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.