STEMMING RUSSIA’S INFORMALITY Unearthing Causes and Developing Solutions Apurva Sanghi Samuel Freije-Rodriquez Aleksandra Posarac STEMMING RUSSIA’S INFORMALITY Unearthing Causes and Developing Solutions Apurva Sanghi Samuel Freije-Rodriquez, Aleksandra Posarac* * Sanghi is the Lead Economist for the Russian Federation, World Bank. Freije-Rodriquez is the Lead Poverty Economist, World Bank; and Posarac is the Lead Social Protection and Jobs Economist, World Bank. May 2019 This report is written by staff and consultants of the World Bank. The findings, interpretations and conclusions expressed herein are those of the authors and should not be attributed in any manner to the Board of Executive Directors the World Bank or the governments they represent, the Government of the Russian Federation, or any of the reviewers. Any mistakes found in the report are the sole re- sponsibility of the authors and the World Bank does not guarantee the accuracy of the data included in this work. © The World Bank, The World Bank Group, 2019. www.worldbank.org alexpublishers.ru Contents Précis ........................................................................................................................... 5 Recognition ................................................................................................................ 7 1. A Rising or Falling Trend? Characteristics and comparisons of informality in Russia ............................................................................................ 9 2. What Lies Beneath Russia’s Rising Informality? .......................................... 17 3. Are Labor Market Rigidities Driving Informality? ......................................... 27 How stringent are Russia’s labor market regulations?............................... 29 Does Russia’s tax-benefits system discourage formal work? .................. 35 Digging deeper: Exploring sectoral and spatial market labor rigidities........................................................................................................ 43 4. Stemming Russia’s Informality Tide: No single fix but multiple policy levers ........................................................................................................................... 49 Policy levers for reducing informal employment in Russia ....................... 51 Reducing informality: Further areas of enquiry ............................................ 58 References ................................................................................................................. 60 4 List of Figures Figure 1-1: Russia’s share of informal employment is not that high when compared to other middle-income countries (circa 2012 – 2017) ..................................................................................12 Figure 1-2: Informal employment rates for Russia are consistent across different data sources .............................................................................................................................................................14 Figure 2-1: Informality is driven by a higher incidence of informal employment across all sectors .....................................................................................................................................................20 Figure 2-2: Population-specific influences have relatively small effects on changes in informality rates ...................................................................................................................................................22 Figure 2-3: Net formal job creation in Russia’s medium and large enterprises has been close to zero ..........................................................................................................................................24 Figure 3-1: Russia’s minimum to average wage ratio is among the lowest .............................................32 Figure 3-2: Russia’s effective tax rate on entering employment is comparatively low ........................37 Figure 3-3: Russia’s marginal effective tax rate on increasing working hours is comparatively low ...............................................................................................................................................38 Figure 3-4: Most migrants come from the Ural, Siberian, Northern and Far East regions (Net migration rates, % of previous year population, 2016) ..........................................................44 Figure 3-5: The rate of informal employment varies between 3.6% in Moscow to 64% in Chechenskaya Republic .....................................................................................................................45 List of Tables Table 3-1: Russia’s Employment Protection Legislation is strict by OECD standards ...........................34 Table 3-2: Russia’s Tax Participation Rate is comparatively low ................................................................36 Table 3-3: Russia’s net replacement rates are among the lowest (Proportion of previous in-work household income maintained after a certain period of unemployment) ..........39 Table 3-4: Russia’s effective tax rate on labor is relatively low ..................................................................41 Table 3-5: Results are robust for households earning less than the average wage ............................42 Table 3-6: The Shorrocks index values for Russia are high (2000-2012) ................................................43 List of Boxes Box 1-1: Many data sources with confusing definitions but one consistent outcome: Informal employment is on the rise in Russia .................................................................................................13 Box 2-1: Methodology to test if de-industrialization explains the rise in Russia’s informal employment ............................................................................................................................................19 Box 2-2: Methodology to test if demography explains the rise in informal employment in Russia ...........................................................................................................................................21 Box 3-1: Labor market regulations in Russia are broad and mandatory ..................................................30 Box 3-2: By OECD standards, regulations on redundancy dismissal in Russia are overly rigid and discourage formal employment....................................................................................35 Box 3-3: Russia’s benefit schemes do not confer commensurate gains compared to those of other countries ..................................................................................................................................40 Box 3-4: Results are robust for households earning less than the average wage ...............................42 Box 3-5: Home and land ownership, as well as social factors, also limit inter-regional mobility in Russia .........................................................................................................................46 Box 4-1: Reducing the cost of formality for employers only has a small impact on informality ...........................................................................................................................................................52 Box 4-2: Certain labor market regulations can be eased to incentivize formal employment .............................................................................................................................................................54 Box 4-3: The role of well-functioning labor inspection systems goes beyond just enforcement.....................................................................................................................................................55 Box 4-4: Russia’s Federal Tax Service has made admirable progress in implementing a risk prioritization approach...............................................................................................................................57 5 Précis Growing informal employment in Russia raises concerns about fiscal sustainability, productivity, and social protection. Cutting through various data and definitions, this report finds one consistent outcome: informal employment is on the rise. As of 2016, Russia’s informal employment was estimated to range between 15.1 and 21.2 percent. The fiscal loss of underpayment by informal workers is estimated at between 1 to 2.3 percent of GDP. However, Russia’s share of informal employment is not that high when compared to other middle-income countries. In fact, countries such as Kazakhstan and Turkey, who have a similar GDP per capita as Russia, exhibit higher informal employment rates – 30 and 33 percent, respectively. Informal employment is a pervasive phenomenon in Russian labor markets, and its growth cannot be solely attributed to changes in the sectoral or demographic composition of the labor force. Rather, informality appears to have been growing across all sectors and particularly among workers without at least some tertiary education. Migrants tend to be more informal: the 2016 share of informal migrant workers (only partially captured in the surveys) was 26.2 percent, versus 15.7 percent of Russian workers. The increase in informality is attributed mainly to the lack of formal job creation, which in recent years, was close to zero. The report focuses on three aspects that affect informality: labor market regulations; taxes and benefits; and labor mobility. • Russia’s labor market regulations, while at par with other countries under some criteria, are overly stringent in others. These regulations, which most severely impinge on SMEs, retain certain unnecessary aspects, notably in the areas of the employment contract and redundancy dismissal, which could be reconsidered. • Tax and benefits policies in Russia, relative to other OECD/EU countries, should not create major disincentives to seek employment or work more hours. In fact, unemployment benefits in Russia may be too low, thereby discouraging participation in the labor force. Introducing a well-designed unemployment insurance system and consolidating small benefits programs into larger income/ means-tested benefits could provide incentives to register as unemployed and to subsequently seek formal work. Moreover, in contrast to other countries, the impact of fiscal proposals in Russia, which reduce the cost of being formal through reducing social insurance contributions, are found to be muted. This could partly be because informal workers currently enjoy benefits such as social pensions and medical treatment with scant contributions. • Intersectoral mobility in Russia is comparable to most advanced economies. However, inter- regional mobility emerges as a key labor market rigidity. Firms are not easily able to hire or retrench based on their economic needs, and workers are not able to easily move to areas where jobs are available. To the extent that informality reacts to distortions in the economy, immobility could lead to greater informality. Stemming Russia’s informal labor tide does not lend itself to an obvious single fix. Instead, the findings allude to a three-pronged policy mix that would lead to (i) more flexible labor legislation in certain areas backed with more effective enforcement; (ii) a stronger safety net with better unemployment benefits; and (iii) a more mobile workforce. The ultimate antidote to reducing informality is faster creation of more formal sector jobs: In both 2017 and 2018, net job creation by medium and large enterprises was close to zero. It may also be helpful to see informality from a different perspective. Russia has an unconventional labor market equilibrium where most of the adjustment comes through wages rather than employment. With more flexible labor markets, Russia could move to a more conventional equilibrium, though this is likely to have a trade-off: more volatile unemployment but also more stable wages. Hence, a strong formal safety net that confers the right incentives and benefits for the unemployed, and an economy that creates formal jobs at a high rate are key. Until then, coercing informal into being formal could be counterproductive. And in this interim, reducing the harmful aspects of informality will rest on the performance of governments and the trust that citizens put in them. It is this two-way street that then becomes as essential a measure as any. Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 7 Recognition This report was prepared by a World Bank team led by Apurva Sanghi (Lead Economist for the Russian Federation), Samuel Freije-Rodriquez (Lead Poverty Economist), and Aleksandra Posarac (Lead Social Protection and Jobs Economist). It builds on the following background papers commissioned for the report: • Kim, Y.S., M. Matytsin, and S. Freije-Rodriguez. (2018). “Informal Employment and Worker’s Wellbeing in Russia.” October 2018. • Matytsin, M., D. Popova, Y.S. Kim, and S. Freije-Rodriguez. (2018). “Household welfare impact of fiscal policy options to growing informal employment in Russia.” October 2018. • Kuddo, Arvo. “Labor Regulations in Russia: An Overview”. June 2018. • Posarac, Aleksandra, Elena Andreeva, and Tatiana Gordine. (2018). “Tax-Benefit Model for the Russian Federation 2017.” June 2018. • Immervoll, Herwig, Daniele Pacifico, Olga Rastrigina, Aleksandra Posarac, and Elena Andreeva. (2019). “Tax-Benefit Model for the Russian Federation 2018.” OECD and World Bank, April 2019. • Artuc, Erhan, Olga Emelyanova, Nicolas Gomez-Parra, Harun Onder, Irina Rostovtseva, and Elena Vakulenko. (2018). “The Macroeconomic Consequences of Labor Mobility Characteristics in the Russian Federation.” June 2018. Farah Manji (Consultant) provided editorial assistance, and Marina Koroleva (Program Assistant) provided logistical support. We are grateful to Andras Horvai (Country Director for the Russian Federation), Dorota Nowak (Country Program Coordinator), and Sandeep Mahajan (Practice Manager, Macroeconomics, Trade and Investment Global Practice for Europe and Central Asia) for their overall guidance and support. Without implicating them, the team is especially grateful to the following peer reviewers for their careful and thoughtful comments: Dr. Vladimir Gimpleson (Professor & Director of the Centre for Labor Market Studies at High School of Economics, Moscow), Dr. Evsey Gurvich (Head of Economic Expert Group & Member of the Economic Council under the President of the Russian Federation), and Johannes Koettl (Senior Economist, World Bank). Helpful comments were also received by Ejaz Ghani (Lead Economist, World Bank). For queries, please contact Apurva Sanghi, at “asanghi@worldbank.org”. 8 1 A Rising or Falling Trend? Characteristics and comparisons of informality in Russia Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 11 Is informality a cause for concern? There are three broad reasons why informality raises concerns. First, by operating largely outside the state’s regulation, where tax evasion is the norm, informality undermines fiscal sustainability.1 In the case of Russia, where the state faces difficulties in collecting taxes and social insurance contributions from workers and firms in the informal sector, the provision of social services is hindered (Matytsin, Popova, & Sinnott, 2017). . As a result, the provision of basic public goods, not conditional upon formal employment and personal contributions, could both alienate individuals from the state and reduce state accountability to taxpayers. Second, informality could undermine productivity and economic growth. There are potential efficiency losses because of suboptimal production decisions related to scale, investment, and the use of technology and innovation. A recent analysis for Russia, covering the period 2002- 12, showed that the expansion of informality partially reduced the positive contribution of labor reallocation to productivity growth (World Bank, 2016). Firm productivity may be hindered both by limited incentives for investing in training informal workers and by the selective enforcement of formal regulations. Finally, informality could increase poverty and inequity. In the face of uninsured risk, workers are vulnerable to economic shocks especially if they are more likely to be excluded from the formal social safety net (Slonimczyk & Gimpelson, 2013). How does informality in Russia compare to other countries? It is worth noting that the nature of informality in Russia is different than in most other countries. This is because of Russia’s high education level, the economy’s non-agrarian structure, and its reliance on hired labor (versus self-employment). This is apparent in Figure 1.1, which shows high informal employment rates in low-income countries – upwards of 90 percent in African countries – versus Russia’s 22 percent. However, middle- income countries such as Kazakhstan and Turkey, who have a similar GDP per capita as Russia, show similar if not higher informal employment rates – 30 and 33 percent, respectively. Thus, compared to this set of middle-income countries, Russia’s share of informal employment is not high. Is informality rising or falling in Russia? By global comparisons at least, Russia’s share of informal employment does not appear too different. However, compared to its own self, the Russian economy has been characterized by a steady, long-term increase in informality from the early 2000s through to 2016. Informal employment increased in the first half of the 2000s, then briefly leveled-off or even fell, but continued to increase thereafter. Specifically, Rosstat estimates that the country’s informal employment increased from 12.5 percent in 2001 to 17.6 percent in 2005 (with a slight dip to 16.4 percent in 2010), followed by a further significant increase in 2016, reaching 21.2 percent. Various data sources show similar trends (Box 1.1), suggesting that informal employment in Russia has continued to grow, including in recent years, regardless of the data source used. It is this continued increase over the past two decades that warrants 1 A background paper commissioned for this report estimates that under varying assumptions, the fiscal loss of underpayment by informal workers is between 1 to 2.3 percent of GDP (Matytsin, Popova, Kim, & Freije, 2018) 12 Stemming Russia’s Informality: Unearthing Causes and Developing Solutions Figure 1-1: Russia’s share of informal employment is not that high when compared to other middle-income countries (circa 2012 – 2017) Source: ILO-WIEGO informal employment database and ILOSTAT informal employment harmonized series, www. ilo.org/ilostat (accessed June 4, 2018); and World Development Indicators for GDP data. Note: Data corresponds to the most recent estimates of the informal employment rate within the period 2012- 2017. further attention.2 It is worth noting that the fall in informal employment in the second half of the 2000s coincided with the global financial crisis.3 As of 2016, Russia’s informal employment from these collective sources is estimated to range between 15.1 and 21.2 percent, or between 10.9 to 15.4 million people (Figure 1.2, Box 1.1). 2 Another aspect of informality that may warrant attention, but which is beyond the scope of this report, is Russia’s share of informal GDP (versus informal labor). Recent estimates put the share of informal GDP in Russia at 38 percent of GDP (average, between 1991 – 2015) compared to the OECD average of 15 percent (Enste & Schneider, 2000) While there is likely to be a positive correlation between the shares of informal labor (15.1 to 21.2 percent as per Box 1) and informal GDP (38 percent as per the Schneider and Enste database), it needs to be interpreted with caution. For one, it does not mean that between 15 and 21 percent of informal workers produce 38 percent of GDP. This is because informal GDP can be produced by both formal and informal workers. For example, large, formal companies, if involved in unrecorded activities, could still use formal labor and contribute to informal GDP. To the contrary, informal labor in Russia, which is mostly located within retail, small construction, personal services and agriculture, contributes little in terms of value added (Voskoboynikov & Gimpelson, 2015) 3 One plausible reason for why informality decreased during the crisis years is that labor demand for using informal workers shrank. Since informal wage employment (versus self-employment) is the more dominant form of employment (see Box 1.2), it can indeed be the case that reduced labor demand due to the crisis adversely affected informal employment. Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 13 Box 1-1: Many data sources with confusing definitions but one consistent outcome: Informal employment is on the rise in Russia We use a rich set of data sources to measure changes in informal employment in Russia. Official data comes from Rosstat. In addition, we exploit four other sources of microdata that include information on informal employment: The Russia Longitudinal Monitoring Survey (RLMS), the Russian Labor Force Survey (LFS), the Life in Transition Survey (LiTS), and the European Social Survey (ESS). Of these, RLMS has the richest and most detailed information on employment. These data sets define informal employment differently, covering different samples and time periods: • The RLMS, which is representative at the national level, is a panel survey of 7,000 households with annual data available from 1994 through to 2016. • LFS is a sample survey of the population on the labor market. The survey is conducted by Rosstat on a quarterly frequency and is representative at the regional level. A sample of approximately 65,000 people between the ages of 15 and 72 years is surveyed. Microdata is publicly available for the period covering 2010-2015. • LiTS was originally developed to capture how transition affected the lives of people in regions. Surveys are designed to be nationally representative, and in the latest round covered 34 countries, with a target number of interviews of 1,500 per country. • ESS collects information on social conditions, attitudes, and values and behavior. It is a cross-national survey of 36 European countries and is regularly undertaken every two years. Russia participated in survey rounds in 2006, 2008, 2010, 2012, and 2016. The sample is designed to be nationally representative of all people aged 15 and over and uses random probability sampling with a target rate of 70 percent and a minimum target sample size of 1,500. This data was previously used to study informality in the EU. These numerous data sources use different, and often confusing, definitions of informality: • RLMS identifies two groups of workers as informally employed: i) workers employed at an enterprise without a contract; and ii) workers employed but not at an enterprise. • The LFS identifies informal workers as i) workers working but not at an enterprise; ii) workers without a written contract; and iii) those who are self-employed without registration. • LiTS defines informal workers as those without a written contract in their main job. • The ESS defines informal workers as those without a contract in their main job. Among employment-related questions, the survey asks whether the individual held a contract in their main job and whether this was of unlimited or limited duration. To avoid confusion and maintain consistency of the analysis, we adopt a simple definition of informal employment: A worker is considered formal if they have a contract in their main job regardless of the duration of contract; otherwise they are considered informal. This “legalistic” definition is in line with most of the Russian literature including (Lukiyanova, 2015), (Slonimczyk & Gimpelson, 2013), and Lehmann, (Lehmann, Razzolini, & Zaiceva, 2009). The alternative to the legalistic definition is a “productivity” one, which considers the type of job, such as being self-employed, salaried in a small firm, casual/ irregular worker, or a zero-income worker. However, this measure has been shown to introduce large measurement errors in transition economies and is therefore deemed less relevant (Lehmann, 2014). 14 Stemming Russia’s Informality: Unearthing Causes and Developing Solutions Thus, for each survey, we focus on a definition based on the characteristics of the primary job (secondary and occasional jobs are not considered): A worker is informal if they work in a firm but have no contract, or if they are self-employed and not registered. Note though that under this definition, a worker who has a contract but who receives envelope wages would be considered formal. However, we adjust for such workers where relevant and specifically in the evaluation of macro-fiscal policies that attempt to reduce the tax wedge (Box 4.1; Chapter 4). Moreover, the share of such workers is small: Of all formal workers with a primary job only (i.e., those who have a formal contract with a formal firm), only 9.6 percent receive envelope wages. For each survey, we observe a long-term increase in informality from the early 2000s (and even before that based on RLMS data) through to 2016, with a short period of stagnation or even decrease in the second half of the 2000s. Encouragingly, these trends and estimates are consistent across different data sources, including the official measure of informal employment monitored by Rosstat. This result serves as a robust starting point for the rest of the analysis. Figure 1-2: Informal employment rates for Russia are consistent across different data sources Informality is estimated to range between 15.1 and 21.2 percent, or between 10.9 to 15 million people. The share of self-employed is estimated to be between 25 and 50 percent. Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 15 To summarize, informality raises concerns over fiscal sustainability, productivity and growth, as well as inequity. The share of informal employment in Russia – between 15 and 21 percent – is not systematically higher than in comparator countries. Though related, informal employment – the focus of this report – is not the same as informal production. The share of informal employment has been increasing over the years in Russia, a finding that is consistent across multiple data sources. The next chapter examines to what extent economy-wide trends, notably de-industrialization, demographics, and migration, affect informality in Russia – with some surprising findings. 16 Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 2 What Lies Beneath Russia’s Rising Informality? Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 19 De-industrialization, changing demographics, and increased migration are often factors associated with rising informality. De-industrialization, with its sectoral shift from manufacturing to services, could indeed be a factor since services tend to attract more informal labor (Vanek, Chen, Carré, Heintz, & Hausmanns, 2014), thus ushering in a higher incidence of informal employment. Changes in the composition of demographics could also be associated with an increase in informality. For example, if women are on average more likely to be employed informally, a higher share of women among all employed would thus be associated with higher informality. Finally, migrant workers are often perceived to be more likely to be informal. This chapter investigates the extent to which these three factors – de-industrialization, demographics, and migrant workers – impinge upon informal employment in Russia and explains what is behind the rise in informality in Russia.4 De-industrialization cannot explain recent changes in Russia’s informal employment. We developed a methodology to test whether de-industrialization could explain changes in informal employment in Russia (explained in Box 2.1), and the results from our analysis suggest that de-industrialization cannot explain the evolution of informal employment rates in Russia in the past decade. Figure 2.1 shows the intra-sectoral effect for both 2006-2010 and 2010-2016. Box 2-1: Methodology to test if de-industrialization explains the rise in Russia’s informal employment We modify the Huppi-Ravallion decomposition approach to examine whether changes in the rate of informal employment are due to increases in the average informality in specific sectors (“intra-sectoral shift effect”) or whether employment in high-incidence sectors is increasing (“population shift effect”). Specifically, the modified Huppi-Ravallion decomposition breaks down sources of observed changes in informal employment into the intra-sectoral effect and population shift effect as follows: The intra-sectoral effect shows how much of the change in informal employment was induced by changes in employment within sectors. The population shift effect shows how much of the change was induced by changes in employment shares between sectors. If de-industrialization were a factor, we would expect the population shift effect to dominate the intra-sectoral one. There is also an interaction effect that arises from the possible correlation between sectoral gains and population shifts. The formula is specified as follows (I_it is the informality rate in sector i with an employment share n_i in year t): To ensure comparability, we select the years 2006, 2010, and 2016 using the RLMS survey, and aggregate sectors into 15 groups.* * These 15 groups are: (i) Light industry and food industry, (ii) Civil machine construction, (iii) Military industrial complex, (iv) Oil and gas industry, (v) Other branches of heavy industry, (vi) Construction, (vii) Transportation and communications, (viii) Agriculture, (ix) Government and public administration, (x) Education, (xi) Science and culture, (xii) Public health, (xiii) Army, ministry of internal affairs and security services, (xiv) Trade and consumer services, and (xv) Other. 4 This section draws upon a background paper commissioned for this report (Matytsin, Popova, Kim, & Freije, 2018). 20 Stemming Russia’s Informality: Unearthing Causes and Developing Solutions Figure 2-1: Informality is driven by a higher incidence of informal employment across all sectors Source: Authors’ estimates. The bulk of the change in the rate of informal employment for the 2006-2016 period is attributable to changes in the informality rate within activities (1.46 percentage points out of a change in 1.92 percentage points) rather than between activities (0.73 percentage points). For example, according to the LFS, the rate of informal employment between 2010 and 2015 rose from 45.8 percent to 54 percent in agriculture; from 7.8 to 11.3 percent in industry; from 21.7 to 27.3 percent in non-public services; and from 2.8 percent to 4.7 percent in public services. Qualitatively, similar trends are found in the other three surveys. In other words, the change in informality is driven by a higher incidence of informal employment across all sectors and not by shifts in employment towards high-incidence sectors typically thought of as attracting informality (such as construction or agriculture). Interestingly, the interaction term (-0.27 percentage points), which captures the correlation between sectoral changes and population shifts, suggests a fall of informality rates in activities with increasing employment, underscoring the role of job creation in reducing informality. Changes in demographic characteristics also play a small role. Box 2.2 describes the methodology to assess whether changes in the composition of demographic groups in the labor market, as defined by gender, age, and education, explain the rise in informality. The analysis, as depicted in Figure 2.2, shows that the “beta effect”, which refers to changes in the likelihood of being informal for a given set of personal characteristics, dominates the “endowment effect” (which refers to changes in the composition of the labor market). This is true in both upturns and downturns. Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 21 Box 2-2: Methodology to test if demography explains the rise in informal employment in Russia We employ an Oaxaca-Blinder decomposition technique, which estimates two components: the “beta effect” and the “endowment effect.” • The beta effect measures changes in informality resulting from changes in the likelihood that given characteristics or endowments have of being informally employed. For example, if women are more likely to be informally employed, and if this likelihood has increased over time, then informality increases. • The endowment effect measure changes in informality resulting from changes in the distribution of personal characteristics or endowments in the labor market. For example, if college graduates are less likely to be informally employed, the share of college graduates increases, and informality decreases. The set of personal characteristics is represented by gender, educational attainment, and the age group of the individual.* Location variables (urban-rural dichotomy and region of residence) are included when available and comparable across years. The mean difference in informality rates (It) between year 1 and year 2 can be expressed as follows: where Xt indicates the sample mean of demographic characteristics in year t=1,2, respectively; i.e., the “endowments”, and βt is the associated structural parameter that measures the “beta” effects of the characteristics. βt is estimated separately from the following specification: It=Xtβt+εt, where εt is the usual error term. The above equation can be re-written as: where 1 is an identity matrix and D is a matrix of weights. While the original Oaxaca decomposition uses either D=0 or D=1, we use matrix D with diagonal elements equal to 0.5 so that the average coefficients and average characteristics are used. The first part of the expression on the right-hand-side shows the portion due to changes in returns to endowments (“beta”) and the second part, due to changes in endowments. * The LiTS 2010 sample reportedly suffered from a heavy gender bias among survey respondents. This issue was particularly severe in the Russian sample where the weighted share of men ended up being only 0.27, which is substantially lower than the 0.45 estimated in LiTS. Individual weights were therefore re-scaled so that men represent 0.45 of the population and women the remaining 0.55. Demographic characteristics were similar before and after the re-scaling, and the results from the Oaxaca decomposition based on the modified weights are fully consistent with results obtained from other surveys This issue does not affect the well-being analysis in the latter part of our paper that uses data from 2016, and which deliberately chose two respondents per household from the opposite sex and did not suffer from such a bias. 22 Stemming Russia’s Informality: Unearthing Causes and Developing Solutions Figure 2-2: Population-specific influences have relatively small effects on changes in informality rates Source: Authors’ calculation using ESS, LiTS, RLMS, and LFS. Note: Results show Oaxaca decompositions of the relative contribution of changes in informality rates that can be attributed to changes in endowment and changes in returns to endowments. Different surveys provide different results about the beta effects. But one common trend across all surveys is that the probability of being informal in Russia has increased among those with only basic education. Interestingly, one of the few demographic characteristics to have changed rapidly over the period is the proportion of workers with tertiary education, and this has partially compensated for the growing probability of informal employment among those without this level of education. In other words, had the share in tertiary education not increased, the rate of informality would have grown even more. In 2010 for instance, according to RLMS data, on average and after controlling for other personal characteristics, people with higher education were 15.7 percentage points less likely to be informal than those with basic education. By 2016, those with some tertiary education were 24.2 percentage points less likely to be informal that those with basic education. Although migrants tend to be more informal, the overall impact of migration on informality is indeterminate. Table 2.1 shows a summary of basic demographic and labor market characteristics of Russian and migrant workers. Migrant workers are simply defined as “non-Russians” in the RLMS, which hence does not clarify their legal status or account for other characteristics of migration. The share of informal migrant workers in Russia’s informal labor force is higher (26.2 percent versus 15.7 percent of Russian workers). On average, migrants are not too different from Russian workers in terms of their age and gender composition. However, they are significantly less schooled, less likely to reside in urban areas, more likely to work in market services, as well as work longer hours. Migrant workers also get paid less per hour and Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 23 Table 2-1: Migrant workers are similar to Russian workers in terms of age and gender but are less schooled and work longer hours   Demographics Schooling Economic activity Less than Above Market Public Age Male Urban general general Higher Agriculture Industry services services   secondary secondary Non- 44.51 48.4% 59.0% 50.1% 31.5% 18.4% 3.1% 15.2% 54.5% 27.3% Russian Russian 44.04 44.7% 76.7% 32.5% 41.0% 26.5% 3.7% 19.9% 49.3% 27.1% Total 44.11 45.2% 74.1% 35.1% 39.6% 25.3% 3.7% 19.3% 49.9% 27.1%   Hours of work Informality Wages Corporate Non-corpo- <40 40-49 >50 All infor- Hourly wage Incidence of enve- employment, rate employ- hours hours hours mal (Rubles) lope wages no contract ment   Non- 9.8% 23.1% 67.2% 6.4% 19.8% 26.2% 146.4 28.9% Russian Russian 8.8% 33.8% 57.4% 6.7% 9.0% 15.7% 161.8 19.0% Total 8.9% 32.2% 58.8% 6.7% 10.3% 16.9% 160.0 20.2% Source: Authors’ estimation using RLMS 2016. have a higher likelihood of receiving part or all their wages unofficially (29 percent versus 19 percent for Russian workers). However, an important limitation is that traditional surveys do not capture illegal migrants. Moreover, the share of migrants is likely to be underestimated in survey data. Another factor to consider is causality: Does informality pull more migrants or do migrants cause informality? Even though, prima facie, the share of informal migrant workers is relatively higher, the extent to which migrants thus contribute to informality is difficult to ascertain. Informality is, in part, driven by lack of formal jobs. In Russia, formal net job creation has been woefully low. Rosstat reported that the number of jobs created and destroyed for medium and large enterprises in 2018 were 2.22 million and 1.93 million, respectively. In 2017, these numbers were 2.18 million and 2.21 million, respectively. In other words, net job creation in Russia, at least in recent years, was close to zero. Figure 2.3 shows formal net job creation for medium and large enterprises in Russia. Sub-nationally, the relationship between informality and Gross Regional Product (GRP) is also found to be negative, with a Pearson correlation coefficient of 0.41. That is, poorer regions are associated with higher informality, reinforcing the need for robust, formal job creation in such regions. 24 Stemming Russia’s Informality: Unearthing Causes and Developing Solutions Figure 2-3: Net formal job creation in Russia’s medium and large enterprises has been close to zero Source: Authors’ estimations based on Rosstat. Note: Data for 2017-2018 are not consistent with the previous years due to methodological changes. Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 25 To summarize, the rising informal employment rates over the past decade in Russia cannot be solely attributed to changes in the sectoral or demographic composition of the labor force. Rather, it appears that informality has been growing across all economic sectors and particularly among those workers without at least some tertiary education. Informal employment is thus a pervasive phenomenon in Russian labor markets and cannot be associated with sector or population-specific influences. Evidence related to migrants and informality is uncertain. The increase in informality is attributed mainly to the lack of formal job creation, which in recent years, was close to zero. The next chapter examines a core aspect that affects informality – the Russian labor market – and unearths a few unexpected features. 26 Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 3 Are Labor Market Rigidities Driving Informality? Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 29 The previous two chapters established the context, characteristics, and composition of growing informal employment in Russia and they examined the role of economy-wide trends such as changes in sectoral and demographic compositions. This chapter turns to one of the most important aspects of informality: the Russian labor market. A well-functioning labor market is desirable for many reasons. From an informality perspective, labor market rigidities can increase informal employment as they prevent formal firms from being able to hire or retrench workers according to their economic needs. Specifically, this chapter assesses labor market rigidities through three complementary lenses: (i) Russia’s labor legislation, including how it compares to other countries; (ii) Russia’s tax-benefits system, and whether it creates disincentives to seek formal work; and (iii) Russia’s labor mobility, both intersectoral and inter-regional. How stringent are Russia’s labor market regulations? Overly stringent rules and regulations in the labor code, such as restrictions on employment contracts, hiring and firing, and high minimum wages, may make labor markets less flexible. If so, employers could be pushed to rely on informal employment to bypass these restrictive regulations.5 The World Bank Enterprise Surveys solicit views of private sector firms on the degree to which labor regulations and other factors hinder their operations. In the latest 2012 survey in Russia, the top three biggest obstacles to doing business were tax rates, indicated by 36 percent of employers, access to finance (about 14 percent), and corruption (8 percent). In contrast, only 0.5 percent of respondents considered labor regulations as the biggest obstacle to the operations of firms. Moreover, only 6 percent of employers in manufacturing saw labor regulations as a major constraint compared to an average of 4.8 percent in Europe and Central Asia (ECA). Thus, labor regulations are not considered high-priority constraints to doing business in Russia. An inadequately educated workforce is more often quoted by Russian employers as a major constraint. An earlier analysis of the federal bank of vacancies shows that demand for skilled workers, such as crane operators, welders, and fitters, is rapidly increasing, while 70 percent of job seekers only have skills as office workers and specialists servicing business structures (Dokuchaev, 2015). From an informality perspective, this reinforces the finding from the previous chapter that more skilled workers tend to be less formal. However, the subjective perception of labor regulations by employers is not necessarily correlated with indices of labor market rigidity. This is because such surveys are conducted relative to other obstacles to firm activity, and it takes into account enforcement — and thus the actual “bite” of regulations — rather than what is in the labor code and supplemental regulations. Box 3.1 summarizes Russia’s labor market regulations. The analysis conducted in the background paper (Kuddo, 2018) finds that labor legislation in Russia is broadly in line with internationally accepted labor standards and norms, in particular, with those of the ILO. Indeed, out of the 77 conventions and 2 protocols ratified by the Russian Federation, 56 are in force, 18 conventions and 1 protocol have been denounced, 1 instrument abrogated, and 3 have been ratified in the past 12 months.6 However, labor 5 The findings of this section draw upon the following background paper commissioned for this report: “Labor Regulations in Russia: An Overview,” (April 2018). Interested readers can refer to it for more detail. 6 See: https://www.ilo.org/dyn/normlex/en/f?p=NORMLEXPUB:11200:0::NO::P11200_COUNTRY_ID:102884 30 Stemming Russia’s Informality: Unearthing Causes and Developing Solutions Box 3-1: Labor market regulations in Russia are broad and mandatory On December 21, 2001, the State Duma in Russia adopted the Labor Code, the main legislative framework for labor regulations. The Code entered into force on February 1, 2002 and has been amended numerous times. The following separate pieces of legislation supplement provisions of the Labor Code: - The Employment of Population Act, 1991; - The Collective Agreements and Accords Act, 1992; - The Settlement of Collective Labor Disputes Act, 1995; - The Trade Union Act, 1996; - The Russian Tripartite Commission for Regulation of the Socio-Labor Relations Act, 1999; - The Fundamentals of Health and Safety Act, 1999; - The Compulsory Social Insurance Against Occupational Accidents and Diseases Act, 1998; - The Fundamentals of Public Service Act, 1995; - The Minimum Wages Act, 2000. Other important sources of labor law in the Russian Federation are decrees and orders issued by the Government. A further source of labor regulation includes normative documents issued by the Ministry of Labor and Social Protection with a view to implementing labor legislation in force in the Russian Federation. Several other federal executive bodies are also empowered to issue normative acts within the powers given to them by federal legislation, decrees, and orders of the President or Government of the Russian Federation. According to Article 11 of the Labor Code (LC), application of the LC and other labor laws and regulations is mandatory in the entire territory of the Russian Federation for all enterprises (legal and physical entities) irrespective of their legal status and form of ownership. The labor contract should be in writing. market regulations in Russia retain certain aspects that can be improved upon, particularly in the areas of the employment contract, minimum wages, and employee dismissals. Small firms, in particular, bear a heavy burden in these areas, thereby exacerbating informality. On the employment contract A variety of employment contracts have developed as economies and labor markets evolve. These contracts differ significantly in terms of the degree of employment security, associated working conditions, and types of benefits that must be provided to workers. Although full-time employment contracts of indefinite duration are still the most common form of employment relationships in developed countries, variations, including temporary employment contracts, have become established features of modern labor markets. Emerging and increasing forms of atypical contracting include the following: Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 31 • Employee sharing – an individual worker is jointly hired by a group of employers to meet human resource (HR) needs of various companies, resulting in permanent, full-time employment; • Job sharing – an employer hires two or more workers to jointly fill a specific job, combining two or more part-time jobs into one full-time position; • Interim management – highly skilled experts are hired temporarily for a specific project or to solve a specific problem, and they integrate external management capacities in the organization; • ICT-based mobile work – enables workers to do their job from any place, at any time, supported by modern technologies; • Voucher-based work – the employment relationship is based on payment for services, with a voucher purchased from an authorized organization that covers both pay and social security contributions; • Portfolio work – a self-employed individual works for a large number of clients, carrying out small-scale jobs for each one of them; • Crowd employment – an online platform matches employers and workers, often with larger tasks divided among a ‘virtual cloud’ of workers; • Collaborative employment – freelancers, self-employed, or micro-enterprises cooperate to overcome limitations of size and professional isolation. Most of these atypical forms of contracting have the potential to contribute to labor market innovation and make it more attractive to both employers and a wider range of potential workers, and they could also be listed in the Labor Code. And even among those currently listed in Russia’s labor market legislation, there is room for improvement: • Standard open-ended contracts are a prevailing form of employment contracts in Russia, accounting for 91 percent of all contracts for hired employees. This is on the high side when compared to the average of 59 percent in EU countries. Only 8 percent of all contracts are fixed-term (compared to 28 percent in Poland and 26 percent in Spain), where the end of the employment contract or relationship is determined by a definite period, and less than 1 percent of contracts are for the completion of a specific task. Russia could therefore consider more flexible forms of labor contracts. Specifically, the country may consider expanding the list of circumstances under which fixed-term/ temporary contracts are allowed, including for permanent tasks, and extend their maximum duration. Most fixed-term contracts are held by those who are young, formerly unemployed, informally employed, or those with lower education levels, namely, those with the weakest bargaining power. For these workers, fixed-term work can provide a pathway into formal employment and an opportunity to gain experience and skills. • Despite the requirement to have a written contract, 4 percent of salaried workers in Russia (about 2.7 million individuals) work based on an oral contract. Russia could thus formalize such practices and allow oral labor contracts in the case of short-term/casual employment – i.e., for a duration of up to two months. • On many occasions, workers would like to work overtime in excess of a standard work- week or on days-off and public holidays in order to earn extra income. However, due to high wage premiums (50 to 100 percent for overtime work and double the rate for work on days-off and public holidays), it is costly for employers, especially in small establishments, to arrange for such work. Moreover, in Russia, working on off-days and public holidays is prohibited (except for the few cases envisaged by the Labor 32 Stemming Russia’s Informality: Unearthing Causes and Developing Solutions Code). Russia could therefore consider lowering statutory wage premiums, allowing for amounts of compensation to be determined by a collective agreement, local normative act, or a labor contract. Regulations related to working on off-days and public holidays could also be revisited. On minimum wages Statutory minimum wages are set in most countries, although their level and scope of application vary widely. As with most labor market policy measures, statutory minimum wages entail both benefits and costs. On the positive side, an effective minimum wage can boost incomes for low-wage earners and reduce wage inequality vis-à-vis the bottom half of the wage distribution by providing a wage floor. However, minimum wages can also exacerbate unemployment and informality if the minimum wage is above the market-clearing level, thereby reducing formal labor demand. High minimum wages are typically more damaging for small and medium-sized enterprises (SMEs) because these enterprises tend to be more labor intensive and financially weaker. High minimum wages could therefore contribute to keeping SMEs smaller and informal (Kuddo, Robalino, & Weber, 2015). In practice, the level of the minimum wage depends largely on prevailing social norms regarding inequality and fairness, as well as relative bargaining strengths of workers and employers. The minimum wage setting was decentralized in Russia in September 2007, which gave regions the power to set their own regional minimum above the federal floor. Workers employed by federal establishments and enterprises are exempt from regional minimum wage legislation. In some regions, regional and municipal employees are also excluded Figure 3-1: Russia’s minimum to average wage ratio is among the lowest Source: OECD online. Note: Data for selected countries is from 2016; Data for Russia is from mid-2017. Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 33 from regional regulation, and the regional wage floor applies only to private sector workers. On average, the ratio of the minimum to average wage in Russia was 20 percent in 2017, relatively lower than the 35 to 60 percent in developed countries (Figure 3.1). Whether the minimum wage is a major impediment to job creation, however, is unclear. The estimated correlation between minimum wage and informal employment rate is minus 0.40: negative but not strong. However, the effect of the minimum wage on informality would depend more on the ratio of its level to the ‘tail’ of the wage distribution rather than on the proportion of the minimum to average wage. While more analysis is required to firmly establish the effect of the minimum wage on informality, the criterion equalizing the minimum wage with the subsistence minimum is not a good one. Subsistence minimum is related to the cost of living and depends on the composition of the minimum consumption basket and inflation, while minimum wages are primarily affected by labor market factors, such as labor productivity or labor supply and demand. Therefore, even though the minimum wage does not seem to be a major impediment to job creation, Russia could consider working out benchmarks other than the subsistence minimum in order to set minimum wages nationwide, by regions, and by occupational groups. On redundancy dismissal For firms to adapt to market demand or technological changes, and hence maintain competitiveness, it is important that they adapt their employee workforce. Overly stringent dismissal procedures can limit new job creation in the formal sector and increase unemployment and informality. Labor rules governing dismissals therefore need to strike a balance between flexibility for businesses and job security for workers. Compared to prime- age workers, older and younger workers are at greater risk of dismissal. Others at higher risk include workers in small firms and those employed on fixed-term and temporary contracts whose contracts might not be renewed. Employment protection legislation (EPL) in Russia is quite strict by international standards. As far as protection of permanent workers against individual and collective dismissals is concerned, comparing Russian legislation to that of 34 OECD countries reveals that only nine OECD countries had more rigid legislation than Russia: Belgium, the Czech Republic, France, Germany, Italy, Luxembourg, Mexico, Portugal, and Sweden (Table 3.1). To address this, Russia’s EPL could be restricted to focus on core and enforceable labor standards, and with the aim to finding a balance between flexibility and security, provide a greater role for trade unions and employers associations to determine employment relations through collective bargaining. In addition, introducing an adequate unemployment insurance system would contribute to finding a better balance between flexibility and security. The Russian Labor Code allows for a worker to be dismissed in the case of insufficient qualification, but this needs to be proven by internal attestation. The latter requires a special internal regulation on attestation, informing workers that they will be attested and establishing an attestation committee. Even if a worker is found to be unsuitable for a job during attestation, the employer has to offer him another job. In Russia, another obstacle for employers to adjust their workforce is the requirement to provide (re)training to redundant workers. Sometimes there is also a reassignment obligation before an employer can make a worker redundant. This obligation is more common in high and upper-middle income countries. These requirements serve as an additional burden, especially to small firms, and could be re-considered (Box 3.2). 34 Stemming Russia’s Informality: Unearthing Causes and Developing Solutions Table 3-1: Russia’s Employment Protection Legislation is strict by OECD standards Country Year Protection of Protection of Specific Regulation permanent workers permanent requirements on temporary against individual workers against for collective forms of and collective (individual) dismissal employment dismissals dismissal Austria 2013 2.44 2.12 3.25 2.17 Belgium 2013 2.99 2.14 5.13 2.42 Czech Republic 2013 2.66 2.87 2.13 2.13 Denmark 2013 2.32 2.10 2.88 1.79 Estonia 2013 2.07 1.74 2.88 3.04 Finland 2013 2.17 2.38 1.63 1.88 France 2013 2.82 2.60 3.38 3.75 Germany 2013 2.84 2.53 3.63 1.75 Greece 2013 2.41 2.07 3.25 2.92 Hungary 2013 2.07 1.45 3.63 2.00 Latvia 2013 2.91 2.57 3.75 1.79 Lithuania 2015 2.42 2.23 2.88 3.33 Netherlands 2013 2.94 2.84 3.19 1.17 New Zealand 2013 1.01 1.41 0.00 0.92 Norway 2013 2.31 2.23 2.50 3.42 Poland 2013 2.39 2.20 2.88 2.33 Portugal 2013 2.69 3.01 1.88 2.33 Slovak Republic 2013 2.26 1.81 3.38 2.42 Slovenia 2014 2.39 1.99 3.38 2.13 Spain 2013 2.36 1.95 3.38 3.17 Sweden 2013 2.52 2.52 2.50 1.17 United Kingdom 2014 1.59 1.18 2.63 0.54 Russia 2012 2.47 2.86 1.50 1.25 Kazakhstan 2015 2.29 3.20 0.00 … Serbia 2015 2.23 1.67 3.63 … Source: OECD: https://www.oecd.org/employment/emp/oecdindicatorsofemploymentprotection.htm Note: The OECD indicators of employment protection are synthetic indicators of the strictness of regulation on dismissals and the use of temporary contracts. Data range from 0 to 6, with higher scores representing stricter regulation. OECD has an elaborated scoring methodology for assessing and ranking countries. Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 35 Box 3-2: By OECD standards, regulations on redundancy dismissal in Russia are overly rigid and discourage formal employment Stringent regulations bite most small and medium firms, thus disincentivizing formal employment. Many OECD countries exempt small firms from some or all employment protection requirements. Most commonly, small firms are exempt from additional notification or procedural requirements when undertaking collective dismissals. In addition, several OECD countries reduce or remove severance payments, notice periods, or the risk of being accused of unfair dismissal for small firms. For example, in Austria, Belgium, Denmark, Hungary, Ireland, and Switzerland, firms with 20 employees or less are exempt from requirements for collective dismissals. In Germany, establishments employing 10 or fewer employees are exempt from regular employment protection legislation. In Italy, firms with less than 15 employees are not required to pay back-pay or reinstate workers who are found to be unfairly dismissed. In Slovenia, employers with 10 workers or less can, by collective agreement, conclude fixed-term contracts irrespective of substantive limitations applying to fixed-term contracts and with longer duration. When terminating contracts in Slovenia, small employers do not have to verify the possibility of redeployment or retraining. Shorter statutory notice periods are allowed for small employers by collective agreement. Replacing severance pay with unemployment benefits in small firms may also contribute to flexible work arrangements, especially in cash strapped small firms. Does Russia’s tax-benefits system discourage formal work? Benefits and taxes affect the take-home incomes of workers, thereby affecting their incentive to participate in the labor market. Overly generous benefits and overly high taxes could reduce incentives of individuals to participate in the labor force. However, overly low benefits can also discourage participation in the labor force by reducing incentives for people to register as being unemployed, and subsequently to seek formal work for example. This section assesses how Russia’s benefit-tax system compares with EU/OECD countries. Specifically, using the OECD tax-benefits model, the analysis estimates four metrics of tax- benefits schemes in Russia:7 • PTR (Participation Tax Rate) measures the extent to which taxes and benefits reduce the financial gain from moving into work. • METR (Marginal Effective Tax Rate) measures the extent to which taxes and benefits reduce the financial gain of increasing work effort. • NRR (Net Replacement Rate) measures the fraction of net income in work that is maintained when unemployed. • ETRL (Effective Tax on Labour) measures net taxes as a percentage of total labour cost for the employer. 7 The findings of this section draw upon a forthcoming background paper commissioned for this report: “Tax- Benefit Model for the Russian Federation,” 2018. The modeling of Russia’s tax-benefit system relies on the OECD’s tax-benefit model (TAXBEN) and database, which covers 40 OECD/EU countries. The TAXBEN model incorporates detailed policy rules for tax liabilities and benefit entitlements as they apply to individual working-age families across OECD and EU countries. The benefits that are taken into account are unemployment, social assistance (including child related benefits), and housing benefits. 36 Stemming Russia’s Informality: Unearthing Causes and Developing Solutions The findings of the background paper (Posarac, Andreeva, & Gordine, 2018) suggest that relative to other EU/OECD countries (and some non-OECD countries in Europe and Central Asia), Russia’s tax and benefits policies should not create major disincentives for individuals and families to seek employment or work more formal hours. Specifically: A. The Participation Tax Rate (PTR), which measures the extent to which taxes and benefits reduce the financial gain from moving into work, is lower in Russia than in any comparator country. This is consistent across most family composition cases (single member family; single with children; one-earner couple, one-earner couple with children; two-earner couple; and two-earner couple with children). Table 3.2 presents PTR estimates for different family types and Figure 3.2 illustrates the PTR results for a single person without children; Compared to the OECD average of almost 50 percent, Russia’s is less than 25 percent. Table 3-2: Russia’s Tax Participation Rate is comparatively low One-earner Two- Two-earner Single with One-earner Single couple with earner couple with children couple children couple children Russia 24.2 28.7 26.2 27.5 13.0 20.5 Turkey 27.9 26.7 27.1 25.9 28.7 28.7 Italy 28.4 27.2 28.4 30.3 34.4 39.9 United States 30.4 39.9 29.0 42.5 28.9 34.6 Korea 33.9 58.1 42.0 52.5 15.2 16.4 Lithuania 34.7 35.0 44.3 54.7 22.7 25.5 Israel 35.8 50.5 47.9 55.4 21.7 19.1 Slovak Republic 35.9 19.6 37.8 40.7 28.2 28.2 Greece 37.5 44.1 43.2 45.4 25.9 27.0 Spain 39.2 39.4 40.7 46.1 25.9 24.1 Portugal 39.7 47.3 43.1 50.1 28.1 31.9 Estonia 40.7 43.4 46.2 63.9 22.9 22.9 Hungary 40.8 31.8 40.8 31.8 33.5 33.5 Canada 41.3 56.1 47.2 60.5 29.5 46.3 New Zealand 44.1 58.2 57.5 61.9 22.4 42.3 Poland 44.1 71.8 52.1 83.6 29.8 51.5 Australia 45.4 57.3 58.9 62.2 24.4 46.7 Latvia 46.1 34.7 54.4 64.7 29.2 29.2 OECD 48.4 54.8 54.9 62.3 30.7 36.0 United Kingdom 50.2 67.9 55.2 73.0 24.0 35.1 Norway 51.8 61.4 63.2 72.8 28.7 28.7 France 52.9 58.4 54.5 60.8 38.9 42.0 Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 37 One-earner Two- Two-earner Single with One-earner Single couple with earner couple with children couple children couple children Japan 53.3 78.0 63.6 78.0 23.4 35.9 Czech Republic 55.3 59.5 58.2 62.1 32.7 34.3 Sweden 56.0 53.8 62.9 69.6 25.2 26.3 Slovenia 56.7 77.8 65.9 71.1 42.2 53.0 Austria 57.2 68.8 65.5 77.1 32.4 33.5 Iceland 58.9 62.4 66.7 68.0 43.5 52.0 Switzerland 59.1 65.3 73.4 74.9 27.9 29.4 Germany 60.2 59.8 62.6 68.8 45.7 47.9 Luxembourg 61.0 69.3 64.8 71.5 29.7 34.8 Ireland 61.1 65.2 69.6 74.0 27.5 34.4 Finland 62.2 64.0 72.9 83.7 33.6 37.7 Belgium 63.1 74.7 61.4 64.2 48.1 48.1 Netherlands 69.0 61.3 78.6 83.0 37.2 35.9 Denmark 71.3 73.1 85.5 93.7 53.2 65.8 Source: TAXBEN Model for the Russian Federation. Figure 3-2: Russia’s effective tax rate on entering employment is comparatively low Source: OECD TAXBEN model for the Russian Federation. Note: Fraction of additional gross earnings lost to either taxes or lower benefits when a jobless person takes up employment (for a single person without children, at 100% of average wage). 38 Stemming Russia’s Informality: Unearthing Causes and Developing Solutions B. Russia’s Marginal Effective Tax Rate (METR), which measures the extent to which taxes and benefits reduce the financial gain of increasing work effort, is also comparatively low. Figure 3.3 presents METR results for a single person without children for Russia and EU/OECD countries. Compared to other countries, Russia’s rate is the lowest, which suggests that high marginal tax rates should not discourage increasing work, at least compared to other countries. Figure 3-3: Russia’s marginal effective tax rate on increasing working hours is comparatively low Source: OECD TAXBEN model for the Russian Federation. Note: Fraction of additional gross earnings lost to either higher taxes or lower benefits when an employed person increases their working hours (for a single person without children, at 100% of average wage, moving from part-time to full-time) C. The Net Replacement Rate (NRR), which measures the fraction of net income in work that is maintained when unemployed, is lower in Russia than any other comparator country irrespective of the duration of unemployment (the model estimates NRR for 2, 6, 9, 12, 24, and 60 months of unemployment) (Table 3.3). This suggests that in Russia, high incomes, when employed, are not a factor that discourage re-entry into the work force, at least compared to other countries. For example, in Russia, the estimated NRR in 2018 for a single person previously earning the average wage was around 25 percent for the first 12 months of unemployment compared to the OECD average of 41 percent. For those unemployed over the long-term (over 12 months), the NRR drops to an even lower 13 percent for 60 months of unemployment – among the lowest among the countries in the above table. Box 3.3 discusses the reasons behind the low NRR in Russia. Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 39 Table 3-3: Russia’s net replacement rates are among the lowest (Proportion of previous in-work household income maintained after a certain period of unemployment)   Duration of unemployment (in months) Country 2 6 9 12 24 60 Russia 26.2 26.2 25.5 25.5 14.6 12.9 Australia 27.8 27.8 27.8 27.8 27.8 27.8 Greece 28.0 28.0 28.0 28.0 15.6 15.6 New Zealand 30.5 30.5 30.5 30.5 30.5 30.5 United Kingdom 34.9 34.9 34.9 34.9 34.9 34.9 United States 43.3 6.0 6.0 6.0 6.0 6.0 Korea 43.4 43.4 22.4 22.4 22.4 22.4 Poland 45.0 41.0 41.0 41.0 21.6 21.6 Hungary 46.3 11.0 11.0 11.0 11.0 11.0 Ireland 47.3 47.3 47.3 48.0 48.0 48.0 Sweden 51.6 43.9 43.9 43.9 43.9 41.2 Japan 52.5 52.5 52.5 39.9 39.9 39.9 Estonia 53.6 43.6 43.6 43.6 25.9 25.9 Austria 55.0 55.0 55.0 50.6 50.6 50.6 Turkey 55.1 55.1 55.1 0.0 0.0 0.0 Iceland 55.5 41.8 41.8 41.8 41.8 39.4 Spain 55.6 55.6 55.6 55.6 55.6 22.9 Finland 56.1 56.1 56.1 56.1 46.0 46.0 OECD 58.7 52.6 46.4 41.6 37.0 30.5 Germany 59.0 59.0 59.0 59.0 33.9 33.9 Canada 60.8 60.8 23.9 23.9 23.9 23.9 Denmark 62.5 62.5 62.5 62.5 62.5 55.2 Norway 64.4 64.4 64.4 64.4 64.4 33.4 Slovenia 64.5 64.5 64.5 34.6 34.6 34.6 Slovak Republic 65.4 65.4 16.1 16.1 16.1 16.1 Italy 66.2 62.0 57.8 54.9 25.0 0.0 Belgium 66.5 66.5 62.0 62.0 62.0 43.2 France 67.9 67.9 67.9 67.9 67.9 34.3 Czech Republic 71.4 41.1 35.7 35.7 35.7 35.7 Switzerland 73.4 73.4 73.4 73.4 73.4 73.4 Netherlands 73.8 69.4 69.4 69.4 69.4 50.5 Portugal 75.0 75.0 67.5 67.5 67.5 16.9 Lithuania 82.0 69.1 56.1 15.5 15.5 15.5 Latvia 84.8 63.6 42.4 23.9 23.9 23.9 Luxembourg 86.0 86.0 86.0 86.0 45.0 45.0 Israel 90.2 63.3 17.0 17.0 17.0 17.0 Source: OECD TAXBEN model for the Russian Federation. Note: For a single person without children (previous wage at 100% of average wage) 40 Stemming Russia’s Informality: Unearthing Causes and Developing Solutions Box 3-3: Russia’s benefit schemes do not confer commensurate gains compared to those of other countries Low NRRs in Russia are a result of the low benefits in the unemployment benefit system. At the maximum, the benefit replaces 14 percent of the average wage for 12 months. However, most of the unemployment benefit claimants received the minimum payment, which equals about 2.6 percent of the average wage in 2017. These rates have remained unchanged since 2009. This suggests that Russia may consider introducing a well- designed unemployment insurance system that would allow for more effective support to the unemployed. This could also provide incentives to register as unemployed, and to subsequently seek formal work. Housing and utility allowances, in addition to the unemployment benefit, are conferred to unemployed citizens under certain eligibility requirements that apply to other households as well. This allowance is an important component of the NRR. However, only 6 percent of all households in Russia receive a housing and utilities allowance, and as such it affects NRR (and METR) only in a limited number of cases. Child allowances are also extremely low in Russia, equivalent to a mere 2.5 percent of the minimum subsistence level. Consolidation of various small and fragmented child and family benefits into a larger income/means-tested family benefit would help (World Bank and Nifi, 2017) Maternity allowances for the first 18 months of a child’s life, together with sizable maternity capital benefits given to families at the birth of the second child, are social policy measures aimed primarily at demographic renewal of Russia; i.e., at incentivizing families to have more children. However, such assistance is “frontloaded” during the period from birth to 18 months. Stronger child protection requires a better policy, programming, and resource balance between the first 18 months and the rest of childhood. As such, it is difficult to consider benefits to those unemployed as having a negative influence on their decision to participate in the labor market. In fact, introducing a well- designed unemployment insurance system and consolidating small and fragmented benefits programs into larger, income/means-tested benefits could provide incentives to register as unemployed, and to subsequently seek formal work. D. The Effective Tax on Labor (ETRL), which measures net taxes as a percentage of the total labor cost for the employer, is also lower in Russia than in many other comparator countries (Table 3.4). Irrespective of the family composition, the ETRL for Russia hovers at about one third of the total labor cost for the employer. In the case of the single member family (around 33 percent), it ranks 9th from the bottom and is significantly lower than the OECD average of around 40 percent. The TAXBEN model results presented above are for households earning the average wage. The question is what happens when one looks at the households earning less than the average wage. Box 3.4 summarizes these results. Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 41 Table 3-4: Russia’s effective tax rate on labor is relatively low   Family type One-earner Two-earner Single with One-earner Two-earner Country Single couple with couple with children couple couple children children New Zealand 19.5 7.8 19.5 7.8 17.7 18.3 Korea 22.8 16.1 22.3 15.9 21.4 17.5 Canada 30.9 10.5 27.1 10.0 29.4 23.3 United Kingdom 30.9 26.7 30.4 26.2 29.0 26.5 United States 31.7 23.5 27.0 20.8 30.2 26.5 Japan 32.5 28.5 31.3 27.3 31.9 29.5 Ireland 32.6 21.0 25.7 16.9 28.4 24.4 Israel 32.8 22.0 32.8 30.4 31.0 28.2 Russia 33.1 32.5 33.1 30.8 33.1 32.3 Australia 34.5 22.1 34.5 22.1 32.7 32.7 Denmark 35.5 13.0 33.3 19.7 35.4 31.3 Norway 36.9 29.8 36.0 32.5 35.6 33.5 Luxembourg 37.8 26.9 28.1 16.8 32.7 26.0 Turkey 38.7 37.6 38.0 37.0 37.5 36.9 Spain 39.3 31.2 36.5 33.7 37.9 36.2 Switzerland 39.3 30.4 41.8 35.4 39.2 35.6 OECD 39.4 27.4 37.2 29.2 37.9 34.1 Estonia 40.2 20.2 38.0 30.1 39.8 35.0 Poland 40.3 25.8 39.4 25.4 40.1 31.9 Greece 40.8 39.2 40.8 37.9 39.2 38.0 Lithuania 41.1 25.5 41.1 35.7 39.7 36.5 Portugal 41.4 32.0 37.1 28.8 39.5 36.2 Iceland 41.5 33.5 34.7 27.9 40.3 39.7 Finland 42.7 28.7 42.7 38.1 40.3 37.4 Latvia 42.7 15.8 42.7 32.6 42.1 36.1 Slovenia 42.9 21.2 39.9 15.5 41.8 34.8 Sweden 43.1 31.8 43.1 38.4 42.3 39.5 Czech Republic 43.4 36.5 38.1 31.2 42.3 38.2 Slovak Republic 43.7 19.8 39.0 32.1 42.8 38.6 Italy 45.6 37.5 45.6 37.5 44.6 41.1 Hungary 46.2 30.6 46.2 31.4 46.2 37.3 Austria 47.4 37.9 47.4 37.9 45.6 40.5 France 48.1 34.9 43.2 37.8 46.6 43.1 Germany 49.6 32.5 42.8 34.3 47.7 42.6 Netherlands 50.8 34.4 51.4 48.3 48.3 41.5 Belgium 53.9 45.3 46.8 38.9 51.2 46.5 Source: OECD TAXBEN model for the Russian Federation. Note: Net taxes as a percentage of total labor cost for the employer (at 100 percent average wage) 42 Stemming Russia’s Informality: Unearthing Causes and Developing Solutions Box 3-4: Results are robust for households earning less than the average wage The TAXBEN model estimates carried out in 2018 included estimates for households earning 50 percent and 67 percent of the average wage. For the Net Replacement Rate, the estimates were as expected; i.e., higher for lower levels of previous earnings. For employees earning 50 percent of the average wage, the NRRs were about 10 percentage points higher than for those at 67 percent of average wage, and about 20 points higher than for those at 100 percent of the average wage. However, the NRRs remained comparatively lower than in OECD/EU (see Table 3-5). Table 3-5: Net Replacement Rate at the beginning of unemployment (household wage at 67% of the average wage) No children Two children One-earner Two-earner One-earn- Two-earner Single Lone married married er married married person parent   couple couple couple couple OECD median 65 65 84 73 73 85 (2015) EU median 68 69 85 76 73 86 (2015) Russia 2017 24 24 62 27 26 63 (without Housing Benefit) Russia 2017 (with 34 47 62 51 49 70 Housing Benefit) Source: Tax Benefit Model for the Russian Federation 2018. In the case of marginal effective tax rates (METR), the simulations showed that the receipt of the housing benefit increased METR for family types eligible to receive it (only 6 percent of Russian households receive housing and utilities benefit). This was the case for one-earner married couples/no children; lone parents with two children; and one-earner married couples with two children. The METR was above 50 percent only in the case of a lone parent with two children moving from two-thirds to full employment. However, relative to other countries, Russia had a lower METR in almost all considered family composition cases. These results corroborate the 2019 TAXBEN model estimates: Marginal tax rates in Russia are comparatively low and should not create disincentives for individuals and families to work or increase working hours. Only in the case of lone parents with two children and one-earner couples with two children are METRs relatively higher than in other family types (mostly due to housing allowances), and in some cases, they may be a deterring factor in labor market decisions. Hence, Russia may consider introducing the gradual phasing-out of benefits such as housing benefits or introducing income disregards (e.g. similar to income disregards in France). Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 43 Digging deeper: Exploring sectoral and spatial market labor rigidities This section focuses on labor market rigidities, specifically, the role of intersectoral and inter-regional mobilities in Russia.8,9 A. Intersectoral mobility in Russia is comparable to most advanced economies A review of recent literature and new analysis show that intersectoral mobility in Russia is comparable to (if not higher than) other countries. A seminal study by (Gimpelson & Sharunina, 2015) uses RLMS–HSE data for 2000-2012 to estimate transitions between employment, unemployment, and inactivity in the form of a Shorrocks index. This index takes values from 0 to 1, where M=0 denotes complete stability, i.e., all individuals stay in their former jobs, and M=1 denotes full mobility, i.e., all individuals change their status. Table 3-5 summarizes these estimates. Table 3-6: The Shorrocks index values for Russia are high (2000-2011) 2000- 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 Average 2001 Shorrocks 0.532 0.563 0.561 0.554 0.549 0.576 0.57 0.553 0.565 0.544 0.539 0.555 Index Source: Gimpelson and Sharunina (2015). As the table shows, Shorrocks index values are persistently high in Russia, averaging at 0.55. This contrasts with the Eurozone average of only 0.27 (for the 1998 – 2008 period), where the highest values were in Denmark (0.45) and Sweden (0.44). Two relevant transitions to be considered are (i) the transition between formal and informal employment, and (ii) the transition between public and private sector employment. (Lehmann, Muravyev, Razzolini, & Zaiceva, 2013) find high levels of transition between formal and informal employment, further supporting the notion of high intersectoral mobility in Russia. (Guriev & Vakulenko, 2012) and (Gurvich E. T., et al., 2016) estimate the second transition, job changes between private and public sectors. They find that absolute numbers of people moving between private and public sector jobs are similar. (Klepikova, 2016) also finds that although the share of people who changed jobs is higher in the private sector (16 percent vs. 9 percent in the public sector in the 2004 – 2013 period), fewer people leave the private sector for the public sector, keeping the flows between both sectors comparable. One interesting observation is that the share of those who left the private sector for the public one increased in the crisis period. This is likely because the private sector is more vulnerable to crises, whereas the public sector provides relatively more job security. 8 This section draws upon the findings of the following background paper commissioned for this report: “The Macroeconomic Consequences of Labor Mobility Characteristics in The Russian Federation,” (World Bank, 2018). Interested readers can refer to it for more detail. It is worth noting that behind the apparently simple concepts of intersectoral and interregional mobility, there hide many pitfalls; for example, differences in registration systems across countries and innate incomparability of these mobilities that are driven by variations in scale. These are discussed and addressed in the background paper. 9 Not all labor market rigidities are modeled. For example, overly stringent regulation of product markets can also have negative effects on labor markets. 44 Stemming Russia’s Informality: Unearthing Causes and Developing Solutions Finally, new analysis undertaken for this report find that a comparison of intersectoral mobilities in Russia and the U.S., which is considered to have a highly flexible labor market, also yield similar results for the 2015 – 2016 period. The diagonal elements of the intersectoral transition matrix for the U.S. are, on average, 0.95 (meaning, 95 percent of workers in the sample did not change sectors) compared to 0.90 for Russia. In other words, intersectoral mobility in Russia is largely comparable to that in the U.S.10 Transition matrices were also constructed to study transitions between the types of economic activity (using nationally representative RLMS–HSE data for 2004-2016). Health and education workers have the lowest intersectoral mobility, or in other words, the greatest “loyalty” to the sector: 97 and 96 percent of the workers, respectively, stay in the same sector. Low mobility levels are also observed in mining and quarrying (94 percent); electricity supply and public administration (93 percent); agriculture and other community, social and personal service activities (92 percent); and manufacturing, trade, transport and financial intermediation (91 percent). Mobility is typically high for hotel and restaurant workers: only 64 percent of them stay in the same sector. B. Inter-regional mobility, however, is low in Russia. There is plenty of evidence of low inter-regional mobility in Russia. For example, registered internal migrants (both inter-regional and intraregional) accounted for only 1.4 percent of Russia’s population in 2002 – 2010, a rather small share. In contrast, their average share in the U.S. was 13.7 percent of the population in 2000–2006, while in Canada and Japan it was 14.6 and 4.6 percent, respectively. Figure 3.4 shows that inter-regional mobility in Russia is characterized by a relatively high population outflow rate from the Ural, Siberian, Northern and Far East regions. Figure 3-4: Most migrants come from the Ural, Siberian, Northern and Far East regions (Net migration rates, % of previous year population, 2016) Source: Authors’ estimates. 10 Note that this is based on aggregating sectors of the Russian economy into four blocks: (i) Agriculture and Construction; (ii) Manufacturing; (iii) Non-traded Services; and (iv) Traded Services. Such aggregation prevents comparisons of intersectoral mobility within each aggregated group. However, for comparison purposes, the mobility between the aggregated blocks would still reflect relative intersectoral mobility differences across different countries. Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 45 As the map shows, migration is mostly from east to west and from north to south, which is likely to be related to employment opportunities. The imputed Shorrocks index value for inter-regional migration is just 0.02, which is low. This points to the fact that the Russian population is not mobile in an inter-regional manner. This is not surprising given Russia’s sheer size and long geographic distances within the country. The low degree of inter-regional migration in Russia is also evident in inter-regional GRP (Gross Regional Product) and unemployment dispersion. (Gurvich E. T., et al., 2016) show that Russia has one of the highest inter-regional GRP and unemployment rate dispersions in large-surface countries. Recent analysis (World Bank, 2018) found that the 1990s and early 2000s witnessed high rates of internal migration. For example, Chukota and the Komi Republic lost two-thirds and one-fifth of their populations, respectively. However, overall mobility in Russia, which was 3 percent per annum through the first half of the 1990s, declined to 1.2 percent by 2008. The inescapable conclusion is that unlike intersectoral mobility, which is on par with other countries, inter-regional mobility in Russia remains low. The main implication for informality is that low inter-regional mobility translates into high inter-regional differences in informality (Figure 3.5).11 Figure 3-5: The rate of informal employment varies between 3.6% in Moscow to 64% in Chechenskaya Republic Source: Authors’ estimates based on Rosstat, Labor Force Survey, 2017. This is because firms are not that easily able to hire or retrench based on their economic needs, and workers are not easily able to move to areas where jobs are available. Indeed, a 2015 survey by Bashkirov and Partners indicated that 84 percent of people would continue to look for a job in the same settlement if they faced job-search problems. Only 3 percent of the respondents would consider relocation for a job. Insufficient inter-regional mobility emerges as a major rigidity in the Russian labor market. Improving inter-regional connective infrastructure, enhancing job search programs, and addressing other features that limit spatial mobility in Russia, such as home and land ownership, as well as social factors, would help (Box 3.5). 11 In addition to contributing to informality, low inter-regional mobility also costs GDP: The background paper estimates that if inter-regional mobility costs were to reduce by 20 percent, Russian GDP would be about 2.2 percent higher than its baseline value. 46 Stemming Russia’s Informality: Unearthing Causes and Developing Solutions Box 3-5: Home and land ownership, as well as social factors, also limit inter-regional mobility in Russia Russia’s home ownership rate has increased dramatically since 2000, currently standing at around 87 percent (up from 58 percent). Moreover, home ownership is higher in the poorest regions (92 percent) as compared to the richest regions (80 percent). This is partly a legacy of the transition when homes were transferred to occupants at little or no cost. Land ownership in the poorest regions is also higher than in the richest regions (55 percent vs. 26 percent) although this land is likely to be low value (agricultural/ subsistence farming). In the absence of liquid and dynamic real estate markets, both the home and land ownership dynamics point to the “house lock” phenomenon, contributing to limited spatial mobility. Internal migration in Russia is also hampered by social factors, which especially affect youth and women. Russian youth face radically different job prospects depending on the regions they live in. Unlike in the past, there are few active labor market policies currently available in Russia that cater specifically to young people. The young also need to rely more on kinship networks to negotiate what would otherwise be hard to access housing and job markets. Internal migration in Russia has a gendered nature: it is easier for men to migrate than women (although most men do so for temporary work). Women are constrained in migration by their domestic roles as well as being perceived as “natural homemakers”. Moreover, the Russian Labor Code (Article 253) prohibits women from working in areas deemed to be too risky for them. Interestingly, women themselves have sought to counter such practices through entrepreneurship: While men are four times more likely to be “nascent entrepreneurs”, nearly half of established businesses are owned by women, suggesting that they are better at backing a winner. However, men dominate in big business, while women are concentrated in SMEs – where a lot of informal labor resides. Source: World Bank, 2018. Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 47 To summarize, this chapter assessed three aspects of the Russian labor market that could increase informality: labor market regulations; benefits and taxes; and labor mobility. Russia’s labor market regulations, while at par with other countries in some areas, are overly stringent in others. These regulations, which most severely impinge on SMEs, retain certain unnecessary aspects related to the employment contract, minimum wages, and redundancy dismissal, and these could be reconsidered. Relative to other OECD/ EU countries, Russian tax and benefits policies should not create major disincentives to seek employment or work more formal hours. Indeed, in some cases, net benefits in Russia may be too low, thereby discouraging participation in the labor force by reducing incentives to register as unemployed, and subsequently to seek formal work. Introducing a well-designed unemployment insurance system and consolidating small and fragmented benefits programs into larger income/means-tested benefits could address this. Finally, even though intersectoral mobility in Russia is comparable to most advanced economies, inter-regional mobility emerges as a key labor market rigidity. Firms are not easily able to hire or retrench based on their economic needs, and workers are not able to easily move to areas where jobs are available. The next chapter turns to policy measures for reducing informal employment in Russia. 48 Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 4 Stemming Russia’s Informality Tide: No single fix but multiple policy levers Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 51 This final chapter examines various policy measures for reducing informal employment in Russia based on the analysis presented in preceding chapters. Such policy levers can be broadly grouped into three categories: (i) Directly intervening to lower the cost of formal labor; (ii) Removing labor market rigidities; (iii) Enhancing skills training. Based on the findings in Chapter 2, namely, that the growth of informality in Russia cannot be attributable to specific sectors or demographics (other than those with basic education), these policy levers deliberately abstain from “vertical” (i.e. sector- or occupation-specific) interventions and instead focus on “horizontal” (i.e. cross-sectoral) ones. The remainder of the chapter discusses these policy levers and concludes with a discussion on other worthy aspects of informality not covered in this report but that merit further enquiry. Policy levers for reducing informal employment in Russia 1. Directly intervening to lower the cost of formal labor: One policy proposal implemented with some success in other countries has been to reduce the employers’ Social Insurance Contribution rate (SIC). To make up for the loss in fiscal revenues from reducing the SIC rate (although some of it would be made from a higher tax base because of lower informality), taxes may need to be increased elsewhere. Typically, countries have maintained budget neutrality of such policies by increasing the Value Added Tax rate (VAT). In principle, such tax maneuvers ought to increase incentives for firms to hire formal labor by lowering the cost of hiring formal labor, as well as be budget neutral. Examples of such maneuver policies in other countries are presented below: • North Macedonia implemented across-the-board labor tax reforms around 2010 that led to significant growth in formal employment. Specifically, a 1 percent decrease in in the tax wedge led to a 0.9 to 3.1 percent increase in the employment rate. • Turkey, in the early 2000s, introduced legislation under which firms could obtain (i) a subsidy on the social security contributions due at the minimum contribution base, and (ii) an income tax subsidy for the amount due at the minimum wage. Establishments located within industrial zones were fully subsidized for their calculated social security contributions and income taxes, whereas establishments outside industrial zones received compensation for only 80 percent of such amounts. Findings suggest that these subsidy programs led to significant net increases in registered jobs in eligible provinces: between 5 and 13 percent for the first program and between 11 and 15 percent for the second (Betcherman, Daysal, & Pagés, 2008). • In the United States, the Targeted Jobs Tax Credit (TJTC) program–which offered in-work benefits staggered over a few years – was found to have a net employment effect of 7.7 percent (Katz, 1998). • In Argentina, a random assignment wage subsidy scheme targeting workers in temporary employment subsidized 50 percent of the first 18 months of wages for workers employed in permanent, regular jobs. Findings indicate that the program aided low-wage workers in finding regular wage employment (but these effects were only statistically significant among women and youth) (Galasso et al., 2001). 52 Stemming Russia’s Informality: Unearthing Causes and Developing Solutions Box 4-1: Reducing the cost of formality for employers only has a small impact on informality In 2017, Russia’s Ministry of Finance proposed a comprehensive reform of the tax system aimed at shifting the tax burden from labor to consumption taxes, referred to as the ‘Tax maneuver 22/22’. The reform suggests reducing the employers’ SIC rate from 30 to 22 percent, while simultaneously increasing the VAT rate from 18 to 22 percent. To assess the impact of this tax maneuver on inducing formality and budget neutrality, we constructed a detailed microsimulation model and calibrated it to the Russia context based on RUSMOD. RUSMOD is the first full-scale model in Russia that simulates most of the existing monetary tax-transfer policies implemented at federal and regional levels for a nationally representative sample of the population. In addition, we made certain assumptions: (a) workers and their employers would enter as contributors to social security (“payroll taxes”) and workers would start paying personal income tax on their earnings; (b) consumers would bear the burden of the VAT increase; (c) the economic incidence of SIC and Personal Income Tax (PIT) would fall on employees rather than employers. That is, workers would have to accept a lower take- home pay and employers would not have to accept higher labor costs to pay for SIC. Consequently, the tax maneuver would involve higher take-home pay for workers, but also higher VAT expenses for consumers; (d) we relax our legalistic definition of informal employment used so far (see Box 1 in Chapter 1: a worker is considered formal if they have a contract in their main job, regardless of duration of contract; and informal otherwise). In other words, our analysis of the tax maneuver explicitly accounts for workers who work for a firm and either have no contract (about 6.7 percent of the employed as of 2016) or have a contract but receive envelope wages (about 8 percent of the employed). The self-employed (about 10.3 percent of total employment) are not included in this exercise because they are subject to a different tax regime. Based on these assumptions and various simulations, the key findings that emerge are: a. Such a tax maneuver would be fiscally neutral only if at least 50 percent of informal workers, i.e., around 7.5 percent of total employment (about 5 million workers), formalize. This is a high and unlikely transition rate from informal to formal employment. The increase in VAT, on the other hand, partly compensates gains in take-home pay, leading to a slight increase in real incomes at the bottom of the distribution (0.1 percent). Both poverty and inequality would remain stable. b. Moreover, a behavioral micro-simulation exercise renders that only 6 percent of the informals would formalize as a reaction to the tax maneuver (i.e., around 600 thousand workers) and the tax maneuver would not be fiscally neutral, leading to an additional fiscal deficit of 0.7 percent of GDP. In this scenario, real incomes of the first decile would increase by 1 percent, and poverty would decline slightly. c. The results are robust even with differing assumptions. If employers bear the incidence of PIT and SIC, then reductions in these taxes would accrue to employers and not to workers. Consequently, the tax maneuver would lead to lower real incomes among workers (because of no increase in take-home pay but higher VAT payments in consumption). Our micro-simulations show a decline in real incomes among the bottom decile of the distribution and slight increase in poverty rates. This can be partially offset by job creation (which we do not model in our exercise) because in Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 53 such cases, any reduction in total labor costs could increase demand for formal labor. Targeting labor tax reductions to the low-skilled sector (where employers have more bargaining power and tax incidence is more likely to fall upon the employer rather than the employee) could thus incentivize formality in this segment of the workforce. These results indicate that such a tax maneuver, i.e., the reduction in SIC rates and increase in the VAT rate, is unlikely to have a major impact on reducing informal employment or attaining fiscal neutrality. A larger SIC reduction could do better strictly in terms of reducing informal employment but would come with higher fiscal costs. Such tax maneuvers have been under consideration in Russia but for reasons discussed in Box 4.1, they would have a limited impact on reducing informality in the Russian context.12 Why is it that similar tax maneuver policies that have been successful in other countries have not yielded such results in Russia? There are at least three possible reasons for the muted results in the case of Russia: One, the above findings are only first-order approximations of the full impact of such tax maneuvers. A more complete analysis of wage and labor productivity changes after a tax maneuver is also needed to know if there would be net wage gains to formalization (i.e., not only due to changes in tax and transfers, but also due to productivity gains). Two, the analysis specifically includes only the impact of formalization upon current net wages, VAT, and some social security benefits. However, it can be argued that long-term benefits — particularly in terms of pensions and health insurance — should also play a role in the worker’s decision to formalize. But workers may suffer from myopia (for example, being unable to gauge the long-term impact of not contributing to social security). Three, and more rationally, workers may indulge in moral hazard (i.e., free-riding on other people’s contributions to enjoy some social security benefits without contributing themselves). This is because in the current environment, informal workers enjoy benefits such as social pensions and medical treatment with scant contributions. In principle, taking away such benefits from informal workers could increase the cost of being informal. However, attempting to reduce such “free-riding” may risk upsetting the already tenuous social contract between the state and citizens and reducing society-wide benefits of widespread coverage of pensions and medical treatment. Another factor to consider is managing unintended consequences. For example, the impact of reducing the SIC is likely to be felt on the contributory pillar of the pensions system in Russia, which could be adversely affected in favor of a move towards general budget financing of pensions (from the proceeds of the higher VAT rate, for example). This may have the rational but adverse effect of discouraging workers to become formal since such a de-linking of contributions from pensions could mean that the returns to their formal contributions are discounted even further. The implication in the Russian context is that changes in payroll taxes and consumption rates are not enough, if at all, to reduce informal employment. In addition, there need to be concerted efforts to increase information about the benefits of becoming formal, and as 12 The box draws upon a background paper commissioned for this report, “Household welfare impact of fiscal policy options to growing informal employment in Russia,” (Matytsin, Popova, Kim, & Freije, 2018). The paper provides technical details of the intricate modeling scenarios and various simulations. 54 Stemming Russia’s Informality: Unearthing Causes and Developing Solutions discussed in the previous chapter, an increase in some of these benefits, many of which are comparatively low. Doing so would help workers better gauge the long-term impact of their contributions. 2. Removing labor market rigidities. This involves action on three fronts: (a) bringing certain aspects of labor market regulations in line with global best practice; (b) consolidating certain aspects of the tax-benefits system to provide more rational incentives to participate in the labor market; and (c) increasing inter-regional mobility. Box 4-2: Certain labor market regulations can be eased to incentivize formal employment This box summarizes the recommendations on adjusting Russia’s labor code and regulations in the areas of labor contracts, minimum wages, and redundancy dismissal from the previous chapter. • More flexible forms of labor contracts could be considered. Specifically, Russia may consider expanding the list of circumstances under which fixed-term/temporary contracts are allowed, including for permanent tasks, and extend their maximum duration. Most fixed-term contracts are held by young people, those who were formerly unemployed, informally employed, or those with lower education levels, namely, those with the weakest bargaining power. For these workers, fixed-term work can provide a pathway into formal employment and an opportunity to gain experience and skills. • Oral labor contracts, especially in case of short-term/casual employment – i.e., for a duration of up to two months, could be allowed / formalized. • Lowering statutory wage premiums could be considered, allowing for amounts of compensation to be determined by a collective agreement, local normative act, or a labor contract. Regulations related to working on off-days and public holidays could be also revisited. • Even though the minimum wage may not be a major impediment to job creation, there is a negative correlation between minimum wage and informality in Russian regions. In any case, working out benchmarks other than using the subsistence minimum could be considered. • Employment Protection Legislation (EPL) could be restricted to focus on core and enforceable labor standards, and with the aim to finding a balance between flexibility and security, provide a greater role for trade unions and employers associations to determine employment relations through collective bargaining. In addition, introducing an adequate unemployment insurance system would contribute to finding a better balance between flexibility and security. • Regulations on redundancy dismissal in Russia are overly rigid by OECD standards, discouraging formal employment, and could be reconsidered. For example, when terminating contracts, small employers may not need to verify possibility of redeployment or retraining. Shorter statutory notice periods could be allowed for small employers by collective agreement. Replacing severance pay with unemployment benefits in small firms may also contribute to flexible work arrangements especially in cash strapped small firms. Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 55 a) Bringing labor market regulations in line with global good practice: As discussed in the previous chapter, Russia’s labor code and related regulations are particularly biting on SMEs, which are a source of informal employment. These were discussed in detail in the previous chapter but for ease of reference the policy actions are summarized in Box 4.2. However, “what’s on the books” is only one side of the coin; the other is how well laws and regulations on the book are enforced. Indeed, in many countries, even state-of-the-art labor codes and EPLs are often ineffective because of evasion, weak enforcement, and Box 4-3: The role of well-functioning labor inspection systems goes beyond just enforcement The institution of labor inspection has a twofold nature. On one hand, labor inspectors enforce legal provisions dealing with labor regulations, occupational health and safety, social services, migrant workers, vocational training, social security, and other matters. On the other hand, labor inspection provides information and advice, as well as training. Specifically, labor inspection services cover a set of five operational functions: 1. Promotion: Raising awareness of standards and national regulations that give effect to them, as well as disseminating best national and international practice. 2. Advice and information: Putting their knowledge and expertise to use in helping resolve specific issues during on-site inspections or, in a more prevention-oriented manner, in their contacts with duty-holders and their organizations. 3. Education: Often exercised in training for employers and workers, labor court officials, other government agencies, and NGOs. 4. Monitoring: Observing, keeping track of, and reporting on compliance levels in enterprises, economic sectors, and the country as a whole. 5. Enforcement: Ensuring compliance with the Law. Modern inspectorates aim for 60 percent proactive inspections and 40 percent reactive inspections (accidents, complaints) based on an application of risk prioritization towards highest risk workplaces. Advice to and stimulation of employers to implement legal requirements is the modern approach to compliance. Labor inspectors are obliged to first and foremost advise employers and employees to fulfill their obligations while leaving the option of punishing grave and consistent violations open. International studies of best practice highlight many characteristics of high-quality, well- functioning labor inspection services. These include adequate resources (both staff and infrastructure); recruitment and training policies designed to attract and retain high quality inspectors; central administration to improve consistency and reduce duplication; preventive targeting of firms based on risk; integration of different types of inspections to reduce the inspection burden on business; and a focus on prevention and education as well as enforcement. In particular, good cooperation is required between the labor inspectorate and other agencies, social partners, institutions, and NGOs. Detection and enforcement measures applied in OECD countries include information exchange (linking computer files) using unique social security numbers; cooperation between labor, social security, and tax inspectorates; administrative requirements for immediate declaration of new hires; making chief contractors responsible for tax 56 Stemming Russia’s Informality: Unearthing Causes and Developing Solutions compliance by subcontractors; encouraging employer and trade union denunciation of unfair competition; enforcing employees’ rights such as protection against unfair dismissal, even within undeclared relationships; and strict sanctions. Lack of public awareness on legal rights associated with employment may also impair law enforcement in several countries. Workers should know their legal rights and how to enforce them. Evidence to the contrary suggests that public opinion is often ill-informed. Running campaigns to inform individuals of their legal labor-related rights is thus crucial. In high-performance labor inspection systems, social dialogue provides the foundation for effective labor inspection work. As an example, in the Netherlands, Germany, the Nordic countries, and the UK, the Labor Inspection consults social partner organizations at national and sector levels on where problems exist, and they agree upon targets, projects, campaigns, etc., on an annual or even quarterly basis. This consultation process creates transparency, higher levels of acceptance, and “ownership” of the compliance process among duty-holders. Further, Labor Inspectorates in many countries have an obligation to “stimulate” (Netherlands) or “animate” (France) cooperation and dialogue among parties in enterprises. Measures must be designed to develop such social dialogue on labor inspection and occupational safety and health (OS&H) at all suitable levels. Furthermore, improved law enforcement and application of sanctions can be achieved through (i) better cooperation between relevant authorities (inter alia tax offices, labor and social inspectorates, police); (ii) reinforcement of the number of labor inspectors, better working conditions, and performance-based remuneration systems; and (iii) investment in training to update knowledge and develop skills in relevant areas of expertise. failure to reach the informal sector. Achieving greater labor market flexibility through non- enforcement of laws is a sub-optimal choice because it undermines the rule of law, exposes firms to costly uncertainty, impedes decent formal employment growth, and leaves workers without adequate protection (Rutkowski & Scarpetta, 2005). This is where labor inspection plays an important role in monitoring compliance with labor standards. Box 4.3 highlights the characteristics of high-quality, well-functioning labor inspection services. In Russia, the Federal Labor Inspectorate (FLI) is a unified, centralized system composed of the federal executive governmental body charged with state supervision and control of observance of labor law and other legal regulatory acts containing labor law norms and its territorial bodies. In conjunction with the Prosecutor’s Office, the FLI has the right to carry out investigations and make binding decisions, including reinstating an employee who was wrongfully dismissed and awarding the employee for wages in arrears.13 Even more so, these authoritative branches can initiate proceedings against the employer and its administrators for liability of violations of labor legislation (Ksenofontov, 2011). The ILO considers that the number of labor inspectors in relation to workers should approach the following: for industrial market economies, 1/10,000; for rapidly industrializing economies, 1/15,000; for transition economies, 1/20,000; and for least developed countries, 1/40,000. However, in Russia, the ratio was 1/34,400 employed in 2016, closer to the least 13 One of the main areas of FLI intervention is wage arrears. In 2016, 116,200 violations of the law on wage payment were found, and 25 billion rubles in wage arrears (around US$300 million) to more than 1 million people were cleared. New special offences for violating procedures for setting or paying salaries were put into effect in 2016, and they provide penalties related to nonpayment or incomplete payment. Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 57 developed country benchmark.14 Current capacity of the FLI allows, on average, for the conduct of one inspection in 28 years, while the ILO recommends on average not less than one in five years. In Russia, institutional capacity to enforce laws and the culture of law compliance across regions and sub-populations vary significantly. All this may result in actual enforcement being close to non-existent in some sectors of the economy and close to complete in others. For example, in 2016, only 0.9 percent of enterprises in Dagestan were found to be without violations, and in Arkhangelsk oblast, this was only 3 percent. On the other end, no violations were observed during inspections in the Republic of Komi in 82.5 percent of cases; in Krasnodar krai in 66.1 percent of cases; in Moscow in 62.7 percent of cases; in Primorsky krai in 61.8 percent of cases; and in Novgorod oblast in 60.7 percent of inspected enterprises. Summary judiciary statistics basically tell the same story, showing significant inter-regional variation in enforcement of the labor regulations. The Far Eastern Magadan region, with 200 legal cases per 1,000 employees filed to courts, took the leading place. It was followed by a few other Northern and Far Eastern regions, ranging between 30 and 70 legal cases. In contrast, in mostly urban and densely populated regions like Moscow, St. Petersburg, and Nizhny Novgorod oblasts, of every 1,000 employees, only 1 to 4 were involved in legal conflicts with their former or current employers in regional or local courts. Labor inspection services are an important line of defense against informality. While a detailed analysis of FLI and its effectiveness is beyond the scope of this report, international evidence suggests that a “law-and-order” approach that focuses on penalties and sanctions is not helpful to combat informal employment, especially in environments with inadequate governance. Rather, a more client-focused and risk prioritization approach, which the FLI is moving towards, and that supports firms to comply with regulations and only uses penalties and sanctions as a last resort, works better to decrease informal employment. The Baltic countries implemented successful reforms along these lines in the 1990s. Box 4.4 summarizes Russia’s Federal Tax Service’s experience and progress in adopting a risk prioritization approach. Box 4-4: Russia’s Federal Tax Service has made admirable progress in implementing a risk prioritization approach On the issue of mainstreaming risk prioritization in their daily work, Russia’s Federal Tax Service (FTS) may offer useful lessons. The FTS has made admirable progress by adopting a self-assessment of risk approach. The numbers of field tax audits have steadily declined, and efficiency has improved. Russia’s FTS no longer uses the 100 percent audits principle and it applies a risk-based approach to tax audits. Tax audit planning is an open process based on selecting taxpayers for field audits with the use of 12 publicly available criteria. Self-assessment of risk based on financial and operational performance helps enable the taxpayer to assess tax risks in a timely fashion. This approach has helped reduce the administrative burden for businesses and improve FTS performance. Numbers of field tax audits have steadily declined and efficiency has improved. On average, only two out of 1,000 taxpayers, or 0.2 percent, have undergone a tax audit in the first nine months of 2018. 14 In 2016, there were 72.4 million employees in Russia while the total number of staff of the Federal Labor Inspectorate was 2,438, including the number of labor inspectors. For comparison, in Latvia, there were 8,300 workers per one inspector. 58 Stemming Russia’s Informality: Unearthing Causes and Developing Solutions b)Consolidating certain aspects of the tax-benefits system to provide more rational incentives to participate in the labor market: The discussion of Russia’s tax-benefits system in the previous chapter points to several benchmarks that are below comparator countries. An assessment of various taxes yields the conclusion that by global standards at least, Russia’s effective taxes are low and should not provide disincentives to seek formal work. Benefits such as unemployment benefits, housing and utility allowances, and child allowances are also low by global standards. Maternity allowances, though generous, are frontloaded. As such, it is difficult to consider benefits to those unemployed as having a negative influence on their decision to participate in the labor market. The main policy lever that thus emerges is on the benefit side of the equation: Russia could consider introducing a well-designed unemployment insurance system and consolidating small and fragmented benefits programs into larger income/means-tested benefits. This could provide incentives to register as unemployed and to subsequently seek formal work. c) Increasing inter-regional mobility: The previous chapter discussed how, while intersectoral mobility in Russia is not a major concern, inter-regional mobility emerges as a key rigidity in the Russian labor market. This has implications for the ease with which formal firms can hire or retrench workers. Inter-regional mobility could be increased by putting in place connective infrastructure, making real estate markets (home and land) more liquid, and addressing social barriers for internal migration, especially for youth and women. Increasing inter-regional mobility is likely to yield other economy-wide benefits that will go beyond reducing informality. As referenced in Chapter 3, if inter- regional mobility costs were to reduce by 20 percent, Russia’s GDP would be about 2.2 percent higher than its baseline value. 3. Enhancing skills training: Even though a key finding of this report is that growing informality in Russia cannot be attributed to demographic factors per se, the one exception and consistent finding across all surveys and databases is that it has increased among those with only basic education. By 2016, those with some tertiary education were 24.2 percentage points less likely to be informal that those with basic education. Other surveys show qualitatively similar results regarding education. Having a post-secondary education seems to have prevented workers from becoming informal. In other words, had the share in tertiary education not increased, the rate of informality in Russia would have grown even more. This suggests that a longer-term objective to reduce informality could be to enhance skills training in areas connected to the modern economy. And given the reported shortages of skilled workers faced by Russian employers, improvements and adjustments to Russia’s vocational education and training (VET) system could also be considered. Equipping the workforce with necessary skills is likely to yield other economy-wide benefits that will go beyond reducing informality. Reducing informality: Further areas of enquiry Based on the findings and conclusions of the preceding analyses, this report has presented multiple policy measures for reducing informal employment in Russia. The inescapable conclusion is that informality can only be partially alleviated with specific fiscal or labor market measures. There are no quick fixes. Systemic solutions to reduce informality will require broader polices. In particular, and although it may sound tautological, the best antidote to high informal employment is faster creation of more formal jobs. In this context, Stemming Russia’s Informality: Unearthing Causes and Developing Solutions 59 it is worth noting that concentrating the formalization effort on microenterprises may be misguided (Loayza, 2018). Instead, formalization should be sought – in both employment and production – mainly in emerging, medium, and large firms. These are enterprises that can generate greater growth in productivity and greater diversification of risks. A healthy economy is characterized by the entry of young companies that boost its productivity. Dynamic firms, whether new or established, are the source of formal jobs when conditions are favorable. It may also be helpful to view informality from a different perspective. Russia is recognized as having a labor market equilibrium where most of the adjustment comes through wages rather than employment. Informality enhances this adjustment as well as provides people with a de facto social safety net (given that the formal safety net is not at par – as discussed extensively in Chapter 3). More flexible labor legislation, better unemployment insurance, and less rigid labor markets could move Russia to another equilibrium where adjustment happens through changes in employment (rather than in wages). But this comes with a trade- off that should be recognized: more volatile unemployment but also more stable wages. If Russia were to move to such an equilibrium, a strong formal safety net that confers the right incentives and benefits for those who find themselves unemployed, and an economy that creates formal jobs at a high rate are key. Until then, coercing informal into being formal could be counterproductive. And in this interim, reducing the harmful aspects of informality will rest on the performance of governments and the trust that citizens put in them. It is this two-way street that then becomes as essential a measure as any. 60 Stemming Russia’s Informality: Unearthing Causes and Developing Solutions References Betcherman, G., Daysal, N. M., & Pagés, C. (2008, May). Do Employment Subsidies Work? Evidence from Regionally Targeted Subsidies in Turkey. Discussion papper series(IZA DP No. 3508). Dokuchaev, D. (2015). Russia’s unemployment rate resilient to economic crisis. Retrieved from http:// www.russia-direct.org/analysis/russia%E2%80%99s-unemployment-rate-surprisinglyresilient. Enste, D. H., & Schneider, F. (2000, February ). Shadow Economies: Size, Causes, and Consequences. Journal of Economic Literature, 38(1):77-114. Galasso, E., Ravallion, M., & Salvia, A. (2001). Assisting the transition from workfare to work: a randomized experiment. Argentina: The World Bank . Gimpelson, V., & Sharunina, A. (2015). Russian Labor Market Flows: 2000–2012. Ekonomicheskiy zhurnal Vysshey Shkoly ekonomiki [Highier School of Economics Economic Journal], 19(3), 313–348. Guriev, S., & Vakulenko, E. (2012, October 24). Convergence between Russian regions. CEFIR / NES Working Paper No. 180. Gurvich, E. T., Vakulenko, E. S., Ivanova, M. A., Klepikova, E. A., Dedova, M. S., Leukhin, R. S., & Khazanov, A. A. (2016). Mechanisms of the Russian Labor Market. Moscow: RANEPA Publishing House Delo. In Russian . Gurvich, E., & Vakulenko, E. (2017). Macroeconomic and structural properties of the Russian labor market: A cross-country comparison. Russian Journal of Economics, 3(4), 411-424. Klepikova, E. A. (2016). Mobility of Private and Public Sector Workers. Obschestvennye nauki i sovremennost [Social Sciences and Contamporary World]., 3, 75-90. in Russian. Ksenofontov, A. (2011, November 1). Foreign Citizens in Russia and Protection of Labor Rights. The Moscow Times . Kuddo, A. (2018). Labor Regulations in Russia: An Overview. Washington DC: The World Bank. Kuddo, A., Robalino, D., & Weber, M. (2015). Balancing Regulations to Promote Jobs: From Employment Contracts to Unemployment Benefits. Lehmann, H., Muravyev, A., Razzolini, T., & Zaiceva, A. (2013). The wage and non-wage costs of displacement in boom times: Evidence from Russia. Journal of Comparative Economics, 1184-1201. Lehmann, H., Razzolini, T., & Zaiceva, A. (2009). Job separations and informality in the Russian labor market. Research in Labor Economics(34), 257-290. Loayza, N. V. (2018, December). Informality: Why Is It So Widespread and How Can It Be Reduced? Research & Policy Briefs; no. 20. Washington DC: The World Bank . Retrieved from http://documents. worldbank.org/curated/en/130391545228882358/Informality-Why-Is-It-So-Widespread-and-How- Can-It-Be-Reduced Lukiyanova, A. (2015). Earnings Inequality and Informal Employment in Russia. Economics of Transition, 469-515. Matytsin, M., Popova, D., & Sinnott, E. (2017). Distributional impact of fiscal policy in Russia over the boom and downturn. unpublished manuscript. Washington DC. Matytsin, M., Popova, D., Kim, Y. S., & Freije, S. (2018). Household welfare impact of fiscal policy options to growing informal employment in Russia. Washington DC: The World Bank. Posarac. (2017). The development of the effective social support system in Russia. Posarac, A., Andreeva, E., & Gordine, T. (2018). Tax-Benefit Model for the Russian Federation 2017. Rutkowski, J., & Scarpetta, S. (2005). Enhancing Job Opportunities: Eastern Europe and the Former Soviet Union. Washington DC: World Bank. Slonimczyk, F., & Gimpelson, V. (2013). Informality and Mobility: Evidence from Russian Panel Data. IZA Discussion Paper(7703). Vanek, J., Chen, M., Carré, F., Heintz, J., & Hausmanns, R. (2014, April). Statistics on the Informal Economy: Definitions, Reional Estimates and Challenges. WIEGO Working Paper (Statistics), 2. Voskoboynikov, I., & Gimpelson, V. (2015). Productivity Growth, Structural Change and Informality: the Case of Russia. Moscow: Higher School of Economics. World Bank. (2016). Russian Federation, Systematic Country Diagnostic: Pathwqays to Inclusive Growth. Washington DC: World Bank Group. World Bank. (2018). Rolling Back Russia’s Spatial Disparities: Re-assembling the Soviet Jigsaw Under a Market Economy. Washington, DC: World Bank. Retrieved from https://openknowledge.worldbank. org/handle/10986/29866 World Bank and Nifi. (2017). The development of an effective social support system in Russia. Moscow. 61 THE W O RL D B A N K I N T H E R U S S I AN F E D E R AT I O N , MAY 2 0 1 9 Stemming Russia’s Informality: Unearthing Causes and Developing Solutions Informality appears to have been growing across all sectors and particularly among workers without at least some tertiary education. Growing informal employment in raises concerns about fiscal sustainability, productivity, and social protection. Cutting through various data and definitions, this report finds one consistent outcome: informal employment is on the rise. The increase in informality is attributed mainly to the lack of formal job creation, which in recent years, was close to zero. The report also focuses on three aspects that affect informality: labor market regulations, taxes and benefits, and labor mobility. © 2019 International Bank for Reconstruction and Development / The World Bank Some rights reserved 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) http://creativecommons.org /licenses/by/3.0/igo.