Technological progress with segmented factor markets and welfare implications for the urban poor

This analysis, in terms of a four-sector static general equilibrium framework, models the urban informal sector for a typical developing economy with labour market distortion in the form of unionised urban sector labour market and capital market segmentation between urban informal and formal credit markets. It has been highlighted in different literature that growth experience in the South Asian countries like India or Pakistan during liberalised regime have primarily been driven by the productivity take-off in the traded sectors. This theoretical analysis offers another attempt to predict the implications of technological progress in the traded formal sectors on informal wage, taking into consideration that real wage is a reasonable benchmark to measure the well-being of the economically marginalised people living under informal arrangements. The key model propositions are further exemplified by a sensitivity analysis using plausible ranges of parameter values for India. We also provide empirical evidence using data on twenty-seven Indian States (including one Union Territory) between 1989 and 2010 on informal wages, capital stocks in informal and formal zones and value-additions in the formal segment to substantiate the model prediction on informal wage depicted in our numerical exercise, which shows that the growth in informal wage could reasonably be linked to the productivity surge in the formal sectors, while greater capital accumulation in the informal units over the formal counterparts has further aggravated this upswing in informal wages.