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Trade Reform and Informal Wages

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  • Sugata Marjit
  • Saibal Kar
  • Hamid Beladi

Abstract

When trade reform contracts protected formal sectors in developing countries and the formal workers move to the informal sector for employment, does that reduce informal wages? Using a 2 � 2 Heckscher-Ohlin-Samuelson (HOS) structure with formal-informal production organization for the same commodity, we show that a tariff cut in the import-competing sector increases both informal wage and employment under very reasonable assumptions. An increase in the price of the export commodity will also increase informal wages, although aggregate informal employment unambiguously falls even if the informal export sector is labor intensive. Furthermore, the formal-informal segmentation of each sector opens up an interesting, hitherto unexplored, possibility that the informal export sector may contract despite a price increase in this sector. Change in the overall size of the export sector is also ambiguous and conditional on the relative strengths of changes in these two segments. Copyright � 2007 The Authors; Journal compilation � 2007 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of Development Economics.

Volume (Year): 11 (2007)
Issue (Month): 2 (05)
Pages: 313-320

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Handle: RePEc:bla:rdevec:v:11:y:2007:i:2:p:313-320

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=1363-6669

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Cited by:
  1. PHAM Thi Hong Hanh, 2011. "Globalisation versus Informality: Evidence from developing countries," FIW Working Paper series 074, FIW.
  2. Kar, Saibal & Marjit, Sugata, 2009. "Urban informal sector and poverty," International Review of Economics & Finance, Elsevier, vol. 18(4), pages 631-642, October.
  3. Kar, Saibal & Marjit, Sugata, 2011. "Firm Heterogeneity, Informal Wage and Good Governance," IZA Discussion Papers 5978, Institute for the Study of Labor (IZA).
  4. Roychowdhury, Punarjit & Dutta, Mousumi, 2011. "Regulation, governance and informality: an empirical analysis of selected countries," MPRA Paper 33775, University Library of Munich, Germany.
  5. Marjit, Sugata & Mandal, Biswajit, 2010. "Extortion and Informal Sector in a Small Open Economy," MPRA Paper 25044, University Library of Munich, Germany.
  6. Arvin-Rad, Hassan & Basu, Arnab K. & Willumsen, Maria, 2010. "Economic reform, informal-formal sector linkages and intervention in the informal sector in developing countries: A paradox," International Review of Economics & Finance, Elsevier, vol. 19(4), pages 662-670, October.
  7. Mukherjee, Soumyatanu & Zafar, Sameen, 2014. "Technological progress with segmented factor markets and welfare implications for the urban poor," MPRA Paper 55297, University Library of Munich, Germany.
  8. Marjit, Sugata & Kar, Saibal, 2007. "Labor productivity growth, informal wage and capital mobility: A general equilibrium analysis," MPRA Paper 23912, University Library of Munich, Germany, revised 2008.
  9. Marjit, Sugata & Kar, Saibal & Maiti, Dibyendu, 2008. "Labor market reform and poverty – the role of informal sector," MPRA Paper 23999, University Library of Munich, Germany, revised 2009.

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