Risk Attitudes, Time Preferences and theIncidence of Informality Among Ukrainian

Workers

Thomas Dohmen (ROA, Maastricht University and IZA)Melanie Khamis (IZA)

Hartmut Lehmann (University of Bologna and IZA)

WORK IN PROGRESSFourth IZA/World Bank Conference

5th May 2009

2

Presentation Overview

Motivation

Literature on Informality and Risk Attitudes

Contribution

Data

Results

Preliminary Conclusions

3

Motivation (1)

• Paper is part of a larger project on informality in transition countries

• The analysis of the Ukraine data (ULMS) helps us to refine the research on risk measures and time preferences

(1) contribution to a literature which has not been covered

(2) helps to refine and illicit survey instruments with respect to risk measures and time preferences in further survey implementation

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Motivation (2)

• The work force in transition countries might be a lot more risk averse than the work force in a “normal” developing country where uncertainty has been a way of life for generations for all but the most privileged strata.

• In contrast, most of the older workers in transition countries are used to total security provided by the state and might be very reluctant to engage in unsure self-employment in the informal sector for example.

• One crucial point of the research is to relate demographic characteristics like age, gender, educational attainment to riskattitudes that in turn will be linked to the incidence of informal or formal employment.

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Motivation (3)

• A second important area as far as behaviour patterns are concerned that might impact on informality are time preferences of workers.

• Here we would expect that many workers have very high discount rates since they experienced terrible turmoil in their lives during the first decade of the transition (this is especially true in countries of the former Soviet Union).

• Such high discount rates can have different implications as far as choosing informality or formality is concerned (e.g. do not value benefits such as pensions in distant future but also want to have current income and so self-employment might not be a good option)

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Literature on Informality (1)

• Debate on labour market segmentation/involuntary informal sectorparticipation vs. voluntary choice of informality (Harris and Todaro1970; Maloney 1999, 2004; Fields 1990; World Bank 2007)

• Empirical studies on LAC on find mixed evidence (a selection of studies):

1. for voluntary choice for self-employed, e.g. Cunningham and Maloney 2001;

2. no formal-informal wage gap, e.g. Pratap and Quintin 2006;

3. evidence for segmentation btw. formal-informal waged and voluntary choice of self-employed, e.g. Arias and Khamis 2008.

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Literature on Informality (2)

• In the transition economy context, the empirical evidence on this debate and choice between formality and informality in the labour market is more sparse than LAC

• Pages and Stampini (2007): find high mobility from informal and formal job, for self-employed and formal no clear pattern (Albania, Georgia and Ukraine)

• Bernabe and Stampini (2008): support for segmentation in Georgia, preference for formal employment over informal work which is buffer in recessions

• Lehmann and Pignatti (2007) assess the role of the informal sector in the transition country, Ukraine and find segmentation to be present for the majority of informal salaried employees. The informal sector is also found to be split into two tiers, with upper-tier voluntary in the sector and the majority in the involuntary lower-tier. Commander et al. (2008): model informality and test with the ULMS.

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Literature on Risk Attitudes and Time Preference

• Risk behaviour and time preference and the relationship to informal-formal labour market choice have not been studied.

• Risk attitudes and its links to gender, age, migration were studied by Dohmen et al. 2005 and Jaeger et al. 2009 in the German context (females are less risk-taking, older people are more risk-averse, people more willing to take risks are more likely to migrate).

• Risk-taking behaviour and the link to entrepreneurship in a transition country was studied by Djankov et al. 2005 (entrepreneurs in Russia are more risk-taking).

• Time Preference (as of our knowledge) has not been covered in the transition context. Frederick et al. (2002) point to some of the weakness to illicit time preferences (choice tasks, economic uncertainty, inflation).

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Contribution

• We incorporate risk measures and time preferences in a study of the

informal labour market, which has not been done before.

• How much do risk and time preferences matter for selection into

labour market states?

• We employ a unique survey in Ukraine, which allows us to study job

histories, informality, risk measures and time preferences.

• Results from our current study make contribution to the research on

informality and help us to refine further survey work.

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Data (1)

• Ukrainian Longitudinal Monitoring Survey (ULMS) for 2007

• The sample is about 6500 individuals.

• Household information, education, gender, job history information,

sectors, regions, enterprise information (ownership etc.), hours

worked, trust, nationality.

• Informality: Registration of contract, voluntary or involuntary

registration.

• Self-employed: Also can check registration or not.

• Risk measures, Lotteries and questions on time preferences.

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Data (2)

Informality:(1) EmployeesTell me, please, are you officially registered at this job, that is on a workRoster, work agreement or contract?1. Registered 2. Not Registered.

Why aren’t you officially registered at this job?1. Employer does not want to register.2. I do not want to register.3. Both.

(2) Self-employedIs your activity registered?1. Yes 2. No

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Data (3)

Risk Attitudes: General (1) and Career (2)

(1) How do you see yourself? Are you generally a person who is fullywilling to take risks or do you try to avoid taking risks? Please give a number from 0 to 10, where the value 0 means: “Completely unwilling to take risks” and the value 10 means “Completely willing to take risks”. You can take the values in between to make your estimate.

(2) People can behave differently in different situations. How would you rate your willingness to take risks in career matters? (0 to 10 as before).

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Data (4)

Time Preferences:Imagine that you were offered to receive 1000 Hryvnias today or 1200 Hryvnias in a year from now. What would you prefer? (1) 1000 today (2) 1200 a year from now.Respondents are offered to choose btw. 1000 at the time of interview or 1200, 1400, 1600, 1800, 2000 in a year’s time.

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General risk measure for all respondents

General risk measure for all respondents

0

5

10

15

20

25

0 1 2 3 4 5 6 7 8 9 10

scale

perc

ent

15

General Risk and Labour Market States

General risk and informal employees

0

5

10

15

20

25

0 1 2 3 4 5 6 7 8 9 10

scalepe

rcen

tinvoluntary voluntary

General risk by employment category

0

5

10

15

20

25

0 1 2 3 4 5 6 7 8 9 10

scale

perc

ent

informal employees formal employees self-employed

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Average risk measures – Descriptive Statistics

S e lf -e m pl oy e d 1 /A v er ag e o f R is k In dex N A v er ag e o f R is k In de x N A v er ag e o f R is k In de x N

A l l 4.6 34 29 8 3 .6 9 2 2 72 5 4 .7 8 6 3 7 9G e n de rM e n 5.3 25 16 6 4 .3 3 4 1 33 2 5 .1 9 2 2 1 4W o m e n 3.7 65 13 2 3 .0 7 8 1 39 3 4 .2 6 1 1 6 5A g e G ro up1 5 -2 5 5.3 02 9 6 4 .5 7 5 3 88 5 .2 3 7 3 82 6 -3 5 5.2 56 7 8 4 .1 3 9 5 83 5 .2 5 0 7 63 6 -4 5 3.8 87 6 2 3 .5 5 7 6 87 4 .8 1 7 1 2 04 6 -5 5 3.4 67 4 5 3 .0 9 7 7 25 4 .3 3 0 1 0 65 6 -6 5 3.6 92 1 3 3 .5 4 4 2 83 4 .9 3 5 3 16 5 + 4.2 50 4 3 .0 6 8 59 3 .2 5 0 8E d uc a t i on 3 /H ig h S c h o o l 4.1 59 6 9 3 .7 1 0 4 55 4 .6 1 3 7 5U n ive rs ity 5.1 25 2 4 3 .9 9 5 6 46 5 .6 0 0 6 5M a rr ie dY e s 3.7 41 13 5 3 .5 3 7 1 81 1 4 .7 9 2 2 5 5N o 5.3 74 16 3 4 .0 0 2 9 21 4 .7 7 4 1 2 4K id s 4 /Y e s 4.2 37 9 7 3 .5 8 6 1 06 4 4 .5 7 6 1 3 9N o 5.3 64 3 3 3 .4 6 8 4 08 4 .5 5 1 7 8R e gi onK ie v 7.0 00 1 0 3 .4 0 9 1 54 5 .2 1 4 1 4C e n te r 4.0 15 6 5 3 .6 9 9 6 67 4 .6 8 8 9 6W e st 4.7 45 4 7 3 .9 1 1 4 71 5 .6 8 4 7 6E a s t 4.7 95 7 8 3 .5 9 0 7 48 4 .7 7 1 8 3S o u t h 4.6 22 9 8 3 .7 1 1 6 85 4 .2 0 9 1 1 0R e gi s tra ti on d e ta il s 5 /R e g ist e re d S e lf -e m p lo ye d … … … … 4 .9 2 6 1 6 2N o t re g ist e re d S e lf -e m p lo ye d … … … … 4 .7 0 2 2 1 8I n vo lu n t a ry in fo rm a l 4.5 00 20 0 … … … …V o lu n t a ry in fo rm a l 4.9 08 9 8 … … … …

S o ur c e: Au tho rs ' c a lc ul at io ns b as e d o n U k ra in i an L o ng itud in al M on itor in g S ur ve y (U L M S ) 2 00 7. N ot es :1 / S e l f-e m ploy e d: t h is c a teg or y inc lud es s el f- em ploy e d a nd en tr ep re ne ur s /em p lo y er s fr om th e U L M S .2 / N : n um be r o f o bs e rv a tion s . 3 / C om ple ted lev e l.4 / K id s : k ids in ho us e ho ld5 / If the em p lo y er do es not w ant to re gis te r the em p lo y ee , th is is c las s i fied he re a s " in v olu nta ry in for m al" .

Info rm a l e m pl oy e es F o rm a l em pl oy e esA ve rag e m ea s u res o f r is k a tt it u d e s fo r in fo rm a l , fo rm a l a n d s el f- em p lo y ed w o rk

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Risk in career matters

Risk in career matters, all respondents

0

5

10

15

20

25

30

0 1 2 3 4 5 6 7 8 9 10scale

perc

ent

Risk in career matters by employment category

0

5

10

15

20

25

30

0 1 2 3 4 5 6 7 8 9 10

scale

perc

ent

informal employees formal employees self-employed

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Time Preference

Time preferences of all respondents

0

10

20

30

40

50

60

70

80

1

perc

ent

delayed consumption immediate consumption

Time preference by employment categories

0

2

4

6

8

10

12

20 40 60 80 100

discount rate

perc

ent

informal formal self-employed

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Propensity to be Informal and Risk Attitudes: Regressions

( 1 ) ( 2 ) (3 ) (4 )r is k 0 . 0 0 5 * * * … … …

[ 0 .0 0 2 ] … … …r is k in d ic a t o r … 0 .0 2 5 * … …

… [ 0 .0 1 3 ] … …c a re e r r is k … … 0 . 0 0 4 * * …

… … [ 0 .0 0 2 ] …c a re e r r is k in d i c a t o r … … … 0 . 0 3 6 * * *

… … … [ 0 . 0 1 1 ]a g e -0 . 0 0 1 * * -0 .0 0 2 * * * -0 .0 0 1 * * -0 .0 0 1 * *

[ 0 .0 0 0 ] [ 0 .0 0 1 ] [ 0 .0 0 0 ] [ 0 . 0 0 0 ]u k ra in e - 0 . 0 1 5 - 0 . 0 2 - 0 . 0 1 1 - 0 . 0 1 7

[ 0 .0 1 3 ] [ 0 .0 1 4 ] [ 0 .0 1 2 ] [ 0 . 0 1 3 ]f e m a le -0 . 0 2 5 * * -0 . 0 2 7 * * -0 .0 2 8 * * * -0 .0 2 6 * *

[ 0 .0 1 1 ] [ 0 .0 1 2 ] [ 0 .0 1 1 ] [ 0 . 0 1 1 ]m a r rie d -0 . 0 5 3 * * * -0 .0 6 5 * * * -0 .0 3 5 * * -0 .0 5 4 * * *

[ 0 .0 1 5 ] [ 0 .0 1 7 ] [ 0 .0 1 4 ] [ 0 . 0 1 6 ]k i d s in h o u s e h o ld 0 .0 0 8 0 .0 0 6 0 .0 0 2 0 . 0 0 6

[ 0 .0 0 6 ] [ 0 .0 0 6 ] [ 0 .0 0 6 ] [ 0 . 0 0 6 ]c o m p le t e d s e c o n d a r y 0 .0 0 8 0 .0 0 8 0 .0 0 9 0 . 0 0 6

[ 0 .0 1 2 ] [ 0 .0 1 4 ] [ 0 .0 1 2 ] [ 0 . 0 1 2 ]u n iv e r s it y c o m p le t e d -0 . 0 3 0 * * * -0 .0 3 4 * * * -0 .0 3 0 * * * -0 . 0 2 1 *

[ 0 .0 1 1 ] [ 0 .0 1 1 ] [ 0 .0 1 0 ] [ 0 . 0 1 1 ]n o n - e m p lo y m e n t (2 0 0 4 -2 0 0 7 ) 0 . 0 9 6 * * * 0 . 0 9 2 * * * 0 . 0 9 3 * * * 0 . 0 9 6 * * *

[ 0 .0 2 0 ] [ 0 .0 2 2 ] [ 0 .0 2 1 ] [ 0 . 0 2 1 ]l n h o u s e h o ld in c o m e -0 . 0 1 6 * * - 0 . 0 1 6 * - 0 . 0 1 4 * -0 .0 1 7 * *

[ 0 .0 0 8 ] [ 0 .0 0 9 ] [ 0 .0 0 8 ] [ 0 . 0 0 8 ]O t h e r c o n tr o l sS e c to rs Y E S Y E S Y E S Y E SR e g io n s Y E S Y E S Y E S Y E SO b s e r v a t io n s 2 3 2 3 1 8 4 2 2 0 7 5 2 0 4 9S o u r c e : A u t h o rs ' c a lc u l a t io n s b a s e d o n t h e U L M S 2 0 0 7 .S t a n d a r d e r ro rs in b ra c k e ts* s ig n i fi c a n t a t 1 0 % ; * * s ig n if ic a n t a t 5 % ; * * * s ig n if ic a n t a t 1 %

R i s k M e a s u re s a n d I n f o rm a l L a b o u r M a rk e t : P ro b i t R e g r e s s io n s

20

Risk, Informality and Different Age Groups

26 -3 5 ye ars 36 -5 5 ye ars 4 6-55 yea rsr isk 0.01 0 ** 0 0 .0 0 7*

[0 .00 5 ] [0 .00 4] [0 .0 04 ]u kra in e -0 .0 1 6 -0.0 21 -0 .02

[0 .04 2 ] [0 .02 6] [0 .0 28 ]fe ma le -0 .0 4 9 -0.0 3 -0.0 22

[0 .03 4 ] [0 .02 3] [0 .0 25 ]m ar rie d -0 .14 5*** -0 .0 9 3*** 0 .0 32

[0 .04 8 ] [0 .03 4] [0 .0 23 ]kids in ho use h old 0 .00 8 0 .00 5 0 .0 2 8**

[0 .02 1 ] [0 .01 2] [0 .0 13 ]co mp le ted se co nd ary 0 .02 9 0 .00 6 0 .0 07

[0 .04 1 ] [0 .02 6] [0 .0 26 ]u n iver sity c omp le ted -0 .0 2 5 -0 .0 5 8*** -0.0 56 ***

[0 .03 4 ] [0 .01 9] [0 .0 20 ]n o n-emp lo yme nt (2 00 4 -20 0 7) 0.12 8 *** 0 .08 7** 0 .1 0 5**

[0 .04 8 ] [0 .03 8] [0 .0 53 ]l n h ou seh o ld in com e 0 0 .01 1 -0.0 66 ***

[0 .02 4 ] [0 .01 7] [0 .0 18 ]O ther c ontrolsS e cto rs Y ES YE S YE SR eg io ns Y ES YE S YE SO b servatio ns 45 5 6 6 4 5 37S o urce: Au tho rs' ca lculatio ns b ase d o n th e UL MS 20 07 .S tan d ard er ro rs in b ra cke ts* sig ni fi can t a t 10 % ; ** sig nifica n t a t 5 % ; *** sign ifica nt a t 1 %

R isk an d In fo rm al L ab o ur M arket: P ro b it R eg re ssio ns b y A g e G ro up s

21

Risk, Time and Informality: Regressions(1 ) (2 ) (3 ) (4 )

r is k 0 .0 05 * * … … …[0.0 02 ] … … …

r is k in d ic a tor … 0.0 24 * … …… [0.0 14 ] … …

c a re e r ris k … … 0.0 04 * * …… … [0.0 02 ] …

c a re e r ris k in d i c a to r … … … 0.0 41 * * *… … … [0.0 12 ]

t im e p re fe re nc e/d i s c ou nt ra te 0.0 01 0.0 07 -0 .00 6 0.0 13[0 .0 16 ] [0 .0 17 ] [0 .0 16 ] [0 .0 14 ]

a g e -0 .00 1 ** -0 .00 2 ** * -0 .00 1 ** - 0 .00 1 * *[0 .0 00 ] [0 .0 01 ] [0 .0 00 ] [0 .0 00 ]

u k ra in e -0 .01 6 -0 .02 1 -0 .01 1 -0 .01 7[0 .0 14 ] [0 .0 15 ] [0 .0 13 ] [0 .0 14 ]

fe m a le -0 .02 7 ** -0 .03 1 ** - 0 .03 0 * ** - 0 .02 8 * *[0 .0 12 ] [0 .0 13 ] [0 .0 11 ] [0 .0 12 ]

m ar rie d -0 .05 9 ** * -0 .07 3 ** * - 0 .04 0 * ** - 0 .05 8 * **[0 .0 16 ] [0 .0 19 ] [0 .0 15 ] [0 .0 17 ]

k i ds in ho us e h o ld 0.0 09 0.0 07 0.0 02 0.0 07[0 .0 06 ] [0 .0 07 ] [0 .0 06 ] [0 .0 06 ]

c o m p le ted s e c o nd ar y 0.0 07 0.0 06 0.0 08 0.0 05[0 .0 13 ] [0 .0 14 ] [0 .0 13 ] [0 .0 13 ]

u n iv er s it y c om p le ted -0 .03 1 ** * -0 .03 5 ** * - 0 .03 2 * ** -0 .02 1 *[0 .0 11 ] [0 .0 12 ] [0 .0 11 ] [0 .0 12 ]

n o n- em p lo y m e nt (2 00 4 -20 0 7) 0 .1 04 * * * 0 .1 00 * * * 0 .0 98 * * * 0 .1 04 * * *[0 .0 22 ] [0 .0 24 ] [0 .0 22 ] [0 .0 23 ]

l n h ou s eh o ld in c om e -0 .01 7 ** -0 .01 6* -0 .01 4 * - 0 .01 8 * *[0 .0 08 ] [0 .0 09 ] [0 .0 08 ] [0 .0 08 ]

O t h er c o n tr o lsS e c to rs Y E S Y E S Y E S Y E SR eg io ns Y E S Y E S Y E S Y E SO b s er v at io ns 2 18 0 1 71 8 1 96 5 1 97 6S o ur c e: A u tho rs ' c a lc u l a t io ns b as e d o n th e U L M S 20 07 .S tan d ar d er ro rs in b ra c k e ts* s ig n i fi c an t a t 10 % ; * * s ig n if ic a n t a t 5 % ; * * * s ign if ic a nt a t 1 %

R is k , T im e an d In fo rm al L ab ou r M ark et : P ro b it R eg re s s io ns

22

How important is risk as a determinant of informality?( 1 ) ( 2) ( 3) ( 4)

r is k 0 .0 06 * * * … … …[0.0 53 ] … … …

r is k in d ic a tor … 0 .0 32 * * … …… [0.0 49 ] … …

c a re e r ris k … … 0 .0 0 5* * …… … [0.0 47 ] …

c a re e r ris k in d i c a to r … … … 0 .0 4 5* * *… … … [0 .0 72 ]

a g e - 0 .0 01 * * - 0 .0 02 * * * - 0 .0 01 * - 0 .0 01 * *[ - 0 .04 5 ] [ - 0 .07 1 ] [ - 0 .0 41 ] [ - 0 .0 49 ]

u k ra in e - 0 .02 1 - 0 .02 6 - 0 .0 14 - 0 .0 24[ - 0 .02 8 ] [ - 0 .03 5 ] [ - 0 .0 18 ] [ - 0 .0 33 ]

fe m a le - 0 .0 36 * * * - 0 .0 37 * * * - 0 .0 41 * * * - 0 .0 39 * * *[ - 0 .05 8 ] [ - 0 .06 2 ] [ - 0 .0 70 ] [ - 0 .0 64 ]

m ar rie d - 0 .0 68 * * * - 0 .0 81 * * * - 0 .0 49 * * * - 0 .0 71 * * *[ - 0 .09 4 ] [ - 0 .11 5 ] [ - 0 .0 69 ] [ - 0 .0 99 ]

k i ds in ho us e h o ld 0.0 1 0.0 04 0.0 03 0 .0 07[0 .0 26 ] [0 .0 12 ] [0 .0 08 ] [0 .0 20 ]

c o m p le ted s e c o nd ar y 0.0 09 0.0 11 0.0 11 0 .0 05[0 .0 12 ] [0 .0 14 ] [0 .0 14 ] [0 .0 06 ]

u n iv er s it y c om p le ted - 0 .0 31 * * - 0 .0 33 * * - 0 .0 31 * * - 0 .0 23[ - 0 .04 2 ] [ - 0 .04 7 ] [ - 0 .0 44 ] [ - 0 .0 32 ]

n o n- em p lo y m e nt (2 00 4 -20 0 7) 0 .1 21 * * * 0 .1 1 2* * * 0 .1 2 2* * * 0 .1 2 1* * *[0 .1 38 ] [0 .1 33 ] [0 .1 43 ] [0 .1 42 ]

l n h ou s eh o ld in c om e - 0.01 9 * - 0 .01 7 - 0 .0 20 * - 0 .0 21 *[ - 0 .03 7 ] [ - 0 .03 5 ] [ - 0 .0 39 ] [ - 0 .0 42 ]

O t h er c o n tr o lsS e c to rs Y E S Y E S Y E S Y E SR eg io ns Y E S Y E S Y E S Y E SO b s er v at io ns 2 42 9 2 00 3 2 18 3 2 14 8S o ur c e: Au tho rs ' c a lc u l a t io ns b as e d o n th e U L M S 20 07 .N or m a liz e d b eta c o ef f ic ie n ts in br ac k e ts* s ig n i fi c an t a t 10 % ; * * s ig n if ic a n t a t 5 % ; * * * s ign if ic a nt a t 1 %

G e n era l R i s k a n d In fo rm a l La b ou r M a rk e t : B eta R eg re s s io ns

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Preliminary Conclusions

• Informal employees and the self-employed are more willing to take risks while formal employees are more risk-averse.

• Voluntary informal employees are less risk-averse than involuntary informal employees.

• Women are more risk-averse than men and the younger age cohorts are more willing to take risks than older cohorts.

• Higher willingness to take risk means a higher propensity to participate in the informal sector

• Time preferences: respondents prefer current consumption to future consumption.

• Measures of time preferences are ‘too’ simple and one needs to vary the questions in terms of time and amount of money.

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Melanie KhamisIZA

IZA, P.O. Box 7240, 53072 Bonn, Germany

Phone: +49 (0) 228 - 38 94 -221Fax: +49 (0) 228 - 38 94 180

E-mail: khamis@iza.org

http://www.iza.org