• interest rates charged by informal moneylenders may range from 0 to 200 per cent
per year in India, Pakistan, and Thailand (SF 22)
The theoretical rationale for multiple informal interest rates will be reviewed in section 5.
3 Informality in the labour market: early contributions
There are different ways of modelling the informal sector adopting a non-Marshallian view
of labour markets.18 Starting from the classical Harris-Todaro framework, early modelling
in this area has been very prolific.
The basic analytical set up used by this literature is similar to that used in the literature
on migration (Todaro (1969) and Harris and Todaro (1970)) and the modelling approach
adopted by the migration with search literature. As pointed out by Zenou (2008), the
earlier analytical framework - where only one side (i.e the worker) is modeled (Fields
(1975)) - differs from later set ups that have incorporated the Mortensen-Pissarides model
in a migration equilibrium (Ortega (2000) and Sato (2004)).
The early studies by Todaro (1969) and Harris and Todaro (1970) capture informality
by building a model of two geographically distinct markets that are segmented and in which
two different wage equilibria prevail (wage duality), where wages in the formal sector can
turn out to be higher-than-market-clearing wages.19 Brueckner and Zenou (1999b) add a
land market to the standard Harris-Todaro framework where wages are exogenously fixed.
The idea of identifying the informal labour market with the disadvantaged sector of a
market segmented by rigidities in the formal sector dates back to Lewis (1954) and the
idea of infinite labour supply.20
More recent work, like Brueckner and Zenou (1999a), take a different approach and
introduces efficiency wages. Developments in the theory of imperfect information allows
to introduce labour dualism as a result of a firm’s response to adverse selection and moral
hazard problems. In general, there are many models that can be used to justify duality
and the presence of a higher wage in the formal sector, but this always requires an ad
18A view where labour market does not clear.
19 See Lall et al. (2006) for a survey on rural-urban migration.
20 Similarly, the report of the International Labor Office (ILO (1972)) on employment in Kenya considered
the informal sector as a subsistence sector.
14