Economic Recession, Informal Sector and Skilled–Unskilled Wage Disparity in a Developing Economy: A Trade-Theoretical Analysis

Abstract

The paper analyses some selective aspects of economic crises, namely skilled-sector recession, reversed international migration of labour and decline in foreign capital inflow on the informal sector employment and wage rate in developing economies and seeks to explain the non-monotonic effect on the informal sector both across nations and within nation across sectors. In so doing, we develop three-sector General Equilibrium models under two different scenarios which may apply to a large class of emerging market economies. In the first model, we have a traded informal export sector, and the role of the non-traded informal sector in the presence of credit market imperfection is analysed in the second model. Skilled-sector recession produces a favourable (unfavourable) effect on the workers employed in the traded informal sector (non-traded informal sector) due to an induced complementary relationship between the high-skilled export sector and the informal sector. A fall in emigration level of skilled or unskilled worker and a decline in foreign capital inflow hurt the workers in the informal traded sector, while the workers in the non-traded informal sector gain. The results of the paper reflect contradictions of an emerging economy, which is essentially hybrid economics in which capitalist nucleus has a conditional-conditioning relationship with an archaic structure. JEL Codes: F13, J31