Pakistan Institute of Development Economics

JEL Classification : J3
The Harris-Todaro Hypothesis
Publication Year : 2007
Author: M. Ali Khan

The Harris-Todaro hypothesis replaces the equality of wages by the equality of ‘expected’ wages as the basic equilibrium condition in a segmented but homogeneous labour market, and in so doing it generates an equilibrium level of urban unemployment when a mechanism for the determination of urban wages is specified. This article reviews work in which the Harris-Todaro hypothesis is embedded in canonical models of trade theory in order to investigate a variety of issues in development economics. These include the desirability (or the lack thereof) of foreign investment, the complications of an informal sector, and the presence of clearly identifiable ethnic groups.