DP11386 Job Creation in a Multi-Sector Labor Market Model for Developing Economies
This paper proposes an overlapping generations multi-sector model of the labor market for
developing countries with three heterogeneities – heterogeneity within self-employment,
heterogeneity in ability, and heterogeneity in age. We revisit an iconic paradox in a class of multisector
labor market models in which the creation of high-wage employment exacerbates
unemployment. Our richer setting allows for generational differences in the motivations for job
search to be reflected in two distinct inverted U-shaped relationships between unemployment
and high-wage employment, one for youth and a different one for adults. In turn, the relationship
between overall unemployment and high-wage employment is shown to be non-monotonic and
multi-peaked. The model also sheds light on the implications of increasing high-wage
employment on self-employed workers, who make up most of the world’s poor. Nonmonotonicity
in unemployment notwithstanding, increasing high-wage employment has an
unambiguous positive impact on high-paying self-employment, and an unambiguous negative
impact on free-entry (low-wage) self-employment.
