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A model of the Informal Economy in Transition Economies

Author

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  • Simon Commander
  • Andrei Tolstopiatenko

Abstract

The informal economy has burgeoned in many transition economies but particularly in those of the Former Soviet Union. While this variation has commonly been related to the prevalent tax regimes and the degree of transparency in the legal and commercial system, the causality is far from obvious and other factors -- such as the importance of non-monetary compensation or social benefits -- seem to be important. This paper sets up a model of a formal and informal sector where multiple job-holding is feasible. The informal sector can choose to employ part time labour or full time workers; the latter will be subject to payroll taxation. The informal sector in this model makes its decisions contingent on the behavior of the formal sector and parameters, such as tax rates and the probability of being caught evading taxes. The model allows us to retrieve the ratio of the types of employment in each sector and their associated levels. With the closed form, a set of simulations are run that indicate the effect of shocks to demand and/or financing of social benefits on labour allocation. The distribution of employment across full and part time employment is very sensitive to the scale of subsidy given to benefits, as well as the tax regime and incidence.

Suggested Citation

  • Simon Commander & Andrei Tolstopiatenko, 1997. "A model of the Informal Economy in Transition Economies," William Davidson Institute Working Papers Series 122, William Davidson Institute at the University of Michigan.
    • Handle: RePEc:wdi:papers:1997-122
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    Citations

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    Cited by:

    1. Klarita Gërxhani, 2004. "The Informal Sector in Developed and Less Developed Countries: A Literature Survey," Public Choice, Springer, vol. 120(3_4), pages 267-300, September.
    2. repec:ilo:ilowps:355192 is not listed on IDEAS
    3. Alessandra Guariglia & Byung‐Yeon Kim, 2006. "The dynamics of moonlighting in Russia," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 14(1), pages 1-45, March.
    4. Bernabè, Sabine. & Singh, Andréa Menefee,, 2002. "A profile of informal employment : the case of Georgia," ILO Working Papers 993551923402676, International Labour Organization.
    5. Tichit, Ariane, 2006. "The optimal speed of transition revisited," European Journal of Political Economy, Elsevier, vol. 22(2), pages 349-369, June.
    6. Maxim Bouev, 2004. "Diverging Paths: Transition in the Presence of the Informal Sector," William Davidson Institute Working Papers Series 2004-689, William Davidson Institute at the University of Michigan.
    7. Maxim Bouev, 2001. "Labor Supply, Informal Economy and Russian Transition," William Davidson Institute Working Papers Series 408, William Davidson Institute at the University of Michigan.
    8. Alexander Chepurenko, 2017. "Entrepreneurial Activity in Post-Socialist Countries: Methodology and Research Limitations," Foresight and STI Governance (Foresight-Russia till No. 3/2015), National Research University Higher School of Economics, vol. 11(3), pages 11-24.

    More about this item

    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • P31 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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