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.
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.
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.
The China Shock has challenged economists’
benign view of how trade integration affects labor markets in developed
Economists have long recognized that free trade
has the potential to raise countries’ living standards. But what applies to
a country as a whole need not apply to all its citizens. Workers displaced
by trade cannot change jobs costlessly, and by reshaping skill demands,
trade integration is likely to be permanently harmful to some workers and
permanently beneficial to others. The “China Shock”—denoting China’s rapid
market integration in the 1990s and its accession to the World Trade
Organization in 2001—has given new, unwelcome empirical relevance to these
Policies to increase formal finance to smaller
firms requires improving the functioning of government bureaucracies
Although small- and medium-sized enterprises
(SMEs) represent more than 90% of all enterprises and play an important role
in employment generation, they lack access to affordable formal finance.
Conventionally, market failures and information imperfections are seen as
major causes of this misallocation. However, the role of social and political
factors in resource allocation, including access to formal finance, has
recently become more widely accepted. Firm-level evidence from
post-communist economies, for example, shows that political connectedness
improves access to bank credit, but is not associated with enterprise
Does the transition to market economies imply
growing wage inequality and, if so, along what dimensions?
Examining the implications of changes in public
sector wage-setting arrangements due to privatization is a relatively new
area of economics research, with few studies having analyzed the effects of
public sector restructuring on relative wages in developed countries. There
is, however, a growing empirical literature that measures the effects of
transitioning from central planning to market-based systems on
public–private sector wage differentials. Policymakers can learn from this
evidence about the ways in which ownership transformation affects the
distribution of wages in both the public and private employment sectors.
Households can benefit from international trade
as it lowers the prices of consumer goods
Imported products tend to have lower prices than
locally produced ones for a variety of reasons, including lower labor costs
and better technology in the exporting country. The reduced prices may lead
to wage losses for individuals who work in the production of a local version
of the imported item. On the other hand, lower prices may be beneficial to
households if the cheaper product is in their consumption basket. These
welfare gains through consumption, on average, are found to be larger in
magnitude than the wage effect for some developing countries.
Harnessing the benefits of diversity is essential for
encouraging entrepreneurship in the transition region
Entrepreneurship is an important lever for spurring transition
in the economies of the former Soviet Union and Central and Eastern Europe. Utilizing
diversity, in terms of religion or gender, can positively affect entrepreneurial development.
Programs that encourage entrepreneurial initiatives (such as business start-ups) in culturally
diverse localities should rank high on the policy agenda. Prompting women to start a business,
along with female-friendly measures (including targeted legislation), can positively affect
entrepreneurial behaviour and the performance of existing enterprises.
Low coverage and greater fragmentation can limit
the benefits of trade unions
Countries with strong industrial relations
institutions and well-established social dialogue often perform well in
terms of economic growth and social cohesion. The weak and fragmented
bargaining and low levels of union coverage in Central and Eastern Europe
(CEE) raise concerns about these countries’ potential to maintain
competitiveness, tackle demographic and macroeconomic challenges, and catch
up with Western European economic and social standards. There is evidence
that unions in CEE continue to protect their members and generate wage
premiums, despite their institutional weaknesses.
Economic progress coupled with political and
institutional stability is needed to reduce unhappiness
Since 1989, post-communist countries have
undergone profound changes in their political, economic, and social
structures and institutions. Across a range of development outcomes—in terms
of the speed and success of reforms—transition is an “unhappy process.” The
“happiness gap,” i.e. the difference in average happiness levels between the
populations of transition and non-transition economies, is closing, but at a
slower pace than the process of economic convergence. Economic growth, as
the determinant of a country’s collective well-being, has been superseded by
measurements of institutional quality and social development.