The Effect of Education on Informal Sector Participation in a Post-Communist Country

Abstract

This article examines participation in the informal economy in Albania, a post-communist country in transition. In particular, it focuses on the effect of education while considering other individual, social, and institutional factors. Two factors that can be central in the educational effect on informal sector participation are considered. The human capital factor, referring to the income-related returns of education, may lead to less participation due to lower financial incentives to do so. The other factor, referring more to the role of education in forming moral attitudes and values, may also lead to less participation but primarily through broad and civic norms affected by education. Using survey data, we find a strong negative relationship between education and informal sector participation. The role of education in shaping broad civic attitudes explains relatively more of this relationship than the human capital factor. Importantly, the effect of education is independent of income, which suggests that education shapes moral values independent of whether these values are developed to legitimize one's advantaged position in society. These findings provide a somewhat optimistic view of how to deal with the social inequality caused by participation in the informal sector.