Imperfect Labor Mobility and Unemployment in LDCs

Abstract

In the two-sector, two-factor general equilibrium literature, generic unemployment has been introduced under the assumption of decreasing returns to scale in production (see e.g., Batra and Seth [1, 295-306], and Yu [10, 399-404]), whereas sector-specific unemployment has been introduced under the assumption of sticky wages (e.g., Harris and Todaro [6, 136-42], Corden and Findlay [5, 59-78], Khan [8, 527-47], and Marjit [9, 527-47]). In either case, however, labor is assumed to be perfectly mobile between two sectors. The latter assumption has recently been a major topic of further research in the two-sector general equilibrium literature. Specifically, it is argued that in a perfectly competitive environment, despite significant intersectoral wage differential caused by various parametric policy changes, enough labor do not move from the low wage to the high wage sector to equate the wage rates in two sectors even in the long run. Locational preferences, attachment to existing arrangements, and also the high costs of relocation are usually cited as the possible reasons behind the sluggish movement of labor from one sector to the other. Casas [2, 747-61], in a pioneering article, has modeled this phenomenon of general immobility of labor in a standard two-sector model of production. In his model, however, Casas assumes full employment of labor. The purpose of the present paper is to extend the Casas model further by incorporating unemployment caused by sector-specific sticky wages of the Harris-Todaro variety, and examine the effects of growth and trade policies on output, employment, and welfare of a small country. We will highlight the role of the elasticity of labor mobility parameter in our main results, and demonstrate that there exists a critical (minimum) value of the elasticity of labor mobility parameter that will ensure the validity of the conventional results even in the world of imperfect labor mobility. Several interesting results emerge from our analysis. In particular, we have shown that capital accumulation causes urban unemployment to rise and the optimal tariff for a small open economy is positive. The paper is organized as follows. In section II, we lay out the basic model of labor immobility and unemployment; and in section III we derive the basic comparative static results. In