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Reducing informality requires better enforcement,
more reasonable regulation, and economic growth
In developing and transition economies as much as
half the labor force works in the informal sector (or “shadow economy”).
Informal firms congest infrastructure and other public services but do not
contribute the taxes needed to finance them. Informal workers are
unprotected against such negative shocks as ill-health, but for certain
groups there can be scarce opportunities to enter the formal sector meaning
informal employment is the only feasible option. Reducing informality
requires better enforcement, more reasonable regulation, and economic
growth.
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Reducing under-reporting of salaries requires
institutional changes
In transition economies, a significant number of
companies reduce their tax and social contributions by paying their staff an
official salary, described in a registered formal employment agreement, and
an extra, undeclared “envelope wage,” via a verbal unwritten agreement. The
consequences include a loss of government income and a lack of fair play for
lawful companies. For employees, accepting under-reported wages reduces
their access to credit and their social protections. Addressing this issue
will help increase the quality of working conditions, strengthen trade
unions, and reduce unfair competition.
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Excessive drinking is the main cause of high
male mortality rates, but the problem can be addressed
Eastern European countries, particularly former
Soviet Union economies, traditionally have the highest rates of alcohol
consumption in the world. Consequently, they also have some of the highest
male mortality rates in the world. Regulation can be effective in
significantly decreasing excessive drinking and its related negative
effects, such as low labor productivity and high rates of mortality.
Understanding the consequences of specific regulatory measures and what
tools should be used to combat excessive alcohol consumption is essential
for designing effective policies.
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Trade policy is not an employment policy and
should not be expected to have major effects on overall employment
Trade regulation can create jobs in the sectors
it protects or promotes, but almost always at the expense of destroying a
roughly equivalent number of jobs elsewhere in the economy. At a
product-specific or micro level and in the short term, controlling trade
could reduce the offending imports and save jobs, but for the economy as a
whole and in the long term, this has neither theoretical support nor
evidence in its favor. Given that protection may have other—usually
adverse—effects, understanding the difficulties in using it to manage
employment is important for economic policy.
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Workers and policymakers may fear that
privatization leads to job losses and wage cuts, but what’s the empirical
evidence?
Conventional wisdom and prevailing economic
theory hold that the new owners of a privatized firm will cut jobs and
wages. But this ignores the possibility that new owners will expand the
firm’s scale, with potentially positive effects on employment, wages, and
productivity. Evidence generally shows these forces to be offsetting,
usually resulting in small employment and earnings effects and sometimes in
large, positive effects on productivity and scale. Foreign ownership usually
has positive effects, and the effects of domestic privatization tend to be
larger in countries with a more competitive business environment.
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State capture and uneven infrastructure development due to foreign direct investment can outweigh productivity gains
Firms in the new EU member states of Eastern Europe are more productive than those in other transition economies, but with a diminishing advantage. The least productive firms benefit the most from membership, although the situation is reversed in the case of foreign-owned firms. Foreign direct investment fails to promote knowledge and technology spillovers beyond the receiving firms. The dominance of multinational enterprises in the new EU member states enhances the threat of corporate state capture and asymmetric infrastructure development, whilst access to finance remains a constricting issue for all firms.
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The automotive industry has brought economic
growth, but a developmental model based on foreign capital is reaching its
limits
Central Europe has experienced one of the most
impressive growth and convergence stories of recent times. In particular,
this has been achieved on the back of foreign-owned, capital-intensive
manufacturing production in the automotive sector. With large domestic
supplier networks and high skill intensity, the presence of complex industry
yields many economic benefits. However, this developmental path is now
reaching its limits with the exhaustion of the available skilled workforce,
limited investments in upgrading and research, and persistent regional
inequalities.
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More important than defining and measuring
informality is focusing on reducing its detrimental consequences
There are more informal workers than formal
workers across the globe, and yet there remains confusion as to what makes
workers or firms informal and how to measure the extent of it. Informal work
and informal economic activities imply large efficiency and welfare losses,
in terms of low productivity, low earnings, sub-standard working conditions,
and lack of social insurance coverage. Rather than quibbling over
definitions and measures of informality, it is crucial for policymakers to
address these correlates of informality in order to mitigate the negative
efficiency and welfare effects.
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The benefits of trade regulation increase when workers are
mobile
Economists have shown that international trade increases
economic growth, with trade liberalization and integration having characterized the last 50
years. While trade can increase national welfare, recent estimates from both developed and
developing countries show that labor market adjustment costs matter. Regulating trade, defined
as adding or removing tariffs and other trade barriers, is not the best way to help
lower-income workers who suffer from trade-induced losses. Policies that reduce adjustment
costs may increase aggregate welfare more than regulating trade flows does.
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One-company towns concentrate employment but
their ability to adapt to adverse events is often very limited
One-company towns are a relatively rare
phenomenon. Mostly created in locations that are difficult to access, due to
their association with industries such as mining, they have been a marked
feature of the former planned economies. One-company towns typically have
high concentrations of employment that normally provide much of the funding
for local services. This combination has proven problematic when faced with
shocks that force restructuring or even closure. Specific policies for the
redeployment of labor and funding of services need to be in place instead of
subsidies simply aimed at averting job losses.
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