Unemployment, Migration, and Growth

Abstract

Economic development is typically accompanied by migration from rural to urban employment. This migration is often associated with significant urban underemployment. Both factors are important in the development process. We consider a neoclassical growth model with rural‐urban migration and urban underemployment, which arises from an adverse selection problem in labor markets. We demonstrate that rural‐urban migration and underemployment can be a source of development traps and can give rise to a large set of periodic equilibria display long periods of uninterrupted growth, punctuated by brief but severe recessions.