IZA DP No. 1861: The Todaro Paradox Revisited
revised version published as 'Rural-Urban Migration and Unemployment: Theory and Policy Implications' in: Journal of Regional Science, 2011, 51 (1), 65 - 82
The Todaro Paradox states that policies aimed at reducing urban unemployment are bound to backfire: they will raise rather than reduce urban unemployment. The aim of this paper is to reexamine this paradox in the context of efficiency wage and search-matching models. For that, we study a policy that consists in decreasing the urban unemployment benefit. In an efficiency wage model, we find that there is no Todaro paradox while this is not always true in a search-matching model since a decrease in the urban unemployment benefit can increase both urban employment and unemployment.