Will Raising Wages in the High-Wage Sector Increase Total Employment?-A Critique of the Stewart-Weeks View on the Relationship Between Wage Changes and Unemployment in LDC's

Abstract

Frances Stewart and John Weeks have recently argued that increasing the wage rate in the "controlled" sector of an underdeveloped economy may increase total employment in some plausible circumstances. This paper examines the problem using a fully specified general equilibrium model of a two sector closed economy with unemployment, deriving necessary and sufficient conditions for a rate in the controlled sector wage rate to lead to an increase in total employment. Assigning realistic values to all factors involved indicates a negative rather than a positive relationship between the controlled sector wage rate and total employment, contrary to Stewart and Weeks' assertion. Policy-makers considering raising wages in the controlled sector should take into account the known or likely values of all the factors shown to be involved--not just those mentioned by Stewart and Weeks--to assess the impact on total employment. In addition, theyshould consider the effect of the wage rise on output as well, since it is not in fact reasonable to suppose, as Stewart and Weeks do, that output will be unchanged.