DP5402 The Todaro Paradox Revisited

Author(s):	Yves Zenou
Publication Date:	December 2005
Keyword(s):	efficiency wages, policy, rural-urban migration, search-matching
JEL(s):	D83, J41, J64, O15
Programme Areas:	Labour Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=5402

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.