Problem: Suppose in Kenya, a minimum wage is instituted in the urban sector above the market clearing wage, whilst the rural traditional wage is market determined at a lower level than in the urban sector.
a. Discuss using The Harris-Todaro model below, the impact of this policy on the rural traditional wage, the rural labour force, and the urban sector unemployment. Can we expect the urban sector wage to equal to the traditional sector wage after the markets equilibrate through migration? Explain using the graph below.
b. What effects might the relocation costs and the introduction of factories in rural areas have on the equilibrium discussed in part (a)?
In this model, the x axis represents total labour supply (how many works in rural (OA) and how many works in urban (OM), the 'A curve' represents the demand for Rural labour , the 'M curve' represents the demand for Urban Labour and At equilibrium (E), the wages in the two sectors are equal (WM* = WA*)