Abstract
It is commonly argued that a rise in ‘modern1 sector wage rates in poor countries will reduce employment as a result of factor substitution. However, it is shown that this need not apply, even assuming the existence of high elasticities of substitution, if there are segregated labour markets, as is common in poor countries. When all labour markets are considered, a rise in ‘modern’ sector wage rates may increase total employment opportunities through the shift in demand towards the more labour intensive low‐wage sector. The effects of a rise in ‘modern’ sector wage rates must, therefore, be analysed in terms of its effect on the distribution of employment opportunities and income throughout the whole economy and not just in one sector.
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