The Self-Selection of Workers to the Formal and Informal in Transition Economies: Evidence from Tajikistan

This paper analyzes the selection of workers to informal and formal sector employment in Tajikistan. It estimates multinomial selection bias correction model to assess the impact of observable and unobservable characteristics on the self-selection of workers into the formal and informal sector and on sector specific wages using individual level data from the Tajikistan Standards of Living Survey of 2007. The results suggest that selection of workers on both observable and unobservable characteristics to these sectors is broadly consistent with self-selection on comparative advantages, that the self-selection of workers on unobservable characteristics is the main reason for higher wages in the informal than the formal sector in Tajikistan and that relative wages in the two sectors have a rather strong impact on the decision of workers to work in the formal or informal sector.