Unemployment and Development

59 Pages Posted: 22 Oct 2018 Last revised: 12 Apr 2023

See all articles by Ying Feng

Ying Feng

National University of Singapore

David Lagakos

University of California, San Diego (UCSD) - Department of Economics; National Bureau of Economic Research (NBER)

James E. Rauch

University of California, San Diego (UCSD) - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: October 2018

Abstract

This paper draws on household survey data from countries of all income levels to measure how average unemployment rates vary with income per capita. We document that unemployment is increasing with GDP per capita. Furthermore, we show that this fact is accounted for almost entirely by low-educated workers, whose unemployment rates are strongly increasing in GDP per capita, rather than by high-educated workers, whose unemployment rates are not correlated with income. To interpret these facts, we build a model with workers of heterogeneous ability and two sectors: a traditional sector, in which self-employed workers produce output without reward for ability; and a modern sector, in which firms hire in frictional labor markets, and output increases with ability. Countries differ exogenously in the productivity level of the modern sector. The model predicts that as productivity rises, the traditional sector shrinks, as progressively less-able workers enter the modern sector, leading to a rise in overall unemployment and in the ratio of low-educated to high-educated unemployment rates. Quantitatively, the model accounts for around one third of the cross-country patterns we document.

Suggested Citation

Feng, Ying and Lagakos, David and Rauch, James E., Unemployment and Development (October 2018). NBER Working Paper No. w25171, Available at SSRN: https://ssrn.com/abstract=3270721

Ying Feng (Contact Author)

National University of Singapore ( email )

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David Lagakos

University of California, San Diego (UCSD) - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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James E. Rauch

University of California, San Diego (UCSD) - Department of Economics ( email )

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United States
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619-534-7040 (Fax)

National Bureau of Economic Research (NBER)

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United States

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