MONGOLIA'S INFORMAL SECTOR Reasons for Growth _24_

# **The Result: Incomes of Informal Sector Activities**

61. Having discussed the leading supply and demand factors, we can now examine the end result: incomes in the informal sector. Differences in income levels between the informal and formal sectors draw people toward, or push people away, from the informal sector and therefore motivate growth0 But the levels actually observed are the result of an interaction of the all of the factors outlined above. (State sector incomes will be used as representative of formal sector incomes, simply because the data is readily available.) 62. Employees in the formal sector are guaranteed by law certain benefits that informals do not receive, such as holidays, paid vacations, and sick leave.' Such guarantees must be addressed before comparing formal and informal incomes; they will be treated as an effective 19% increase in base salary of formal sector employees. Also, formal sector employers must make contributions, on behalf of employees, to the state's Health Insurance and Social Insurance Funds. The value of such contributions to the employees will be approximated by the amount of the contributions, 24% of income.<sup>7</sup> " 63. Figure 4 illustrates the relative profitability of state employment versus informal sector work. Even after incorporating the value of employer paid benefits, holidays, annual leave, etc., state salaries seem extraordinarily low, considering the relative requirements of education and the relative prestige of the jobs. It is not at all uncommon to find doctors cleaning houses or skilled engineers driving taxicabs. Indeed, the informal sector surveys revealed numerous examples of people who said they didn't want to work in the formal sector simply because salaries were so low?<sup>2</sup> It is particularly instructive that kiosks, which are viewed by local officials as a means of alleviating poverty (see the section on kiosks in Appendix A), generate average incomes greater than salaries earned by judges on the Supreme Court.

64. While the large relative salaries afforded to some informal occupations serve as an incentive for formal sector employees to consider informal work, those that prefer not to leave their formal sector jobs still have the incentive to moonlight, and those that do, usually earn more money informally than they do in their fornal sector jobs. The informal sector surveys reveal that the degree of moonlighting varies across informal occupations, predictably, with the potential incomes of the occupations, and how well the informal activity lends itself to moonlighting. Informals on the streets and in the outdoor markets are roughly 20% moonlighters, while kiosks are 32% moonlighters, and taxicabs, an informal occupation particularly well-suited as such, are 43% moonlighters. (Part-time taxicabs are 72% moonlighters.) Among those informals that are moonlighting from formal sector jobs, most make more money in their informal occupations: 68% of moonlighting kiosk proprietors, and 88% percent of taxicab drivers earn more money in their informal work than they do in their formal jobs.

65. As outlined earlier, different types of formal and informal sector occupations are taxed in different ways. Formal sector employees are subject to the personal income tax at a progressive marginal rate, while informal sector participants are covered by a separate schedule of flat monthly taxes for occupations where the income is difficult to define '<sup>3</sup> The tax treatmnent of various occupations is presented separately in Figure _5?4_ Note that the tax paid by the average informal is small relative to the tax paid by fornals with similar incomes. As the _Informal Sector Income Tax Law_ was passed in 1993, the real tax paid by informals has declined with inflation. There is another point, mentioned earlier, that is worth re-emphasizing here. Whereas the formal income taxes depicted in Figure 5 are based on the