Investment and wage gap in India: a general equilibrium analysis
12 Oct 2018-Indian Growth and Development Review (Emerald Publishing Limited)-Vol. 11, Iss: 2, pp 107-135
TL;DR: In this paper, the authors build a general equilibrium model of a developing economy with a large informal sector and a capital-intensive formal sector with sector-specific capital and incorporate endogenous demand, with homothetic preferences, a small initial wage premium and elastic relative demand.
Abstract: This paper aims to theoretically find out whether investments could close the formal-informal wage gap in India.,The paper builds a general equilibrium model of a developing economy with a large informal sector and a capital-intensive formal sector with sector-specific capital and incorporates endogenous demand.,With homothetic preferences, a small initial wage premium and elastic relative demand, investment in the formal sector is likely to close the wage gap, but the gap persists with non-homothetic preferences. However, investment in the informal sector is unlikely to close the wage gap with either type of preferences.,Though labour market distortions in developing economies leading to a formal-informal wage gap are well-documented in the development literature, little attention has been given to the question of whether such a gap would close over time.
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TL;DR: The authors developed a wage differential model with a unionized and a non-unionized informal sector for a small open economy, where the unionized wage rate adjusts to a cost of living index and the informal wage is market-determined.
Abstract: 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.
22 citations
TL;DR: In this paper, the authors used competitive general equilibrium model of trade for small open economy with informal sector to check the possible effects of virtual trade and showed that skilled labors and educational capital owners benefit from virtual trade.
Abstract: This paper uses competitive general equilibrium model of trade for small open economy with informal sector to check the possible effects of virtual trade. We show that skilled labors and educational capital owners benefit from virtual trade. The service sector expands while the formal and informal sector contract along with the number of people engaged in corruption-related intermediation. Following this, we also check the effect of a fall in the extent of cost of corruption. Results show an increase in unskilled wage and outflow of educational capital thus hurting the skill-intensive sector. We proceed further to club the effects of both virtual trade and fall in intermediation cost, and explore the consequences. Though, both skilled and unskilled labors benefit, the effect on output and intermediators, however, is ambiguous. We then modify the basic model to endogenize the cost of corruption, include punishment aspect of intermediators, etc. In this case, owing to time zone difference exploitation, we experience an increase in wage of both types of labor, an expansion of the service sector and contraction of the informal sector. Interestingly, the cost of intermediation rises while the number of intermediators falls in the extended model.
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TL;DR: In this paper , the characteristics of women to the opportunities in the informal and formal job that seen from age, marital status, wages, length of education taken, ethnicity, and area of residence were analyzed.
Abstract: The existence of SDGs program which supported by the demographic bonus era provides potential for female labor force, but the fact in Indonesia is that there is an inequality in the number of working female labor force compared to men, especially the field of work dominated by women is threatened by industrial automation 4.0. The purpose of this study is to analyze how the characteristics of women to the opportunities in the informal and formal job that seen from age, marital status, wages, length of education taken, ethnicity, and area of residence. The method used in this study is binary logistic regression with IFLS 5 data sources. The results showed that women who decided to work in the informal sector were women of older age, married women, women who studied longer, women with Batak and Sasak ethnicities, and women who lived in rural areas. The Indonesian government is expected to be able to improve policies for informal sector workers including decent wages, social security and health, and legal protection in order to achieve Indonesian goals according to SDGs agenda.
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TL;DR: In this paper, the authors present an extended model for demand endogenous substitution, aggregate elasticity of substitution, convergence to balanced growth, and saving behavior of technology change, including the Magnification Effect.
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TL;DR: In this article, a report from the McKinsey Global Institute describes informal firms as parasites competing unfairly with law-abiding formal firms and argues that informality should be suppressed, not unleashed.
Abstract: In developing countries, informal firms account for up to half of economic activity. They provide livelihood for billions of people. Yet their role in economic development remains controversial. Some, like Hernando De Soto (1989, 2000), see informal firms as an untapped reservoir of entrepreneurial energy, held back by government regulations. In this view, unleashing this energy by reducing entry regulations or improving property rights would fuel growth and development. Others, like Levy (2008), take a more cynical view, stressing the advantages enjoyed by informal firms and workers from avoiding taxes and regulations. A report from the McKinsey Global Institute describes informal firms as parasites competing unfairly with law-abiding formal firms (Farrell 2004). In this view, informality should be suppressed, not unleashed. Still others follow the development tradition of Lewis (1954), Harris and Todaro (1970), and more recently Rauch (1991) and see informality as a byproduct of poverty. From this dual perspective, formal and informal firms are fundamentally different. Productive formal entrepreneurs pay taxes and bear the cost of government regulation to reach new customers, raise capital, and access public goods. These entrepreneurs are often educated and find it more profitable to run bigger formal firms rather than the smaller informal ones. In contrast, informal entrepreneurs are typically uneducated and unproductive, and they run small businesses producing low-quality products for low-income customers using little capital and
840 citations
TL;DR: The authors found that informal firms are small and extremely unproductive compared with even the small formal firms in the sample, and especially relative to the larger formal firms, which supports the dual economy theory of development, in which growth comes about from the creation of highly productive formal firms.
Abstract: In developing countries, informal firms account for up to about half of all economic activity. Using data from World Bank firm-level surveys, we find that informal firms are small and extremely unproductive compared with even the small formal firms in the sample, and especially relative to the larger formal firms. Formal firms are run by much better educated managers than informal ones and use more capital, have different customers, market their products, and use more external finance. Few formal firms have ever operated informally. This evidence supports the dual economy (“Wal-Mart”) theory of development, in which growth comes about from the creation of highly productive formal firms. Informal firms keep millions of people alive but disappear as the economy develops.
648 citations
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Abstract: Structural transformation refers to the reallocation of economic activity across the broad sectors agriculture, manufacturing and services. This review article synthesizes and evaluates recent advances in the research on structural transformation. We begin by presenting the stylized facts of structural transformation across time and space. We then develop a multi-sector extension of the one-sector growth model that encompasses the main existing theories of structural transformation. We argue that this multi-sector model serves as a natural benchmark to study structural transformation and that it is able to account for many salient features of structural transformation. We also argue that this multi-sector model delivers new and sharper insights for understanding economic development, regional income convergence, aggregate productivity trends, hours worked, business cycles, and wage inequality. We conclude by suggesting several directions for future research on structural transformation.
502 citations
TL;DR: In this paper, the authors studied the growth process in a two-sector model of capital accumulation and showed that balanced growth equilibria are globally stable under the neoclassical hypotheses.
Abstract: In the present paper we are interested in the growth process in a two-sector model of capital accumulation and show that balanced growth equilibria are globally,stable under the neoclassical hypotheses.
380 citations