- Overview
- Concept of Informal Sector
- Measuring the size of Informal Sector
- Self-Employment and Business Development
- Labor Market and Tax Regulations
- Coping Strategies and Exclusion
- Corruption and Governance
- Country Specific Information | | Coping Strategies and Exclusion
Massive structural unemployment and underemployment in many of the transition countries created the situation when large portions of the population including those who occupied professional level positions before transition find themselves coping with the loss of previous labor market positions, in the “survival” section of the informal labor market, mostly performing low-paid and low-skill jobs. The abrupt change in the labor market and consequent deterioration of the status of these individuals’ labor market positions lead to their alienation and exclusion from the the society. This problem is particularly acute in the Former Soviet Union countries (excluding Baltic countries).
Coping Strategies: General and Classification Issues
The analysis of the response of individuals and households to labor market restructuring including self-employment and coping strategies in transition countries is presented in the Transition Report 2000 of the European Bank for Reconstruction and Development (EBRD) (PDF), where the second part specifically focuses on household and individual labor market strategies, self-employment and human capital. Using the results of the surveys of individuals and households, the report describes earning strategies that are typically chosen by labor market participants in different countries - from business start-ups to multiple job holding to subsistence informal activities. Firms in transition economies are found lagging behind advanced industrialized countries in terms of the quality of their workforce. Such quality gaps are larger in the CIS than in the CEE countries. This finding contradicts the view that the region has abundant human capital as a result of considerable achievements in formal education. Moreover, the lack of restructuring in the less reformed economies of the region means that many skilled workers are performing jobs that do not reflect their levels of education. Over time, there will be a continuing loss of skills, leading to an even greater gap in quality of the workforce between advanced industrialized countries and CIS countries.
The EBRD Transition Report 2000 uses a typology of household coping strategies that divides them into two main groups: subsistence informal work and multiple job holding.
Typology of household coping strategies (EBRD Transition Report 2000):
1. Subsistence work:
§ unpaid family workers including working age family members of self-employed individuals self-reported as inactive and unemployed;
§ occasional workers including self-reported inactive and unemployed persons if they own land and those who report agricultural earnings.
2. Multiple job holding
Calculations based on the self-reported status show high levels of unemployment and inactivity in the CIS countries. However, when the classification described above is used, the outcome demonstrates much higher labor force participation and lower unemployment rate, which is more consistent with the view expressed in various studies that one of the main sources of poverty in these countries are working poor.
The typology described above was used by R. Yemtsov in the paper "Armenia: Labor Markets, Unemployment and Growth" :
1. Standard classification for unemployed and for employed. A person is considered employed if she/he, during the reference week of the survey, has worked either for salary or private gain (including work without pay on family enterprise) or occupied a job position.
2. Estimate of the labor force employed at family farms including not working members of households owning land. These individuals are not considered unemployed. The large drop in the participation rate among working age population observed in FSU countries can be partially attributed to misclassification of self-employed in agriculture (landplots have played a critical role in alleviating poverty) as unemployed.
3. Estimate of the labor force employed by family businesses. All working age family members of self-employed individuals that are reported as not working, are considered employed and classified as unpaid family workers.
4. All working age members of households that report income from sales of assets and valuables are considered employed. This income probably represents proceeds from unregistered trading activities.
As shown in Table 1, these adjustments reverse the pattern of high unemployment and low participation in the case of Armenia.
Table 1.
Source: Armenia household surveys: 1996, 1998, World Bank
Survival Activities and Exclusion
The part of the informal labor market in transition countries constituted by survival activities was largely created in response to different forms of underemployment in the formal sector (time-related, productivity-related, remuneration-related) and the unreliability of social protection mechanisms (including pension and social benefit inflation and arrears along with the high cost of health and education services). Being unable to survive using inflated formal sector salaries and government social safety net sources, many were forced to develop survival strategies that moved them to the informal sector. As opposed to active labor market strategies including entrepreneurial activities and development of marketable skills through education and skill adjustment, survival activities are on the border of active and passive labor market behavior – low income self-employment including street trade and services that don’t require any skills, low-paid multiple low-skill jobs, occasional jobs, selling assets and valuables.
In their recent work by M.Lokshin and R.Yemtsov "Household Strategies for Coping with Poverty and Social Exclusion in Post-Crisis Russia" (Policy Research Working Paper #2556, World Bank 2001) (PDF), the authors analyze survival strategies that households in the Russian Federation used after the 1998 financial crisis and come to the conclusion that the choice of the strategy highly depends on the household level of human capital: the higher the capital, the more likely it is that an active strategy is chosen. Households with lower level of social capital are more likely to suffer exclusion. Targeted policy interventions need to be undertaken to prevent marginalization and impoverishment of those groups.
Exclusion and Marginalization
Exclusion is a complex condition of an individual or family that is characterized by one or more of the following disadvantages - material, social, political, and cultural – as well as by the loss of self-esteem and incentives to actively participate in the labor market. Long-term exclusion from the labor market or, as it often happens in the transition countries, loss of access to previously available more prestigious positions in the labor market, often leads to marginalization. When large groups of the population are excluded from the formal labor market or are not able to find positions relevant to their skills for long periods of time, marginalization becomes a social problem that negatively affects the country’s potential to reform.
The issues of exclusion are discussed in the ECA Social Development Unit report Social Development in Europe and Central Asia region: Issues and Directives. World Bank, 2001 (attached below) . The report describes different forms of exclusion including marginalization of vulnerable groups such as children, youth, disabled, aged; analyzes marginalization and exclusion that results from atomization of both rural and urban communities; and depicts negative social consequences of exclusion including crime and violence.
In the context of strong growth, a large number of workers who lost their previous labor market positions, especially those with high levels of education and skills, should be able to grasp new job opportunities. However, long periods of low-productivity employment including underutilization of technical skills as well as unemployment erode these workers’ ability to adjust to the market environment. These processes lead to the erosion of human capital in these countries.
World Development Report on poverty (2000/2001) (PDF) discusses exclusion as one of the most complicated issues that need to be taken into account in poverty reduction strategies and policy work. Policies and programs for mitigating exclusion from the labor market are described as depending on the nature of exclusion. In some cases exclusion can be addressed by improving the outreach of public services to neglected areas. Where more active discrimination is involved, it is important to ensure equity in the law and in the functioning of state institutions. In addition, affirmative action policies may be needed.
Ethnic Exclusion: Roma
Exclusion of groups with distinctive social and cultural patterns of behavior became more visible during transition. Roma ethnic group represents probably the most striking example of cultural exclusion - they were consistently excluded from the formal labor market throughout the transition period. In her work "Roma and the Transition in Central and Eastern Europe: Trends and Challenges." (World Bank, 2000), D.Rengold (PDF) analyzes the scope and magnitude of the challenges, raises issues for further analysis and to explore policy implications. |  |