Investment and wage gap in India: a general equilibrium analysis

Subhasankar Chattopadhyay

Indian Growth and Development Review, 2018, vol. 11, issue 2, 107-135

Abstract: Purpose - This paper aims to theoretically find out whether investments could close the formal-informal wage gap in India. Design/methodology/approach - 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. Findings - 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. Originality/value - 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.

Keywords: Investment; Wage gap; Formal and informal sectors; General equilibrium (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eme:igdrpp:igdr-12-2017-0104

DOI: 10.1108/IGDR-12-2017-0104

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