The Impact of a Customs Union with the European Union on Internal Migration in Turkey

The impact of the recent Customs Union (CU) agreement between Turkey and the European Union on internal migration is studied using an intra-industry trade Computable General Equilibrium (CGE) model with intersectoral capital mobility under two alternative specifications for the labor market: the traditional Harris-Todaro approach and the existence of a "wage curve" in the urban sector. Under both specifications, the numerical results show that the CU is welfare enhancing and causes a reduction of the urban-rural wage gap as suggested by theoretical studies. At the same time, it leads to rural-to-urban migration and raises the capital rent, results that are counter intuitive with respect to the dual economy literature. Furthermore, the rise in formal labor demand and the migration response to the CU have not resulted in an increase in urban unemployment (i.e. the "Todaro paradox"), but rather to a fall in the unemployment pool. The study also shows that the Bhagwati-Srinivasan proposal of maximizing welfare by uniformly subsidizing the entire labor market is impracticable, especially if the high wage union sector can negotiate employment conditions