Labor markets and internal migration in developing countries

Low and middle income countries frequently have a substantial informal sector within large cities. In the tradition of the Harris-Todaro classical model of rural-urban migration I develop a two-sector general equilibrium model with matching frictions in the urban labor market which allows for migration between sectors. Having the wage as the driving force of migration I show that without further assumptions the Todaro paradox - a productivity increase in the urban sector that can cause an increase in unemployment - can be attained. The model also answers the problem - previously unexplained by Harris and Todaro - of why unemployed workers in the urban sector do not migrate back to the agricultural sector. Furthermore, I demonstrate that, in contrast to the existing literature, an efficient equilibrium will naturally result without government intervention.