Unemployment and Development

60 Pages Posted: 21 Feb 2019

See all articles by Ying Feng

Ying Feng

University of California, San Diego (UCSD) - Department of Economics

David Lagakos

University of California, San Diego (UCSD) - Department of Economics; National Bureau of Economic Research (NBER)

James E. Rauch

University of California at San Diego; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: 2018

Abstract

This paper draws on household survey data from countries of all income levels to measure how average unemployment rates vary with income per capita. We document that unemployment is increasing with GDP per capita. Furthermore, we show that this fact is accounted for almost entirely by low-educated workers, whose unemployment rates are strongly increasing in GDP per capita, rather than by high-educated workers, whose unemployment rates are not correlated with income. To interpret these facts, we build a model with workers of heterogeneous ability and two sectors: a traditional sector, in which self-employed workers produce output without reward for ability; and a modern sector, in which firms hire in frictional labor markets, and output increases with ability. Countries differ exogenously in the productivity level of the modern sector. The model predicts that as productivity rises, the traditional sector shrinks, as progressively less-able workers enter the modern sector, leading to a rise in overall unemployment and in the ratio of low-educated to high-educated unemployment rates. Quantitatively, the model accounts for around one third of the cross-country patterns we document.

Keywords: unemployment, development

JEL Classification: E240

Suggested Citation

Feng, Ying and Lagakos, David and Rauch, James E., Unemployment and Development (2018). CESifo Working Paper No. 7311, Available at SSRN: https://ssrn.com/abstract=3338640 or http://dx.doi.org/10.2139/ssrn.3338640

Ying Feng (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States

David Lagakos

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

James E. Rauch

University of California at San Diego ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
619-534-2405 (Phone)
619-534-7040 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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