A Model of Development: The Static Analysis

The chapter presents the static version of a model of development that systematically incorporates an informal sector into the analysis. Some of the implications of the model are seen to be in direct contrast to some of the major implications of the Lewis-type models. These implications of the model can be interpreted as giving theoretical support to some of the revised ideas about the history of both the English and Japanese industrialisation. The model also enables one to derive a number of policy relevant comparative static results. In particular, we have questioned the conventional wisdom that decreases in the formal sector ‘minimum’ wage and increases in the maximum size of firm above which this minimum is enforced will help workers in the informal sector, the essential argument being that these policies may have adverse terms of trade effects on the informal sector that offset their favourable labour market effects.