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A Contemporary Perspective on the Informal Labour Market: Theory, Policy and the Indian Experience

This article looks at the substantial literature that has emerged in recent times on the impact of globalisation, reform and deregulation on the informal labour market, in terms of theory and accompanying empirical evidence. Growth of real informal wage and productivity across all states in India since the early 1990s is an interesting starting point. While it is not a foregone conclusion that a liberal economic environment necessarily benefits such sectors, marketfriendly policies can improve the real income of informal workers and thus can have a substantial effect on urban poverty. Some supportive evidence to this effect has led to analytical models that investigate these issues closely. The analysis here shows that deregulated economies may benefit the informal workers, by raising both wages and employment under certain conditions that depend on inter-sectoral capital mobility. In the process, agriculture and formal manufacturing may suffer. Labour and commodity market reform may have different and contradictory impact on informal labour. Organisational changes in production in a more open economy increase the degree of specialisation, help informal entrepreneurs, and promote exports. Lower tariffs and lower interest rates have opposite impacts on the informal segment of import competitive industries.

SPECIAL ARTICLEapril 4, 2009 vol xliv no 14 EPW Economic & Political Weekly60A Contemporary Perspective on the Informal Labour Market: Theory, Policy and the Indian ExperienceSugata Marjit, Saibal KarThis article looks at the substantial literature that has emerged in recent times on the impact of globalisation, reform and deregulation on the informal labour market, in terms of theory and accompanying empirical evidence. Growth of real informal wage and productivity across all states in India since the early 1990s is an interesting starting point. While it is not a foregone conclusion that a liberal economic environment necessarily benefits such sectors, market-friendly policies can improve the real income of informal workers and thus can have a substantial effect on urban poverty. Some supportive evidence to this effect has led to analytical models that investigate these issues closely. The analysis here shows that deregulated economies may benefit the informal workers, by raising both wages and employment under certain conditions that depend on inter-sectoral capital mobility. In the process, agriculture and formal manufacturing may suffer. Labour and commodity market reform may have different and contradictory impact on informal labour. Organisational changes in production in a more open economy increase the degree of specialisation, help informal entrepreneurs, and promote exports. Lower tariffs and lower interest rates have opposite impacts on the informal segment of import competitive industries. We are indebted to Rajat Acharya, Hamid Beladi, Amit Biswas, Udo Broll, Indraneel Dasgupta, Sudeep Ghosh, Dibyendu Maiti, Sandip Mitra, Vivekananda Mukherjee and others for collaborative research in related areas. Sugata Marjit is also grateful to Ronald Jones, Ravi Kanbur, T N Srinivasan and participants in presentations at conferences, workshops, seminars at the Indian Statistical Institute, Calcutta and Delhi, Universities of Calcutta, Michigan, Monash University, Nottingham and Sydney, Presidency College, Calcutta, IGIDR, Mumbai, WIDER, Helsinki and the MENA division of the World Bank for exciting comments. Saibal Kar thanks WIDER, PEP-Network, Canada, Humboldt Foundation, and conference participants in Colombo, Addis Ababa, University of East Anglia, JNU and CSSSC. Sugata Marjit ( and Saibal Kar ( are with the Centre for Studies in Social Sciences, Calcutta.The informal economy has emerged as one of the most dynamicand active segments in the developing world. Unfortunately, at the same time, it remains one of the least treated subjects in mainstream economic theory and develop-ment economics. No text on international trade or development economics offers a separate chapter on the informal sector in spite of the fact that much of the workforce in poorer countries is in this segment. 1 IntroductionIn India, the informal sector provides livelihood to more than 90% of the population. If Arthur Lewis had re-rewritten a more contemporary version of his classic article (1954) on growth with unlimited supplies of labour, he would have definitely brought this phenomenon to the core of development analysis. It should be noted that Harris and Todaro (1970) failed to recognise the fact that open unemployment among the poor and relatively un-skilled in anticipation of uncertain future formal employment is not a viable proposition in the face of dire survival needs. In fact, choosing to remain unemployed especially in the absence of social assistance programmes may be construed as inconsistent with the socio-economic conditions of the very poor workers whomigrate to escape starvation in the rural sector. Fields (1975), using a closer approach to Lewis’ basic model, however, included a third option for the migrants in terms of the urban informal sector, albeit the choice to remain unemployed was still an open possibility. More modern treatments of the problem have been able to accommodate both open unemployment and informal employment in the conventional Harris-Todaro framework guaranteeing the fact that informal wage does not fall below theruralwage, in fact, the urban informal wage is held equal to the rural wage owing to perfect intersectoral mobility of labour (Marjit and Beladi 2008).As has been shown in some of the contemporary studies that we take up for detailed discussion shortly, markets and competi-tion both play dominant roles in determining wages in the infor-mal sector. In the presence of a huge pool of unskilled labour, agriculture, a large component of the informal sector, might naturally exhibit “full employment” particularly with the large number of agricultural labourers sharing the minimum possible wage either in kind or cash and suffering from the usual eco-nomic maladies of poor countries, including food insecurity and malnutrition. A huge drop in the land-man ratio may not cause open unemployment, but will devastate the per capita income for agricultural workers. It may be argued that the problem for
SPECIAL ARTICLEEconomic & Political Weekly EPW april 4, 2009 vol xliv no 1461theverypoorandthe unskilled was never lack of jobs, but the wage rate or the price at which poor workers were likely to find such employment.It should be clearly noted that studies that deal with minimum wage, open unemployment, wage negotiations, employment subsidies, and etc, essentially cover a small percentage of the labour force in poor countries. This leaves out the majority for which the wage level and not the employment status is a more tenable criterion for measuring the conditions of living and there-fore the issues of wage determination and movements should have received more attention than it ever did. For a distribution of employment highly skewed in favour of the informal sector, any set of policy parameters decided in the formal or organised segment, generally witnesses a palpable and significant spillover into the informal sector in terms of returns to capital and labour. The studies that are discussed here mainly fill this gap in the existing literature by treating the informal sector in a general equilibrium framework.The approach has therefore been geared to address the wide-spread reluctance to pursue general equilibrium analyses for understanding some of the idiosyncratic features embedded in the interactions between the formal and the informal sectors. To the best of our knowledge, none of the prior theoretical and empirical studies on the informal sector discussed the general equilibrium effects of intersectoral mobility of capital and labour or of labour productivity in both and its relationship with wages. The lack of attempts might have been caused by the fact that sometimes such movements are very slow and often invisible, particularly due to constrictions created by state regulations, social constraints, or risks and uncertainties. At other times, such movements may be quite rapid and, in effect, substantiate the theory that resources in the long run do have a tendency to move from low to high return sectors. In most previous cases, the view was restricted to one single industry, or one production unit, or even one particular location. Analysis of the general conditions based on partial evidence is naturally exposed to the risk of biased relationship between economic changes and the health of a particular sector. The case of the informal sector in India has not been an exception in this regard. In some of the later studies it is pointed out that if capital is treated as a “black box” one may also obtain biased outcomes regarding wage-employment move-ments laden with misspecification problems.Thus, one recurrent theme that we shall discuss deals with how the informal wage responds to unemployment among the formal or organised/unionised segment of individual industry types. It has been shown theoretically (Marjit 2003; Marjit and Kar 2004; Marjit, Kar and Acharyya 2007; Marjit, Kar and Beladi 2007; Marjit and Kar 2008 a, b; Marjit Kar and Maity 2008, etc)1 that informal wage can move up or down depending on the assumption on capital mobility between formal and informal activities. These studies use simple general equilibrium expositions to answer a critical question – how do exogenous policy changes in the formal sector affect the wage and employment conditions in the informal sector? In the entire post-1990s decade and up to very recent times, employment in the manufacturing sector and wages in the organised sector did not show much improvement, and neither did its capital stock. The productivity growth has also been quite limited. Compared to this, data on the wage- employment and productivity within the informal sector as avail-able from the National Sample Survey Organisation (NSSO) for most of the states and union territories in India tell a completely different story. It has been empirically verified that, labour pro-ductivity, fixed assets, per unit value added and real wages in the informal sector, all have improved in comparison with the typical organised sector in India. Without capital accumulation in this sector, the observed upward wage movement or productivity growth would not have been possible.In the development discourse, whatever be its ideological or rhetorical origin, “informal” is a derogatory term. Workers in this sector are sometimes coined as marginalised, underprivileged, dying to be formalised, located at the receiving end of liberal policies, suffering from undesired pitfalls of free market mecha-nisms, etc. Without denying the fact that the conditions of work in these sectors can be quite deplorable and raising them to acceptable standards is the need of the hour, one could still highlight the point that this sector, like many others, may easily get the benefit of a more open and liberal economic environ-ment. This point has been noted in various recent works, such as, Harris-White and Sinha (2007) in the context of India. It is important to realise that the informal sector can be far more dynamic than the organised sector provided they have the right opportunities to flourish. Contrary to the general wisdom, the informal sector is not synonymous with an entity that necessarily stagnates in a low level equilibrium trap, in fact both informal manufacturing units and self-employed units accumulate fixed assets, invest and prosper and they may do so even at a time when their formal counterparts are often mired in complex regulations and not successful in protecting their self-interests in transition. No doubt, outcomes facing informal units are more likely to be mixed than uniform, but there are situations when markets deliver clear benefits to workers engaged in this sector. It is however, contingent not only on the degree of capital mobility as the pre-deployed capital needs to be reallocated from non-viable sectors to those offering higher returns, but also on institutional capabilities to reformulate existing regulations.A number of issues that necessitate discussion at an early stage have to do with the emergence, sustenance and characterisation of the informal economy. What causes the informal sector to emerge and grow? Is it all economics or a refined political strategy? What are the focal points of analyses that relate informal labour to the broader issue of development? Is formalising the informal the right solution? These will be discussed in the second section of our paper. We will also try to highlight some work done in the interface of economics and politics, including those on the asso-ciation of informality with property rights, social welfare and the general issue of governance.The third section discusses trade reform and the role of capital mobility on informal wage and employment. The fourth section discusses productivity growth in the skilled sector and its result-ant impact on informal wage related issues and the Indian evidence. The last section concludes.
SPECIAL ARTICLEapril 4, 2009 vol xliv no 14 EPW Economic & Political Weekly622 The Origin and Sustenance: A Political PerspectiveDefinition of informal activities can be both varied and quite specific. The populist interpretation seems to be in terms of activities that are illegal, or at least extra-legal often amounting to criminal activities, highlighting tax evasion and/or undocu-mented production-employment relations. In a broader context unregistered firms escaping tax payments, labour regulations, environmental strictures or indulging deliberately in unrecorded activities, would be treated as the informal sector. For our purpose we shall concentrate on such activities that are extra legal, i e, in violation of some officially specified codes of conduct but are not criminal activities. In this set of activities we shall isolate the case of the labour market where in one of the segments, labour regulations, officially recognised collective bargaining process, taxes or for that matter any institutional obligations are largely ignored; while the other is a unionised high wage sector. The issue of factor mobility between the formal and the competi-tive low wage informal sector constitute the core of our general equilibrium analysis. For analytical simplicity and to avoid unnecessary complications we shall use the terms informal and unorganised interchangeably.However, before we land into the analytical domain of models dealing with informal labour, we must offer a discussion on why and how the informal sector has emerged and whether it is adeterrent to the process of development. Is it partly a conscious choice of the state or is it something that is imposed on the state?The borderline between legal and extra legal can be an endogenous political choice in a democracy, a thesis which has again been somewhat neglected in discussions on politics and economics of development.A couple of texts that set the stage for such discussions are by Hernando De Soto (2000) and Avinash Dixit (2004), although they are written from two different perspectives. De Soto’s book, Mystery of Capital talks about the lack of property rights and legal contracts in the informal segment that locks in huge amount of capital, blocking development all around. The policy of guaranteeing property rights, enforcement of legal contracts, etc, is expected to release capital for investment and growth. Dixit, on the other hand, talks about lawlessness of economics that necessitates appropriately designed contracts needed for conducting business. Dixit’s book is a technical manuscript rep-resenting the intricacies of contractual arrangements. De Soto’s is a more casual empirical work with persuasive anecdotes. Nevertheless, both in a sense admit the problems of informality in economic activities. While De Soto talks about legalising the extra-legal, Dixit provides a workable structure within the domain of the extra-legal. Both of these approaches indirectly hold the state and the regulatory structures responsible for the emergence of informal arrangements and formalising the informal seems to be the first best choice that is somehow not implemented by the state.Contrary to these, two recent studies by Marjit, Mukherjee and Kolmar (2006) and Dasgupta and Marjit (2006) provide political rationale to the part of the state to perpetuate informal arrange-ments. The first one argues that given high incidence of poverty and absence of a social welfare system, a democratic state uses the informal sector as a buffer for the poor people. The extra legal occupations work as substitutes for social security and emergeas an innovative and effective re-distributive strategy. The degree of enforcement of property rights itself becomes a strategic political variable. The existence of an unorganised sector helps the organised firms to take advantage of liberal economic policies and in a way use a disadvantage to gain com-petitive advantages, locally and globally. This is amply demon-strated in Marjit and Maiti (2006) and Maiti and Marjit (2008). Dasgupta and Marjit (2006) use a framework with unionised la-bour and informal workers and show that the state will have rea-sons to undermine the strength of trade unions and stealthily promote the culture of informal sector, again to push forward liberal policies. Essentially, these papers look at the possible reasons as to why the State may be reluctant in clearly defining theboundaries of legal institutions and consequently chose an optimal degree of enforcement. In a related paper Sarkar (2006) writes on the economic policies of the left-ruled state government in West Bengal and argues that the ruling coalition has encouraged formation of the informal sector as if on a clientele mode, such that they are always in a position to control the economic lives of the poor. This is also in line with the general tenet of the argument that the informal sector becomes a necessary element of state sponsored political strategy, especially when the institutions themselves are endog-enously designed and their limits are manipulated to obtain high-est political returns. It may perhaps be best viewed as the well-known dilemma of rules versus discretion as exemplified in the macroeconomic theory in a different context (Barro and Gordon 1983). Institutional commitment specifies certain rules of the game relatively sticky and unmanipulable. On the other hand, the state sometimes needs flexibility to foster adopted policies and at times to steer political self-interest. Informal sector pro-vides a great opportunity to practise discretion. Great many con-cerns behind formalising the informal often miss out this simple motivation of a democracy. Marcoullier and Young (1995) is an elegant piece which is related to the political issues discussed above. It talks about the preda-tory state that uses informal arrangements to extract revenues.In this context it will be interesting to look at the following research question, which seems to address serious contemporary concerns regarding the organisation of production in the informal sector in India. One could extend the line of argument developed by Sarkar (2006) and Marjit, Mukherjee and Kolmar (2006) and analyse how the state actually renders a fairly organised form of political supervision and control of the unorganised sector in India. There seems to be a tremendous “organised” intervention if one takes the case of left-ruled West Bengal. The parallel infor-mal economy employs people, leads to politically recognised and guarded activities, and generates revenues that are redistributed to strengthen political patronage. If markets and policies promote relatively unfettered growth of small private investments, the poor people’s dependence on politics and politicians will be far less and that undoubtedly poses a threat to the political power structure. Full-blown market capitalism, if it does deliver, will go against such entrenched vested interest. Yet, politicians need
SPECIAL ARTICLEEconomic & Political Weekly EPW april 4, 2009 vol xliv no 1463markets, to the extent it absorbs the poor and helps them to have an economically meaningful existence.The fear of massive social unrest and revolution powerful enough to shatter the very foundation of political power in a democracy seems to have been an important concern behind such huge patronage of the informal sector acting as a pure sub-stitute for the front-door development efforts on the part of the governments. It is this kind of love-hate relationship that makes the informal sector a strategic conduit of development. This issue remains a wide and open research question.3 Informal Sector in General EquilibriumIt is perhaps doubly important to recognise that even under such pre-existing conditions as discussed thus far, wage and employ-ment situations in the informal sector across the country have been fairly sensitive to exogenous shocks in international trade and per se to the waves of globalisation. In the existing literature, welfare implications of trade reforms, with the informal sector as an important part of the economy, have recently come up for much discussion (Marjit and Kar 2007; Marjit et al 2007; Chaudhuri and Banerjee 2007; Chaudhuri 2003; Marjit 2003; Chaudhuri and Mukhopadhyay 2002; Chen 2000; Kar and Marjit 2001, etc). A primary reason as argued earlier, is that, leaving out the informal sector fails to capture the actual impact of such policy reforms since on an average 70% of the labour force in the less developed countries (LDCs) work under arrangements outside the purview of what is typically known as the formal/organised sector. Data from the south-east Asian, East European, African, and Latin American countries show varying rates of urban informal sector employment withinthe range of 15% to 20% in Turkey and Slovakia to 80% in Zambia, or even more, to about 83% in Myanmar. Moreover, con-sidering the state of agricultural and rural activities in these countries, it is quite apparent that the total shares of the informal sector in these countries are quite high (ILO 1999). This is also corroborated by some of the other studies (for example, Turnham 1993), which provide evidence that in low-income countries like Nigeria, Bangladesh, Ivory Coast, India, and elsewhere, the share of the urban informal sector is at least as high as 51%. Alternatively, seen from the point of view of the “minimum wage” earners, only 11% of Tunisia’s labour force, for example, is subject to minimum wage; in Mexico and Morocco, a substantive number earns less than the minimum wage; in Taiwan, the minimum wage received by many is less than half of the average wage and, etc (Agenor and Montiel 1996).There are conjectural suggestions that the level of informalisa-tion in a country increases as the economic reforms are initiated. A more general concern that follows is that such expansion will reduce informal wage with retrenched workers crowding in from the formal sector. Some of the above mentioned studies show that despite contraction of the previously protected and often state-run formal sector as a consequence of trade liberalisation, and consequent relocation of relatively unskilled and older work-ers into the informal segment, informal wage can still rise if capi-tal also relocates into the informal sector.Although generally, the informal sector activity pertains to non-traded items in the economy, from street vendors to domestic help, in many countries they produce intermediate goods, processed exportable and import substitutes with subcontracts from the formal sector. In such cases, the formal sector often adds the capital content (like, the brand name) only. In many other cases, informal industries that produce garments, leather goods, small tools and machinery are known to export directly – often by pass-ing the formal regulations and procedures mainly through adja-cent border trade.2 Apart from that, in all the developing coun-tries, agriculture, poultry and fisheries are predominantly out-side the formal sphere and consumer non-durables such as vege-tables, fish and meat are procured from informal producers, processed and traded. Analysing the impact of industrial and trade reform on these activities and on the workers employed therein should offer a wider view in favour of appropriate policy formulations. It is to be noted that given the considerably large share of employment in these sectors even small positive gains in the real wage, can increase the economic attainments of millions in most developing and transition countries.As briefly referred to earlier, let us re-emphasise the fact that mobility and more specifically the degree of mobility of capital is one of the most instrumental factors behind tracing the connec-tion between either prosperity or ruin in the formal sector to the implications it might have for the informal counterpart. In this connection, it is imperative to discuss the precise mechanism that captures the issue of capital mobility, typically since there is neither a measure nor statistical evidence on how capital takes flight from dwindling industries and relocates into the prospering ones. Marjit (2003) and later Marjit and Kar (2007), Marjit, Kar and Beladi (2007) explore this issue in greater detail. Of these, Marjit (2003) shows that even if a part of the informal sector is verti-cally linked with the formal sector and the formal sector con-tracts due to trade liberalisation, informal wage can still increase. In the other paper capital mobility plays a major role in a two sector formal-informal framework. Capital immobility reduces informal wage when informal employment expands, whereas allowing for freer capital mobility leads to exactly opposite outcomes.While there are several other mechanisms that can generate such positive economic impact for the existing group, here the argument behind invoking the issue of capital mobility comes from the observation that several developing countries have been experimenting with policies on trade reform for quite some time, wherein the critical feature has been the contraction of the formal protected industries, either, via, import liberalisation or through state initiatives in withdrawing support from loss-making public enterprises. This implies that a large amount of capital and labour that were earlier part of these industries would now have to relocate to a more profitable venture. In most of these countries, the vacuum left by the vanishing large-scale public industries have been filled not by similar manufacturing units, but by predominantly service-oriented industrial structure which faces less stringentlabour laws and industrial regulations. And, moreover, the new opportu-nities that have emerged in the so-called sunshine industries are incapable of accommodating the retrenched capital and labour, a larger share of which has hence been devoted to less formal applications. There may be several explanationsforthistransition, which include the fact that workers intypicalimport-competing
SPECIAL ARTICLEapril 4, 2009 vol xliv no 14 EPW Economic & Political Weekly64publicorprivateenterprises would not find an easy accesstothe more formal service industries, which recruit high-skilled profes-sionals with advanced technical expertise that these older indus-tries rarely employed. We present a formal model below, which cap-tures the exact mechanism whereby capital mobility affects the informal wage subject to downsizing of the formal sector.Assume a two-sector small open economy.X is produced in the formal manufacturing sector andY is the informal manufacturing sector. BothX andY use labour and capital. Wage in the formal segment is fixed through bargaining. Initially,X is protected ei-ther through a tariff or by a state subsidy, which artificially in-creases the price of X. Trade reform or withdrawal of subsidy im-plies a decline in the tariff/subsidy rate, denoted byt. Workers, who do not find jobs in the formal sector flock in sector Y where they receive the market determined wage rate. We call this the informal wage. There is no open unemployment in this model. People must find jobs to survive, and wage in the informal sector adjusts fully to accommodate workers moving into the sector. Markets are competitive and technology exhibitsCRS and dimin-ishing marginal productivity.The model is similar in spirit to Agenor and Montiel (1996), Carruth and Oswald (1981), Marjit and Beladi (2002) and Marjit (2003). Capital and land are fully employed.The symbols we use are given as follows:w: Formal unionised wage; w: Informal (flexible) wageri:Return to capital in sector i, i=X, Y; X: Output of formal sector;Y: Output of informal sector; (PX, PY): Exogenous commodity pricesL: Supply of labour; K: Total supply of capitalKi: Supply of capital in sector i; (aLX, aLY): Per unit labour use inX andY.(aKX, aKY): Per unit capital use inX andY; t: Import tariff.‘^’ represents percentage changes for particular variables and symbols used bear the same implications as in Jones (1965).Competitive price equations that describe the system are given by,waLX+ rXaKX = PX(1+t) ...(1)waLY + rYaKY = PY ...(2)Commodity prices are given from the rest of the world. Let us supposeY is exported andX is imported.Full employment conditions imply:a LXX + aLYY = L ...(3)KX + KY = K ...(4)aKXX = KX ...(5)aKYY = KY ...(6)Let ^wbe so determined that,^w = α ^PX + β^PY, 0 < α, β <1 ...(7)Finally, the capital mobility condition:KX rX— = φ(—), φ’ > 0 KY rY ...(8)Equation (8) suggests the following. At any point of time K is allocated betweenX andY. But such allocation depends on return differential. Hence there is imperfect mobility of capital. If rX(—) rY, increases, KX—KY will also increases. KX—KY describes the relative supply of capital in sector X. The usual way to model this is to assume sector-specific capital for X andY without any mobility withφ’=0. Perfect mobility will always imply ry =rx and there is no relevance for a separate sectoral supply function of capital. Relative supply adjusts to demand in each sector and this is the standard Heck-scher-Ohlin structure. We shall demonstrate that our compara-tive static depends on the curvature of φ’=0. Given (PX + t, PY),w, L, and K, we have w, rX, rY, X, Y, KX, KY to solve from (1)-(6) and (8). The determination of general equilib-rium proceeds as follows. From (1) we can determinerx. Now using (4) and (8) we get (8)′.K – KY rX——– =φ(— )KY rY ...(8)’AsrY increases, givenrX andφ’ > 0, KY must rise. This defines the relationship MM in figure (1). Now using (5), (6) and (3),aLX aLY—– (K – KY) + —– KY = LaKX aKY ...(9)SincerX is given byCRS, aLX—–aKX is given. Now asrY increases, from (2),rY— w must rise and aLY—–aKY must rise as well. Hence in equation (9) theLHS unambiguously increases. To bring back the balance KY must fall substantially. As long as aLY—–aKY> aLX—–aKX, LHS must decrease with a decline inKY. Such an assumption implies that the informal sector is labour-intensive; an assumption by virtue of being real-istic is kept all through the paper. Therefore asrY rises,KY must fall. This definesFF in Figure 1 (p 65). Once (rY, KY) are determined from Figure 1, the rest of the variables can be determined easily.The key comparative static exercise we are interested in is a decline in‘t’. Figure (1) helps us to trace out the consequences of both. A decline int reducesrX, given w andPx. Given rY ca drop in rX increasesKY, asφ’ > 0. This will mean a rightward shift of MM to M’M’.At the same time given rY andKY, a drop inrX reduces aLX—–aKX and thereforeLHS in (9) declines. The balance is restored through an increase inKY at a given rY. FF shifts to the right as well. The way Figure 2 (p 65) is drawn suggests that Y must expand. But rY may remain unchanged and can in fact go either way. Note that ifMM shifts quite a bit relative to FF, rY will decline and w will increase. The mobility effect has to be significant for a positive effect on the informal wage. A drop inaLX—–aKX releases labour to Y sector, which implies that FF shifts up requiring moreKY to accommo-date displaced labour. Additional capital that comes to Y because rX is lower must outweigh the required amount needed to absorb displaced labour at a given rY, hence at a given w to induce an increase inw. With zero mobilityMM is vertical and remain un-changed. Hence,rY must increase andw must decrease through a shift inFF. With perfect mobilityMM is horizontal atrY = rX and asrX drops,MM shifts down. Notwithstanding the shift inFF, rY must adjust to the new level of rX andw must increase. Figure 3 (p 65) describes the effects of such adjustments.The above two cases explicitly demonstrate the partial and general equilibrium results that can be derived from this model. In Figure 2, the vertical lineMM represents perfect immobility of capital between the formal and the informal segments. Under the circumstances, formal job losses and crowding in of workers into the informal sector leads to wage cuts in the latter. The situation

undergoes a complete reversal if capital is perfectly mobile and is represented by a horizontal line MM (Figures 2 and 3). Retrenchments from the formal sector and additional job creation in the informal could even lead to a wage gain for the informal

workers, thus establishing the general equilibrium implications of our model. Finally, the precise condition for dw > 0 is given




by: ŵ> 0, iff, ε > σXKXf . ...(10)3,4


Figure 1

rY M


r*Y F



Figure 2

rY M

Zero mobility F

F’ M M’

Perfect mobility

r*Y F’


Figure 3





M’ M’

F F’


3.1 Empirical Evidence for India: Capital Mobility and Informal Wage

It is best to admit that relating informal wage and trade liberalisation via intersectoral capital mobility is a more difficult job empirically, than theoretically. The empirical structure is highly dependent on the availability and reliability of data on the informal sector. For India, however, there exist the surveys of informal units by the NSSO – usually five-yearly samples drawn from almost all states and union territories in the more recent years. The survey covers the average yearly wage, employment, major

Economic & Political Weekly EPW april 4, 2009 vol xliv no 14


occupational categories by broad industry types, gender, fixed assets and value added of the informal units classified as nondirectory manufacturing enterprises (NDMEs) and own account enterprises (OAEs), both rural and urban in either case. Given this, our next concern is which variables to use that capture the impact of capital accumulation on wages, best. To this end we take up only urban NDMEs given their strong inter-linkages with the urban formal sector for five consecutive rounds, 1984-85, 1989-90, 1994-95, 1999-2000 and 2000-01, for 17 states in the first period as per availability that extends to all states and union territories for the subsequent rounds. We intend to show that the period of gradual trade liberalisation in India, i e, the post1991 decade which led to closures of many formal and traditional industries releasing unskilled labour in large numbers, coincides significantly with annual (real) growths in (i) urban informal wage (IW), (ii) urban informal fixed assets (as a proxy for capital formation, FA) and (iii) urban informal value added (VA). We estimate the impact of the latter two variables on real informal wage (deflated by 1989-90 consumer price index of India).

The logic behind such modelling emanates from the observation that trade liberalisation drives capital and labour into the informal sector and yet the wage rises across states, steeply for some and moderately for the rest leading to an average annual Table 1: Descriptive Statistics for the Variables (Year-wise)

Year Variables SD Kurtosis Minimum Maximum Observations

Mean Skewness

1989-90 IW 3.45 3.16 (-)18.96 (-)6.75 17

(-)15.08 0.97 FA 4.71 9.29 3.18 26.92

0.54 17

(-)10.75 VA (-)7.90 7.12 4.20 10.00

1.20 (-)19.04 17 1994-95 IW 20.72 0.22

10.97 3.03 (-)0.43 47.97 30 FA 3.23 12.93 5.99 47.98

1.36 (-)19.28 30 VA 5.89 13.31 7.94 56.44

1.98 (-)12.24 30

1999-2000 IW 1.29 7.65 1.26 4.76 (-)9.07 25.49 30 FA 58.50 50.32 4.16 208.01

1.35 (-)13.24 30 VA 42.05 32.67 4.93 140.38

1.47 3.48 30

2000-2001 IW 44.18 28.51 (-)0.52 3.30 (-)37.11 90.74 30 FA (-)10.52 35.77 4.19 99.74

0.87 30

(-)69.15 VA (-)40.18 25.04 4.42 26.49

0.82 30

(-)94.69 All years IW 16.16 26.84 0.81 3.20 (-)37.11 90.74 107 FA 15.10 43.33 1.69 7.54 208.01

(-)69.15 107 VA 0.92 38.68 4.54 140.38

0.59 107

(-)94.69 Description of variables: IW = Annual growth rate of real informal wage. FA = Annual growth rate of real fixed assets. VA = Annual growth rate of real value added.

Table 2: Regression Results for Individual Time-Points Corrected for Heteroscedasticity (Generalised Least Squares, Dependent variable: Annual Growth Rate of IW)

Year Exp Coeff R2R2LL

Variables t-ratio Adj AIC

1989-90 Constant (-) 11.35 (-) 6.70473* 0.48 0.36 5.01 (-) 39.10 FA 0.102

2.588* VA 0.233

5.098* 1994-95 Constant 15.89 8.846* 0.23 0.14 7.59 109.98

(-) FA 0.278

2.190* VA 0.183

1.744** 1999-2000 Constant (-) 3.76 (-) 1.622 0.16 0.06 6.961 (-) 100.42 FA 0.014

0.4587 VA 0.083

2.041** 2000-2001 Constant 5.691* 0.30 0.23 9.41 (-)

69.56 137.09 FA 0.152


VA 0.607


* denotes significance at 5% level and ** denotes significance at 10% level. Adj R2 = adjusted R2, AIC = Akaike Information Criterion, LL = Log-likelihood.


SPECIAL ARTICLEapril 4, 2009 vol xliv no 14 EPW Economic & Political Weekly66real wage growth of 10% somewhat contrary to conventional wisdom (see AppendixII, Figure 1 (p 70), and also for abbreviations for provinces and union territories). What could possibly explain the post-reform average rise in the wage if more unskilled labour formerly part of the organised sector flows into the informal counterpart due to contraction of the formal industries and con-sequent unemployment? It is observed that a rise inFA, an equiv-alent to capital formation, affects the informal wage positively as does a rise in the value added for each such unit. We run individ-ual cross sections for each year and then pool the data for all the available years to run a pseudo-panel regression on the same set of variables to capture the overall impact on real informal wage (Figures 2 and 3 provide the annual growth rates of realFA and realVA, respectively). AppendixII offers detailed descriptive sta-tistics for the variables under consideration and we have checked that there does not exist substantial problem of multi-collinearity among the variables. It should be noted that there are many other important variables that are potential candidates in the exercise, such as wages by gender, specific occupational types, literacy rates and so on, which are excluded here mainly to pro-vide an aggregative explanation of the driving relationship, the growth of the informal wage in a period dominated by industrial trade liberalisation.The state-wise and year-wise movements of the two explanatory variables, informal value added (real VA) and informal fixed assets (realFA) are reported in Tables 8 and 9, respectively (AppendixII). During 1989-90 and 1994-95 immediately after the reforms took effect in India, informal fixed asset shows high growth rate in most of the states while some report negative growth (BH, HP, LA, ME, etc). Between 1994-95 and 1999-2000 in-formal fixed assets grew positively (10% to 150%) for 29 out of 30 locations in India, with the exception of Manipur (MA). The pat-tern, however, seems dampened for many states during 1999-2000 and 2000-01. The real value added (VA) also registered a negative trend for all states except Gujarat and West Bengal during 1984-85 and 1989-90. It underwent a turnaround in the post-reform period, when most states and union territories showed significant increase in the value added. Finally between 1999-2000 and 2000-01 it reports negative growth rates in most states.The dependent variable in our model, the growth rate of real informal wage (IW) shows a negative growth for all the states between 1984-85 and 1989-90. The trend shifted substantially in favour of informal workers in the period im-mediately following the introduction ofeconomic reforms in India. All the states including,GJ, MH, OR (22%), TN, RJ (32%), AP (38%) showed sig-nificant positive annual growth in informal wages. Between 1994-95 and 1999-2000, 29 out of 30 loca-tions, except WB (-2%) show moder-ate positive annual growth of infor-mal wage and the post-reform aver-age annual growth in informal wage is recorded at between 15-20% with a variance of 26% between states.Therefore, using a simple empirical modelwt = at + β1 (FA)t + β2(VA)t + εt ...(11)Table 4: Share of Workers in Unorganised Manufacturing Sector by States (% of total state level manufacturing workers) Without DME With DME 1989-90 1994-95 2000-01 1989-90 1994-95 2000-01Andhra Pradesh 79.77 71.90 79.15 82.07 74.14 81.20Assam 72.71 85.66 83.66 75.21 86.00 84.36Bihar 87.52 90.05 92.67 88.20 90.58 92.95Gujarat 64.90 65.55 63.41 75.19 76.05 72.88Haryana 65.37 53.59 60.12 69.77 60.21 65.90Himachal Pradesh 87.88 76.67 81.84 88.73 78.31 83.87Karnataka 81.86 79.20 81.44 85.61 84.03 84.98Kerala 82.00 63.87 75.86 86.33 69.83 80.28Madhya Pradesh 80.44 79.83 87.23 82.30 81.13 88.28Maharashtra 68.16 62.96 71.94 74.10 72.00 78.43Orissa 95.0495.3695.57 95.20 95.45 95.69Punjab 61.17 55.97 66.47 65.83 62.55 72.80Rajasthan 85.49 80.12 85.37 86.76 81.20 86.72Tamil Nadu 77.68 69.45 73.89 81.83 75.79 78.82Uttar Pradesh 87.37 89.71 91.31 89.18 91.03 92.89West Bengal 90.74 87.02 91.87 91.41 88.28 92.79Delhi 72.5674.0085.8085.1185.7491.81All India 82.40 66.91 83.52 84.83 70.91 85.80Source: ASI and NSSO (respective years), DME: Directory Manufacturing Enterprises.Table 5: Share of Gross Value Added and Workers in the Informal Sector by Industry Share of workers in Informal Sector (%) Share of GVA in Informal Sector (%) 1978-79 1984-85 1989-90 1994-95 2000-01 1978-79 1984-85 1989-90 1994-95 2000-01Food, beverages and tobacco 72.23 87.02 85.29 82.32 82.73 41.76 52.18 41.99 33.67 43.09Textiles 77.98 89.56 83.96 81.50 77.72 33.93 53.48 37.81 28.33 46.35Wood 94.75 97.01 97.60 97.01 95.28 44.37 71.76 51.36 66.99 93.57Paper 71.97 68.60 84.55 69.26 80.29 65.34 69.85 66.37 50.14 22.67Leather 64.5481.63 80.93 85.09 71.27 70.12 68.72 70.75 51.05 40.50Chemical 56.93 54.80 38.85 18.37 35.07 8.67 10.92 4.78 4.442.95Rubber plastics and petroleum 76.64 83.58 92.35 89.53 46.87 3.96 5.65 11.45 4.28 10.38Nonmetal 25.53 25.67 20.5621.59 85.12 33.68 33.42 31.23 28.56 31.82Basic metals 55.96 60.91 66.22 67.20 15.82 3.66 5.14 4.51 2.30 3.24Metal products 49.99 59.56 75.96 74.31 81.24 45.38 58.47 49.57 45.32 41.61Machinary and equipment 25.66 33.58 52.89 49.78 83.53 8.07 10.34 12.66 9.93 25.51Transport 65.69 71.51 81.75 82.85 23.49 17.61 31.33 32.61 29.67 6.35All 71.25 82.81 81.46 78.37 78.42 27.07 37.33 29.87 21.71 28.07Source: ASI and NSSO; Note: Re-estimated according to NIC definition 1998.Table 3: Unbalanced Panel Regression on Real IW Dependent Variable: Real Informal Wage (1989-2005); Independent Variable: Real Fixed Assets and Real GVA Exp Variables Coeff t R2 sigma_usigma_eF(25,102) testthat allu_i=0Fixed Effect (within) Regression Constant 70.1485.360*0.50123.92544.7441.29FA 0.0255.710* GVA 0.044 4.180* Exp variables Coeff z R2 sigma_usigma_e Wald chi2(2)Random-effects GLS regression Constant 69.0096.430*0.512 7.670 44.744129.23FA 0.020 5.730* GVA 0.054 5.970* Exp variables Coeff Difference chi2(2) Prob>chi2 FERE Hausman Test FA 0.0250.0200.0065.750.0565GVA 0.044 0.054 -0.010 * denotes significance at 5% level (Hausman test supports acceptance of fixed effects).
SPECIAL ARTICLEEconomic & Political Weekly EPW april 4, 2009 vol xliv no 1467where,a is constant,w is real informal wage,t is year,ε the error term and rest as defined, we offer results from a generalised least square regression (Table 2, p 65), after correcting for pres-ence of heteroscedasticity in the error terms. Between 1984-85 and 1989-90 (denoted as 1989-90 in Table 2), all the elements significantly explain changes in the informal real wage. Notably, the intercept term is negative. Admittedly, the explanatory power of the regression (Adjusted R-squares) analysis declines over time.Subsequently, we offer a pooled (a pseudo panel) regression for these variables:wit = α+ βXit + εit ...(12)where, wit = real informal wage pooled for i states andt periods, i= 1..N, the number of states, βis the coefficient vector for the explanatory variables (X), t=1..T the time periods and follows N(0, σ2). The findings are reported in Table 3 (p 66). The panel regression tests for whether the fixed effects (FE) or the random effects (RE)model is consistent with the data, given that the FE/REisthenatural choice over classical regression (CR) model since the value of the Lagrange Multiplier is very large. Further, betweenFE andRE the results from the Hausman Test suggest thatFE is the appropriate model to use. Consequently, we use the methodology of Least Squares Dummy Variables after cor-recting for heteroscedasticity. According to this model, however, the realFA is not significant, although, with a positive impact on realIW. RealVA on the other hand is positive and highly signifi-cant (at 1% level) in explaining the increase in realIW. The panel regression is consistent with the cross section results, in that, the realVA continues to be significant in explaining the real in-formal wage while the FA is not, although the general direction is positive as expected.4 Labour Productivity and Informal WageThis section offers the empirical relationship between labour productivity growth in the informal sector and the informal wages, another area that we have already explored theoretically (Marjit and Kar 2008a, b). Intrinsic differences in labour produc-tivity are difficult to measure since much depends on the comple-mentary factors. If capital is sticky and not flowing freely into the informal segment, then the informal labour productivity might remain low. Below we offer some features that are expected in this relationship. (1)Productivity of informal workers is directly related to the market-determined informal wage and the labour supply curve may not be infinitely elastic.(2) Capital should play some role in determining the level of labour productivity. Very strong trade unions/high effective hiring cost in the organised sector may have mixed effects on informal wage depending on capital mobility (Marjit and Maiti 2006).(3) More productive formal sector workers again should impart mixed effects on informal wage andproductivity(Marjitand Kar 2007b)(4) Even if informal workers do have similar productivities and work at lower wages, firms may still prefer working with formal labour (Marjit, Biswas and Ghosh 2007; Marjit and Maiti 2007).(5) Wage growth in the informal sector may in-crease labour productivity in the formal sector.A few of these assertions are verified with Indian data. In particular, we look at the relation-ship between wage and productivityinformal/informal sector, nature of productivity growth in these segments and the role of capital (also see Marjit and Maiti 2007).The DataAs an extension of the previous study, we now include all the categories,namely,ownaccount manufacturing enterprise (OAME), non-directory manufacturing enterprise (NDME) and directory manufacturing enterprises (DME). TheOAME does not hire any labour while NDME andDME are those which hire up to five workers and more than five workers, respectively, on fairly Table 6: Unorganised Manufacturing by Types of Enterprises Share of Enterprises in (%) Absolute Number of EnterprisesYear OAMENDMEDMEOAMENDMEDME Total1978-79 95.68 4.32 7,187,173 324,197 75,11,3701984-85 86.77 10.67 2.56 1,53,56,726 18,89,176 4,52,509 17,6,98,4111989-90 86.93 9.56 3.72 1,27,09,320 1,3,98,056 5,43,4091,46,20,7851994-95 84.59 10.40 5.01 1,07,10,987 13,16,757 6,34,004 1,26,61,7482000-01 86.1910.05 3.76 1,46,70,000 17,10,000 6,40,000 1,70,20,000 Source: NSS report (various rounds).Table 7: Workers in Unorganised Manufacturing by Types of Enterprises Share of Enterprises (in %) Absolute Number of EmployedYear OAMENDMEDMEOAMENDMEDME Total1978-79 77.78 22.22 12,984,22137,09,557 1,66,93,7781984-85 74.15 12.62 13.23 2,54,18,255 43,27,124 45,35,870 3,42,81,2491989-90 69.38 13.40 17.22 2,27,89,981 44,02,547 56,56,635 3,28,49,1631994-95 68.1113.6918.19 2,05,12,44941,24,17954,78,046 3,01,14,6742000-01 67.5814.9917.42 2,50,60,00055,60,00064,60,0003,70,80,000 Source: NSS report (various rounds).Table 8: Real GVA Per Worker by States(Rs)State Formal Informal without DME Informal with DME 1989-90 1994-95 2000-01 1989-90 1994-95 2000-01 1989-90 1994-95 2000-01Andhra Pradesh 55,859 93,600 99,091 4,288 5,334 7,273 4,394 5,841 8,154Assam 1,21,5841,02,4921,18,578 6,462 5,649 9,960 7,532 5,912 11,194Bihar 1,54,3341,74,5462,21,4117,425 5,843 8,136 7,813 5,976 8,637Gujarat 1,17,1942,29,5942,83,75119,30112,90616,63815,13215,54419,125Haryana 1,09,6891,50,9102,23,2138,37415,52215,85814,17020,13718,314Himachal Pradesh 1,15,405 1,88,139 3,54,982 12,191 7,159 11,362 13,403 7,682 14,487Karnataka 1,20,8001,73,7241,94,2725,330 6,596 8,816 5,646 7,067 9,840Kerala 1,06,57778,3371,08,657 5,740 7,969 11,1246,511 8,595 12,983Madhya Pradesh 1,47,232 2,17,470 2,77,599 5,271 6,373 6,420 5,985 9,264 7,271Maharashtra 1,85,8312,68,1293,15,0949,27711,94113,55715,00416,45117,494Orissa 1,70,4241,58,3132,12,2832,2732,3253,4822,5562,4673,758Punjab 1,13,4331,16,9371,29,11012,31914,85016,99414,17216,88520,432Rajasthan 1,03,8131,96,2732,51,6146,88210,33912,5368,15211,11513,940Tamil Nadu 1,06,940 1,35,241 1,49,697 5,029 8,118 9,263 6,516 11,038 11,958Uttar Pradesh 1,16,773 1,92,203 2,14,509 5,491 6,485 7,498 6,340 7,588 8,860West Bengal 67,296 98,239 1,06,662 4,890 5,491 7,078 5,511 6,285 8,542Delhi 1,05,6092,22,3981,91,48523,23718,69526,96011,54420,41229,247All India 1,17,200 84,775 1,98,646 3,948 6,951 8,927 5,394 8,792 11,075Source: ASI and NSSO (respective years).
SPECIAL ARTICLEapril 4, 2009 vol xliv no 14 EPW Economic & Political Weekly68regular basis. Till date NSSO has published five reports on unor-ganised manufacturing from 1978-89 to 2000-01, but first three reports do not cover all information as the more recent ones.Table 4 (p 66) shows that 85.8% of total industrial workers in Indiaand more than 90% in some states in the year 2000-01, are employed in the informal sector. Informal shares are not only high in agro-allied industries like wood, food, beverage and tobacco, paper, leather etc, but also captures as high as 80% in non-agro industries like metal products, machinery and equipment, etc. In some industries, such as basic metal works, transport and rubber and petroleum industries, etc, the share is pretty low (Table 5, p 66). The share of informal employment alsovariessignificantlyacross the states, ranging from 72.80% in Punjab to 92.95% in Bihar in 2000-01 (Table 6, p 67).Ofthese, almost 86% enterprises are OAMEs for the year 2000-01,andmainly in the nature of cottage in-dustries, employing two-thirds of the work-force, while the presence of DMEs is still negligi-ble (Tables 8 and 9).Moreover,theinformalsec-tor contributes 25.5% to total industrial value addition in 2000-01 and it is on the rise in the post-reform period, albeit interstate variation is rather high – from 13.7% in Haryana to 50.9% in West Bengal.Wage and ProductivityTo find out the relationship between wage and productivity, we have run both correlation and panel regressions. While the correlation co-efficient between formal wage and formal labour productivity is declining from 1989-90 to 2000-01, the correlation coefficients be-tween informal wage and informal producti-vity as well as between informal wage and formal productivity are rising steadily. The regression results also tell a similar story. The regression coefficient of formal wage on formal labour productivity is not statistically signi-ficant, but that of informal wage on formal labour productivity is positive and highly sig-nificant (Table 12, p 69). These results suggest that in a typical developing country the productivity augmenting efforts in formal sector will be limited by the existence of a large informal sector thriving at lower wage rates. The expansion of informal wage must push the R&D efforts in the formal sector and eventually it should also improve the labour productivity in the formal sector.Finally, looking at the stagnant or declining real formal wage and rising informal wage, it should be interesting to see the trend of wage gap between formal and informal sectors during thepost-reform period in India. We estimate the beta-coefficient of trend factor using the stand-ard formula, and we observe a converging trend between the sectors. Using,1Tln (wit/wi0) = α – (e-β – l) ln wio + γXit + uit ...(13)we obtain results under both fixed effects and random effects models, respectively:1Tln (wit/wi0) = 0.07 – 0.14 ln wio + 0.001Xit, R2 = 0.48, ρ= 0.80 ...(14)1Tln (wit/wi0) = 0.04 – 0.13 ln wio + 0.001Xit, R2 = 0.58, ρ = 0.56,Hausman=0.13 ...(15)The Hausman statistic suggests that the random effect model is not rejected. The rate of convergence in the wage gap is 3.10% per annum.What we observe in this section is still an incomplete picture, typically because it is rather impossible to account for several Table 9: Real Fixed Assets Per Enterprise by States(Rs)State Formal (Capital Formation) Informal without DME Informal with DME 1989-90 1994-95 2000-01 1989-90 1994-95 2000-01 1989-90 1994-95 2000-01Andhra Pradesh 67,37,426 1,36,28,606 1,28,28,948 7,153 10,070 19,073 na 10,433 23,621Assam 87,47,3981,16,04,7392,64,28,7409,5458,18111,392na8,14112,960Bihar 2,73,43,846 3,66,55,0003,93,36,61714,16110,407 15,611na9,899 16,739Gujarat 1,24,55,562 2,10,40,161 3,49,61,584 33,95539,40061,114na64,01888,207Haryana 1,42,11,2861,71,71,8702,14,77,71325,92338,57285,142na9,300116,138Himachal Pradesh 4,95,15,313 5,44,27,435 4,59,03,881 35,812 16,491 34,512 na 10,045 50,454Karnataka 1,00,05,869 1,47,85,496 2,56,67,300 9,440 13,48821,929na20,32131,917Kerala 95,37,991 91,41,109 96,12,778 10,462 15,87432,901na8,267 48,350Madhya Pradesh 3,54,44,595 4,67,91,189 3,14,38,982 11,032 14,502 19,586 na 13,624 23,913Maharashtra 1,73,39,4732,21,67,6552,49,06,62421,22839,46353,213na78,89185,447Orissa 5,09,68,7576,34,02,3054,70,72,0004,4053,8427,381na4,6348,340Punjab 1,16,99,694 1,51,47,740 81,31,834 32,87713,82071,867 na16,978 1,13,637Rajasthan 187,81,1422,25,39,8961,82,77,21120,36213,95239,015na12,58746,254Tamil Nadu 97,10,269 1,34,25,883 1,24,15,718 10,421 8,747 33,725 na 18,449 53,222Uttar Pradesh 1,70,19,438 2,77,18,705 2,41,35,866 13,433 9,083 24,308 na 11,217 33,410West Bengal 1,94,64,024 3,49,23,640 1,93,55,927 5,833 6,782 12,120 na 6,223 16,717Delhi 23,83,99380,63,16943,23,40695,99893,2712,41,282 na1,99,058317,632All India 1,41,26,454 2,04,74,363 2,07,39,871 12,839 13,392 28,260 na 28,921 40,759Source: ASI and NSSO (respective years).Table 10: Real Fixed Assets Per Worker by States(Rs)State Formal (Capital Formation) Informal without DME Informal with DME 1989-90 1994-95 2000-01 1989-90 1994-95 2000-01 1989-90 1994-95 2000-01Andhra Pradesh 1,54,316 2,54,548 2,35,606 4,089 5,243 10,281 na 5,970 11,501Assam 1,36,6931,73,320410,118 5,648 4,117 6,631 na4,207 7,234Bihar 3,35,5594,99,9346,50,5848,5885,7928,409na5,7658,711Gujarat 2,43,6294,43,0148,89,66115,86720,15631,311na19,85932,146Haryana 2,44,8752,76,6434,39,16714,44920,40347,884na23,92953,407Himachal Pradesh 3,97,096 4,95,145 7,81,297 21,898 11,947 24,676 na 12,016 31,980Karnataka 1,86,539 2,60,3465,00,9145,622 7,611 13,696na8,345 16,247Kerala 1,52,5071,32,4501,77,3926,2368,57219,292na9,60622,985MadHyaPradesh 4,28,8266,09,608 5,49,945 6,469 7,54410,809 na 8,173 12,185Maharashtra 3,00,7724,17,278 5,64,62410,98218,93229,033 na28,445 35,614Orissa 5,90,0727,61,5877,90,6511,9161,7513,372na2,0733,729Punjab 2,27,9452,95,7332,08,53918,3417,76441,778na9,22351,973Rajasthan 2,92,0775,03,2685,32,18211,0767,86223,225na8,52125,159Tamil Nadu 1,78,805 2,73,528 2,76,399 5,403 4,509 18,619 na 6,906 23,618Uttar Pradesh 2,65,324 4,81,226 5,82,058 7,130 4,318 12,499 na 4,587 14,334West Bengal 1,81,678 3,35,965 2,58,653 2,912 3,227 6,353 na 3,820 7,894Delhi 80,0892,46,9531,84,04032,76335,13987,316na35,99679,392All India 2,40,626 1,85,054 4,41,981 6,828 6,739 15,043 na 16,592 18,964Source: ASI and NSSO (respective years).
SPECIAL ARTICLEEconomic & Political Weekly EPW april 4, 2009 vol xliv no 1469problems that the sector encounters, without which we believe the total factor productivity growth (TFPG) would have been sig-nificantly higher than that reported. The total factor productivity in the informal sector is constrained by the technological change because of lack of capital accumulation. In fact, NSSO reports that more than 50% of unorganised enterprises face capital shortagein 2000-01 and this is the most severe problem. Other common problems are marketing of goods, non-availability of electricity, power-cuts, non-availability of raw materials, etc. Among the other problems, competition from larger units, non-recoveryof service charges/business credits, regional problems, lack of infrastructure, etc, are reported as main constraints for the informal entrepreneurs.4 ConclusionsThe present study offers an aggregative view of the informal sector in India. The paper is a turnaround from other prior at-tempts at quantifying and theorising the activities of the infor-mal sector in dual economy labour markets. By linking the unor-ganised sector to the organised sector through aspects of capital mobility and labour productivity, we are able to estimate and theorise in more formal ways the effects of reform on the wage and employment status of the workers in the informal sector. Theresults, as we have discussed are quite revealing. We estab-lish via rigorous general equilibrium models that trade liberalisa-tion in the formal sector can, in fact contrary to conventional wis-dom, raise both employment and wages in the informal sector if capital is easily mobile between the two sectors. Even if capital is sticky, as we explored in subsequent studies, downsizing of the capital intensive import competing sector may lead to increased output in the labour-intensive informal segment and rise in infor-mal wage. The issue of capital mobility thus takes an important role in shaping the magnitude and directionality of informal wage subject to exogenous policy changes in the organised sec-tors of an economy.Furthermore, the role of labour productivity in both formal and informal sectors can also impart strong influences on the em-ployment and wages in the informal sector. Labour productivity improvement in the unskilled labour-intensive segments of the formal sector can improve informal wage even in the short run under free mobility of capital, and with formalisation of informal labour. These features, as argued, have not surfaced until a set of recent papers opened up the scope and dimensions of research inthis context. The empirical investigations reported here may thus be deemed as scratching the surface of an iceberg, although delving deeper may not be easy due to serious deficits in thedata sources. Nevertheless, the results discussed provide some credible attempts at capturing mobility and productivity aspects of the wage-employment dynamics in the informal sector. The high-lights of the section include empirical support for the theoretical conjectures that informal real wage in India has experienced a rising trend, despite the fact that, in the post-reform era fierce import competition pushed many erstwhile protected industries out of business and released significant amounts of capital andla-bour into unorganised manufacturing and service sectors. We have simultaneously established that the labour productivity growth in the informal sector, an outcome of more efficient utili-sation of the limited resources in the sector, is also responsible for higher wage realisation. While, paucity of space does not presently allow us to report more specific microeconometric features on the formal-informal relations that we studied with the aid of primary surveys in different urban locations in West Bengal, Maharashtra and Gujarat, we can broadly claim that viewing the case of informal sector in partial equilibrium by neglecting roles played by other factors, such as capital and land, is likely to produce inconsistent estimates of the internal dynamics of the sector. This synthesis of various dimensions of the informal sector is therefore an impera-tive step towards situating the subject in a wider context.Notes1 For evidence on other countries, see Goldberg and Pavcnik (2003), for example. 2 Earlier, De Soto (2000) pointed out that a heavy burden of taxes, bribes and inflexible bureaucratic regulations in the formal sector drives many producers into the informal sector. 3 See Appendix I for detailed algebraic proof. 4 Condition (10) offers a directly testable hypothesis. However, it requires matching data on product specific capital stock in both formal and informal sectors, and the return such capital fetches in each sector. Annual Survey of Industriesin India offers data on formal commodities until 1997 only, and reliable data on the return to capital in the informal sector is unavailable. Thus, we set aside this direct exercise for future work effort and use a proxy measure instead. Table 11: TFPG of Formal and Informal Sector in India by States during 1990-2001 Formal Sector Informal SectorFirm EFFCHTECHCHTFPCHEFFCHTECHCHTFPCHAndhra Pradesh 6.3 6.9 13.6 -2.0 -1.2 -3.2Assam -31.8 5.8 -27.9 10.81.5 12.4Bihar -10.2 26.813.88.4 0.1 8.5Gujarat 6.1 27.134.9 0.0 -15.5 -15.5Haryana 10.814.326.630.5-10.916.2Himachal Pradesh 26.9 31 66.3 14.1 -14.5 -2.5Karnataka -11.2 12.7 0.1 5.0 0.9 6.0Kerala -14.6 7.4 -8.311.41.3 12.9Madhya Pradesh 6.3 30.6 38.7 -30.4 0.7 -29.9Maharashtra -19.237.911.3-1.3-5.4-6.7Punjab -4.614.18.821.4-5.015.3Rajasthan 20.623.448.732.7-2.129.9Tamil Nadu -5.4 8.2 2.3 3.4 2.5 6.0Uttar Pradesh -0.1 24.7 24.6 6.5 1.6 8.2West Bengal 2.3 9.2 11.8 -13.9 -4.6 -17.9Delhi India -2.1 17.3 14.8 5.3 -4.0 1.2EFFCH= change in Labour Efficiency. TECHCH= Technical change in sector i and TFPCH= Total Factor Productivity Change in sector i, i=Formal, Informal. Finally, TFPCH=EFFCH*TECHCH.Table 12: Determinants of Formal Wage, Informal Wage and Formal Productivity lnwf lnwi lnaplf FixedRandomFixedRandomFixedRandom EffectsEffectsEffectsEffectsEffectsEffectsConst 9.98**9.54**6.19**6.04**6.38**8.42**lnaplf 0.020.05 lnapli 0.32**0.34** lnwi 0.62* 0.39*R2 0.89 0.86 0.84 0.78 0.67 0.55Hausman -28.23-1.140.08wf : formal wage; wi : informal wage; aplf : formal average labour productivity;apli: informal average labour productivity.

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