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Investment and wage gap in India: a general equilibrium analysis
Published in Emerald Publishing
Volume: 11
Issue: 2
Pages: 107 - 135


This paper aims to theoretically find out whether investments could close the formal-informal wage gap in India.


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.


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.


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.

About the journal
JournalData powered by TypesetIndian Growth and Development Review
PublisherData powered by TypesetEmerald Publishing
Open AccessNo