The Effect of Unobservables on Labour Supply Decisions:The formal and informal sector during transition

The transition from a command economy in the FSU resulted in increasedactivities in the informal sector. However despite prevalent delays in wagepayments many workers were still observed to be working full-time in theformal sector. Here a model of workers' labour supply decisions incorporatesunobservable features of informal activities in both sectors; namely unofficialpayments within the formal sector and stigma associated with the informalsector. These extensions result in non-trivial changes to workers' reservationwage conditions and reconcile the unexpected outcomes of workers' laboursupply decisions. A limited empirical analysis of Kyrgyz data, for 1993 and1996, provides support for the implications of this framework.[...]