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

45 Pages Posted: 18 Jul 2016

See all articles by Arnab Basu

Arnab Basu

Cornell University - Dyson School of Applied Economics and Management

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: July 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 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.

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

JEL Classification: I32, O17

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 (July 2016). CEPR Discussion Paper No. DP11386. Available at SSRN: https://ssrn.com/abstract=2811081

Arnab Basu (Contact Author)

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

Ithaca, NY
United States

Nancy H. Chau

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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