Domestic Income Transfer in an Open Dual Economy
This chapter investigates the welfare effects of an income transfer from urban manufacturing workers to rural agricultural workers in an open dual economy where the urban manufacturing wage is fixed under the minimum wage legislation. We show that the utility of a rural worker may be reduced by the transfer if capital is specific, but such a transfer paradox never appears if capital is mobile between industries. We also derive the result that the transfer causes urban unemployment to decrease in the sector-specific capital case but possibly increase in the mobile capital case.
KeywordsDual open economy Minimum wage legislation Transfer paradox Labor income disparity Walrasian price adjustment Harris−Todaro model
We are grateful to Professors Xiaochun Li and Dongpeng Liu of Nanjing University, Professor Binh Tran-Nam of University of New South Wales, and, in particular, an anonymous reviewer for their valuable comments. We also appreciate Professors Kojun Hamada of Niigata University and Mitsuyoshi Yanagihara of Nagoya University for their useful discussions.
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