Investment and wage gap in India: a general equilibrium analysis

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.

Citation

Chattopadhyay, S. (2018), "Investment and wage gap in India: a general equilibrium analysis", Indian Growth and Development Review, Vol. 11 No. 2, pp. 107-135. https://doi.org/10.1108/IGDR-12-2017-0104