This paper modiÖes Hansenís model of indivisible labour, to include labour exports, which is parameterised and calibrated to mimic some of the Lesotho economyís distinctive features. Of particular interest in this small open economy framework, is the fact that the householdís average labour supply consists of domestic and foreign components, in which the latter represents labour supplied to the South African mines. To the extent that Lesotho householdís consumption expenditure, on average, exceeds domestic output, shocks to foreign labour income potentially play a critical role in ináuencing domestic economic activity.
The results of this neoclassical model suggest that private consumption rises while domestic output declines due to a positive shock in foreign wages, which attracts labour away from domestic production to foreign mining employment. This result has signiÖcant policy implications, in that a conventional demand management policy geared towards consumption has a potential to cause a recession. Similarly, any policy e§orts to boost domestic output must be considered against the possibility of exacerbating output volatility.