Migration and capital accumulation in a labour-surplus economy

Abstract

In this paper, we show that if capital and labour are complementary inputs and labour is in surplus[LS], economic development will reduce investment in the agricultural sector. We analyse the impact of factor substitutability and factor mobility on economic welfare as indicated by changes in output by the use of appropriate fiscal policies in LS economies. Next, we demonstrate how a LS economy results in a higher agricultural employment but it can also accumulate more capital in the rural sector under certain conditions given by the elasticity of substitution between inputs in a nested CES production function. Finally, we analyse the welfare economics of migration and show that the net benefits crucially depend on the response of urban unemployment rate to migration and the flexibility of real wages with respect to unemployment rate. Migration without capital mobility is welfare enhancing iff the absolute value of the semi-elasticity of the urban real wage with respect to industrial unemployment is large. Benefits from migration are then estimated by calibrating the model. In the long-run, we allow capital to adjust to the increases in migration to show the welfare-enhancing impact of migration.