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The impacts of privatization on employment, wages, and welfare in the presence of an informal sector

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  • Jiancai Pi

    (Nanjing University)

  • Xinyi Liu

    (Nanjing University)

  • Jun Yin

    (Nanjing University)

Abstract

By constructing three-sector general equilibrium models, this paper investigates how privatization influences regional wage rates, inter-regional employment, and social welfare in the presence of an informal sector. In the short-term basic model with sector-specific capital, an increase in the degree of privatization will decrease formal-sector employment, increase agricultural-sector employment while decreasing its wage rate, conditionally decrease informal-sector employment while increasing its wage rate, and reduce social welfare. When partially relaxing capital mobility constraints, we find the results remain largely consistent: privatization continues to decrease formal-sector employment, increase agricultural-sector employment while conditionally lowering its wage rate, reduce informal-sector employment while raising its wage level, and reduce social welfare. However, in the long-term model where capital moves freely across all sectors, most outcomes differ from those in the basic model, and this paper identifies the conditions under which the conclusions hold.

Suggested Citation

  • Jiancai Pi & Xinyi Liu & Jun Yin, 2025. "The impacts of privatization on employment, wages, and welfare in the presence of an informal sector," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 74(1), pages 1-28, March.
    • Handle: RePEc:spr:anresc:v:74:y:2025:i:1:d:10.1007_s00168-025-01363-9
    DOI: 10.1007/s00168-025-01363-9
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    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies

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