Investment and wage gap in India: a general equilibrium analysis

2018 ◽  
Vol 11 (2) ◽  
pp. 107-135 ◽  
Author(s):  
Subhasankar Chattopadhyay
Keyword(s):  
General Equilibrium ◽  
Informal Sector ◽  
Developing Economies ◽  
Wage Gap ◽  
Equilibrium Analysis ◽  
Formal Sector ◽  
Content Type ◽  
Development Literature ◽  
Capital Intensive ◽  
Specific Capital

Purpose This paper aims to theoretically find out whether investments could close the formal-informal wage gap in India. Design/methodology/approach The 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. Findings With 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/value Though 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.

Mexico City street vendors and the stickiness of institutional contexts

2017 ◽  
Vol 13 (2) ◽  
pp. 119-135 ◽  
Author(s):  
Farzad H. Alvi ◽  
Jorge Alberto Mendoza
Keyword(s):  
Emerging Markets ◽  
International Business ◽  
Informal Sector ◽  
Rational Expectations ◽  
Macro Level ◽  
Formal Sector ◽  
Street Vendors ◽  
Content Type ◽  
Institutional Contexts ◽  
Micro Level

Purpose The need for a firm’s business strategy to be responsive to the institutional contexts of emerging markets is well-established in the literature. Often, however, strategic responsiveness is impeded by defining institutional contexts as country-level aggregations (macro-level) and glossing over sub-national variations (micro-level). The purpose of this paper is to investigate micro-level contexts that can defy macro-level assumptions of economic rationality. Design/methodology/approach As a research site, the motivations of street vendors in Mexico City are analyzed in terms staying in one sub-national context, the informal sector, as opposed movement to another, the formal sector. Unanticipated reluctance to move from one context to another is defined as stickiness. Findings Sub-national institutional contexts are found to be sticky, with less movement between informal and formal sectors than would have been anticipated. Unexpectedly, it is found that a significant number of street vendors prefer the hardship of the informal sector to the relative security of the formal sector. Research implications International business research makes assumptions about the growth narrative of emerging markets, often characterizing a growing middle class as a rising tide that lifts all boats. In terms of further research on adapting strategy, however, assumptions of rational expectations ought to be tempered, as demonstrated by the stickiness of the informal sector. Originality/value A contribution is made to the international business literature by showing that macro-level assumptions about institutional context based on rational expectations of wealth-maximizing behavior in emerging markets may result in an incomplete view of institutional context. Ultimately, adaptation of strategy could be impaired as a result.

scholarly journals Employment targeting in a frictional labor market

2019 ◽  
Vol 12 (2) ◽  
pp. 242-262 ◽  
Author(s):  
Chetan Ghate ◽  
Debojyoti Mazumder
Keyword(s):  
Labor Market ◽  
Public Sector ◽  
Private Sector ◽  
Informal Sector ◽  
Developing Economies ◽  
Job Creation ◽  
Friction Model ◽  
Search And Matching ◽  
Content Type ◽  
The Public

Purpose Governments in both developing and developed economies play an active role in labor markets in the form of providing both formal public sector jobs and employment through public workfare programs. The authors refer to this as employment targeting. The purpose of the paper is to consider different labor market effects of employment targeting in a stylized model of a developing economy. In the context of a simple search and matching friction model, the authors show that the propensity for the public sector to target more employment can increase the unemployment rate in the economy and lead to an increase in the size of the informal sector. Design/methodology/approach The model is an application of a search and matching model of labor market frictions, where agents have heterogeneous abilities. The authors introduce a public sector alongside the private sector in the economy. Wage in the private sector is determined through Nash bargaining, whereas the public sector wage is exogenously fixed. In this setup, the public sector hiring rate influences private sector job creation and hence the overall employment rate of the economy. As an extension, the authors model the informal sector coupled with the other two sectors. This resembles developing economies. Then, the authors check the overall labor market effects of employment targeting through public sector intervention. Findings In the context of a simple search and matching friction model with heterogeneous agents, the authors show that the propensity for the public sector to target more employment can increase the unemployment rate in the economy and lead to an increase in the size of the informal sector. Employment targeting can, therefore, have perverse effects on labor market outcomes. The authors also find that it is possible that the private sector wage falls as a result of an increase in the public sector hiring rate, which leads to more job creation in the private sector. Originality/value What is less understood in the literature is the impact of employment targeting on the size of the informal sector in developing economies. The authors fill this gap and show that public sector intervention can have perverse effects on overall job creation and the size of the informal sector. Moreover, a decrease in the private sector wage due to a rise in public sector hiring reverses the consensus findings in the search and matching literature which show that an increase in public sector employment disincentivizes private sector vacancy postings.

Female labour force participation: evidence from Ghana

2017 ◽  
Vol 44 (11) ◽  
pp. 1489-1505 ◽  
Author(s):  
Abena Yeboah Abraham ◽  
Fidelia Nana Akom Ohemeng ◽  
Williams Ohemeng
Keyword(s):  
Informal Sector ◽  
Rural Areas ◽  
Census Data ◽  
Labour Force ◽  
Labour Force Participation ◽  
Female Labour Force Participation ◽  
Formal Sector ◽  
Social Reforms ◽  
Female Labour ◽  
Content Type

Purpose The purpose of this paper is to examine female labour force participation (FLFP) and their employment choice between the formal and informal sectors after several institutional and social reforms such as Millennium Development Goal 3 aimed at promoting gender equality and empowerment of women by 2015, using data from Ghana’s 2010 Population and Housing Census. Design/methodology/approach In this paper, logit regression and multinomial logit techniques were employed. Findings The results show that FLFP has declined marginally from the 2005 figures; education remains the important factor in determining women’s participation in the formal sector. Strikingly 91 per cent of the FLFP is engaged in the informal sector of the Ghanaian economy, a sector with a very low contribution per head. Practical implications Interventions such as encouraging female education and retraining of self-employed females to improve upon their efficiency ought to be pursued vigorously; whiles developing rural areas for females to get equal labour opportunities and many others aimed at enhancing the efficiency and by inference earning per head of the informal sector is highly recommended. Originality/value The literature on the FLFP is thin in Ghana. The current study uses a census data unlike the previous studies and as such employed a huge sample size that reflects the reality in Ghana. The study contributed immensely to policy having established that 91 per cent of the female labour force is engaged in the informal sectors of the economy, and therefore any intervention targeting at reducing poverty and meeting the MDG 3 should be targeted at the informal sector of the Ghanaian economy.

Expanding East African tax base will face resistance

2016 ◽  
Keyword(s):  
Informal Sector ◽  
Informal Economy ◽  
Essential Role ◽  
Budget Deficits ◽  
Formal Sector ◽  
East African ◽  
Efficient Manner ◽  
Tax Base ◽  
Member States ◽  
Content Type

Significance Member states' national budgets include plans to increase taxation of the informal economy. Governments have several reasons for broadening tax bases: budget deficits, increasing debts, donor dependency, declining revenue from the formal sector and a desire to improve services and infrastructure. Impacts Limited state resources will hinder attempts to formalise economies through enforcement alone. Incentives will play an essential role in any attempt to expand the tax base. Unless implemented in an efficient manner, taxation of the informal economy could drain government funds and hurt informal businesses. Successful taxation of the informal sector will fail unless businesses see returns in services or infrastructure.

ON-THE-JOB SEARCH, URBAN INFORMAL SECTOR AND DEVELOPMENT POLICIES — A GENERAL EQUILIBRIUM ANALYSIS

2010 ◽  
Vol 55 (02) ◽  
pp. 401-410
Author(s):  
TITAS KUMAR BANDOPADHYAY
Keyword(s):  
General Equilibrium ◽  
Informal Sector ◽  
Unemployment Rate ◽  
Job Search ◽  
Capital Mobility ◽  
Equilibrium Analysis ◽  
Subsidy Policy ◽  
Urban Unemployment ◽  
Price Subsidy ◽  
Urban Informal Sector

The purpose of this paper is to examine Field's (1989) proposition in a multisector general equilibrium model with imperfect capital mobility. The effects of different fiscal policies on the equilibrium rate of urban unemployment are also examined. The main findings are (i) more efficient on-the-job search from the rural sector raises equilibrium urban unemployment rate whereas (ii) increased job search efficiency from the urban informal sector lowers this rate. Aditionally, (iii) urban price subsidy policy lowers the equilibrium urban unemployment rate, and (iv) rural subsidy policy raises this rate.

scholarly journals Wage Difference Between Formal Sector and Informal Sector Jobs; With Special Reference to the Labour Market in Sri Lanka

2021 ◽  
Vol 7 (3) ◽  
pp. 7-19
Author(s):  
Bharatha Prabath Parakrama Badullahewage ◽  
Shohani Upeksha Badullahewage
Keyword(s):  
Labour Market ◽  
Informal Sector ◽  
Wage Gap ◽  
Labour Force ◽  
Secondary Data ◽  
Equal Opportunities ◽  
Formal Sector ◽  
Dummy Variable ◽  
Basic Model ◽  
Formal And Informal Sectors

It is globally understood that wage-based employment structure and wages are a central aspects of the labour force at work. The informal sector is ranging to a broader concept that is difficult to define. The formal–informal wage gap is crucial to understand labour market informality, especially in developing countries with the large informal sectors. The basic model is taken from Mincer (1974), and the study is primarily based on secondary data. The new dummy variable of Job_type and an interactive term were incorporated into the Mincer earning function to analyse wage differences between formal sector and informal sector jobs. The study concludes that there is a wage gap between the a formal and informal sector. Moreover, if a person engages in formal sector job with good education qualification and good working experience, he will be entitled for a higher wage rate. Policies that promote education and equal opportunities for workers in both formal and informal sectors would improve earnings for many workers by increasing productivity and incomes.

Labour informality may increase in Latin America

2016 ◽  
Keyword(s):  
United States ◽  
Latin America ◽  
Latin American ◽  
Informal Sector ◽  
Labour Productivity ◽  
The United States ◽  
Formal Sector ◽  
Content Type ◽  
Surplus Labour ◽  
Low Levels

Subject The informal sector in Latin America. Significance The scale of informality in Latin American labour markets is widely seen as the main reason for the region's low levels of labour productivity; consequently, policymakers seek ways to induce a transfer of labour towards the formal sector where, in addition, workers come within the tax net. However, in spite of a decade of growth in the region, levels of informality have remained stubbornly high. Impacts A reduction in informality could increase the number of taxpayers and thus revenues. Tighter migration policies in the United States could limit options for surplus labour to relocate elsewhere. Lower birth rates will slow the number of new entrants into the labour market overall.

scholarly journals Agglomeration effects and informal firms in the internal structure of cities

2019 ◽  
Vol 27 (80) ◽  
pp. 93-107
Author(s):  
Andres Dominguez
Keyword(s):  
Developing Countries ◽  
Standard Deviation ◽  
Internal Structure ◽  
Informal Sector ◽  
Local Economy ◽  
Earthquake Risk ◽  
Formal Sector ◽  
Economic Activities ◽  
Standard Deviation Increase ◽  
Content Type

Purpose This paper aims to estimate the effect of agglomeration on the probability of being an informal firm in Cali, Colombia. Informal firms produce legal goods but do not comply with official regulations. This issue is relevant because, similar to other developing countries, the informal sector in Colombia employs more than 50 per cent of the workforce. The results of this study demonstrate that one standard deviation increase in agglomeration reduces by 52 per cent the probability of being informal. Results are consistent with the idea that informal firms benefit less from agglomeration because of legal restrictions that block the relationship with formal firms. Design/methodology/approach The objective of the present paper is to estimate the effect of agglomeration on the probability that a firm – given a location – chooses to be informal. The authors deal with endogeneity issues by using soil information related to earthquake risk, which reduces the height of buildings and therefore increases the cost of agglomeration. The analysis focuses on Cali, Colombia, where the informal sector employs 60 per cent of the workforce. The registration of economic activities is used as a criterion to identify informal firms, in such a way that the percentage of informal firms is 42 per cent. Findings The authors find that the effect of agglomeration is strongly negative. The probability of being informal diminishes by 52 per cent when agglomeration increases by one standard deviation. Results in this paper shed light on how formal firms tend to be localized in high-density commercial and industrial areas, while informal firms are localized in low-density and peripheral areas where the land for production is cheaper and where they can avoid the control of authorities. Originality/value Theory argues that spatial production externalities and commuting costs are among the main forces that shape the city’s internal structure. Externalities include effects that increase firms’ production, and therefore workers’ income, when the size of the local economy grows. The authors now have strong evidence that firms’ productivity is positively related with the volume of nearby employment. Most of the empirical findings concern firms in the formal sector and, accordingly, the literature says little about the effect of agglomeration on informal firms’ location. However, this effect is crucial for developing countries where informal work is the main option for less-educated workers facing unemployment.

Analysis of the Formal/Informal Wage Inequalities in Colombia: A Semiparametric Approach

2020 ◽  
pp. 193672442097534
Author(s):  
Josefa Ramoni-Perazzi ◽  
Giampaolo Orlandoni-Merli
Keyword(s):  
Informal Sector ◽  
Comparative Advantage ◽  
Wage Gap ◽  
Kernel Density ◽  
Household Survey ◽  
Density Functions ◽  
Formal Sector ◽  
Semiparametric Approach ◽  
Informal Sector Worker ◽  
Wage Inequalities

Informality is a common problem in Colombia, with almost 50 percent of the workers employed in this sector. This may be a solution for unemployment, but it is a lose/lose game unless the individuals have a comparative advantage in the informal sector. This article uses information from the Colombian Great Integrated Household Survey (GIHS) to analyze the wage gap between formal and informal urban sectors in two different periods, 2008:4 and 2017:4, using a semiparametric approach. Kernel density functions by groups are estimated; counterfactuals are generated by weighting wages of informal sector workers by their probability of working in the formal sector, to estimate how much an informal sector worker could make if treated as formal, according to his characteristics. The results indicate that only some groups (self-employed and some entrepreneurs) are better off if formalized.

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