Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 652: The Todaro Paradox Revisited

Yves Zenou ()
Additional contact information
Yves Zenou: The Research Institute of Industrial Economics, Postal: P.O. Box 55665, 102 15 Stockholm, Sweden

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 reexamine 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-codes: D83; J41; J64; O15

25 pages, November 9, 2005

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