Labour mobility during transitionEvidence from Georgia1

This article deals with labour mobility in Georgia during economic transition. We use quarterly 1998–99 panel data to examine mobility across six labour market statuses (inactivity, unemployment, formal wage employment, informal wage employment, self‐employment and farming). Our findings are consistent with the hypothesis of labour market segmentation. Formal employment is preferred to informal employment. Unemployment is largely a queuing device for individuals with higher education waiting for formal jobs. Some self‐employment is subsistence activities and consistent with a segmented labour market, while other is high risk and potentially high return activities. Age, gender and education are significant determinants of labour mobility. Finally, informal employment serves as a buffer in times of recession – with farming and informal wage employment absorbing labour shed by other statuses during the Russian financial crisis.     

Opening the Pandora's box? Trade openness and informal sector growth

This article constructs a labour transition model combining the features of job loss and job creation in the formal sector of an economy. The theoretical model examines the impact of trade liberalization on net job transition from formal to informal sector. In the light of our model we establish certain pre-conditions based on simulations under which trade liberalization is accompanied by rising informal sector. The model outcome conforms to the empirical evidence of rising informality with openness which we find in 18 Central Eastern European and Former Soviet Union countries.     

International factor mobility,informal interest rate and capital market imperfection: A general equilibrium analysis

This paper makes an attempt to provide a theory of determination of interest rate in the informal credit market in a less developed economy in terms of a three-sector static deterministic general equilibrium model. There are two informal sectors which obtain production loans from a monopolistic moneylender and employ labour from the informal labour market. On the other hand, the formal sector employs labour at an institutionally fixed wage rate and takes loans from the competitive formal credit market. We show that an inflow of foreign capital and/or an emigration of labour raises (lowers) the informal (formal) interest rate but lowers the competitive wage rate in the informal labour market when the informal manufacturing sector is more capital-intensive vis-à-vis the informal agricultural sector. International factor mobility, therefore, raises the degrees of distortions in both the factor markets in this case.     

ENVIRONMENTAL POLICY AND LABOUR MARKET IMPERFECTION

This paper will set up a general equilibrium model with a distorted labour market to explore the effects of an environmental tax and union bargaining power on formal employment and the informal competitive wage. We find that when the government raises the environmental tax, both formal employment and informal competitive wage would fall. In addition, we confirm that a policy of labour market reform would increase both formal employment and the informal competitive wage.     

Informality,enforcement and growth

This paper develops a two-sector growth model with formal and informal sectors for an economy that cares about redistribution and illustrates its relationship with the enforcement level. The technology gap and labour rigidity explicate the duality. The state can tax the formal sector to subsidise informal income and finance public infrastructure. Alternatively, enforcement, which is costly and corresponds to a variety of discrete components from the security of property rights and integrity of contracts to control of corruptions, can be chosen to favour the formal sector and discourage the informal sector. It is observed that weaker enforcement required to accommodate some degree of informality, which releases tax burden from the formal sector needed for redistribution, can accelerate growth rate. However, sufficiently weaker enforcement dampens the formal sector expansion and growth rate. The growth rate registers an inverted-U shaped relationship against the enforcement level. The optimum enforcement can, however, be higher without formal labour union and subsidisation. This must be higher for welfare maximisation than that of growth rate, especially when the consumer cares about the quality of enforcement.     

Informal work networks

Abstract We present a model of time allocation between formal and informal labour supply, where workers learn of informal job opportunities from their peers. In addition to formal income taxation and enforcement, individuals’ labour supply decisions depend on the number of their peers with informal jobs and the strength of social ties. Workers allocate more time to informal activities when tax enforcement is lax and job information transmission is good. More connected social networks (e.g., wheel, complete) feature lower average income but higher average utility than poorly connected social networks (e.g., star, empty). Average income may be non‐monotonic in tax enforcement.     

Household sectoral choice and effective demand for rural credit in India

An analysis of the ICRISAT data from three Indian villages raises concern about the extent of rationing mechanism inhibiting the spread of formal credit in rural India where a significant proportion of households do not have any outstanding loan or borrow from the informal sector only. A limited-dependent econometric analysis of the factors jointly determining household sectoral choice and effective demand for informal loan conditional on whether a formal loan is available suggests that compared to formal loan easy and adequate access and prompt recovery are significant determinants of the popularity and viability of informal rural credit among sample households; also some households substitute labour income to ease the extent of credit. Thus, rationing of the formal credit is not the only factor inhibiting the spread of formal credit in the study villages.     

Earnings inequality and the informal economy

We analyse the extent and evolution of informality and inequality in the Serbian labour market between 2002 and 2007, using data from the Living Standard Measurement Surveys. Two surprising results emerge. First, the level of informal employment has risen significantly over the period, despite strong economic growth and the introduction of a range of market‐oriented reforms. Secondly, the level of inequality in earnings seems to have remained more or less constant over the period, in contrast to the experience of other countries at a similar stage of transition. We show that informal employees earn significantly less than those in the formal sector, controlling for a range of other variables, and informality plays an increasingly important role in explaining earnings inequality.     

Active ageing beyond the labour market: evidence on the role of intrinsic and extrinsic rewards at work

‘Active Ageing’ strategies aim to foster the participation of seniors in the society. Although economic literature has extensively studied the incentives for seniors to increase their labour supply, little is known about the motivations for older people to complement labour with other forms of social participation. This article provides empirical evidence of the role of intrinsic and extrinsic rewards received at work in the supply of formal and informal productive activities of 50- to 65-year-old workers. The results show that workers with higher levels of intrinsic rewards received at work, such as skill development opportunities and decision latitude, are more likely to participate in social activities outside the labour market. Extrinsic rewards on the other hand, like advancement perspectives, job security and pay, appear independent from both formal and informal social participation.     

Formal microlending and adverse (or nonexistent) selection: a case study of shrimp farmers in Bangladesh

Microcredit schemes have become a popular means of improving smallholders’ access to credit and making long term investment possible. However, it remains to be explored whether the current microcredit schemes are more successful than earlier formal small scale lending in identifying successful borrowers. We studied shrimp farming in a rural region in Bangladesh where formal microlending is well established, but where more expensive informal microlending coexists with the formal schemes. Farmers – both those who exclusively use formal loans and those who also use informal loans – remain credit-constrained; both types overutilize labour in order to reduce the need for working capital. However, the credit constraint is actually milder for the informal borrowers: the implicit shadow price of working capital is substantially higher in the group that only takes formal loans than in the group that also uses informal loans. These results suggest that informal lenders – with their closer ties to the individual farmers – remain more successful in identifying those smallholder farmers that are most likely to use the borrowed funds successfully. Informal lenders have an information advantage that formal microlenders lack: the latter need to find routes to access this information in order for formal microcredit schemes to succeed.     

Tanzanian formal sector workers' participation in informal production

A theoretical model is developed explaining formal sector workers participation in the informal sector. A reduced-form informal sector participation function is derived from a specific utility function, a specific informal sector production function, and a specific informal sector earnings function. The participation function can be estimated consistently, and provides a solution to the problem that informal sector ‘wages’ in developing countries are hard to observe. A sample of Tanzanian formal sector workers is used to estimate the participation function. A majority of Tanzanian formal sector workers participate in informal production. Participation in informal production is inversely related to household income, to living in Dar es Salaam, and to being a mother with small children. Participation is positively related to age, and multiple-job-holding seems to play a very different role in the transition from work to retirement in Tanzania compared to industrialized countries.     

Tax Reform,Structural Unemployment and the Environment

The effects of environmental tax reform, i.e., using the proceeds of a higher energy tax rate to lower the labour tax rate, on wage formation, employment and environmental quality are analysed in the context of a small open economy with structural unemployment caused by hiring costs. We find that such a reform may boost employment if it shifts the tax burden away from workers towards those without employment in the formal sector. Environmental tax reform succeeds in shifting the tax burden away from workers in the formal sector if higher energy taxes reduce earnings in the informal sector by reducing labour productivity.     

Formal and Informal Labour Markets: Challenges and Policy in the Central and Eastern European New EU Members and Candidate Countries

The paper aims at comparing the formal and informal labour marketsin the Central and Eastern European new EU Member States andcandidate countries of the European Union. First, the currentsituation of the labour market is described, focusing on therecent developments since the breaking up of the East. Thenthe policy design of these labour markets is depicted and itseffects on formal and informal labour markets. The most importantchallenges for employment policy as well as the effects of enlargementon the labour markets are analysed. The paper ends with a shortsummary. (JEL J21, J23, H26, H11, O17, O57)     

Not just a work permit: EU citizenship and the consumption behaviour of documented and undocumented immigrants

This paper explores the impact of the 2007 European Union enlargement on the consumption behaviour of immigrant households. Using data from a unique Italian survey and a difference-in-differences approach, we find that the enlargement induced a significant consumption increase for the immigrant households from new member states both in the short and in the medium run. This enlargement effect cannot be attributed to the mere legalization as it concerns both undocumented and documented immigrants, albeit through different channels. Detailed information on immigrants’ legal status (undocumented/documented) and sector of employment (informal/formal) allows us to shed light on the exact mechanisms. Following the enlargement, previously undocumented immigrants experienced an increase in the labour income by moving from the informal towards the formal economy, whereas immigrants who were already working legally in Italy benefited from the increased probability of getting a permanent contract. Enhanced employment stability in turn reduced the uncertainty about future labour income leading to an increase in documented immigrants’ consumption expenditure.     

Modernization,Heterogeneity and Employment in Mexico

The principal objective of this paper is to study the effects of Mexico's recent economic reforms on employment and labour productivity. The author argues that the globalization and modernization entailed by the reforms tended to accentuate the structural heterogeneity and the differentials in productivity levels between different sectors.While in formal activities the growth rate of labour productivity accelerated, the contrary occurred in informal activities. Given the relatively moderate rate of increase in output and employment of formal activities, it is very likely that the greater heterogeneity has contributed to the decrease in the average growth rate of labour productivity as observed in Mexico in the period studied.     

No education,no good jobs? Evidence on the relationship between education and labor market segmentation

This paper assesses labor market segmentation across formal and informal salaried jobs and self-employment in three Latin American and three transition countries. It looks separately at the markets for skilled and unskilled labor, inquiring if segmentation is an exclusive feature of the latter. Longitudinal data are used to assess wage differentials and mobility patterns across jobs. To study mobility, the paper compares observed transitions with a new benchmark measure of mobility under no segmentation. It finds evidence of a formal wage premium relative to informal salaried jobs in the three Latin American countries, but not in transition economies. It also finds evidence of extensive mobility across these two types of jobs in all countries, particularly from informal salaried to formal jobs. These patterns are suggestive of a preference for formal over informal salaried jobs in all countries. In contrast, there is little mobility between self-employment and formal salaried jobs, suggesting the existence of barriers to this type of mobility or a strong assortative matching according to workers’ individual preferences. Lastly, for both wage differentials and mobility, there is no statistical difference across skill levels, indicating that the markets for skilled and unskilled labor are similarly affected by segmentation.     

CHILDCARE USE AND PARENTS’ LABOUR SUPPLY IN AUSTRALIA*

Based on data which are representative of the Australian population in 2002, this paper first analyses the demand for and cost of formal and informal childcare for couple and sole‐parent families, shedding light on factors which affect the demand for childcare. The predicted demand of formal childcare and the predicted costs of informal childcare arising from these models are then used to impute total childcare costs at different levels of labour supply. Finally, the predicted total costs are incorporated in the estimation procedure of structural labour supply models for couple and sole parent families. By making several extensions to the methodology adopted in Doiron and Kalb (2005a ), who estimated similar models based on 1996 Australian data and which this paper largely replicates in terms of methodology, it is found that the average elasticities of labour supply with regard to the cost of childcare are quite similar to the earlier estimates. The elasticities remain at the lower end of the range found in the international literature with the exception of the elasticities for sole parents with preschool children and/or on relatively low wages.     

Economic liberalization, capital mobility and informal wage in a small open economy: A theoretical analysis

Empirical evidence suggests that the size of the informal sector in the developing countries has increased considerably during the liberalized economic regime. The present paper purports to analyze the consequences of economic reforms on the wellbeing of the informal sector workforce using a three-sector general equilibrium model with two informal sectors. The theoretical analysis finds that different liberalized policies produce diverse effects on the informal wage and that these results are independent of the nature of capital mobility between the informal and the formal sectors. It also shows that labour market reforms, contrary to the common wisdom, are likely to produce favourable effects on the informal wage.     

Increasing wage dispersion and the changes in relative employment and wages in Mexico's urban informal sector: 1987-1993

This study analyses the role of changes in informal/formal relative employment, wage levels and wage inequality in explaining increasing wage dispersion in Mexico during the 1987–1993 period. From 1987 to 1993, the variance of the log of hourly wages for Mexican workers increased by more than 50 per cent. Using data from the Encuesta nacional de empleo urbano we find that this increase in the overall wage dispersion was mainly driven by increasing wage dispersion in the formal sector coupled with a faster growth in formal sector employment as a percentage of total employment. However, compression in the distribution of wages within the informal sector contributed to substantially slowdown the increasing overall wage inequality. About 60 per cent of the 1987–1993 4.65 percentage point reduction in the informal sector share of total employment is explained by changes in the structure that determines sectoral employment; the rest is explained by changes in the composition of the labour force, particularly increases in the sectoral education gap and a change in the regional relative share of sectoral employment. Also, from 1987 to 1993 the sectoral wage ratio increased from 0.59 to 0.63. It seems that a relative improvement in unobserved skills in the informal sector helped to close the wage differential but this effect was partially offset by an increase in the relative prices of both observed and unobserved skills, as well as increases in relative observed skills in the formal sector, particularly education.     

Are Minimum Wages to Blame for Informality in the Labour Market?

The paper estimates the impact of the minimum wage on formal and informal employment in a developing country combining the use of aggregate time series data with modern time-series methods. The analysis is carried out for the case of Brazil over the period 1982–2002. The hypothesis under investigation is that minimum wage rises price workers out of the formal labour market and into the informal sector. The modelling strategy involves the estimation of the long-run structure as well as the short-term dynamics of employment equations in which the minimum wage enters as an explanatory variable.JEL codes: J23 J51 C32