A substantial portion of urban labour employment in a developing economy like India lies in the informal sector because the organized labour market is unable to absorb the entire urban labour force. This paper has analysed the working of the informal sector in light of the development policies. Using Harris-Todaro model of rural-urban migration, the equilibrium wage rate and employment is determined. Its speciality lies in determination of the simultaneous existance of open unemployment and the existence of informal sector in urban areas. The model studies the effect of alternative subsidy policies on unemployment and welfare of workers.
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