URBAN PRODUCTIVITY, URBAN UNEMPLOYMENT, AND LABOR-MARKET POLICIES

Some important effects of government policies on urban labor productiv ity are absent from Harris and Todaro's popular two-region development model. Revising their model using efficiency wages allows for these e ffects and for endogenous urban wages, employment, and unemployment. I t also reverses many standard Harris-Todaro welfare and policy conclus ions. For example, an urban wage increase raises welfare and income in both the urban and rural regions, even though the wage already exceed s the urban market-clearing rate and exceeds the rural wage. Income an d welfare also rise with migration into the urban region, even though there are already unemployed workers there. (C) 1998 Elsevier Science B.V.