Efficiency wage, unemployment and tourism development: a theoretical analysis

International tourism has experienced a substantial growth during the second half of twentieth century. Tourism development can contribute substantially to the reduction of poverty problem by creating new employment opportunities. The purpose of this paper is to analyse the effect of tourism development on unemployment problem using an efficiency wage framework.

The authors developed a two-sector two-factor static competitive general equilibrium model of a less-developed open economy called South with an imported traded goods sector and with a non-traded tourism service sector, and with two factors, capital and labour. Labour is measured in efficiency unit; there exists unemployment in the labour market which is explained by the efficiency wage hypothesis. The authors also consider extensions of the basic model by introducing an exportable traded goods sector as well as sector-specific capital in the tourism sector.

The authors show that, with perfect intersectoral mobility of capital and with only one traded good, tourism development in South lowers unemployment rate and raises national income. However, this tourism development neither affects unemployment rate nor national income in South, in the mobile-capital model when there are two traded goods. When tourism sector uses sector-specific capital but capital is mobile between two traded goods sectors, tourism development keeps the unemployment rate unchanged but raises national income in South.

There exists a lot of debate about economic benefits of tourism development in a less-developed economy. A few works analyse the economic effects of tourism without developing formal models. However, no existing work analyses the effect on unemployment in an efficiency wage model. Although Harris–Todaro model is of relevance to explain unemployment in low-income countries, efficiency wage models are relevant for middle-income countries.