The Coexistence of High Unemployment and Good Economic Performance in Large Open Developing Countries

The Harris-Todaro labor reallocation mechanism is embedded into a North-South trade model and a theoretical model is provided to explain the coexistence of high unemployment and good economic performance as large developing countries become more open to trade. The relative improvement in the total factor productivity of the Southern manufacturing sector is conjectured to give rise to this phenomenon. Although it induces an increase in the demand for labor in the Southern urban areas, this increase in demand is outweighed by an increase in supply brought by the reallocation of labor from rural to urban areas. The final result is higher unemployment. The model is supported by some empirical evidence.