The Participation of North Korean Households in the Informal Economy: Size, Determinants, and Effect

This paper uses a survey of North Korean refugees to look at the size and the determinants of informal economic activities. In addition, we estimate the effect of internal economic participation on labor supply in the formal economy. We find that the informal economy is very large in North Korea with the share of income from informal economic activities at 78% of the total income of North Korean households. However, there is little evidence that supports a deepening informalization from 1996 to 2003. It is estimated that such activities are primarily driven by survival motives in North Korea. We also find that workers who have secondary jobs reduce working hours in the formal economy. These results suggest that increases in informal economic activities can shrink the formal economy, but preventing such activities is difficult.