DP523 | Segmented Labor Markets and Unemployment

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The paper suggests alternatives to the Harris-Todaro theory to explain unemployment in segmented labour markets. We focus on a labour market with a perfectly competitive secondary sector and an imperfectly competitive primary sector, the latter combining salient features of the efficiency-wage, insider-outsider and bargaining theories of employment and wage formation. Unemployment and labour-market segmentation are explained with reference to heterogeneous preferences, productivities and endowments among workers. The responsiveness of unemployment to external shocks is shown to depend crucially on whether the above heterogeneities are exogenously given or endogenously generated through workers' employment histories.