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Title: Rural-Urban Migration and Unemployment: Theory and Policy Implications

Author(s): Yves Zenou

Publication Date: November 2010

Keyword(s): Efficiency wages, policy, rural-urban migration and Todaro paradox

Programme Area(s): Labour Economics

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.

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Bibliographic Reference

Zenou, Y. 2010. 'Rural-Urban Migration and Unemployment: Theory and Policy Implications'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8123