LABOR MIGRATION AND WAGE DIFFERENTIALS IN A LESS DEVELOPED COUNTRY

Abstract

In this paper, we study the dynamics of unemployment, wage differentials and labor migration in a less developed country.
It is assumed that the firm of the urban sector has a dynamic monopsony power in a labor market where the higher wage offer is required for the firm to increase its employment flow. Typically the product market of this sector is supposed to be monopolistically competitive. The rural sector's product and labor market are assumed to be perfectly competitive.
It is concluded that a stationary state with unemployment and wage differential exists, and that generally the wage rate of the sector with dynamic monopsony power is higher than the other.
Comparative statics of the stationary state with respect to several parameters are examined.
The stationary state is stable if the elasticity of the urban sector's wage with respect to its employment ratio is not greater than one. Cyclical fluctuation around the stationary state is possible if the above elasticity is greater than one and if the sensitivity of labor turnover to wage (differential) in the rural sector is sufficiently large relative to that in the urban sector.