Abstract
Even though informal employment is widespread in transition economies, the literature on this phenomenon in the region is rather scarce. For policy makers it is important to know the incidence and the determinants of informal employment. In the first part of the paper we demonstrate that its incidence and to a lesser degree its determinants depend on the definition used. We then discuss studies that attempt to test for labor market segmentation in transition economies along the formal–informal divide. The presented results are inconclusive, and we come to the conclusion that more work needs to be done before we can make definitive statements about whether labor markets are integrated or segmented in transition economies. Last but not least we introduce a new research area that links risk preferences and selection into labor market states. We show that if individuals have a choice, relatively risk-loving workers have an increased likelihood to choose informal employment and self-employment.
This is a preview of subscription content, access via your institution.
Notes
These averages are not weighted by population size; they are just meant to demonstrate that informality is a large phenomenon in transition economies.
In this school of thought, formal sector jobs not only command higher wages but also provide fringe benefits that are absent with informal sector jobs (see also Mazumdar, 1976).
La Porta and Shleifer (2008) present three schools of thought that are related to our paradigms but have a pure firm perspective. The first paradigm is the dual view that finds the formal sector consisting of high-ability managers matched to high-quality assets and the informal sector consisting of low-ability managers matched to low-quality assets. This sorting leads to two parallel worlds that do not really interact, with a low-productivity informal sector and a high-productivity formal sector. The second paradigm is the parasitic view that maintains that informal firms are of low productivity but because they evade regulations and taxes can undercut prices of formally operating firms and thus take away costumers. In this parasitic view, the informal sector hampers growth since it is of low productivity itself and reduces the activities of the high-productivity formal sector. The third view of the informal sector mentioned by La Porta and Shleifer is the romantic view, in the literature associated with the work of de Soto: the informal sector is actually or potentially vibrant with many very creative entrepreneurs who for the most part are held back by government regulations and taxes and insecure property rights. This romantic view gels with the idea of an integrated labor market.
The questions are identical in the RLMS and the ULMS.
Other definitions of involuntary employment relationships are, of course, possible. Bennett and Rablen (2015) in a theoretical paper define a job as involuntary if a person does not get her first choice job, even though her second choice job is voluntary in the sense that it is chosen in preference to the third choice.
The complete results of the probit regressions, on which Table 2 is based, are presented in tables A2–A6 in the appendix of Lehmann and Zaiceva (2013).
For a detailed description of the ULMS, see Lehmann et al. (2012).
The three transition countries are: Albania, Georgia and Ukraine.
Lehmann and Pignatti treat informal self-employment as voluntary.
It is inherently risky since, for example, there is the risk of detection and subsequent punishment, the risk of immediate layoff and the risk of ending up ill or beyond working age without social security coverage.
To save space we do not discuss the risk index averages across demographics or regions. As far as the demographics are concerned, the relative magnitudes definitely confirm our priors.
References
Bargain, O, Lehmann, H and Zaiceva, A . 2015: The Great Recession and informal employment in Russia: The evolution of the informal-formal wage gap. IZA Discussion Paper forthcoming.
Bennett, J and Rablen, MR . 2015: Self-employment, wage employment and informality in a developing economy, Oxford Economic Papers. First published online 17 December 2014 doi:10.1093/oep/gpu047.
Caliendo, M, Fossen, FM and Kritikos, AS . 2014: Personality characteristics and the decision to become and stay self-employed. Small Business Economics 42 (4): 787–814.
Cunningham, WV and Maloney, WF . 2001: Heterogeneity among Mexico’s microenterprises: An application of cluster and factor analysis. Economic Development and Cultural Change 50 (1): 131–156.
Dohmen, T, Falk, A, Huffman, DB, Sunde, U, Schupp, J and Wagner, GG . 2011: Individual risk attitudes: Measurement, determinants and behavioral consequences. Journal of the European Economic Association 9 (3): 522–550.
Dohmen, T, Khamis, M and Lehmann, H . 2013: Risk attitudes and the incidence among workers: Evidence from a transition country. Bonn, Middletown, CT and Bologna, mimeo.
Dohmen, T, Kriechel, B and Skriabikova, O . 2012: Risk attitudes and occupational choice, ROA, Maastricht University, mimeo.
Fields, GS . 1990: Labour market modelling and the urban informal sector: Theory and evidence. In: Thurnham, D, Salomé, B and Schwarz, A (eds). The Informal Sector Revisited. OECD: Paris.
Harris, JR and Todaro, MP . 1970: Migration, unemployment and development: A two sector analysis. American Economic Review 60 (1): 126–142.
Jaeger, DA, Bonin, H, Dohmen, T, Falk, A, Huffman, DB and Sunde, U . 2010: Direct evidence on risk attitudes and migration. Review of Economics and Statistics 92 (3): 684–689.
Kanbur, R . 2009: Conceptualising informality: Regulation and enforcement. Ithaca, New York, February, mimeo.
Kapeliushnikov, RI . 2012: Informal employment in Russia: What do the alternative definitions say? (in Russian: Neformalnaja Zaniatost v Rossii: Chto Govoriat Alternativnyje Opredelenija). Higher School of Economics Working Paper WP3/2012/04.
La Porta, R and Shleifer, A . 2008: The unofficial economy and economic development. Brookings Papers on Economic Activity (Fall): 275–352.
Lehmann, H, Muravyev, A and Zimmermann, KF . 2012: The Ukrainian Longitudinal Monitoring Survey: Towards a better understanding of labor markets in transition. IZA Journal of Labor and Development 1: 9.
Lehmann, H and Pignatti, N . 2007: Informal employment and labor market segmentation in transition economies: Evidence from Ukraine. IZA Discussion Paper No. 3269, Institute for the Study of Labor, IZA, Bonn.
Lehmann, H and Zaiceva, A . 2013: Informal employment in Russia: Incidence, determinants and labor market segmentation. Working Paper DSE No. 903, University of Bologna, Department of Economics.
Maloney, WF . 1999: Does informality imply segmentation in urban labor markets? Evidence from sectoral transitions in Mexico. The World Bank Economic Review 13 (2): 275–302.
Maloney, WF . 2004: Informality revisited. World Development 32 (7): 1159–1178.
Mazumdar, D . 1976: The urban informal sector. World Development 4 (8): 655–679.
Pagés, C and Stampini, M . 2009: No education, no good jobs? Evidence on the relationship between education and labor market segmentation. Journal of Comparative Economics 37 (2): 387–401.
Perry, G, Maloney, W, Arias, O, Fajnzylber, P, Mason, A and Saavedra-Chanduvi, J . 2007: Informality: Exit and exclusion. World Bank: Washington DC.
Schneider, F, Buehn, A and Montenegro, CE . 2010: New estimates for the shadow economies all over the world. International Economic Journal 24 (4): 443–461.
Slonimczyk, F and Gimpelson, V . 2013: Informality and mobility: Evidence from Russian panel data. IZA Discussion Paper No. 7703, Institute for the Study of Labor, Bonn.
Solon, G . 1988: Self-selection bias in longitudinal estimation of wage gaps. Economic Letters 28 (3): 285–290.
Tokman, V . 1986: The informal sector: Fifteen later. Paper presented at the Conference ‘The Comparative Study of the Informal Sector’. Harper’s Ferry, October.
Acknowledgements
This paper is based on my presidential address to the 2014 Annual Meeting of the Association of Comparative Economic Studies, which I presented on 4 January 2014 in Philadelphia, Pennsylvania. I am grateful to Olivier Bargain, Thomas Dohmen, Melanie Khamis, Norberto Pignatti, Tiziano Razzolini and Anzelika Zaiceva for allowing me to draw on joint work. Comments by Josef Brada, John Bennett and by participants of the ASSA meetings in Philadelphia and of the Second International Conference of the Institute for East and Southeast European Studies in June 2014 in Regensburg, where I gave an invited lecture on the same topic, are gratefully acknowledged. I am also grateful to the Fritz Thyssen-Foundation for partial financial support within the project ‘Risk attitudes and labor market informality: with a case study of Russia’. The opinions expressed in this paper are mine and should not be attributed to the University of Bologna or IZA.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Lehmann, H. Informal Employment in Transition Countries: Empirical Evidence and Research Challenges. Comp Econ Stud 57, 1–30 (2015). https://doi.org/10.1057/ces.2014.44
Published:
Issue Date:
DOI: https://doi.org/10.1057/ces.2014.44