Modelling Informal Labour Market Participation In The Context Of European Economic Integration

With the collapse of the socialist system in Eastern Europe and the advancement of the European Union integration process of the formerly communist countries, many of which are increasingly likely to join the single European market in the foreseeable future, the informal sector in transitional economies has become the centre of attention for researchers. The weakening and sometimes the dissolution of public institutions in these countries and the increase in poverty throughout the region have contributed to the significant expansion of informal activities. In this context, the paper tries to accomplish two things. First, it intends to construct a dynamic model for a utility maximizer's labour market behaviour where one of the options available to him is to work in the informal sector. Second, the model tries to capture the influence of the EU integration process on the conduct of individuals searching for jobs in the formal and informal sectors. The paper concludes that the contingency plan of the representative worker in transitional economies is influenced by the existence of the informal sector and by the transfers the candidate countries receive from the European Union. * (The authors are grateful for the support received from the ACE PHARE Program for undertaking this research. A draft of this paper was presented to the participants in the workshop organised in Bucharest at the beginning of April 2002, from whom we have received extensive comments and suggestions. We are especially grateful to L. Albu, G. Duchenne, A. Kolev, M. Kotzeva, and A. McAuley for their pertinent observations).