Financial liberalization,urban unemployment and welfare: some implications of the artificial low interest rate and the high wage rate policies in LDCs

This paper investigates how the low interest rate policy in the commercial banking sector affects the urban unemployment in a small open Harris-Todaro model. The rate of urban unemployment unambiguously declines. The volume of it shrinks if the rural-to-urban employment rate and the urban unemployment rate are sufficiently high relative to the wage elasticity of agricultural labor demand. The national income increases if agriculture is dominant in the domestic production. In such an economy, the “financial liberalization” advocated by the Mckinnon-Shaw school may aggravate the welfare even if it eliminates the “financial repression”.     

Sector Specific Wage Rigidity and Factor Accumulation*

Economic expansion resulting from factor accumulation is introduced in the mobile capital and small open economy version of the Harris-Todaro model. Among other things, it is shown that economy expansion leads to normal effects on urban unemployment if land is introduced as a scarce input in the agricultural sector. However, capital accumulation and labour growth have indeterminate effects on the absolute level of urban unemployment.     

A general equilibrium analysis of production subsidy in a Harris-Todaro developing economy: an application to India

Since 1950s India has advocated import substituting industrialization policies to promote its manufacturing sector. The end result was creation of a dual economy: highly favored manufacturing sector with high and rigid wages and neglected agricultural sector with low wages and poverty. Because of the higher wages in the manufacturing sector, the rural laborers migrate to the urban sector, a typical characteristic of the Harris-Todaro developing economy. Realizing this crisis, the Indian government recently initiated policies to boost agricultural production to curb the labor migration and improve the welfare of the rural population. In this study, we develop a computable general equilibrium (CGE) model for India by incorporating Harris-Todaro economic characteristics of unemployment, labor migration, farm dependant population, and labor-intensive agriculture. We use the model to analyze the effects of agricultural production subsidy policies on employment, factor price, output price, output levels, and welfare in agricultural and manufacturing sectors. Our findings show that agricultural production subsidy increases agricultural production, reduces unemployment, raises the wage rate in the agriculture sector, augments the consumption among the rural and urban households, and increases the rental rate for capital in agricultural sector.     

Migration,unemployment and development: a dynamic two-sector analysis

"A time-minimizing problem of attaining a full employment state is solved in a dual-economy model with [the] Harris-Todaro migration mechanism and with a positive level of urban unemployment in the starting period. It appears that the optimum solution lies in the specialization of investment in the urban sector at least in the initial stage of development if the per-capita stock in the urban sector is very small in the starting period."     

Rural-urban migration,informal sector and development policies: a theoretical analysis

"A theoretical model of rural-urban migration has been developed with special reference to the informal sector. The wage rate and employment in the informal sector are determined endogenously. The paper shows the simultaneous existence of open unemployment and informal sector in the urban area in migration equilibrium. The effects of alternative subsidy policies on unemployment and welfare of the workers are studied." The model is intended primarily for use in analyzing trends and policies in developing countries.     

Rural–Urban Migration, the Informal Sector, Urban Unemployment, and Development Policies: A Theoretical Analysis

This paper develops a theoretical model like Gupta's to show the simultaneous existence of the urban informal sector and open unemployment in the urban sector in a Harris–Todaro type of model of rural–urbanmigration. A wage or a price subsidy policy to the rural sector, or a demand management policy like an export promotional scheme in the manufacturing sector, reduces the urban unemployment level, and provides a theoretical basis for the introduction of export promotional measures like the formation of duty-free Export Processing Zones (EPZs) to solve the urban unemployment problem. The policy conclusions of the present paper are different from those found in Gupta's 1993 model.     

Job-search and foreign capital inflow — A three-sector general equilibrium analysis

The purpose of this paper is to extend the Fields' (1989) multi-sector job-search model in a three-sector general equilibrium framework by introducing international trade and capital as input. The three sectors are the rural sector, the urban informal sector and the urban formal sector. The rural sector and the urban informal sector use one type of mobile capital while the urban formal sector uses a sector-specific capital. We find that the effects of an inflow of foreign capital in the urban formal sector on unemployment and social welfare crucially hinge on the relative factor intensities of the rural sector and the urban informal sector. We show that there is a possibility of trade-off between the government's twin objectives of improvement in social welfare and mitigation of the urban unemployment problem. These results are extremely crucial from the view point of policymaking in an unemployment plagued, low-income developing economy.     

Endogenous labour market imperfection,foreign direct investment and external terms-of-trade shocks in a developing economy

This theoretical paper shows that developing countries possess an inherent shock-absorbing mechanism that stems from their peculiar institutional characteristics and can lessen the gravity of detrimental welfare consequence of international terms-of-trade disturbances in terms of a static two-sector, full-employment general equilibrium model with endogenous labour market distortion. The supply of foreign capital in the economy is a positive function of the return to capital. Subsequently, it has been verbally explained why the main result of the full-employment model would remain valid even in a two-sector specific-factor Harris-Todaro type model with urban unemployment. The analysis leads to a couple of important policies that should be adhered to preserve this in-built system. Finally, it offers three important statistically testable hypotheses which would pave the way for future empirical research in this area.     

Subsidizing healthcare in the presence of market distortions

The paper develops a three-sector full-employment general equilibrium model for a small open developing economy with exogenous labour market imperfection and a non-traded sector providing healthcare services, the consumption of which generates positive externalities. Our main objective is to show that the optimal consumption subsidy to healthcare, if solely judged from the standpoint of economic growth, is strictly positive (zero) when the production technology of the healthcare sector is of the variable (fixed) coefficient type. However, in the variable coefficient case, the optimal per capita expenditure on healthcare crucially hinges on the degree of labour market imperfection and the quality of services provided by the healthcare sector. The latter result can possibly be considered as a theoretical justification why the magnitude of per capita public spending on healthcare services is significantly lower in the developing countries compared to that in the developed nations. Besides, using the Sen's (1974) index of social welfare that takes into consideration both the growth and income inequality aspects, we have proved that the optimal health subsidy is positive irrespective of the nature of production technology of the healthcare sector. Furthermore, most of these results are found to be valid even in the presence of Harris-Todaro type unemployment. Finally, the results lead to a few important policy implications in the context of the developing countries.     

Development policies in the presence of an informal sector: A note

We consider the model of Grinols (1991) which introduces an urban informal sector with a specific capital in an otherwise mobile capital Harris-Todaro model. In this paper, we analyze the welfare effect of various policies in the model of Grinols and compare the results with those obtained from the model of Corden and Findlay (1975).     

International Trade,Migration and Unemployment – The Role of Informal Sector

This paper provides an elaborate general equilibrium framework by including informal economic activities in a model of trade, migration and unemployment. Existence of informal activities is critical in generating positive employment effects of liberal trade policies. Following a tariff cut informal wage increases and rate of unemployment goes down under reasonable conditions. Next we generalize the benchmark model to capture the phenomenon of sequential migration: from agriculture to urban informal sector, and then to urban formal sector. Positive employment effect of reformatory trade policy partly owes to the fact that the presence of informal sector directly reduces the cost of migration and, hence, further induces the process of outmigration from agricultural sector. The paper also extends the benchmark model to include both informal intermediate and final good.     

Skilled-unskilled wage inequality and unemployment: A general equilibrium analysis

The paper develops a static three sector competitive general equilibrium model of a small open economy in which skilled labor is mobile between a traded good sector and the non-traded good sector and unskilled labor is specific to another traded good sector. Capital is perfectly mobile among all these three sectors. We introduce involuntary unemployment equilibrium in both the labor markets and explain unemployment using efficiency wage hypothesis. We examine the effects of change in different factor endowments and prices of traded goods on the unemployment rates and on the skilled-unskilled relative wage. Also, we introduce Gini-Coefficient of wage income distribution as a measure of wage income inequality; and show that a comparative static effect may force the skilled-unskilled relative wage and the Gini-Coefficient of wage income distribution to move in opposite directions in the presence of unemployment.     

Labor market dynamics in urban China and the role of the state sector

This paper studies the effect of state-owned enterprises (SOEs) on the dynamics of the Chinese urban labor market. Using longitudinally matched monthly panel data, we document very low labor force dynamics in the state sector, which leads to a high long-term unemployment rate. We develop and estimate an equilibrium search and matching model with three differences between the state and non-state sectors: labor productivity, labor adjustment cost, and workers’ bargaining power. Counterfactual analysis shows that, among the three channels, reducing the bargaining power of state sector workers is most effective in reducing unemployment duration and unemployment rate.     

Duty-free zone,unemployment, and welfare a note

We consider a small open Harris-Todaro economy with the urban sector consisting of a duty-free zone and a non-duty free zone. There is no capital mobility between the urban sector and the rural sector, but capital is perfectly shiftable between the two sub-sectors of the urban sector. A policy of expanding the duty-free zone through the reduction in import-duty on intermediate goods in that sector ultimately lowers the level of output of that sector. This policy also raises the level of unemployment, lowers national income (social welfare), and increases economic inequality. If, however, the tariff on the final product is reduced in that sector, we get the opposite result.     

The Optimal Environmental Tax and Urban Unemployment in an Open Economy

This paper investigates how a rise in the urban pollution tax rate may affect urban unemployment and welfare in a small open Harris–Todaro (HT) model with intersectoral capital mobility. First, by formulating urban pollution as a dirty input in manufacturing, we find that an increase in the urban pollution tax rate can increase the level of urban unemployment even with intersectoral capital mobility. That is, the optimistic finding by Rapanos (2007 ) that environmental protection policy reduces urban unemployment in the long run does not always hold. Second, the (sub)optimal pollution tax rate under urban unemployment is higher than the Pigouvian tax rate (the marginal damage of pollution). This result opposes those of Beladi and Chao (2006 ) for a closed HT economy and that of Tsakiris et al. (2008 ) for an open HT economy with sector‐specific capital.     

INTERNATIONAL TRADE AND REGIONAL DEVELOPMENT

The paper considers a two-region model of trade based on the authors'earlier (HS) model, in which two nontraded goods, one urban and one rural, were introduced into the Harris-Todaro model. The HS framework captures the duality of the labour market, and it is argued that the HS model is suited to the purpose of regional analysis where the urban and rural agents may be in conflict as their welfare (income) may not respond in an identical manner to exogenous shocks and policy changes. The paper examines the implications of a change in capital and the terms of trade on outputs and regional incomes. It is established that in response to a terms-of-trade shock the prices of urban and rural nontraded goods could move in opposite directions, so structural change could also be in opposite directions. The same could also be true of welfare in the two regions.     

North–South Trade Liberalization and Economic Welfare

We consider a general equilibrium model of a developing economy (the South) that opens to trade with a developed economy (the North). The southern economy is characterized by open urban unemployment and rural–urban migration, a competitive agricultural sector and a monopolistically competitive manufacturing sector. Hence, there is potential for both inter‐ and intra‐industry trade to arise on liberalization, in addition to distortionary effects of duality. Southern comparative advantage in agriculture may arise from the labor market distortion and the basis for intra‐industry trade is love for variety. We characterize various configurations of the trade pattern, and the resulting welfare consequences of opening to trade in this context. We illustrate a new mechanism under which in some circumstances it may be possible for trade liberalization to lower economic welfare in the South.     

Renewable energy and unemployment: A general equilibrium analysis

Using a three-sector general equilibrium model, the impact of renewable electricity support policies on the rate of equilibrium unemployment is analyzed. In a simple two-factor version of the model, the paper shows analytically that renewable electricity support policies lead to an increase in the rate of unemployment. A numerical analysis is conducted with an expanded three-factor model. In this version, most scenarios analyzed also lead to an increase in equilibrium unemployment. However, the paper identifies conditions in which renewable energy support policies can decrease the rate of equilibrium unemployment. In particular, when the elasticity of substitution between capital and labor is low, when capital is not mobile internationally, and when the labor intensity of renewable generation is high relative to conventional generation, renewable electricity support policies may reduce the rate of equilibrium unemployment. The model is parameterized to represent the US economy, such that the magnitudes of quantities can be observed. Although there is some variation in the results depending on parameters, the findings suggest in general that reducing electricity sector emissions by 10% through renewable electricity support policies is likely to increase the equilibrium unemployment rate by about 0.1–0.3 percentage points.     

Renewable energy and unemployment: A general equilibrium analysis

Using a three-sector general equilibrium model, the impact of renewable electricity support policies on the rate of equilibrium unemployment is analyzed. In a simple two-factor version of the model, the paper shows analytically that renewable electricity support policies lead to an increase in the rate of unemployment. A numerical analysis is conducted with an expanded three-factor model. In this version, most scenarios analyzed also lead to an increase in equilibrium unemployment. However, the paper identifies conditions in which renewable energy support policies can decrease the rate of equilibrium unemployment. In particular, when the elasticity of substitution between capital and labor is low, when capital is not mobile internationally, and when the labor intensity of renewable generation is high relative to conventional generation, renewable electricity support policies may reduce the rate of equilibrium unemployment. The model is parameterized to represent the US economy, such that the magnitudes of quantities can be observed. Although there is some variation in the results depending on parameters, the findings suggest in general that reducing electricity sector emissions by 10% through renewable electricity support policies is likely to increase the equilibrium unemployment rate by about 0.1–0.3 percentage points.     

Urban unemployment, informal sector and development policies

We analyze the effects of wage subsidy policies on unemployment and welfare in the model that is characterized by the existence of both open unemployment and the informal sector that producesfinal goods. Our main findings are as follows. Wage subsidies to the agricultural and informal sectors increase welfare and decrease urban unemployment. The effects of a wage subsidy to manufacturing sector on welfare and unemployment are conditional. We identify some sufficient conditions for the definite results and interpret them.