Abstract
Existing study argues that labour market flexibility accompanied by trade liberalisation helped in building complementary relationship between formal and informal sectors in India. However, no direct relation is established between the labour market flexibility and trade liberalisation with respect to inter- and intra-sectoral movement of labour. The present study enquires whether the extent of labour mobility between and within formal–informal sectors affects the formal–informal growth linkages due to the tariff cut on traded goods, as a part of trade liberalisation in India. The findings based on static CGE analysis indicate that in absence of labour market segmentation (i.e. in absence of both wage rigidity and skill specificity) with full mobility of labour, formal sector growth is higher vis-à-vis the growth of those activities under segmented labour market with full mobility of labour. Amongst growing informal sector activities, output growth is lower in absence of segmented labour market with full mobility of labour. Finally, restricted labour mobility leads to largest expansion of formal activities, but further exacerbates the growth of informal activities. The study reveals that improvement in functional income distribution is mixed across households, depending on the degree of labour mobility, which implies labour market adjustment is costly due to structural reforms, that pitches for government intervention.
Highlights
Since a large mass of workforce in India is employed within informal segment of the economy,1 enhancing income of the people engaged with this sector and bringing this sector out of poverty trap becomes crucial from a policy perspective (NCEUS 2007)
In Indian context, it is argued that benefits of economic reforms could be beneficial to a section of informal workforce engaged in high-income elastic informal services, such as construction, trade and transportations; and these growth-oriented informal services in turn absorb the labour from the low-productive sector such as agriculture, which ensures the overall growth of the economy (Kotwal et al 2011:1156)
6 Conclusion This study reveals that labour mobility based on the extent of labour market segmentation gives rise to varied outcomes in terms of linkages between formal–informal sectors under tariff reduction; and the degree of expansion amongst the growing non-agricultural sectors, both formal and informal, varies
Summary
Since a large mass of workforce in India is employed within informal segment of the economy,1 enhancing income of the people engaged with this sector and bringing this sector out of poverty trap becomes crucial from a policy perspective (NCEUS 2007). Primary cause of increasing unit cost of production is increasing wage rates of informal labour in homogeneous labour market as compared to the declining wage rates of those categories under segmented market (Table 4).19 we can argue that mobility of labour, the supply-side factor, is not the only determining factor to growth of the industry; but the lower unit cost of production accompanied by increasing domestic demand for the locally produced goods and services, the demand-side factor, plays a significant role.
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