This paper incorporates informal sector and efficiency wage relation in a mobile capital H-T(1970) model. The simultaneous existence of the urban informal sector and the urban unemployment has been explained interms of such efficiency wage relation. Two different versions have been considered in this paper: first, urban informal sector has no global exposure and the urban formal wage rate is exogenous;second, urban informal sector produces internationally traded goods and the urban formal wage rate is endogenous. Our investigation shows that policy impacts of different trade and fiscal policies lead to different effects in the two different situations. Interestingly, urban subsidy policies reduces urban unemployment in both of the two cases, where as rural subsidy policy intensifies the problem of unemployment when urban informal sector is related to the international market and the urban formal wage rate is endogenous.Both of the two results are uncommon to the traditional H-T(1970) economy.These theoretical results may guide the policy makers to pursue the development policy in the small open economy.Development policy,mobile capital,unemployment
To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.