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Investment and wage gap in India: a general equilibrium analysis

Investment and wage gap in India: a general equilibrium analysis This paper aims to theoretically find out whether investments could close the formal-informal wage gap in India.Design/methodology/approachThe 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.FindingsWith 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/valueThough 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Indian Growth and Development Review Emerald Publishing

Investment and wage gap in India: a general equilibrium analysis

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1753-8254
DOI
10.1108/igdr-12-2017-0104
Publisher site
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Abstract

This paper aims to theoretically find out whether investments could close the formal-informal wage gap in India.Design/methodology/approachThe 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.FindingsWith 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/valueThough 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.

Journal

Indian Growth and Development Review – Emerald Publishing

Published: Oct 30, 2018

Keywords: Investment; Wage gap; Formal and informal sectors; General equilibrium

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