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Informal sector, income inequality and economic development

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  • Bhattacharya, Prabir C.

Abstract

This paper addresses - with the help of numerical simulations - some of the issues relating to income distribution in the context of development of an economy with an informal sector and migration of both low- and high-skilled workers from the rural to the urban area. A major aim has been to see under what conditions we do or do not get an inverted U-shaped curve of income distribution. The paper finds that the tendency always is for the Gini coefficient to rise and then decline. However, once it starts declining, it need not continuously decline; it may rise, then decline, then rise again and indeed rise above the previous peak before starting to decline again and may well end at the end of the simulation at a higher value than at the start. Any case for the redistribution of income is seen to be much stronger at the later stages of development that at earlier stages, even though at later stages, Gini coefficient may be lower than at earlier stages. The policy implications of the findings are considered.

Suggested Citation

  • Bhattacharya, Prabir C., 2011. "Informal sector, income inequality and economic development," Economic Modelling, Elsevier, vol. 28(3), pages 820-830, May.
  • Handle: RePEc:eee:ecmode:v:28:y:2011:i:3:p:820-830
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    References listed on IDEAS

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    1. Yellen, Janet L, 1984. "Efficiency Wage Models of Unemployment," American Economic Review, American Economic Association, vol. 74(2), pages 200-205, May.
    2. Winchester, Niven & Greenaway, David, 2007. "Rising wage inequality and capital-skill complementarity," Journal of Policy Modeling, Elsevier, vol. 29(1), pages 41-54.
    3. Prabir C. Bhattacharya, 2007. "Informal Sector, Income Inequality and Economic Development," CERT Discussion Papers 0709, Centre for Economic Reform and Transformation, Heriot Watt University.
    4. Campano, Fred & Salvatore, Dominick, 2007. "Economic development and income distribution," Journal of Policy Modeling, Elsevier, vol. 29(4), pages 553-566.
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    6. Anand, Sudhir & Kanbur, S. M. R., 1993. "The Kuznets process and the inequality--development relationship," Journal of Development Economics, Elsevier, vol. 40(1), pages 25-52, February.
    7. Prabir C. Bhattacharya, 2002. "Rural-to-urban migration in LDCS: a test of two rival models," Journal of International Development, John Wiley & Sons, Ltd., vol. 14(7), pages 951-972.
    8. Williamson, Jeffrey G., 1988. "Migration and urbanization," Handbook of Development Economics,in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 1, chapter 11, pages 425-465 Elsevier.
    9. Papanek, Gustav F. & Kyn, Oldrich, 1986. "The effect on income distribution of development, the growth rate and economic strategy," Journal of Development Economics, Elsevier, vol. 23(1), pages 55-65, September.
    10. Harris, John R & Todaro, Michael P, 1970. "Migration, Unemployment & Development: A Two-Sector Analysis," American Economic Review, American Economic Association, vol. 60(1), pages 126-142, March.
    11. Prabir C. Bhattacharya, 1998. "Migration, employment and development: a three-sector analysis," Journal of International Development, John Wiley & Sons, Ltd., vol. 10(7), pages 899-921.
    12. Prabir C. Bhattacharya, 1996. "The role of the informal sector in structural transformation: Some Indian evidence," Journal of International Development, John Wiley & Sons, Ltd., vol. 8(1), pages 83-94.
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    Cited by:

    1. Prabir C. Bhattacharya, 2015. "A Model of Optimal Development: Further Results," Heriot-Watt University Economics Discussion Papers 1504a, Department of Economics, School of Management and Languages, Heriot Watt University.
    2. Chambers, Dustin & Dhongde, Shatakshee, 2016. "Convergence in income distributions: Evidence from a panel of countries," Economic Modelling, Elsevier, vol. 59(C), pages 262-270.

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