Efficiency wages, agglomeration, and a developing dual economy

Abstract

In analyzing the implications of rural-urban migration in the presence of efficiency wages and external economies of scale in the urban sector, this paper focuses on structural transformation of a developing dual economy. It compares the agglomeration effects in the urban sector under exogenous wage distortion with that under exogenous wage distortion and external economies of scale and also with the agglomeration under efficiency wages and external economies of scale. It shows that because of the employment enhancing effect of rural-urban migration with efficiency wages, the agglomeration economies are bigger with efficiency wages than with minimum wage distortion in the Harris-Todaro model. In exploiting the existing external economies of scale, this agglomeration reduces the sectoral wage differential, and changes the effects of factor accumulation and commodity price changes in a way that is different from the effects under migration with exogenous wage distortion. Copyright Springer-Verlag 2004O18, R23,

The efficiency wages perspective to wage rigidity in the open economy: a survey

“…Recent international economics literature attempts to explore the effects of wage rigidity in models of international trade. A number of studies (among others, Basu, 2004;Dinopoulos and Zhao, 2004;etc. ) have indeed pointed to the sensitivity of results when one departs from the assumptions of perfectly functioning labour and product markets in neoclassical trade models.…”

“…The resulting unemployment has been analysed by Corden and Findley (1975). In contrast, the efficiency wage model of Basu (2004) presents the the non-shirking constraint as being somewhat relaxed in response to migration. That is, the new equilibrium efficiency wage would be established at a lower level in the urban sector, allowing for more employment in this sector, and, together with the simultaneous increase in the wage of the rural region, for a decline in the inter-sector wage differential [16].…”