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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.

This study aims to introduce an education sector which transforms a part of unskilled labour into new skilled labour, and then show how the level of output of educational service is determined in the short-run equilibrium along with the level of output of two production sectors. This study also introduces intertemporal dynamics into the model assuming that all factor endowments grow over time, and then show how a strong anti-immigration policy in the destination country affects the long-run equilibrium of the source country.

This study considers a three sector open economy model to analyse the long-run economic effects of the anti-immigration policy adopted in the destination country on the general equilibrium of the source country.

If the education sector in the source country is more skilled labour intensive than the advanced production sector, then this anti-immigration policy would raise the capital unskilled labour ratio, skilled labour–unskilled labour ratio and the balanced endogenous growth rate in the new long-run equilibrium but would lower the gross rate of creation of new skilled labour there.

The authors want to analyse the effect of anti-immigration policy adopted in the destination country on the long-run balanced growth rate in the source country. The dynamic growth effect of anti-immigration policy cannot be studied in a static short-run equilibrium model, the authors also introduce intertemporal dynamics into the model assuming that all factor endowments grow over time and then show how a strong anti-immigration policy in the destination country affects the long-run equilibrium of the source country.