Abstract:
This paper talks about a small open economy comprising of three sectors:
two formal sectors and one informal sector. One of these formal sectors uses a
specific factor which is specially trained labor. ‘‘Special training’’ can easily
encompass the issues such as vocational training, technical training, computer lit eracy, software knowledge etc. Unskilled workers have the option of being trained
to get a job in high wage skilled sector or to be employed in the informal sector. In
such situation, an inflow of educational capital leads to a change in informal wage
while formal wage and rental will remain unchanged. Under reasonable condition
informal wage may even go up. Though we have mixed effect in formal sector,
informal sector must shrink. An extended version of the model with the incorporation of the effect of trade liberalization policy predicts just the opposite results
with regard to informal output and formal wage
