RURAL–URBAN MIGRATION AND UNEMPLOYMENT: THEORY AND POLICY IMPLICATIONS

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Abstract:

ABSTRACT. 

We develop a regional model where, in the city, unemployment prevails because of too high (efficiency) wages, while, in the rural area, workers are paid at their marginal productivity. We characterize the steady-state equilibrium and show that it is unique. We then consider two policies: decreasing urban unemployment benefits and subsidizing urban employment. We find that decreasing the unemployment benefit in the city creates urban jobs and reduces rural–urban migration since new migrants have to spend some time unemployed before they can find a job in the city. On the other hand, raising employment subsidies increases urban employment but may also increase urban unemployment because it triggers more rural–urban migration. In this respect, the employment subsidy policy can backfire by raising rather than reducing urban unemployment.

Document Type: Research Article

DOI: http://dx.doi.org/10.1111/j.1467-9787.2010.00670.x

Affiliations: Stockholm University, Department of Economics, 106 91 Stockholm, Sweden, and Research Institute of Industrial Economics (IFN)., Email: yves.zenou@ne.su.se.

Publication date: February 1, 2011

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