On-the-Job Search, Urban Informal Secotr and Development Policies - a General Equilibrium Analysis

The purpose of this paper is to examine the Fields (1989) proposition in a multi sector general equilibrium model with perfect and imperfect capital mobility. The effects of different fiscal policies on the equilibrium rate of urban unemployment are also examined here. The main findings are more efficient on-the-job search from the rural sector raises equilibrium urban unemployment rate whereas increased job search efficiency from the urban informal sector lowers this rate. Again urban subsidy policy lowers the equilibrium urban unemployment rate and rural subsidy policy raises this rate. Urban formal sector enlargement leads to a change in ex-ante and ex-post labour force in the rural sector even if urban informal sector wage rate is constant. All the results are obtained both in the case of perfect and imperfect capital mobility