The Persistence of Informality: Evidence from Panel Data

38 Pages Posted: 11 Dec 2011

See all articles by Alpaslan Akay

Alpaslan Akay

IZA Institute of Labor Economics

Melanie Khamis

IZA Institute of Labor Economics

Abstract

Informality is a growing phenomenon in the developing and transition country labor market context. In particular, it is noticeable that working in an informal employment relationship is often not temporary. The degree of persistence of informality in the labor market might be due to different sources: structural state dependence due to past informality experiences and spurious state dependence due to time-invariant unobserved individual effects, which can alter the propensity of being in the informal sector independently from actual informality experiences. The purpose of our paper is to study the dynamics of informality using a genuine panel data set in the Ukrainian labor market. By estimating a dynamic panel data probit model with endogenous initial conditions, we find a highly significant degree of persistence due to previous informality experiences. This result implies that policies attempting to reduce current levels of informality may have a long-lasting effect on the labor market.

Keywords: state dependence, unobserved heterogeneity, informality, transition countries

JEL Classification: D60, I31

Suggested Citation

Akay, Alpaslan and Khamis, Melanie, The Persistence of Informality: Evidence from Panel Data. IZA Discussion Paper No. 6163, Available at SSRN: https://ssrn.com/abstract=1970758

Alpaslan Akay (Contact Author)

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Melanie Khamis

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

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