Labor Supply, Informal Economy and Russian Transition

Abstract

The literature on economics of transition has suggested a number of scenarios to explain unemployment and labor reallocation in Eastern Europe. However, it has recently been argued that these so-called Optimal Speed of Transition (OST) studies do not account for many stylized facts concerning transitional labor markets (such as a drop in participation rates, job-to-job shifts of workers, development of an informal labor market, etc.). The transformation in Russia has witnessed an increase in moonlighting opportunities for workers and a rapid growth of the informal sector. To allow for this fact, which has a strong structural and qualitative effect on Russian transition, I attempt to incorporate secondary job holding in the OST framework. I first consider a time-allocation model in the spirit of Gronau (1977), which takes account of institutional peculiarities of the Russian state sector allowing workers to moonlight in the informal market. I introduce the motivational factor describing a heterogeneous worker's propensity to informal activity. The time-allocation model leads into an OST-type dynamic model with on-the-job search, labor shifts underground and state sector hirings. Numerical simulations of the model help look at Russian transition from a new angle and explain several stylized facts.