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- Publisher
- Emerald Publishing
- Copyright
- © Emerald Publishing Limited
- ISSN
- 1753-8254
- DOI
- 10.1108/igdr-12-2017-0104
- Publisher site
- See Article on Publisher Site
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