Answer to Debraj Ray Chapter 10 Ex.

10
(a) False. In the phase of disguised unemployment, marginal productivity of labor in
agriculture is positive, which makes average surplus go down as workers migrate to the city.
There is less agricultural output available for each industrial worker, and this means workers
will only move if the wage goes up in terms of industrial goods.
(b) Uncertain. If there is no market for agricultural labor, then this could be true. Say
land holdings are distributed very unequally, so that some families work very large plots and
others very small plots. Assuming output depends on hours worked per unit of land area,
we could be in a situation such that: there is surplus labor in the small farms; transferring
one of them to a large plot would raise output in the large plot; because there is no labor
market, this cannot happen so the workers from the small plots migrate. Thus, migration
would be faster than if all plots were the same.
But inequality in landholding matters only if there is no mechanism by which to assign
labor efficiently across households.

(c) False. Migration restrictions, if they are enforced, allow people into the urban sector only
if they hold a formal job. Therefore, the informal sector shrinks to zero. On the other hand,
it results in inefficiently many people in the agricultural sector.

(d) True. Say labor demand increases. At the going formal wage, demand grows from Lf
to Lf . If this gap is filled by informal workers, we have that the expected wage in the urban
sector goes from

this wage has gone up. This cannot be an equilibrium, so workers migrate from the agricultural
sector, which raises the agricultural wage, wA. 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 share of the urban
population works in the formal sector.

(e) True. Even in the surplus labor phase, a worker leaving the agricultural sector increases
output per worker. If this increase is not taxed away, then labor supply should be upward
sloping.