Alternative Theories of Wage Determination and Unemployment in LDC's: The Labor Turnover Model

Abstract

The problem of unemployment and underemployment in LDC's has long been a central concern of development economics. More recently, the discussion has focused on unemployment and underemployment in the urban sector. The common diagnosis of the source of urban unemployment, particularly in economies such as those in East Africa where there does not seem to be surplus in the agricultural sector, is that there is a large wage differential between the urban and rural sectors that encourages. migration into the urban sector. And, finally, there seems to be a consensus that the remedies for this -if it is impossible in fact to lower the urban wage to the level in the rural sector -are (a) a wage subsidy to encourage private employers to hire more laborers (use more laborintensive techniques) and (b) the use of a shadow price of labor for projects in the government sector, which is lower than the market wage in the urban sector. Although economists have advised governments all over the world to undertake these measures, they have based these policy prescriptions on partial equilibrium models that have not traced out the full implications of these policies; in particular, they have failed to take into account (a) the determination of the rate or level of unemployment in the economy and (b) the determination of wages in the urban sector. The possible implications of these failures may easily be seen. If the number of people in the urban sector is fixed,