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One-Third of Russians Prefer Informal Employment

The informal labour market is growing in Russia. An increasing number of people are moving to the informal economy because they do not trust government institutions and do not receive the public benefits they are entitled to as taxpayers. 'Shadowed from Regulation: Informality in the Russian Labor Markets, Its Dynamics, Extent, and Consequences' is a paper by Vladimir Gimpelson

The labour market today is subject to a multitude of various rules and restrictions which formalize employment and earnings. However, many workers are employed wholly or partly outside these regulations, making them 'informal' and off the government's radar. This raises a variety of questions for researchers and policy makers about the nature of this phenomenon and ways to deal with it. Vladimir Gimpelson, Director of the HSE's Laboratory for Labour Market Studies, presented the findings of the HSE's long-term project to study Russia's informal labour market to participants of a joint academic seminar organized by the HSE's Laboratory for Labour Market Studies (LLMS) and Centre for Labour Market Studies (CLMS).

The Country Does Not Know Who They Are

In virtually all countries the informal sector attracts interest. An informal labour market, in one form or another, exists in developing and transitional economies, as well as in the OECD countries. Russia is no exception. A large part of its population is engaged ininformal or semi-formal employment. The problem is that no one in Russia really knows much about the country's informal labour market: who these people are, where they work, why they make this choice, and how it affects their well-being.

Deputy Prime Minister Olga Golodets pointed to this gap as she addressed the HSE's XIVth April Conference. "In Russia, just 48 million of the 86 million citizens of working age are employed in sectors which we can see and understand. But we do not understand where the rest are employed and what they do," she said.

According to Gimpelson, not only the government but also the academic community does not understand the phenomenon either. "We are at the beginning stage of studying this problem," says Gimpelson, noting that the purpose of his study has been to estimate the scope, causes, and dynamics of the informal labour market in Russia.

Citizens Do Not Trust the Government

Overregulation and excessive taxation are traditionally mentioned as reasons for the growth of informal employment in the world. However, Gimpelson notes, no universal definition of informality exists. "It is something hardly visible and difficult to measure but nevertheless commonly known," he says. In addition, there are different approaches to measuring 'informality', depending on whether we look at individuals, firms, government, or society.

There is no single answer as to whether informality is good or bad. "It is rather bad than good, but no uniform regulatory opinion exists. Complex and diverse relationships exist between formal and informal employment, and if we try to suppress the informal sector, it may affect the formal sector as well. In its essence, informal employment is a violation of the social contract between individuals and the state, whereby people pay taxes in exchange for public benefits," said Gimpelson.

He concludes that the growing popularity of informal employment is caused by the state's failure to deliver on its social obligations. "Prevalent informality in any country reflects a failure of state institutions; people do not trust them," the professor explains.

Marginalization – or the Emergence of New Businesses?

Informality generally has negative consequences for society, such as marginalization and poverty, inequality and a lack of social mobility, people dropping out of social security, and a loss of tax revenue for the government. However, informality has certain 'pros', eg by facilitating small business and micro-enterprise startups, which can contribute to overall business growth in the country. Informality, Gimpelson says, also serves as an alternative to unemployment.

Globally, research on informal employment has been ongoing for some 50 years, and whereas earlier studies described it in negative terms only, over the years attitudes have changed. Thus, says Gimpelson, the first studies of informality published in the early ‘70s made an unequivocal diagnosis: the poor are forced into the informal sector and trapped there. Over time, ideas have changed to recognize the informal economy as a heterogeneous phenomenon accommodating members of different parts of society, including self-employed individuals who can be quite affluent and successful. To date, informality is considered a complex concept with no clear-cut boundaries between the formal and the informal sectors. Researchers conclude that each sector has its own pros and cons.

Shadow Absorbs Light

For individuals, the informal and formal sector's costs-to-benefits ratio may vary. The benefits of being visible in the 'daylight' of the formal economy include a guaranteed salary, social benefits and security, pensions, loans, and bank cards, while its costs include the obligation to pay taxes, dealing with bureaucracy, and only limited social security. "Informality tends to 'absorb light' and reproduce itself, as long as businesses and individuals gain when everyone is acting informally; the more people there are in the shadow, the fewerremain in the daylight," Gimpelson emphasized.

By his estimates, the share of employment in the informal economy is 25% to 30% in Russia. According to Rosstat (the Russian Federal State Statistics Service), before September 2009, an estimated 270,000 Russians were employed in the informal sector each year, but in recent years the number has increased to some 800,000 people.

It is the informal sector that accounts for the overall growth of employment in Russia; without it, the country's labour market would show a negative trend. Since 1999, thanks to 12 years of informal employment, the overall employment has grown by 7% in Russia, while employment in the informal sector has increased by 1.5 times.

The difference between Russia and other countries lies in the fact that wage employment, rather than self-employment, is the main contributor to informal employment and its dynamics – whereas, elsewhere in the world self-employed individuals form the bulk of the informal sector.

Informal Employees Don't Stand Much to Lose

Informal employment, just like unemployment, is seasonal in Russia. There is also a clear association with age – informal employees tend to be younger. Gimpelson's findings suggest that an average informal employee earns less than an average formal sector employee, but self-employed individuals tend to earn more in the informal sector than the formal sector. The sectors of Russia's economy with the highest rates of informal employment include construction, trade, agriculture, and transportation.

A detailed econometric analysis reveals that employees in the informal sector are paid 12%-20% less than those in the formal sector; by contrast, informal self-employment brings a substantial premium of up to 85%.

According to Gimpelson, an informal employee in Russia stands little to lose in terms of social security. "The formal sector is not 100% formal. Compliance with labour legislation does not exceed 90% in formal employment and 60% in informal employment," the professor noted. At the same time, the workforce moves back and forth between the formal and the informal sectors. "By looking closely, one can observe that the workforce flow from the formal to the informal sector prevails over the opposite flow from the informal to the formal sector, but not much: three people moving in one direction versus two people moving in the opposite direction," he explains.

Informality contributes to inequality in society, but such inequality decreases over time. There is not much difference between formal and informal workers in terms of wages and life satisfaction, allowing informal employment to gradually win over the job market.

Reforming Institutions May Help Reduce Informal Employment

The HSE's research oninformal employment has produced findings which may be useful in designing the country's economic policy. According to Gimpelson, the main problems lie in workforce demand. "The formal economy is not creating jobs because of the unfavourable investment climate and excessive and distorted regulation. At the same time, suppressing the informal sector does not make sense. What is needed instead is to change the labour legislation to make it more rational, and to improve the performance of state institutions", said Gimpelson.


July 15, 2013