Informal labour market activity: A social safety net during economic transition? The case of Georgia.

This thesis provides the first in depth study of formal and informal labour markets in Georgia, based on the analysis of labour force and household survey data for 1998, 1999. A conceptual framework is developed, which distinguishes informal activities from other types of untaxed, unregulated and/or unmeasured activities (illegal, underground and household activities). Despite a massive collapse in output, following the dismantlement of the former Soviet Union, open unemployment increased relatively little in Georgia. This thesis suggests that this was, in part, due to a transfer of labour into informal employment. The results show that by 1999, 52% of total (34% of non-agricultural) employment was informal. It argues that the resulting fiscal crisis squeezed social security provision and individuals could not afford to be unemployed. It also shows that there was little growth in private firms capable of absorbing labour shed from the state sector. With limited formal job creation and no adequate social benefits, labour shifted mainly into informal employment. The analysis shows that informal activities provide a social safety net. Informal employment is found to increase the risk of poverty with respect to formal employment and to lower it with respect to unemployment and inactivity ceteris paribus. Assuming that individuals are utility maximizing and that they make rational choices, this thesis concludes that, on average, individuals work informally because there is no formal alternative and because they are better off than being unemployed or inactive. However, the informal sector is also found to be contributing to deskilling the labour force, further marginalizing certain vulnerable groups, and its concentration amongst ethnic minorities and underprivileged regions could contribute to undermining Georgia's stability. The challenge for policy will be how to benefit from the informal sector's capacity to provide a social safety net, while minimizing its potentially detrimental consequences.