Please use this identifier to cite or link to this item:
Arvin-Rad, Hassan
Basu, Arnab K.
Willumsen, Maria
Year of Publication: 
Series/Report no.: 
Discussion paper series // Forschungsinstitut zur Zukunft der Arbeit 5229
Within a general equilibrium framework of a developing economy with a foreign owned factor of production, this paper questions whether the informal-formal sector relationship is procyclical/ complementary - expansion or contraction in one necessarily implies an expansion or contraction in the other - when the informal sector is subject to a technological shock. We derive a necessary and sufficient condition under which a positive shock to the informal sector results in a contraction in both the size of the urban formal sector and the informal sector. Thus, although our result shows that the informal-formal sector relationship is procyclical, it nevertheless calls into question the conventional wisdom on the benefits of intervention in the informal sector of developing economies, particularly where multinational corporations sub-contract certain labor intensive stages of production to the informal sector.
rural-urban migration
urban informal sector
technological change
Document Type: 
Working Paper

Files in This Item:
129.72 kB

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.