Heterogeneous Firms and Rural-urban Migration Heterogeneous Firms and Rural-urban Migration

We construct a general equilibrium model of urban unemployment with a continuum of heterogeneous urban firms producing differentiated products in a monopolistic competitive market. We show that an increase in urban institutionally fixed minimum wage reduces urban aggregate output and each urban firm will experience an output cut proportional to the change in aggregate output. However, such proportional output cuts are different for each urban firm and depends on its initial competitive position. We also indicate that raising minimum wage can reduce welfare. Moreover, we study the effects of rural technical progress and show that it increases each firm’s output proportionally to the increase in aggregate urban output and that such proportions are different across urban firms and depend on their initial competitive position. Most importantly, we introduce a notion of pattern of technical progress among the heterogeneous urban firms and show that this pattern plays a crucial role in determining the effects of urban technical progress in a developing economy. While both rural and urban technical progress can be immiserizing, immiserization takes place in urban case only if the pattern of progress is biased toward more productive urban firms. JEL: O14, O18