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

PEP MPIA Working Paper No. 2007-09

34 Pages Posted: 7 Mar 2007 Last revised: 11 Jul 2018

See all articles by Sugata Marjit

Sugata Marjit

Centre for Studies in Social Sciences, Calcutta; City University of Hong Kong (CityUHK) - Department of Economics & Finance

Saibal Kar

Centre for Studies in Social Sciences, Calcutta; Institute of Labor Economics (IZA)

Date Written: March 1, 2007

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 conventional wisdom usually obtained under a partial equilibrium framework. However, with increased mobility of capital this result is reversed. We offer detailed empirical 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.

Keywords: Informal Wage, Capital Mobility, Trade Reform, Poverty, India

JEL Classification: F13, F16, O17, J21, J31

Suggested Citation

Marjit, Sugata and Kar, Saibal, The Urban Informal Sector and Poverty: Effects of Trade Reform and Capital Mobility in India (March 1, 2007). PEP MPIA Working Paper No. 2007-09. Available at SSRN: https://ssrn.com/abstract=968655 or http://dx.doi.org/10.2139/ssrn.968655

Sugata Marjit (Contact Author)

Centre for Studies in Social Sciences, Calcutta ( email )

R 1, B.P. Township
Kolkata, West Bengal, India
Kolkata, West Bengal 700094
India

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Saibal Kar

Centre for Studies in Social Sciences, Calcutta ( email )

R-1, Baishnabghata Patuli Township
Calcutta, 700 094
India
91-33-2462 7252 (Phone)
91-33-2462 6183 (Fax)

HOME PAGE: http://www.cssscal.org

Institute of Labor Economics (IZA) ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
344
Abstract Views
2,002
rank
85,592
PlumX Metrics