RURAL-URBAN WAGE DIFFERENTIALS, UNEMPLOYMENT, AND EFFICIENCY WAGES - AN OPEN-ECONOMY POLICY ANALYSIS

This paper analyzes the desirability of various policies designed to c ounteract the distorting nature of an equilibrium rural-urban wage dif ferential in a small, open, two-sector economy with urban unemployment . A dual labor market model with an efficiency wage in the urban secto r and urban unemployment is analyzed for the distributional and nation al output effects of an urban wage subsidy, an urban production subsid y, and a tariff on the urban good. While a small subsidy or tariff rai ses the value of national output, redistribution effects may limit the viability of intervention. However, subsidies can also be Pareto impr oving policies.