In a brilliant and pioneering paper, John Harris and Michael Todaro introduced a model with two sectors, manufacturing (urban) and agriculture (rural), a (sticky) minimum wage in manufacturing and consequent unemployment. They also introduced a labor allocation mechanism under which, instead of the usual equalization of actual wages, the actual rural wage was equated with the expected urban wage; the latter was defined as the (sticky) minimum wage weighted by the rate of employment, so that, unlike in the standard rigid-wage models of trade theory, the unemployment resulting from the minimum wage is to be construed as specific to the urban sector. In the context of this model, Harris and Todaro analyze two policies: a wage subsidy policy in the manufacturing sector and a labor-mobility restriction policy. They argue that the former, as well as the latter, can be used to improve welfare, defined as a function of available goods in the usual way; but that, to attain the optimal first best solution, both policies are necessary.

While freer trade, or “openness” in trade, is now widely regarded as economically benign, in the sense that it increases the size of the pie, the recent anti-globalization critics have suggested that it is socially malign on several dimensions, among them the question of poverty. Their contention is that trade accentuates not ameliorates, deepens not diminishes, poverty in both the rich and the poor countries. The theoretical and empirical analysis of the impact of freer trade on poverty in the rich and in the poor countries is not symmetric, of course. We focus here therefore only on the latter. But in doing so, we distinguish between two different strands of argumentation: static and dynamic. In the former case, we treat the resources and technology to be given and then ask: how does freer trade affect poverty in this static framework. In the latter case, we admit growth effects that impact on the state of poverty over time.