Labor migration and increasing return on investment in Hunan

For decades, rural-urban migration has been through the lens of the Todaro model. But contrary to Todaro's prediction, an increasing stream of city-bound migrants attends an expected urban income lower than expected rural income. An alternative theoretical framework initiated by Appelbaum and Katz provides a better means to reconcile this apparent empirical paradox.; This study modifies Katz and Stark's model to explain why farmers in Hunan engage in outmigration in the face of lower expected urban earnings. Both of the prerequisites for migration to occur even though it is an actuarially unfair choice are shown to be satisfied in Hunan: (1) imperfect rural credit markets and (2) increasing rate of return on investment. The increasing return on investment in Hunan manifests itself in discrete jumps associated with the two distinct ways household savings are disposed--being deposited in the bank on the one hand and being used to buy entry into rural non-farm enterprises on the other. The study concludes that outmigration is still attractive to farmers in Hunan because the urban employment, though limited, delivers remittances from which a large pool of savings can be generated to buy entry into rural non-farm enterprises.; The theoretical inference is supported by the empirical examination which finds: (1) the rate of return on investment in rural industry is substantially higher than the interest rate for bank savings; (2) home income is not large enough to generate a pool of savings to start a business or to "buy" entry into a rural industry job; (3) urban income is large enough to generate a pool of savings to start a business or to "buy" entry into a rural industry job; (4) remittances are channelled into developing rural industry; and (5) saving from agricultural earnings are usually deposited in the bank.