Can a Profit-Sharing Scheme Remedy Large Scale Unemployment in a Less Developed Country?
In this chapter, we examine the effects of introducing a profit-sharing scheme in the urban sectors of a less developed country (LDC). We use a generalized Harris and Todaro (1970) model in which the LDC has a dual economy with urban-specific unemployment. We assume that the wage of urban labor is determined by a single labor union. We then introduce a profit-sharing scheme in the urban sector. We find that profit-sharing results in a decrease in wages and an increase in employment in the urban sector, an increase in employment and a decrease in wages in the rural sector, and an increase in the welfare of the LDC. We conclude that profit-sharing may remedy the large-scale urban unemployment problems of LDCs and improve the LDC’s welfare.
KeywordsLabor Union Urban Sector Rural Sector Little Develop Country Wage Elasticity
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