Risk Attitudes and Informal Employment: Evidence from a Transition Country

Presentation by Norberto Pignatti (ISET, Tbilisi State University) as part of the Economics Department seminar series at the IOS.
Using data from the four waves of the Ukrainian Longitudinal Monitoring Survey - ULMS (2003, 2004, 2007 and 2012), we analyze the question whether workers with a higher willingness to take risks are more likely to select into informal salaried or informal self-employment. The data permit us to distinguish between five employment states: formal and informal self-employment, formal salaried employment, voluntary informal salaried employment, and involuntary informal salaried employment. The produced empirical evidence reveals risk attitudes as a strong determinant of the incidence of informal employment among salaried employees. We also produce evidence that allows us to reject the idea of reverse causality: risk attitudes impact on the choice of employment state whilst this latter does not influence risk attitudes. Thus, we interpret the link between risk attitudes and selection into informal employment as causal. Finally, in a competing risk framework, we explore the relationship between risk attitudes and the likelihood of exit from unemployment towards other employment states. We find that higher willingness to take risks seems to play a significant role in driving exit towards self-employment – both formal and informal. The impact of risk attitudes on the likelihood of exiting towards salaried employment either formal or informal, is less straightforward.