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