Unemployment and Development
This paper draws on household survey data from countries of all income levels to measure how average unemployment rates vary with income per capita. We document that unemployment is increasing with GDP per capita. Furthermore, we show that this fact is accounted for almost entirely by low-educated workers, whose unemployment rates are strongly increasing in GDP per capita, rather than by high-educated workers, whose unemployment rates are not correlated with income. To interpret these facts, we build a model with workers of heterogeneous ability and two sectors: a traditional sector, in which self-employed workers produce output without reward for ability; and a modern sector, in which firms hire in frictional labor markets, and output increases with ability. Countries differ exogenously in the productivity level of the modern sector. The model predicts that as productivity rises, the traditional sector shrinks, as progressively less-able workers enter the modern sector, leading to a rise in overall unemployment and in the ratio of low-educated to high-educated unemployment rates. Quantitatively, the model accounts for around one third of the cross-country patterns we document.
For helpful comments we thank Gary Fields, Chris Huckfeldt, Ben Moll, Andi Mueller, Tommaso Porzio, Guillaume Rocheteau, Venky Venkateswaran, Mike Waugh, Erin Wolcott, Randy Wright and seminar/conference audiences at Cornell, Harvard/MIT, NYU, Rochester, Midwest Macro (Pittsburgh), SED (Mexico City), China Conference on Development and Growth (Wuhan), the MacCaLM Workshop (Edinburgh), Trinity College Dublin, UCSD and the West Coast Search Conference (Irvine). All potential errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.