INFORMAL WAGE AND FORMAL SECTOR PRODUCTIVITY: THEORY AND EVIDENCES FROM INDIA

Dibyendu Maiti () and Sugata Marjit

Labor Economics Working Papers from East Asian Bureau of Economic Research

Abstract: We express a doubt on the conventional wisdom namely, of a positive relationship between wage and productivity, of a formal sector firm in a developing economy where the firm can either go for subcontracting to the informal sector to minimize wage cost along with apprehension of extra-legal cost and/or investment in R&D for in-house production. We show that a rise of the formal wage does not necessarily ensure higher R&D and labour-productivity of the formal firm while a rise of the informal sector wage must improve R&D and the resultant labour-productivity in the firm. Thus countries with a vast segment of lowly-paid informal workers will also exhibit lowly-productive formal sector workers.

Keywords: Informal Wage; poverty; Labour Productivity; R&D Investment; Outsourcing (search for similar items in EconPapers)
JEL-codes: D23 E26 J24 J42 L24 (search for similar items in EconPapers)
Date: 2009-01
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Citations: View citations in EconPapers (3)

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