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

Abstract

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

Namazie, Ceema Zahra, The Effect of Unobservables on Labour Supply Decisions: The Formal and Informal Sector During Transition (June 2003). LSE STICERD Research Paper No. CASE072, Available at SSRN: https://ssrn.com/abstract=1158963

Ceema Zahra Namazie (Contact Author)

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