External Shocks in the Presence of Informal Wage Employment and Self-employment: How is Gender Wage Inequality Affected?

The paper develops a three-sector full-employment general equilibrium model that considers two types of dichotomies: formal and informal sectors, and wage employment and self-employment within the informal sector. It aims to explore the effects of external shocks on informal wages and gender wage inequality. Considering the shocks due to COVID-19, the comparative static results indicate that there is a trade-off between the size of self-employed sector and its earnings due to changes in world prices of traded goods, but both are adversely affected due to decline in foreign capital inflow. On the other hand, a slump in export demand for informal good and fall in foreign capital inflow may accentuate gender wage inequality, while drop in import price may work favourably for the wage gap. The paper highlights two important aspects: first, the exogenous demand shocks seem to be more detrimental for wages of women in the informal sector, and secondly, there are possibilities of favourable effects on gender inequality in the informal sector due to supply shocks.