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Unemployment and Development

Ying Feng, David Lagakos and James Rauch ()
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Ying Feng: University of California, San Diego

No 289, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: This paper draws on household survey data from countries of all income levels to measure how unemployment varies with income. We document that unemployment is increasing with GDP per capita. Furthermore, we show that this fact is accounted for almost entirely by low-educated workers, whose unemployment rates are strongly increasing in GDP per capita, rather than by high-educated workers, whose unemployment rates are not correlated with income. To interpret these facts, we build a model with workers of heterogeneous ability and two sectors: a traditional sector, in which self-employed workers produce output without reward for ability; and a modern sector, in which rms hire in frictional labor markets, and output increases with ability. Countries dier exogenously in the productivity level of the modern sector. The model predicts that as productivity rises, the traditional sector shrinks, as progressively less-able workers enter the modern sector, leading to a rise in overall unemployment and in the ratio of low-educated to high-educated unemployment rates. A calibrated version of the model accounts for some, but not all, of the cross-country patterns we document.

Date: 2018
New Economics Papers: this item is included in nep-dge
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