The Effect of Unobservables on Labour Supply Decisions: The Formal and Informal Sector During Transition
35 Pages Posted: 14 Jul 2008
Date Written: June 2003
The transition from a command economy in the FSU resulted in increased activities in the informal sector. However despite prevalent delays in wage payments many workers were still observed to be working full-time in the formal sector. Here a model of workers' labour supply decisions incorporates unobservable features of informal activities in both sectors; namely unofficial payments within the formal sector and stigma associated with the informal sector. These extensions result in non-trivial changes to workers' reservation wage conditions and reconcile the unexpected outcomes of workers' labour supply decisions. A limited empirical analysis of Kyrgyz data, for 1993 and 1996, provides support for the implications of this framework.
JEL Classification: J220, P230
Suggested Citation: Suggested Citation