Agricultural prospects and informal wage in general equilibrium

Better prospect for agricultural exports and productivity should increase agricultural wage. However, we argue that such an outcome depends on the capital movement between the formal and informalmanufacturing sectors. This is shown in a model that demonstrates a close link between agricultural and informal wage. Presence of an informal sector may lead to reverse migration from the urban to the rural sector without any pressure on rural wage. We argue that the policy outcome in the rural sector is likely to depend on the intersectoral mobility of capital in the urban sector. Our result is robust with respect to reasonable alterations of the basic structure. © 2006 Elsevier B.V. All rights reserved. JEL classification: E26; F16; J43