Discussion Paper Details

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Title: The Todaro Paradox Revisited

Author(s): Yves Zenou

Publication Date: December 2005

Keyword(s): efficiency wages, policy, rural-urban migration and search-matching

Programme Area(s): Labour Economics

Abstract: 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 re-examine 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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Bibliographic Reference

Zenou, Y. 2005. 'The Todaro Paradox Revisited'. London, Centre for Economic Policy Research.