A Note on the Optimal Unemployment Allowance in the Harris-Todaro Model with Trade Unions

Abstract

In this paper, we take an unemployment allowance into account in the Harris-Todaro model with an endogenous urban wage determined by a negotiation between a trade union and a firm. In the standard Harris-Todaro model, no unemployment allowance can yield a first-best optimum. However, we show in our model that a first-best competitive allocation of resources can be attained by the appropriate al lowance.