In the HarrisTodaro model, migration equilibrium is achieved when the actual wage in the underdeveloped, rural sector and the expected wage in the developed, urban sector are equal: the migration rate is positively related to the wage gap and the perceived probability of finding a job in the urban sector. In Discussion Paper No. 769, Subrata Ghatak and Research Fellow Paul Levine develop an encompassing model of which this is a special case. If potential migrants face borrowing constraints, reducing the wage gap may even increase the flow of migrants by providing the resources they need to move, so growth of credit institutions, availability of credit and income distribution may account for the migration rate. In the Stark portfolio investment model, whose welfare implications are similar, families spread risk and combine incomes to insure against uncertainty in specific labour markets.

With urban employment fixed, any migration raises urban unemployment so its socially optimal rate is zero. If real-wage flexibility allows migration to raise urban employment, however, migration may yield substantial benefits provided the urban sector has the higher marginal productivity of labour. Without such flexibility or subsidies, migration's short-run adjustment costs may reduce social welfare, so optimal schemes that do not satisfy the resulting budget constraint may require a `second-best' solution.

Ghatak and Levine propose combating excessive migration into the Community by adopting policies to reduce the wage gap, promote employment in potential migrants' home countries, and support stabilization of their political systems. To determine their welfare impact on the Community requires clear estimates of the size of potential migration flows, the marginal costs and benefits of admitting migrants, and assessments of migrants' educational and skill compositions and the impact of human capital on growth. Improved dissemination of information in home countries concerning availability of public goods in potential host countries may also affect migration decisions.

Migration Theory and Evidence: An Assessment
Subrata Ghatak and Paul Levine

Discussion Paper No. 769, February 1993 (HR)