Economic Recession and Informal Sector Workers

Abstract

The paper develops a three-sector specific factor model with Harris-Todaro type unemployment to examine the consequences of economic recession in the skilled sector on the informal sector workforce. It finds that while a decrease in the price of high-skill commodity raises both the informal (rural) sector wage and unemployment of unskilled labour, a drop in emigration of skilled labour produces exactly the opposite effects. The effects of these policies on the welfare of unskilled workers in terms of the welfare measure of Sen (1974) have also been studied. The paper recommends a protectionist policy to the unskilled labour-intensive sector for protecting the interest of the vulnerable section of the working population.