The Informal Sector in General Equilibrium Models

Sugata Marjit and Saibal Kar

in The Outsiders

Published in print March 2011 | ISBN: 9780198071495
Published online September 2012 | e-ISBN: 9780199081257 | DOI:
The Informal Sector in General Equilibrium Models

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This chapter presents a general equilibrium model to theoretically examine the activities of the informal sector in dual economy labour markets. By linking the unorganized sector to the organized sector through aspects of capital mobility and labour productivity, it estimates and theorizes in more formal ways the effects of reforms on the wages and employment status of workers in the informal sector. It establishes via rigorous general equilibrium models that trade liberalization in the formal sector can raise both employment and wages in the informal sector if capital is easily mobile between the two sectors. Even if capital is sticky, downsizing of the capital-intensive import-competing sector may lead to increased output in the labour-intensive informal segment and an increase in informal wages. The issue of capital mobility thus takes on an important role in shaping the magnitude and directionality of informal wages subject to exogenous policy changes in the organized sectors of an economy.

Keywords: general equilibrium model; informal sectors; dual economy; formal sector; labour markets; capital mobility; labour productivity; trade liberalization; wages

Chapter.  4335 words.  Illustrated.

Subjects: Economic Development and Growth

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