Suppose that, for example in India, a minimum wage is instituted in the modern sector above the market clearing wage, while the rural traditional wage is market determined at a lower level than in the modern sector
(a) Describe the impact of this policy on the rural labor force, urban unemployment, and the rural wage.
(b) Will the modern sector wage be equal to the traditional sector wage after markets equilibrate through migration? Explain.
(c) What effect might moving costs have on the equilibrium you described in part (b)?
(d) What effect might the introduction of factories to rural areas have no the equilibrium you described in part (b)?
(a) Use of the Todaro model is called for here. The rural wage will not necessarily change despite a reduction in the rural labor force as a result of migration. The minimum wage in the urban sector will encourage migration until the expected urban wage is equal to the rural wage. Urban unemployment will rise, both from migration and the minimum wage.
(b) Expected, not actual, urban wages will equal rural wages after equilibration.
(c) With moving costs, there would be less migration.
(d) With rural development, there would be less migration if this increased the rural wage.
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