Problem: Income and Migration
The following figure plots the relationship between the probabilities that a household in rural Indonesia has any members currently working abroad against the size of its landholdings at home, which are a very good proxy for household wealth. (The data are from a 2005 household survey.)
1. Now suppose that there is a large increase in the price of agricultural output the following year. What will happen to incomes among farmers in rural areas (assuming that all farmers are net producers)? How will that change in income affect migration choices among households with small landholdings? with large landholdings? and overall emigration rate from rural areas? Recall our discussion in class about the relationship between wealth/income and emigration which can explain the shape of the above curve.
2. Suppose that a skeptic does not believe that the commodity price shocks are a good proxy for changes in income. Describe a randomized experiment that would allow you to convince this skeptic that an increase in income has the effects that you claim it does in part (1). Suppose you have enough money to conduct your study in 400 villages.
3. Many policymakers in rich countries argue that poor countries should invest more in rural areas as a way to stimulate development and encourage less outmigration. How would assess this argument in light of your findings above?