Informationally Imperfect Labour Markets and the 'Dutch Disease' Problem

Haideh Salehi-Esfahani

Canadian Journal of Economics, 1988, vol. 21, issue 3, 617-24

Abstract: This paper analyzes the "Dutch Disease" as a phenomenon arising from incomplete information in the labor markets of resource-exporting countries. Imperfect observation of labor quality in the manufacturing (traded) sector leads to the pa yment of an efficiency wage in this sector which exceeds the opportun ity cost of low-quality workers. The presence of such an imperfection in a resource-exporting economy is an externality that calls for gov ernment intervention in the form of wage subsidy to the manufacturing sector. It is also shown that in the event of an oil boom, the optim al wage subsidy should be unambiguously increased to prevent perverse effects due to deindustrialization.

Date: 1988
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