Recessionary Shock, Capital Mobility and the Informal Sector

Abstract

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