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Informal Wage And Formal Sector Productivity : Theory And Evidences From India

Listed author(s):
  • Dibyendu Maiti


  • Sugata Marjit

We express a doubt on the conventional wisdom namely, of a positive relationship between wage and productivity, of a formal sector firm in a developing economy where the firm can either go for subcontracting to the informal sector to minimize wage cost along with apprehension of extra-legal cost and/or investment in R&D for in-house production. We show that a rise of the formal wage does not necessarily ensure higher R&D and labour-productivity of the formal firm while a rise of the informal sector wage must improve R&D and the resultant labour-productivity in the firm. Thus countries with a vast segment of lowly-paid informal workers will also exhibit lowly-productive formal sector workers.

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Paper provided by East Asian Bureau of Economic Research in its series Labor Economics Working Papers with number 22928.

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Date of creation: Jan 2009
Handle: RePEc:eab:laborw:22928
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