The Todaro Paradox Revisited
27 Pages Posted: 22 Mar 2006
There are 2 versions of this paper
Date Written: December 2005
Abstract
The Todaro Paradox states that policies aimed at reducing urban unemployment are bound to backfire: they will raise rather than reduce urban unemployment. The aim of this paper is to re-examine this paradox in the context of efficiency wage and search-matching models. For that, we study a policy that consists in decreasing the urban unemployment benefit. In an efficiency wage model, we find that there is no Todaro paradox while this is not always true in a search-matching model since a decrease in the urban unemployment benefit can increase both urban employment and unemployment.
Keywords: Efficiency wages, search-matching, rural-urban migration, policy
JEL Classification: D83, J41, J64, O15
Suggested Citation: Suggested Citation
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