Migration, Informality, and Extortion in a Small Country Trade Model

In this chapter, I propose another competitive trade model where both formal and informal sectors co-exist in tandem. Main features of the model are: Trade union segregates some labor from being formal; Capital is not allowed to freely move between formal and informal sectors. Using this sort of framework, it has been shown that immigration of unskilled workers reduces the wage of informal workers and makes the informal good cheaper. A tariff slash also produces similar results. In both the cases, informal capitalists, however, gain. Moreover, what is more striking is that both migration and tariff reform are equally bad for the economy as a whole in the sense that both these policies enhance the ‘unproductive’ element in the society which is really costly as these laborers could have been, otherwise, used to produce some more consumable commodities.