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The Urban Informal Sector and Poverty: Effects of Trade Reform and Capital Mobility in India

Author

Listed:
  • Suguta Marjit
  • Saibal Kar
Abstract
Studies on formal-informal interactions in the labor markets of developing countries claim that economic reform increases the level of informal activity. Although the extent of such claims differs across countries, it is generally believed that reform is likely to depress informal wage by contracting the formal sector and driving labor onto its informal counterpart. However, available empirical evidence suggests that real wage and real fixed assets in the informal manufacturing sector have risen significantly across most states in post-liberalization India. Using this as a benchmark, we formalize a general equilibrium model of inter-sectoral capital mobility and informal wage to argue that, with limited degree of capital mobility, trade reform reduces the informal wage. This is the convetional wisdom usually obtained under a partial equilibrium framework. However, with increased mobility of capital this result is reversed. We offer detailed emmpirical evidence on the movements of real wage in the informal sector in India and how this affects poverty at the state level. The basic result on income mobility is corroborated by a primary survey in the province of West Bengal, for which we offer descriptive analysis on household income levels in the province's informal manufacturing and service sectors.

Suggested Citation

  • Suguta Marjit & Saibal Kar, 2007. "The Urban Informal Sector and Poverty: Effects of Trade Reform and Capital Mobility in India," Working Papers MPIA 2007-09, PEP-MPIA.
    • Handle: RePEc:lvl:mpiacr:2007-09
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    File URL: https://portal.pep-net.org/documents/download/id/13104
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    References listed on IDEAS

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    1. Kar, Saibal & Marjit, Sugata, 2001. "Informal sector in general equilibrium: welfare effects of trade policy reforms," International Review of Economics & Finance, Elsevier, vol. 10(3), pages 289-300, July.
    2. Mazumdar, Dipak, 1983. "Segmented Labor Markets in LDCs," American Economic Review, American Economic Association, vol. 73(2), pages 254-259, May.
    3. Ira N. Gang & Shubhashis Gangopadhyay, 1990. "A Model of the Informal Sector in Development," Journal of Economic Studies, Emerald Group Publishing, vol. 17(5), pages 19-31, December.
    4. Carruth, Alan A. & Oswald, Andrew J., 1981. "The determination of union and non-union wage rates," European Economic Review, Elsevier, vol. 16(2), pages 285-302.
    5. Gupta, Manash Ranjan, 1997. "Informal sector and informal capital market in a small open less-developed economy," Journal of Development Economics, Elsevier, vol. 52(2), pages 409-428, April.
    6. Mazumdar, Dipak, 1976. "The Rural-Urban Wage Gap, Migration, and the Shadow Wage," Oxford Economic Papers, Oxford University Press, vol. 28(3), pages 406-425, November.
    7. Gupta, Manash Ranjan, 1993. "Rural-urban migation, informal sector and development policies A theoretical analysis," Journal of Development Economics, Elsevier, vol. 41(1), pages 137-151, June.
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    Citations

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    Cited by:

    1. Simplice Asongu, 2015. "Liberalisation and Financial Sector Competition: A Critical Contribution to the Empirics with an African Assessment," South African Journal of Economics, Economic Society of South Africa, vol. 83(3), pages 425-451, September.
    2. Subhasankar Chattopadhyay & Rima Mondal, 2017. "Characterisation of Economic Growth in Developing Economies with Informal Sector," Economic Papers, The Economic Society of Australia, vol. 36(1), pages 86-101, March.
    3. Marjit, Sugata & Kar, Saibal, 2012. "Informal sector and the developing world: relating theory and evidence to India," MPRA Paper 103445, University Library of Munich, Germany.
    4. Marjit, Sugata & Kar, Saibal & Chaudhuri, Sarbajit, 2011. "Recession in the skilled sector and implications for informal wage," Research in Economics, Elsevier, vol. 65(3), pages 158-163, September.
    5. Chattopadhyay, Shubhasankar & Mondal, Rima, 2016. "Characterization of Economic Growth in Developing Economies with Informal Sector," Conference papers 330223, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    6. Kar, Saibal & Marjit, Sugata, 2009. "Urban informal sector and poverty," International Review of Economics & Finance, Elsevier, vol. 18(4), pages 631-642, October.
    7. Rajyasri ROY & Amit KUNDU, 2020. "An analysis of poverty among the informal workers of India," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(1(622), S), pages 87-104, Spring.

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    More about this item

    Keywords

    Informal Wage; Capital Mobility; Trade Reform; Poverty; India;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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