Should Informal Sector Be Subsidised?

This is the first sentence of the author's introduction. The author's paper examines the impact of subsidy policies, given to the informal sector, on urban unemployment and domestic factor income. At the present juncture, it is well known to all development economists that the informal sector provides jobs to many unemployeds. This is true irrespective of the level of development. At the same time, it is also observed that huze unemployment also exists in many countries where informal sector plays important role in the employment generating activities. One question obviously comes: why such huze unemployment exists even when the informal sector is very large? Fields (1975,1989) and Gupta(1993) have explained this1. This paper explains such co-existence in terms of consumption efficiency hypothesis of Leibenstein(1957).