Capital and growth

The Approach of Operational Research to Planning in India

A Two-Sector Model of Economic Growth

We develop a wage differential model with a unionized and a non-unionized informal sector for a small open economy. The unionized wage rate adjusts to a cost of living index and the informal wage is market-determined. In this structure, a Stolper-Samuelson type result holds without any assumption regarding factor-intensity ranking.

The Stolper-Samuelson Theorem in a Wage Differential Framework

Despite the extensive existing literature on income inequality and economic growth, there remains considerable disagreement on the effect of inequality on economic growth. Existing literatures find either a positive or a negative relationship. In this paper, we attempt to theoretically examine that relationship with a stochastic optimal growth model. We make the disagreement clear within a single model. We conclude (i) that both are possible -- that is, higher inequality can retard growth in the early stage of economic development, and can encourage growth in a near steady state, (ii) that income redistribution by high income tax does not always reduce income inequality. Income inequality can be reduced by higher income tax in a near steady state, but it cannot be reduced in the early stage of economic development, and (iii) that two government polices -- rapid economic growth and low income inequality -- can be achieved by low income tax in the early stage of economic development, but both cannot be achieved simultaneously in a near steady state.

Income Inequality and Economic Growth

We build a two‐sector general equilibrium growth model with capital‐intensive consumption goods and a labour‐intensive investment goods sector to investigate the coexistence of growth and unemployment. The model uses heterogeneity in saving behaviour, introduces an effective demand problem, has full employment of capital with input non‐substitutability and shows that the aggregate labour employment is determined by available capital along with commodity market equilibrium. The long‐run growth may not be balanced, and under biased growth, the level of unemployment may monotonically increase or decrease over time, or may first increase (decrease) and then decrease (increase). Such possible unemployment paths help us tightly define “jobless growth”.

https://papers.ssrn.com/sol3/Delivery.cfm/MECA_MECA12299.pdf?abstractid=3713161&mirid=1

Growth, income distribution and unemployment in a two‐sector economy

The paper presents a general equilibrium model of a developing economy with a capital intensive formal sector and a large informal sector with sector-specific capital to analyse the effects of investments on the sectoral returns to capital, sectoral wage rates, and composition of output and employment. Beginning with capital market disequilibrium (unequal sectoral rates of return) and labour market distortion (formal-informal wage gap), the model traces the evolution of the economy till capital market equilibrium is attained. The investments in the formal sector equalise the wages (a “turning point” in growth a la Lewis) and reduces the size of the informal sector. The sectoral rates of returns equalise only if there is no factor intensity reversal, otherwise the economy specialises in the production of formal goods. The investments in the informal sector equalise the rates of return, do not affect the size of the formal sector and finally, a formal-informal wage gap persists provided factor intensities are not reversed.

Characterisation of Economic Growth in Developing Economies with Informal Sector

In developing economies like India, ‘informal’ sector occupies a large portion of GDP and employment. In the wake of slowdown in investments across countries and ensuing fall in the GDP growth rates, the question that arises is the following. If an economy suffers from growth slowdown, and since investment is often believed to be a driver of growth, should more investments go to the formal sector or to the informal sector? In what ways outcomes are different in terms of composition of output, employment, and wages? The issue may be a particular interest to India where slowdown in investments is believed to be the primary reason behind the recent sluggish growth of the economy. This paper theoretically evaluates the effects of investments on sectoral wage rates, output and employment composition, and growth in a developing economy consisting of a vast informal sector in a general equilibrium framework with endogenous demand and sector specific capital. The model traces, beginning with capital market disequilibrium and labour market distortion, whether investments into the sectors lead to equilibrium in capital and labour markets over time. This approach is distinctly different from the existing literature that is primarily engaged with finding out comparative statics results of a change in policy variables such as tariff rate and subsidy/tax. This paper also brings in endogenous demand that is mostly missing thus far. The model highlights the following results. Investments in the formal sector increase the size of the sector and cause the informal sector to shrink. The labour market distortion goes away as wages are eventually equalized across the sectors, after which the capital market equilibrium is achieved. Equalisation of wages is similar to the ‘turning point’ of the Lewis model of development. On the other hand, investments in the informal sector increase its own size but do not alter the size of the formal sector. Much contrary to the previous case, capital market equilibrium is achieved first, so the labour market distortion stays, leading to the existence of a persistent wage gap in the long run. One way of avoiding the possibility of the informal sector becoming large in size would be to subsidize the short-run capital return in the formal sector. This of course is a ‘second-best’ policy to counteracting the distortion in the labour market.

Investment and growth in a developing economy with vast informal sector

Both skilled and unskilled workers are employed formally and informally in developing economies. However, workers employed informally are often discriminated – they receive lower returns to their i...

Skilled-unskilled wage gap without discrimination–the case of India

The withdrawal of high-denomination paper money in India—popularly termed ‘demonetization’—has generated interest among common people to understand what the usual macroeconomic consequences of such...

Subhasankar Chattopadhyay

Papers

Growth, income distribution and unemployment in a two‐sector economy

Characterisation of Economic Growth in Developing Economies with Informal Sector

Investment and growth in a developing economy with vast informal sector

Skilled-unskilled wage gap without discrimination–the case of India

The Macroeconomics of Demonetization: Theory and Some Conjectures: