A Theory of Dual Labor Markets with Application to Industrial Policy, Discrimination, and Keynesian Unemployment

Abstract

This paper develops a model of dual labor markets based on employers' need to motivate workers. In order to elicit effort from their workers, employers may find it optimal to pay more than the going wage. This changes fundamentally the character of labor markets. The modelis applied to a wide range of labormarket phenomena. It provides a coherent framework for understanding the claims of industrial policy advocates. It also can provide the basis for a theory of occupational segregation and discrimination which will not be eroded by market forces. Finally, the model provides the basis for a theory of involuntary unemployment.