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The Todaro Paradox Revisited

  • Zenou, Yves

    ()

    (Stockholm University)

The Todaro Paradox states that policies aimed at reducing urban unemployment are bound to backfire: they will raise rather than reduce urban unemployment. The aim of this paper is to reexamine this paradox in the context of efficiency wage and search-matching models. For that, we study a policy that consists in decreasing the urban unemployment benefit. In an efficiency wage model, we find that there is no Todaro paradox while this is not always true in a search-matching model since a decrease in the urban unemployment benefit can increase both urban employment and unemployment.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1861.

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Length: 27 pages
Date of creation: Nov 2005
Date of revision:
Handle: RePEc:iza:izadps:dp1861
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  1. Blomqvist, A. G., 1978. "Urban job creation and unemployment in LDCs : Todaro vs. Harris and Todaro," Journal of Development Economics, Elsevier, vol. 5(1), pages 3-18, March.
  2. ZENOU, Yves & SMITH, Tony E., 1994. "Efficiency Wages, Involuntary Unemployment and Urban Spatial Structure," CORE Discussion Papers 1994076, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Yasuhiro Sato, 2004. "Migration, Frictional Unemployment, and Welfare-Improving Labor Policies," Journal of Regional Science, Wiley Blackwell, vol. 44(4), pages 773-793.
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  7. Brueckner, Jan K, 1990. "Analyzing Third World Urbanization: A Model with Empirical Evidence," Economic Development and Cultural Change, University of Chicago Press, vol. 38(3), pages 587-610, April.
  8. Petrongolo, Barbara & Pissarides, Christopher, 2000. "Looking Into The Black Box: A Survey Of The Matching Function," CEPR Discussion Papers 2409, C.E.P.R. Discussion Papers.
  9. Coulson, N Edward & Laing, Derek & Wang, Ping, 2001. "Spatial Mismatch in Search Equilibrium," Journal of Labor Economics, University of Chicago Press, vol. 19(4), pages 949-72, October.
  10. Mortensen, Dale T & Pissarides, Christopher, 1999. "New Developments in Models of Search in the Labour Market," CEPR Discussion Papers 2053, C.E.P.R. Discussion Papers.
  11. Fields, Gary S., 1989. "On-the-job search in a labor market model : Ex ante choices and ex post outcomes," Journal of Development Economics, Elsevier, vol. 30(1), pages 159-178, January.
  12. Arellano, Jose-Paulo, 1981. "Do more jobs in the modern sector increase urban unemployment?," Journal of Development Economics, Elsevier, vol. 8(2), pages 241-247, April.
  13. Zarembka, Paul, 1970. "Labor Migration and Urban Unemployment: Comment," American Economic Review, American Economic Association, vol. 60(1), pages 184-86, March.
  14. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-93, March.
  15. Brueckner, Jan K. & Zenou, Yves, 1999. "Harris-Todaro models with a land market," Regional Science and Urban Economics, Elsevier, vol. 29(3), pages 317-339, May.
  16. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  17. Harris, John R & Todaro, Michael P, 1970. "Migration, Unemployment & Development: A Two-Sector Analysis," American Economic Review, American Economic Association, vol. 60(1), pages 126-42, March.
  18. Fields, Gary S., 1975. "Rural-urban migration, urban unemployment and underemployment, and job-search activity in LDCs," Journal of Development Economics, Elsevier, vol. 2(2), pages 165-187, June.
  19. Mohtadi, Hamid, 1989. "Migration and job search in a dualistic economy : A Todaro-Stigler synthesis," Economics Letters, Elsevier, vol. 29(4), pages 373-378.
  20. Jan K. Brueckner & Hyun-A Kim, 2001. "Land Markets in the Harris-Todaro Model: A New Factor Equilibrating Rural-Urban Migration," Journal of Regional Science, Wiley Blackwell, vol. 41(3), pages 507-520.
  21. Moene, Karl Ove, 1988. "A reformulation of the Harris-Todaro mechanism with endogenous wages," Economics Letters, Elsevier, vol. 27(4), pages 387-390.
  22. Banerjee, Biswajit, 1984. "Information flow, expectations and job search : Rural-to-urban migration process in India," Journal of Development Economics, Elsevier, vol. 15(1-3), pages 239-257.
  23. William T. Dickens & Lawrence F. Katz, 1986. "Interindustry Wage Differences and Industry Characteristics," NBER Working Papers 2014, National Bureau of Economic Research, Inc.
  24. Stiglitz, Joseph E, 1974. "Alternative Theories of Wage Determination and Unemployment in LDC'S: The Labor Turnover Model," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 194-227, May.
  25. Stiglitz, Joseph E, 1976. "The Efficiency Wage Hypothesis, Surplus Labour, and the Distribution of Income in L.D.C.s," Oxford Economic Papers, Oxford University Press, vol. 28(2), pages 185-207, July.
  26. Stark, Oded & Ranjan Gupta, Manash & Levhari, David, 1991. "Equilibrium urban unemployment in developing countries : Is migration the culprit?," Economics Letters, Elsevier, vol. 37(4), pages 477-482, December.
  27. Raimondos, Pascalis, 1993. "On the Todaro paradox," Economics Letters, Elsevier, vol. 42(2-3), pages 261-267.
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