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Subcontracting and the Size and Composition of the Informal Sector: Evidence from Indian Manufacturing

  • Moreno-Monroy, Ana Isabel

    ()

    (Rovira i Virgili University)

  • Pieters, Janneke

    ()

    (Wageningen University)

  • Erumban, Abdul Azeez

    ()

    (University of Groningen)

This paper analyzes the relationship between formal sector subcontracting and the evolution of the informal sector using nationally representative survey data of Indian manufacturing enterprises for the period 1995-2006. In these years of fast economic growth, subcontracting by formal enterprises gained importance, while the informal sector continued to account for 90 per cent of total manufacturing employment. In order to contrast between a 'modernization' and a 'stagnation' view on formal-informal production linkages, we test whether subcontracting is related to the size of more modern versus more traditional segments of the informal sector. The results show that formal sector subcontracting is positively related to the size of the informal sector only for the most modern informal activities, supporting the view that subcontracting is related to informal sector modernization. We find no support for the claim that the continued expansion of very traditional informal activities is related to increased outsourcing by formal manufacturing enterprises.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6785.

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Length: 31 pages
Date of creation: Aug 2012
Date of revision:
Publication status: published in: IZA Journal of Labor & Development, 2014, 3(22)
Handle: RePEc:iza:izadps:dp6785
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  1. Philippe Aghion & Robin Burgess & Stephen Redding & Fabrizio Zilibotti, 2006. "The unequal effects of liberalization: evidence from dismantling the License Raj in India," LSE Research Online Documents on Economics 3773, London School of Economics and Political Science, LSE Library.
  2. Ejaz Ghani & William R. Kerr & Stephen D. O'Connell, 2011. "Spatial Determinants of Entrepreneurship in India," NBER Working Papers 17514, National Bureau of Economic Research, Inc.
  3. Rob Davies & James Thurlow, 2010. "Formal–Informal Economy Linkages And Unemployment In South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 78(4), pages 437-459, December.
  4. Maloney, William F., 2004. "Informality Revisited," World Development, Elsevier, vol. 32(7), pages 1159-1178, July.
  5. Dibyendu Maiti, 2008. "The organisational morphology of rural industries and its dynamics in liberalised India: a study of West Bengal," Cambridge Journal of Economics, Oxford University Press, vol. 32(4), pages 577-591, July.
  6. Günther, Isabel & Launov, Andrey, 2012. "Informal employment in developing countries," Journal of Development Economics, Elsevier, vol. 97(1), pages 88-98.
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