We build up a general equilibrium framework to analyze the impact of trade reform on the wage of the informal workers in a small open economy. The role of capital mobility between the formal and the informal sectors becomes crucial for such analysis. A greater degree of capital mobility helps to increase the informal wage in case of a contraction in the formal sector. On the other hand, the beneficial effect of a rise in agricultural productivity on the informal wage is boosted by a restricted mobility of capital. Our major theoretical proposition is consistent with a data set obtained from the National Sample Survey on Informal Manufacturing in India between periods 1984-85 and 1999-2000.