Foreign Enclaves, Informal Sector and Urban Unemployment in Efficiency-Wage Model

Abstract

We consider a small open Harris-Todaro (1970) economy with a rural foreign enclave and urban informal sector. We introduce consumption-efficiency relation to explain the simultaneous existence of informal sector and urban unemployment. Different types of immobility and mobility of capital are assumed in different sections of this paper. We also analyse the effects of expansion of foreign enclave on urban unemployment, on the degree of urbanisation and on domestic factor income.