Wage and Fertility Gaps in Dual Economies

This chapter begins our analysis of two sector models where markets may be missing. Here we focus on the fact that wages are lower and fertility is higher in the traditional sector than in the modern sector of economies. This has important consequences for economic growth for two reasons. First, as suggested by growth fact G11, the wage gap indicates the allocation of labor may be inefficient—the movement of labor from the traditional sector to the modern sector should raise average labor productivity. Second, if fertility falls as households move from the traditional sector to the modern sector, then population growth will decline making it easier to increase physical capital per worker.