Deme, Franck and Naqvi(2005) showed that the increased government expenditure on education, training and skill acquisition leads to lower unemployment rate, expansion of the urban formal sector and the contraction of the urban informal sector. This was observed to be the case in Lesotho. The...

This paper explains the impact of output subsidy to the informal sector on urban unemployment and domestic factor income in a mobile capital model where urban formal wage is endogenous and the informal sector has global exposure.