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A general model (a reduced form formulation) for determining urban wages in less developed countries (LDCs) is presented, and, taking this into account, an analysis is made on the nature of urban–rural prices with an endogenous urban wage (i.e. the case in which sector-specific taxation policies are feasible), and of the price scissors (the price of industrial (urban) goods relative to that of agricultural (rural) goods) with endogenous wages (i.e. the case in which only economy-wide, rather than sector-specific, taxation policies are feasible). There is a brief discussion of whether an endogenous urban wage or a government-controlled urban wage is more appropriate for LDCs, and the former is favoured. There is also a note on fixing the urban wage in terms of the utility level. Lastly, a general formulation is presented of urban unemployment, and of tax-induced effects upon it.

This chapter examines social interactions in human capital spillovers by focusing on spatial patterns in productivity, wages, and incomes, with particular emphasis on whether spatial concentration causes higher productivity. It begins with a discussion of aggregative spatial measures, such as economic activity at the level of states, regions, and counties in comparison with the smaller scale of cities and their neighborhoods. It then considers the interdependence between spatial interactions and spatial economic activity, the implications of spatial equilibrium for the urban wage premium, and human capital spillovers in microneighborhoods and in synthetic neighborhoods. It also shows how differences in patterns of productivity across locations and at different scales of spatial aggregation may be rationalized in terms of simple models of social interactions.

This chapter examines wage inequality in urban China. Increased wage discrimination against women and minorities was observed in favour of Communist Party members. The market forces operating in the growing private sector and the relative immunity of the state sector from those forces increased wage segmentation among types of ownership. Provincial differences in the pace of reform and economic growth created spatial segmentation in wages that could not be removed by the equilibrating movement of labour.

Some aspects are discussed of modelling the urban sector less developed countries (LDCs) that are central for taxation analysis, and have typically been underemphasized in development economics. An economy is considered in which private firms make the decisions concerning the urban wage and employment, there is urban unemployment, and individuals migrate from one sector to another (rural–urban migration). The objective is not to derive results concerning taxation but instead to highlight briefly some issues that need to be taken into account in taxation analysis for the urban sector of LDCs, and to present a general model of the urban sector. Inefficiencies that arise in the market equilibrium, and the role of tax in partially correcting these inefficiencies, are described. The chapter concludes with a brief discussion of the relationship between urban demand and supply of labour; this relationship is different from that in the conventional neoclassical model.

A treatment of the wage–productivity hypothesis, which states that the wage a firm pays or the prices its workers face may have an important effect on the productivity of its workforce is presented. The hypothesis is first discussed at the level of the firm, and then analysed using a subclass of models to study how private firms might determine urban wages and unemployment, and how these decisions might be affected by tax and price policy.

Two pervasive features of most less developed countries (LDCs) are the presence of persistent urban unemployment and rural to urban migration, and these phenomena are important for an analysis of taxes and prices: any model that attempts to describe an LDC economy must at least be consistent with the presence of urban unemployment. Thus, the case is weak for an exclusive use of the neoclassical model (the form typically exposited in public finance textbooks in which all markets clear and in which there is no unemployment). Most models attempting to incorporate urban unemployment begin with the hypothesis that urban wages are higher than the market-clearing level, but they do not explain why wages are high and how wages are determined. Earlier chapters have described alternative mechanisms for determining urban wages and employment, and shown that taxation policies may well have an effect on these, and how this effect, in turn, affects the analysis of taxation policies. A further effect is that taxation policies may affect the nature of migration between the rural and the urban sectors, so a complete analysis of tax policy must take into account its induced effects on migration; these issues are addressed in this chapter.

Addresses the same issues as were examined in the previous chapter, i.e. the situation in which there is only one set of prices in rural and urban sectors, but with reference to a closed economy. The central message is that when there are non-traded goods, or when there are binding constraints on the magnitude of trade, the government cannot change one price (the size of the price scissors, i.e. the price of industrial (urban) goods relative to that of agricultural (rural) goods) alone: for the balance between the demand and supply of non-traded goods to be maintained, the price of some other commodity or the level of the urban wage must change. A simple model is presented in which the urban wage adjusts to ensure that the demand for food equals its supply. This has some dramatic effects on conclusions concerning the effects of increasing the size of the price scissors: i.e. increasing taxes on the rural sector. The induced wage adjustments reinforce the positive effects that such taxes have on government revenue, and they more than offset the direct welfare effects of the price changes on the urban sector.

An analysis of the effects of differential taxation or subsidization of different goods in the urban sector is presented. It is shown that the answer depends critically on two factors: how urban wages are set; and the nature of the effect of wages and prices on urban (un)employment and productivity. Reasons are developed and presented for the conclusion reached that, regardless of concern for inequality, there should be a presumption against differential taxation or subsidization of goods in the urban sector of less developed countries (LDCs).

This chapter studies the labor question brought about by the massive social changes unleashed by industrial, corporate capitalism, and rapid urbanization. This “labor question,” as historian Steve Fraser aptly puts it, was “not merely the supreme economic question but the constitutive moral, political, and social dilemma of the new industrial order.” Indeed, the growth of a seemingly permanent class of urban wage earners, condemned to toil on the fringes of middle-class security, domesticity, and morality, threatened to undermine the very promises of democratic life. Influenced by Progressivism in political culture and modernism in religious culture, American religious leaders of the late nineteenth century began to outline a response to the labor question, which they came to call the “social gospel.” Middle-class proponents of the social gospel critiqued labor exploitation and hoped to bring a measure of peace and justice to the factory, but they also criticized working-class religion itself as culturally primitive and socially destructive.