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Labor Informality and Credit Market Accessibility

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Document pages: 47 pages

Abstract: The paper investigates the effects of the credit market development on thelabor mobility between the informal and formal labor sectors. In the case ofRussia, due to the absence of a credit score system, a formal lender may set acredit limit based on the verified amount of income. To get a loan, an informalworker must first formalize his or her income (switch to a formal job), andthen apply for a loan. To show this mechanism, the RLMS data was utilized, andthe empirical method is the dynamic multinomial logit model of employment. Theempirical results show that a relaxation of credit constraints increases theprobability of transition from an informal to a formal job, and improved CMA(by one standard deviation) increases the chances of informal sector workers toformalize by 5.4 ppt. These results are robust in different specifications ofthe model. Policy simulations show strong support for a reduction in informalemployment in response to better CMA in credit-constrained communities.

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