Poverty impacts of trade liberalisation
The urban informal sector and poverty: effects of trade reform and capital mobility in India
Liberalisation raises informal sector wages in India
Authors:
S. Marjit; S. Kar
Publisher:
Poverty and Economic Policy Network , 2007
According to conventional wisdom, economic reform is likely to reduce informal sector wages.This paper examines the contrary case of post-liberalisation India where real wages in the informal manufacturing sector have risen significantly across most states.It offers detailed empirical evidence how this wage change has affected poverty at the state level.
Key findings include:
• wages in the informal sector are determined by the degree of capital mobility between the formal and informal sectors; high capital mobility raises informal sector wages
• a significant reduction of poverty across states has followed real wage increases in the informal sector.
Based on the study, policy implications indicate that:
• downsizing the formal sector will be harmful to the vast majority of informal workers if inter-sectoral capital flow is restricted
• excess supply of labour in the informal sector must be accompanied by adequate investment in this sector if informal workers are to benefit.
To conclude, the authors emphasise the need to examine both labour and capital markets when analysing the impact of liberal trade reform on wages.
