Are the following statements true, false or uncertain? Provide a brief explanati

Question

Are the following statements true, false or uncertain? Provide a brief explanation to back up your answer. In the dual economy model, the phase of disguised unemployment must be associated with a horizontal supply curve of industrial labor. A low or moderate inequality of land holdings should slow down the pace of rural-urban migration. Migration restrictions alone lead to too many people in the informal sector. In the Harris-Todaro model, an increase in the formal sector labor demand at a fixed wage rate must lower the percentage of people in the informal sector, as a fraction of the urban labor force. If governments cannot tax agriculture, the supply curve of labor to industry in the Lewis model is always upward sloping.

Explanation / Answer

a)

False

In case of disguised unemployment, marginal productivity of labor is positive, which decreases average surplus as workers move to the city. There is less output available for each worker, which means workers will only move if the wage increases in terms of industrial goods, leading to upward sloping supply curve.

b)

Uncertain

This is true when there is no market for labor. When land holdings are distributed unequally, then a situation would arise where transferring labor from large to small farms will increase output. But since there is no labor market, this cannot happen so the workers from the small plots migrate. As a result, migration would be faster than if all plots were the same.

c)

False

Migration restrictions allow workers into the urban sector only if they have an official formal job. As a result, employment in the informal sector shrinks to zero.

d)

True

If labor demand increases and this gap is filled by informal workers, the expected wage in the urban sector goes up. This cannot be market equilibrium, so workers move from the agricultural sector, which raises the agricultural wage. This means that for workers to be willing to migrate from agriculture, the expected urban wage must be higher than at the original equilibrium. Since wages in the urban sector are fixed, this can only be true if a higher portion of the urban population works in the formal sector.

e)

True

A decrease in employment increases output burden per worker. If this increase is not taxed, then labor supply should be upward sloping.

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