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Foreign Capital Inflow, Skilled-Unskilled Wage Gap, and Welfare in the Presence of the Informal Sector

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  • Kausik Gupta

    (University of Burdwan, West Bengal, India.)

  • Tania Basu

    (University of Burdwan, West Bengal, India.)

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    Abstract

    This paper attempts to analyse the impact of trade liberalisation on the skilled- unskilled wage gap and the level of welfare of developing countries, which are generally characterised by large “informal” labour markets. A neo-classical full-employment four-sector model has been developed, where the informal sector produces either a final product or an intermediate product on subcontracting basis. Evidence shows that in either case, trade liberalisation, in the form of an increase in foreign capital inflow, widens the skilled-unskilled wage gap of the economy under some reasonable conditions. It also shows that as a result of an increase in the foreign capital inflow, the level of welfare of the economy increases, when the informal sector produces

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    Bibliographic Info

    Article provided by Pakistan Institute of Development Economics in its journal The Pakistan Development Review.

    Volume (Year): 43 (2004)
    Issue (Month): 2 ()
    Pages: 125-147

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    Handle: RePEc:pid:journl:v:43:y:2004:i:2:p:125-147

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    Keywords: Capital Inflow; Informal Sector;

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    References

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    1. Kausik Gupta & Manash Gupta, 1998. "Foreign enclaves and economic development: A theoretical analysis," Journal of Economics, Springer, vol. 67(3), pages 317-336, October.
    2. Chaudhuri, Sarbajit & Mukherjee, Ujjaini, 2002. "Removal of protectionism, foreign investment and welfare in a model of informal sector," Japan and the World Economy, Elsevier, vol. 14(1), pages 101-116, January.
    3. Robert C. Feenstra & Gordon H. Hanson, 1995. "Foreign Investment, Outsourcing and Relative Wages," NBER Working Papers 5121, National Bureau of Economic Research, Inc.
    4. Brecher, Richard A. & Diaz Alejandro, Carlos F., 1977. "Tariffs, foreign capital and immiserizing growth," Journal of International Economics, Elsevier, vol. 7(4), pages 317-322, November.
    5. Manjusri Bandyopadhyay & Manas Gupta, 1995. "Development policies in the presence of an informal sector: A note," Journal of Economics, Springer, vol. 61(3), pages 301-315, October.
    6. Gupta, Manash Ranjan, 1997. "Informal sector and informal capital market in a small open less-developed economy," Journal of Development Economics, Elsevier, vol. 52(2), pages 409-428, April.
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