Informal Employment Relationships and Labor Market Segmentation in Transition Economies: Evidence from Ukraine

Research on informal employment in transition countries has been very limited because of alack of appropriate data. A new rich panel data set from Ukraine, the Ukrainian LongitudinalMonitoring Survey (ULMS), enables us to provide some empirical evidence on informalemployment in Ukraine and the validity of the three schools of thought in the literature onthe role of informality in the development process. Apart from providing additional evidencewith richer data than usually available in developing countries, the paper investigates to whatextent the informal sector plays a role in labor market adjustment in a transition economy.The evidence points to some labor market segmentation since the majority of informalsalaried employees are involuntarily employed and workers seem to queue for formalsalaried jobs. We also show that the dependent informal sector is segmented into a voluntary"upper tier" and an involuntary lower part where the majority of informal jobs are located.Our contention that informal self-employment is voluntary is confirmed by the substantialearnings premia associated with movements into this state.