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The Effect of Unobservables on Labour Supply Decisions: The formal and informal sector during transition
Ceema Zahra Namazie June 2003
Paper No' CASE 072:
Full Paper (pdf)

JEL Classification: J220; P230

Tags: transition; informal activities; labour supply decisions

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.