However, the welfare implications of such trade liberalization in the skill-intensive services sector for poor, unskilled workers are ambiguous. With the exception of non-traded production and production at the input level, there are diminishing returns to the variable factors in every sector. But the informal wage rate, land capital rent and sector output are determined once equilibrium values are reached in the formal sectors of the economy.
In this setup, productive activities in the sector will be output-constrained, and thus the demand for unskilled labor in the formal sectors. Where denotes the share of the cost of the th input in the production of the th commodity (for example . ) and. The agricultural sector with an informal labor market employs only those unskilled workers who are not employed in the formal sectors of the economy (who are not employed in the U and N sectors).
Equation (14) suggests that the direction of change in the demand for non-traded goods, and therefore in their production, is ambiguous. Consequently, the demand for unskilled workers in the formal sectors would fall unequivocally and the informal wage would fall much faster than in the 0.3 case.
CASE II: Non-traded Production in Unorganised Informal Sector
A complete differentiation of the condition of full employment in the unskilled labor market and substitution of value as obtained. The consequences of liberalization of trade in inputs in the sector on the wages of workers in the informal sector will be properly managed. In the case of contract wages in the formal non-trade sector, the price of non-traded goods was determined by the unionized cash wages of unskilled workers.
But in the case of non-traded goods produced in the informal sector with unorganized labor market where unskilled labor receives market-determined (flexible) nominal wages, production is no longer demand-determined. The prices and output levels in the formal sectors ( ) can still be determined independently of the informal sectors. Given these values of and the resulting input choices, the output levels of the agricultural exports ( ) and non-tradables are determined from Equations (6) and (10), respectively.
The subsequent increase in the intensity of land capital use reduces agricultural production, which, together with the less intensive use of unskilled labor due to the higher unskilled wage, frees up some unskilled labor; accordingly, non-traded production increases. On the other hand, the demand relationship for the non-traded good in equation (11) now becomes a rectangular hyperbola in this case. Comparative static exercise – Decrease in the tariff on the import of under-flexible wage production in the non-traded sector under flexible wage production in the non-traded sector.
This interplay between demand for and supply of non-tradable goods in determining price and production levels has important implications for the wage gap between skilled and unskilled labour. In the former case of production of with contractual unskilled money wages, it was only the demand-determined production of , that was decisive. When non-tradable is produced in the unorganized informal sector, one can therefore express the reduction of sub-tariffs on the imported input by solving equations and (15.1) simultaneously.
On the other hand, the supply effect lowers the non-traded price: At the initial and thus at the initial and unskilled labor released from the contracting sectors and relaxes (net) labor for the non-traded sector and thereby raises its supply.
Given the proportional relationship between competitive unskilled wages and, as indicated in equation (5.1), this latter effect outweighs the former effect on and one should observe a net increase in but a decrease in non-traded output in Figure 5 for 0.7. Another interesting exercise has been to track the movements in the production of and consequent movements of under flexible wages in the non-traded sector due to a 24% tariff reduction on imports by changing the elasticity of substitutability between unskilled labor and land capital. in the agricultural sector, from 0.6 to 3. This analysis has been motivated by an interesting observation in Golder et al. 2014), who have reported that can either approach or exceed unity, with a preferred estimated value of 1.2 (obtained by direct estimation of CES production function using non-linear least squares approach) that has been taken as benchmark value in the previous analyzes for varying.
Although the laid off unskilled workers from sectors and flow to sectors and, reaching 0.3, producers in sectors demand more of the unskilled. This will increase the demand for unskilled workers in the sector, putting upward pressure on the informal wage (starting to become less negative in Figure 7). Given equation (5.1), this leads to an increase in non-traded price and subsequent reduction in the supply of.
For low values of , even with the increase in producers in sector will be relatively less willing to replace unskilled labor by land capital and continue to demand unskilled labor for the expansion of sector. Thus, continues to rise for low values of , but after a certain level, for relatively higher values of , producers in sector substitute land capital for relatively more expensive unskilled labor which forces a downward pull on and consequently. These laid-off unskilled workers from sector will now migrate to sector and this exerts an upward pressure on non-traded production.
Therefore, the resultant trajectory takes a convex (to the origin) pattern, while it takes a concave (from the origin) pattern from lower to higher values of 0.3. By 0.7, the demand for urban consumers falls as a net effect, while the dismissal of unskilled workers from sectors and leads to an excess supply of unskilled labor in the competitive market for unskilled labor in the sector and thus to a reduction. However, with an increase in , producers in the sector will replace land capital with labor in production, causing a consequent upward pressure on , which would in turn increase, implying a subsequent decrease in supply.
Therefore, exact mirror images of those for 0.3 are observed in the paths of and (i.e., concave to the origin of and convex to the origin of ) from lower to higher values of 0.7.
Expression for Relative Wage Inequality
CONCLUDING REMARKS
Growth acceleration in skill-intensive service sectors under the WTO has been one of the most prominent features of the liberalization experience in India. On the other hand, liberalization facilitated the importation of capital goods and thus the foreign technology embedded in those imported inputs. To utilize those inputs, or equivalently, to use the foreign technology embedded in those inputs in the most effective way, demand for additional skills was generated.
This paper explores the general equilibrium impact of such trade-driven growth in the skill-intensive service sector on informal sector wages and employment and, more importantly, how this impact is mediated through the existence of non-tradable finished goods and the corresponding domestic supply-demand. the forces. The numerical analysis carried out in this paper also restores the claim presented by Marjit and Acharyya (2003) that the organization of production of non-tradable final goods, with different elasticities of factor substitution in skill-intensive production and respectively agriculture, is with really important in quantifying the impact on unskilled informal wages and, subsequently, on the degree of wage inequality. This paper therefore challenges the view that relative wage inequality in a DC like India with a rigidly organized labor market in the labor sector is unequivocally governed by skilled wage growth alone.
The general equilibrium approach at the sector level, adopted in this paper, has not only been able to illuminate the role of different degrees of factor substitutability in organized production in different sectors, but also to highlight the role of non-tradable consumer goods in determining the supply of unskilled labor in the informal (unorganized) sector and thus the implication in the competitive unskilled wage and, subsequently, the direction of the relative wage gap. These relationships and outcomes are really important to formulate policies aimed at improving the position of poor unskilled workers. However, a future extension of this exercise could be to introduce the costs of skill formation and capital adjustment into the basic static full employment general equilibrium model under consideration.11.
APPENDICES
The General Equilibrium Structure at a Glance
Detailed Algebraic Derivations
Then is already determined based on equations (2)-(3) in the text, will not change as a result of customs reduction on imports of. Therefore, by substituting into equation (A.3), it is straightforward to obtain as in equation (12) in the main text. However, completely differentiating the zero-profit condition in equation (1) and applying the envelope condition for competitive producers in the sector.
Now if we can fully differentiate the full employment condition for unskilled labor in equation (10), we can obtain this. A.14) Because is unchanged and constant. In the case of intra-union wages in the non-traded sector, this yields equation (15), while in the case of flexible wages in the sector, equation (15.1) is obtained in the text.
Services Growth in India: A Look Inside the Black Box,' in: Bhagwati, J. eds.), Reforms and Economic Transformation in India, New York: Oxford University Press, pp. The impact of imported and domestic technologies on the productivity of firms: panel data evidence from Indian manufacturing firms.'. A Three-factor Model in Theory, Trade and History' in: Bhagwati, J., et al. ed.), Trade, Balance of Payments and Growth.
Labor Productivity Growth, Informal Wage and Capital Mobility – A General Equilibrium Analysis', In: Ravi Kanbur and Jan Svejnar (eds.) Labor Markets and Economic Development, NY: Routledge, 2008. Revisiting the Apparent Paradox: Foreign Capital Inflow, Welfare Amelioration and ' Jobless Growth' with Agricultural Dualism and Non-Traded Intermediate Inputs'.
