Job creation in a multi-sector labour market model for developing economies

Abstract

This paper proposes an overlapping generations multi-sector model of the labour market for developing countries with four heterogeneities—heterogeneity within self-employment, heterogeneity in job experience, heterogeneity in pathways to self-employment, and heterogeneity in ability. We revisit an iconic paradox in a class of multi-sector labour market models in which the creation of high-wage employment exacerbates unemployment. Our richer setting allows for generational differences in the motivations for job search to be reflected in two distinct inverted-U-shaped relationships between unemployment and high-wage employment, one for youth and another for adults. In turn, the relationship between overall unemployment and high-wage employment is shown to be non-monotonic and multi-peaked. The model also sheds light on the implications of increasing high-wage employment on self-employed workers. Non-monotonicity in unemployment notwithstanding, increasing high-wage employment leads to an unambiguous increase in high-paying self-employment, and an unambiguous decrease in free-entry (low-wage) self-employment.