DP11386 Job Creation in a Multi-Sector Labor Market Model for Developing Economies

Author(s):	Arnab Basu, Nancy H Chau, Gary S Fields, Ravi Kanbur
Publication Date:	July 2016
Keyword(s):	Harris-Todaro Model, Multisector Labor Market, Overlapping Generations, Poverty Reduction
JEL(s):	I32, O17
Programme Areas:	Development Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=11386

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.