The paper has attempted to provide a theoretical structure towards analyzing the influence of globalization, trade liberalization and labour market reform on factor income, sectoral growth, income inequality and informalization of labour. Under restricted capital mobility across formal and informal sector, we obtained that tariff liberalization causes informalization of unskilled labour and widens income inequality. Labour market reform and foreign capital inflow leads to formalization of the informal workforce. However, their effect on income inequality is ambiguous, but can be improved under a particular sufficient condition that distributive share of capital is relatively larger in the skilled intensive sector compared to the low skilled
