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Recessionary shock, capital mobility and the informal sector

Mandal, Biswajit and Marjit, Sugata and Beladi, Hamid (2010): Recessionary shock, capital mobility and the informal sector.

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Using the hybrid of Heckscher - Ohlin and Specific Factor models of trade we show that economic recession led shock results in a loss for both capitalists and skilled workers. Some of the unionized unskilled workers lose formal sector employment and move onto the informal sector. In case capital moves from formal to the informal, informal employment and wage both can go up in the informal segment. If capital does not move informal employment expands and wage drops. Thus recession may actually benefit a large number of informal workers.

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