The Todaro Paradox Revisited

27 Pages Posted: 22 Mar 2006

See all articles by Yves Zenou

Yves Zenou

Stockholm University; Monash University - Department of Economics; Research Institute of Industrial Economics (IUI); IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR)

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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

Zenou, Yves and Zenou, Yves, The Todaro Paradox Revisited (December 2005). CEPR Discussion Paper No. 5402, Available at SSRN: https://ssrn.com/abstract=892868

Yves Zenou (Contact Author)

Stockholm University ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91
Sweden

Monash University - Department of Economics ( email )

Australia

Research Institute of Industrial Economics (IUI) ( email )

P.O. Box 5501
S-114 85 Stockholm
Sweden

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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