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Investment and wage gap in India: a general equilibrium analysis

Author

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  • Subhasankar Chattopadhyay

Abstract

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.

Suggested Citation

  • Subhasankar Chattopadhyay, 2018. "Investment and wage gap in India: a general equilibrium analysis," Indian Growth and Development Review, Emerald Group Publishing Limited, vol. 11(2), pages 107-135, October.
    • Handle: RePEc:eme:igdrpp:igdr-12-2017-0104
    DOI: 10.1108/IGDR-12-2017-0104
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    Cited by:

    1. Alaka Shree Prasad & Biswajit Mandal, 2019. "Time zone difference, skill formation and corrupt informal sector: the role of virtual trade," Indian Economic Review, Springer, vol. 54(2), pages 261-290, December.

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