Employed Unemployed? On Shadow Employment In Transition

Evidence on whether people in shadow employment are there due to tax evasion reasons or because of the limited access to formal labour market is thus far mixed. Consistent with the first view, people with informal employment are actually experiencing higher wages than their formally employed counterparts’ ceteris paribus. Conversely, if barriers to access exist, one should expect “grey” wages to fall short of the “non-grey” ones, again, other things held equal. The empirical challenge lies not in the conceptualisation but rather in reliable implementation of the ceteris paribus device. Additional context to this ambiguity is provided by the process of economic transition and/or development. In many of the theoretical frameworks shadow activity be it wageor self-employment is frequently considered one of the transitory phases, sort of tipping the toe, Bennett and Estrin (2007). On the other hand, research on developed economies seems to focus more on the potential adverse effects of the taxing schemes and discrimination/social exclusion, Kopczuk (2001) and Fugazza and Jacques (2004). European transition economies and Poland among them are an interesting mixture of these two contexts. On the one hand, because of the transition heritage, they were and still are characterised by high shares of shadow economy in the GDP. On the other hand, the current estimates are roughly three times lower than in mid-1990s. According to the latest available survey, about 9.6% of the labour force are active in shadow economy1. In this paper we use a set of 52 quarterly labour force surveys for the period 1995q1-2007q4. In each survey roughly 1-2% of the labour force reported having paid employment in the previous week despite being registered as unemployed. We apply propensity score matching to address the problem of considerable heterogeneity among regular and informal compensation and workers. We demonstrate that characteristics of the informally employed resemble more the population of unemployed than that of the formally employed. Using this specific type of “grey” employees we sought “statistical twins” in each of the respective quarters for this very specific group. Subsequently,