Increasing returns and unemployment: an assessment of their relative importance in structural change

This paper proposes a dual-sector Solow-type model where labour reallocation interacts with the presence of involuntary unemployment in non-agriculture, as a consequence of efficiency wages considerations. The urban sector features also increasing returns to scale, and the model is used to quantify the role played by externalities on aggregate TFP growth. Results suggest that what seems to matter most is technological progress. However, increasing returns to scale do gain importance over time and suggest that the growth bonus from labour reallocation might be overestimated in a context with presence of unemployment.