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IIM Indore

Both skilled and unskilled workers are employed formally and informally in developing economies. However, workers employed informally are often discriminated–they receive lower returns to their individual characteristics compared to those employed formally. What would be the skilled-unskilled wage gap if there were no such discrimination in the labour market? We show that the with-discrimination wage gap is more if the unskilled workers are discriminated more in their employment-share weighted terms. We propose a methodology based on Oaxaca-Blinder decomposition technique to estimate the without-discrimination wage gap, apply it to four rounds of Indian NSSO employment data and find that (i) both types of workers face discrimination, and (ii) the without-discrimination wage gap is significantly less. We also check for the possibility of female workers getting discriminated more in informal employment. © 2020 Informa UK Limited, trading as Taylor & Francis Group.

Economics

World University root node

Scopus

Skilled-unskilled wage gap without discrimination–the case of India

We build a two-sector general equilibrium growth model with capital-intensive consumption goods and a labour-intensive investment goods sector to investigate the coexistence of growth and unemployment. The model uses heterogeneity in saving behaviour, introduces an effective demand problem, has full employment of capital with input non-substitutability and shows that the aggregate labour employment is determined by available capital along with commodity market equilibrium. The long-run growth may not be balanced, and under biased growth, the level of unemployment may monotonically increase or decrease over time, or may first increase (decrease) and then decrease (increase). Such possible unemployment paths help us tightly define “jobless growth”. © 2020 John Wiley & Sons Ltd

Growth, income distribution and unemployment in a two-sector economy

This paper studies, how allowing foreign capital flows in a developing economy will impact the inter-sector dynamics in terms of allocation of factors of production, relative output and real exchange rate. This paper introduces foreign capital flows to the theory of structural change and unbalanced economic growth (which is predominantly a closed economy framework).The theory of structural change and unbalanced economic growth takes a contrarian view to the standard growth theoretical models based on “Kaldor Facts”. This theory states that as an economy grows and accumulates capital, the sector that has more income elastic consumption and greater capital intensity grows faster than the sector which has a lower income elastic consumption and lower capital intensity. This asymmetric growth leads to unbalanced economic growth and change in relative price among the sectors. Such divergence in sector-wise growth rates is in contrary to the traditional growth theory (which is based on “Kaldor Facts”).This paper has proposed a developing open economy model having two sectors namely traded sector and non-traded sector. The traded sector has higher income elastic consumption along with higher capital intensity &amp; productivity growth as compared to the non-traded sector. The economy has demand side imbalances in form of non-homothetic preferences. The supply side imbalances is in the form of different capital intensity along with different growth rate of productivity across sectors. We have derived the path of aggregate capital stock per unit of labor, sector-wise allocation of factors of production (capital and labor) and relative price path of non-traded to traded sector goods. The results indicate that as an economy grows and accumulates capital, the factors of production start moving out from non-traded sector to traded sector. As a result, the traded sector starts to grow faster than that of non-traded sector. Also the relative price of non-traded sector to the traded sector goods rises (real exchange rate appreciates) with capital accumulation in the economy thereby creating additional pressure on inflation. This inflationary pressure adversely affects competitiveness of domestic firms in international markets and make domestic investment less attractive. Our findings can be linked with the workings of Kalecki (1955) i.e. “The problem of financing economic development” where it states that as an economy grows the subsistence sector shrinks as compared to the income elastic sector. This causes the aggregate price levels to increase.This paper not only extends the theory of structural change and unbalanced economic growth to open economy framework but also introduces non-homothetic preferences to traditional open economy literature which is based on Dependent Economy Framework which predominantly assumes homothetic preferences.

SSRN

International Capital Flows and Structural Change in a Developing Open Economy

The withdrawal of high-denomination paper money in India—popularly termed ‘demonetization’—has generated interest among common people to understand what the usual macroeconomic consequences of such one-time monetary shock are. This article conjectures (a) that such unanticipated supply-side replacement of paper money of higher denominations may lead to a currency ‘trap’ in the short run and a permanent increase in the hoarding of lower denomination currencies in the long run and (b) that the effect on the GDP in the medium run can be ambiguous in a simple IS-LM framework once the effects of variable price level and changing inflation expectations are captured through the presence of an informal sector. JEL Classification: E 12, E 26, E 44, E 52. © 2019 SAGE Publications.

Fulltext

The Macroeconomics of Demonetization: Theory and Some Conjectures

PurposeThis paper aims to theoretically find out whether investments could close the formal-informal wage gap in India.Design/methodology/approachThe 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.FindingsWith 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/valueThough 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.

Indian Growth and Development Review

Investment and wage gap in India: a general equilibrium analysis

The interconnection between relative price movements, structural change, and inflation targeting in a developing economy like India is studied through a simple macroeconomic model. Different sectors of a developing economy belong to distinctly different stages of development and grow at different rates. It is argued that changes in relative price and structural change are endogenously determined by imbalances in sectoral growth rates.

Economic and Political Weekly

Inflation Targeting amidst Structural Change

The interconnection between relative price movements, structural change, and inflation targeting in a developing economy like India is studied through a simple macroeconomic model. Different sectors of a developing economy belong to distinctly different stages of development and grow at different rates. It is argued that changes in relative price and structural change are endogenously determined by imbalances in sectoral growth rates.

Inflation targeting amidst structural change: Some analytics for developing economies

The paper presents a general equilibrium model of a developing economy with a capital intensive formal sector and a large informal sector with sector‐specific capital to analyse the effects of investments on the sectoral returns to capital, sectoral wage rates, and composition of output and employment. Beginning with capital market disequilibrium (unequal sectoral rates of return) and labour market distortion (formal‐informal wage gap), the model traces the evolution of the economy till capital market equilibrium is attained. The investments in the formal sector equalise the wages (a “turning point” in growth à la Lewis) and reduces the size of the informal sector. The sectoral rates of returns equalise only if there is no factor intensity reversal, otherwise the economy specialises in the production of formal goods. The investments in the informal sector equalise the rates of return, do not affect the size of the formal sector and finally, a formal‐informal wage gap persists provided factor intensities are not reversed.

Economic Papers

Characterisation of Economic Growth in Developing Economies with Informal Sector

Economic growth across countries is associated with changes in the composition of sectoral output, employment and consumption structure, known as “structural change”. With high growth rates in the Indian economy in the post liberalization period, structural change is expected to be rapid. However, the share of the manufacturing sector has “crossed” over that of the agriculture only very recently from the supply side and yet to cross over from the demand side. Through a simple partial equilibrium model, this paper shows that such slow structural change may be linked to a secular rise in the relative price of agricultural goods in India.

Theoretical Economics Letters

Slow Structural Change in India: Is It Related to Rising Relative Price of Agriculture? A Partial Equilibrium Model

In developing economies like India, ‘informal’ sector occupies a large portion of GDP and employment. In the wake of slowdown in investments across countries and ensuing fall in the GDP growth rates, the question that arises is the following. If an economy suffers from growth slowdown, and since investment is often believed to be a driver of growth, should more investments go to the formal sector or to the informal sector? In what ways outcomes are different in terms of composition of output, employment, and wages? The issue may be a particular interest to India where slowdown in investments is believed to be the primary reason behind the recent sluggish growth of the economy. This paper theoretically evaluates the effects of investments on sectoral wage rates, output and employment composition, and growth in a developing economy consisting of a vast informal sector in a general equilibrium framework with endogenous demand and sector specific capital. The model traces, beginning with capital market disequilibrium and labour market distortion, whether investments into the sectors lead to equilibrium in capital and labour markets over time. This approach is distinctly different from the existing literature that is primarily engaged with finding out comparative statics results of a change in policy variables such as tariff rate and subsidy/tax. This paper also brings in endogenous demand that is mostly missing thus far. The model highlights the following results. Investments in the formal sector increase the size of the sector and cause the informal sector to shrink. The labour market distortion goes away as wages are eventually equalized across the sectors, after which the capital market equilibrium is achieved. Equalisation of wages is similar to the ‘turning point’ of the Lewis model of development. On the other hand, investments in the informal sector increase its own size but do not alter the size of the formal sector. Much contrary to the previous case, capital market equilibrium is achieved first, so the labour market distortion stays, leading to the existence of a persistent wage gap in the long run. One way of avoiding the possibility of the informal sector becoming large in size would be to subsidize the short-run capital return in the formal sector. This of course is a ‘second-best’ policy to counteracting the distortion in the labour market.

The Journal of Developing Areas

Investment and growth in a developing economy with vast informal sector

he link between real and financial markets is a perennial source of debate and research in macro-finance. The issue resurfaces time and again in different forms: Does the functioning of financial systems have any effect on real activity (commodity market)? What is the possible relation between ‘financial’ claims and ‘real’ claims? These questions have gained tremendous currency once again after the subprime crisis and the recent ‘great recession’ in the Euro zone. The purpose of this paper is to analyze how the ‘virtual’ economy, captured through the stock market (because stock markets are an integral part of contemporary financial systems), interacts with the ‘real’ economy producing goods and services. The paper tries to critically understand the short-run interconnections between the expansion of aggregate demand through wealth effect generated by stock market and macroeconomic stability. The paper finds that in a dynamic IS-LM type model with wealth effect, there is a possibility of multiple equilibria and some of them are not stable. Given monetary authority’s emphasis on reducing financial market instability, a stabilization program exercised through monetary policy may fail to work when wealth effect is significant. Instead, redistribution of income through tax may turn out to be more effective.

IUP Journal of Applied Economics

On the Analytical Perspectives of Real-Financial Interaction

WORKING PAPER

Balance Sheet Effect of Real Investment

A vast amount of research has asked how and why the growth rates in the Indian economy have risen in recent decades. Implicit in much of that literature is the belief that if the growth rate has increased it must be because something underlying has changed - had some parameters embedded in the "structure" of the economy not changed, the growth rate would have been constant. This is, however, a presumption that may not be true. The search for structural "breaks" is the outcome of a preoccupation with steady states and constant rates of growth. To redress the balance this article provides some simple examples of models in which the rate of growth is never constant but changes endogenously over time. The lesson therefore is that changes in the growth rate have no necessary link with changes in the underlying economic regime or economic structure. This is not an India-specific point but is based on a general analytical argument.