Urban productivity, urban unemployment, and labor market policies.

Some important effects of government policies on urban labor productivity are absent from Harris and Todaro’s popular two-region development model. Revising their model using efficiency wages allows for these effects and for endogenous urban wages, employment, and unemployment. It also reverses many standard Harris–Todaro welfare and policy conclusions. For example, an urban wage increase raises welfare and income in both the urban and rural regions, even though the wage already exceeds the urban market-clearing rate and exceeds the rural wage. Income and welfare also rise with migration into the urban region, even though there are already unemployed workers there.