Attempts to empirically evaluate the neoclassical model involve statistical testing of whether wages and unemployment rates at the origin and destination areas influence migratory flows. Several studies support that both higher incomes and better employment possibilities create incentives to migrate (see e.g. Todaro, 1980; Greenwood, 1985; Pederzen et al., 2004). But, the early neoclassical models have been criticized for their simplifying and restrictive assumptions. For example, in the Harris-Todaro model it is assumed that all individuals are homogeneous and therefore have an equal chance of finding employment when they migrate. But because individuals are heterogeneous and individual characteri...