A condition for the reduction of urban unemployment in the Harris–Todaro model

Abstract

The purpose of this paper is to re-examine the Harris–Todaro model and Todaro paradox in developing countries. Specifically, we address the question of whether new job creation in urban areas always increases urban unemployment. The results of this analysis lead to the derivation of a necessary and sufficient condition under which urban unemployment does not increase when urban social infrastructure is improved and new employment is created. In short, this condition circumvents Todaro paradox. It involves the relationship between an institutionally and legally fixed urban minimum wage in the model and agricultural productivity. The condition itself is simple, but it offers significant suggestions for actual policy design.