Capacity Utilization, Income Distribution, and the Urban Informal Sector: An Open-Economy Model

Kendall K. Schaefer

Working Papers from Political Economy Research Institute, University of Massachusetts at Amherst

Abstract: Developing economies worldwide have experienced rapid informal sector expansion in response to formal sector unemployment. However, the macroeconomic e ects of formal-informal sector dualism have been widely overlooked. This paper develops a two-sector, structuralist, macroeconomic model to analyze the impact of urban informal sector activity on export-led growth policy. The model uses stylized facts from the Johannesburg informal sector and is applicable to countries where informal sector production is concentrated in low-wage goods and commercial services. The paper finds that trade-o s between capacity utilization and reduced income inequality could be magnified when the existence of an urban informal sector is incorporated.

Keywords: informal sector; South Africa; macroeconomic policy (search for similar items in EconPapers)
Date: 2003
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