Foreign Capital Inflow, Skilled-Unskilled Wage Gap, and Welfare in the Presence of the Informal Sector

Kausik Gupta and Tania Basu
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Kausik Gupta: University of Burdwan, West Bengal, India.
Tania Basu: University of Burdwan, West Bengal, India.

The Pakistan Development Review, 2004, vol. 43, issue 2, 125-147

Abstract: This paper attempts to analyse the impact of trade liberalisation on the skilled- unskilled wage gap and the level of welfare of developing countries, which are generally characterised by large “informal” labour markets. A neo-classical full-employment four-sector model has been developed, where the informal sector produces either a final product or an intermediate product on subcontracting basis. Evidence shows that in either case, trade liberalisation, in the form of an increase in foreign capital inflow, widens the skilled-unskilled wage gap of the economy under some reasonable conditions. It also shows that as a result of an increase in the foreign capital inflow, the level of welfare of the economy increases, when the informal sector produces

Keywords: Capital Inflow; Informal Sector (search for similar items in EconPapers)
JEL-codes: F10 F16 F32 (search for similar items in EconPapers)
Date: 2004
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