In section three of this study, we could not find taxes and regulations among the potential barriers to sales and employment growth that clearly separated the ups from the downs in the formal sector. We also showed that the large sector has become a smaller share of the economy rather than a bigger share due to self-employment growth and due to the process of de-industrialisation.

In substance, the CIS-7 may fit the developing countries scenario better than the transitional countries scenario in the Schneider and Klinglmair (2004) regressions. If this is the case, we should expect that the growth of the informal sector negatively contributes to growth. The data we have do not contradict this hypothesis given that the shadow economy has been on the rise during the recession period and has stabilised during the growth period.

This digression on informality suggests that self-employment may partially act as an host to informal and illegal activities especially during recessions where self-employment may constitute a refuge for small informal and illegal businesses. Self-employment is also evidently a sector of necessity for those who wish to keep health and pension records alive and do not want to formally register anywhere else. In times of growth this sector may instead function as a first step to formality, an entry gate to the formal sector given its lower entry barriers and taxes. Has this happened during the recent growth period in the CIS-7?

# **Explaining labor market flows**

The key to understanding output and employment growth in the CIS-7 is evidently the relationship between self-employment which is largely informal and employees in the formal sector. And the transition from non wage (informal) to wage (formal) labor can occur thanks to 1) A migration of workers from self-employment to wage labor or 2) Endogenous growth of selfemployment turning into SMEs and generating formal employment. We have in fact introduced one further dimension of labor market segmentation, the wage/non-wage labor divide. Labor flows between these different states may contribute to explain the employment puzzle.

For this purpose, we turn to Moldova, a country that in many respects could be considered as the average scenario in our CIS-7 sample. Moldova is also the only country that disposes of a consistent longitudinal panel survey between 1997 and 2002 which can be used to assess labor market flows during the growth period and test some hypotheses on the evolution of the labor market. We use the whole longitudinal sample and the restricted panel sample to compute the statistics, the transitional probabilities and the probit regressions presented below.<sup>19</sup> In figure 4.1, we show the distribution of the population across working categories and between 1998 ad 2002. The employed population has marginally increased in percentage of the total population. A migration of workers has also occurred from wage labor to non wage labor and this migration has taken place mostly within agriculture. The most significant change in fact occurred among rural workers with farmers growing very significantly at the expenses of agricultural employees. Non agricultural labor has remained practically unchanged during the period while agricultural employment has increased marginally. This phenomenon occurred during the post-1998 recession (1998-1999) and during the subsequent growth period (2000-2002).

In table 4.4, we report the population structure by category<sup>20</sup> . It is visible the constant growth of private agriculture and the constant decline of employment in agricultural enterprises in both the public and private sectors. Among non-agricultural enterprises, there is a growth in the private sector and a decline in the pubic sector suggesting a migration of workers between the two sectors

> 19 See http://www.statistica.md/ for details on the survey. 20

> Categories are identified on the basis of the main source of income of respondents.

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