Domestic Income Transfer in an Open Dual Economy

This chapter investigates the welfare effects of an income transfer from urban manufacturing workers to rural agricultural workers in an open dual economy where the urban manufacturing wage is fixed under the minimum wage legislation. We show that the utility of a rural worker may be reduced by the transfer if capital is specific, but such a transfer paradox never appears if capital is mobile between industries. We also derive the result that the transfer causes urban unemployment to decrease in the sector-specific capital case but possibly increase in the mobile capital case.