SUBSIDY AND UNEMPLOYMENT IN A MOBILE CAPITAL MODEL

The paper builds a three sector model of a small open economy having perfect capital mobility among all the sectors and efficiency- wage relation in the low wage sector. The general equilibrium effects of subsidy policies on urban unemployment and domestic factor income are examined.The main findings in this paper shows that urban subsidy policy softens the problem of urban unemployment ,while the rural subsidy policy aggravates this, if informal sector is linked to the international market and the urban formal sector wage is flexible.This contradicts the results obtained in the traditional HT(1970) model.