Imperfect labor mobility and unemployment in LDCs: reply.

• Author: Parai, Amar K.
• Position: Response to article by Gilbert and Mikic in this issue, p. 178

In a recent paper (Parai and Beladi 1997; PB hereafter), we have analyzed the implications of growth and trade policies for a small open economy facing imperfect labor mobility and unemployment of the Harris-Todaro variety. We have used the Casas (1984) specification of the labor immobility phenomenon for a Harris-Todaro type economy, and have shown that most of the results in Harris-Todaro framework remain unaltered even under imperfect labor mobility, provided that the elasticity of labor mobility parameter exceeds a critical minimum value. On the optimal tariff issue, Gilbert and Mikic (1997; GM hereafter) find our results counterconventional. In GM's view, the nonconventional result in PB is due to our simplification of the labor mobility specification given by Casas. In this note, we offer our response to GM's comments.

First of all, we appreciate GM's attention to our apparently counterconventional result about the positive optimal tariff because their comment has given us an opportunity to rectify a minor algebraic error in one of our results and clear up the confusions in its policy implications. But their conclusion that it is because of our simplification assumption of unitary values of the scale parameters a and b in Casas's specification is incorrect. Had we maintained the Casas specification intact, PB's equation 10 would become

[b/[(a).sup.1/[Epsilon]][([L.sub.1]/[L.sub.2]).sup.1/[Epsilon]] = [[L.sub.2]/([L.sub.2] + [L.sub.u])]. (1)

Logarithmic differentiation of Equation 1 would again yield equations 28 and 37 in PB. Consequently, the nonunitary values of a and b would leave all the comparative static results in PB unchanged.

On closer scrutiny of our algebra, however, we find an inadvertent error in the derivation of the optimal tariff, [Mathematical Expression Omitted]. The corrected expression reads

[Mathematical Expression Omitted],

where [Psi] [greater than] 1, [a.sub.s] [equivalent to] (d[X.sub.2]/dp)(p/[E.sub.2]) [greater than] 0, [a.sub.d] [equivalent to] - (d[D.sub.2]/dp)(p/[E.sub.2]) [greater than] 0, and G [equivalent to] [1/{1 - [[Lambda].sub.L1] (1 + [Epsilon])}] [less than] 0. Thus, the sign of [Mathematical Expression Omitted] becomes indeterminate as anticipated by GM.

As in Batra and Naqvi (1987), in PB as well, when labor mobility is perfect, a reduction of tariff will increase the social welfare of a Harris-Todaro economy. This can be verified from PB's equation 41. As [Epsilon] [approaches] [infinity], the...