This paper, using a general equilibrium model of production and trade for a developing country
with non-traded goods, dual unskilled labour markets and internationally fragmented skillintensive
production, illuminates how liberalised input trade affects the unskilled wages prevailing
in the informal sectors and employment conditions in those sectors. Numerical analysis
further highlights importance of the elasticities of factor substitution in production of different
sectors to determine the movement in informal wage and therefore the movement in skilled–unskilled
wage gap. These results are consistent with the empirical evidence on developing
countries (like India) that suggests liberalisation-inequality relationship cannot be explained by
focusing on tradable goods alone.