Discussion paper

DP5402 The Todaro Paradox Revisited

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.


Zenou, Y (2005), ‘DP5402 The Todaro Paradox Revisited‘, CEPR Discussion Paper No. 5402. CEPR Press, Paris & London. https://cepr.org/publications/dp5402