Ranjula Bali Swain, Arup Mitra
Many components within the informal sector share close linkages with the formal sector. In such a situation if the formal sector is growing rapidly it is natural that the informal sector would benefit from the percolation effects. However, in reality the informal sector is characterized in terms of low productivity and meagre earnings, explaining considerable overlaps with poverty and slum-dwelling in cities.
Agglomeration economies work and they contribute to productivity growth as a result of which the real wages in the cities tend to be higher compared to the rural areas. Yet, urban poverty exists which warrant an explanation. Some of the reasons of course can be envisaged in terms of a high degree of heterogeneity this sector possesses. There are residual activities with almost no entry barriers and they often involve excess supplies of labour relative to demand. Similarly, there are self-employed households both in manufacturing and services, op