Informal employment dynamics in Ukraine: An analytical model of informality in transition economies

The transition economies of the former Soviet Union have experienced a surge of informal employment since the 1990s. This trend, the authors argue, is driven by the structure of labour compensation inherited from central planning. Their innovative theoretical model centres on worker choices of full-time and/or part-time employment across formal, informal and mixed formal-informal sectors. Factoring in the probability of payroll tax evasion detection and the non-monetary benefits provided by state-owned/privatized firms, it suggests that such benefits incentivize workers to combine formal and informal employment. This is confirmed empirically by panel data evidence from the Ukraine Longitudinal Monitoring Surveys.