Macroeconomic implications of an urban informal sector: A theoretical model and a South African case study

Since the economic crisis of the 1980s, developing economies worldwide have experienced rapid expansion in the informal sector in response to a lack of jobs in the formal, wage-paid sector. However, the effects of formal-informal sector dualism on macroeconomic growth have been widely overlooked in mainstream policy debates. This dissertation develops a two-sector, structuralist, macroeconomic model designed to determine the effect of urban informal sector activity on growth policy and income distribution. Cross-sectional informal sector firm data from a Johannesburg survey is used to confirm stylized facts posited in the literature and employed as assumptions in the theoretical model. Other features unique to the model include: class differentiation within the informal sector; international competition; and an informal sector that is concentrated in the production of low-wage goods and commercial services. This dissertation finds that the nature of formal-informal sector dualism depends on the economic policies being implemented in an economy. Nevertheless, the trade-offs between income growth and reduced income inequality tend to be magnified when the existence of an urban informal sector is acknowledged.