External Shocks And The Urban Poor

This paper examines the effect of external shocks on urban poverty in a two-household (rich and poor), two-sector intertemporal model of an open economy with segmented labor markets. Skilled and unskilled labor are used in the formal sector, whereas only unskilled labor (which moves freely across sectors) is used in the informal economy. The extent to which a permanent increase in the world risk-free interest rate affects the incidence and depth of poverty is shown to depend crucially on the wedge between consumption and product wages. The model is also extended to account for endogenous minimum wages and capital accumulation. © 2011 Blackwell Publishing Ltd.