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

43 Pages Posted: 20 Jun 2016

See all articles by Arnab Basu

Arnab Basu

Cornell University

Nancy H. Chau

Cornell University - School of Applied Economics and Management; IZA Institute of Labor Economics

Gary Fields

Cornell University - School of Industrial and Labor Relations; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Ravi Kanbur

Cornell University; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: May 2016

Abstract

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 multi‐sector 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. Non‐monotonicity 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.

Keywords: Multisector Labor Market, Overlapping Generations, Poverty Reduction, Harris‐Todaro Model

JEL Classification: O17, I32

Suggested Citation

Basu, Arnab and Chau, Nancy H. and Fields, Gary S. and Kanbur, Ravi, Job Creation in a Multi-Sector Labor Market Model for Developing Economies (May 2016). Centro Studi Luca d'Agliano Development Studies Working Paper No. 395. Available at SSRN: https://ssrn.com/abstract=2798184 or http://dx.doi.org/10.2139/ssrn.2798184

Arnab Basu

Cornell University ( email )

Ithaca, NY 14853
United States

Nancy H. Chau (Contact Author)

Cornell University - School of Applied Economics and Management ( email )

Ithaca, NY 14853
United States
607-255-4463 (Phone)
607-255-9984 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Gary S. Fields

Cornell University - School of Industrial and Labor Relations ( email )

250 Ives Hall
Ithaca, NY 14853-3901
United States
607-255-4561 (Phone)
607-255-4496 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Ravi Kanbur

Cornell University ( email )

301-J Warren Hall
Ithaca, NY 14853
United States
607-255-7966 (Phone)
607-255-9984 (Fax)

HOME PAGE: http://www.kanbur.dyson.cornell.edu

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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