Policy Approaches Towards Undeclared Work: A Conceptual Framework
GREY Working Paper no. 4, Sheffield University Management School, University of Sheffield, UK
45 Pages Posted: 14 Jun 2014
Date Written: June 13, 2014
The aim of this working paper is to provide a conceptual framework for understanding the policy approaches for tackling undeclared work. In doing so, the intention is to provide the structure for a future comprehensive review of the policy measures available for tackling undeclared work.
This paper is part of a series of papers associated with the project entitled ‘Out of the shadows: developing capacities and capabilities for tackling undeclared work in Bulgaria, Croatia and FYR Macedonia’. Funded by the European Commission’s Framework 7 Industry-Academia Partnerships Programme (IAPP), the objective of this project is to provide concrete policy recommendations about what policies may work better, based on rigorous empirical evidence, for those seeking to tackle the undeclared economy in the Balkans.
Reframing the undeclared economy: a tame or wicked problem?
Akin to many contemporary societal problems, tackling the undeclared economy has often been conceptually framed as a ‘tame’ problem (i.e., a problem that is complicated but easily solvable, often with a discrete response that can be replicated anywhere). Here however, the undeclared economy is reframed as a ‘wicked’ problem which is complex, rather than complicated, and the outcome of a number of inter-related drivers, each of which if addressed has unforeseen and unintentional knock-on effects. Responsibility for tackling the problem moreover, stretches across multiple stakeholders and requires profound behavioural changes across both citizens and stakeholders. In consequence, there is a need for ‘clumsy’ approaches rather than ‘elegant’ solutions.
Reviewing the policy choices
Four hypothetical policy choices when tackling undeclared work: do nothing; de-regulate the declared economy; eradicate the undeclared economy, or move undeclared work into the declared economy. Reviewing these choices, the first option of doing nothing is unacceptable. This is because it leaves intact the existing negative impacts on legitimate businesses (e.g., unfair competition), undeclared businesses (e.g., the inability to gain access to credit to expand), customers (e.g., no guarantee that health and safety standards have been followed) and governments (e.g., taxes owed are not collected). Secondly, de-regulating the declared economy is unacceptable because it results in a levelling down rather than up of working conditions and third and finally, eradicating the undeclared economy is unacceptable because it leads to governments repressing through their approach towards the undeclared economy precisely the active citizenship, enterprise culture and social inclusion that they otherwise wish to nurture. Moving undeclared work into the declared economy thus appears to be the most viable policy choice.
Nevertheless, this does not mean that the other choices are not useful. Although moving undeclared work into the declared economy is the most viable choice, it may be that doing nothing sometimes will have a supporting role to play such as in relation to small-scale paid favours because such activity is not susceptible to conversion into declared employment. A de-regulatory approach, meanwhile, may be in some instances useful when seeking to simplify compliance in relation to business start-ups, and an eradication approach when tackling those who fail to comply.
Policy measures: a conceptual framework
To provide a conceptual framework of the policy measures available for tackling the undeclared economy, the starting point of this paper are the advances at the organizational level in how to elicit behaviour change. Revealing the shift at the organizational level from the use of direct controls to indirect controls to elicit behaviour change, this paper applies this approach at the societal level to tackling undeclared work. The result is a call for a shift away from using solely direct controls (deterrents and incentives) and for an exploration of the range of indirect controls that might elicit behaviour change (see Figure).
An institutional perspective on the way forward
To develop this indirect controls approach towards tackling undeclared work, an institutional approach is here shown to be required. In many societies, there is incongruence between the laws, codes and regulations of the formal institutions and the norms, beliefs and values that comprise the informal institutions. The result is that what formal institutions deem illegitimate is viewed as licit in terms of the norms, values and beliefs. To tackle undeclared work therefore, a reduction in this institutional incongruence is required. Two options exist.
Firstly, one can change the norms, values and beliefs of the population regarding the acceptability of working in the undeclared economy so that these informal institutions align with the laws, regulations and codes of formal institutions. This requires tax education initiatives, awareness raising campaigns and normative appeals to improve the level of tax morality.
Secondly, one can change the formal institutions to align with the norms, values and beliefs of the wider society. On the one hand, changes in the processes of formal institutions are required. This includes seeking improvement in procedural justice (i.e., whether citizens believe the authorities are treating them in a respectful, impartial and responsible manner), procedural fairness (i.e., whether citizens believe they are paying their fair share compared with others) and redistributive justice (i.e., whether citizens believe they are receiving the goods and services they deserve given the taxes they pay). On the other hand, changes are required in the products of formal institutions by pursuing wider economic and social developments. This requires the pursuit of wealthier economies, with stable high quality government bureaucracies that seek to reduce poverty levels, pursue equality, greater levels of social protection, more effective redistribution via social transfers and greater state intervention in the labour market to protect vulnerable groups.
Synthesising the direct and indirect control approaches
Indirect control measures that change formal and informal institutions, although necessary, are insufficient on their own to tackle undeclared work. Given that undeclared work is a wicked problem with multiple drivers, a multi-pronged approach is required that uses both direct and indirect controls. For example, governments might seek to change the culture of government departments towards a more customer-oriented approach and introduce public campaigns to elicit greater commitment to tax morality, whilst simplifying regulatory compliance and introducing incentives (e.g., amnesties, tax deductions) to enable undeclared work to move into the declared realm. At the same time, and in relation to those who fail to comply, they may also pursue improvements in the probability of detection and tougher sanctions for those subsequently caught.
The debate therefore, is not so much over whether to use direct or indirect controls. Rather, the major discussion concerns which specific policy measures are most effective and what is the most effective way of putting these policy measures together in various combinations and sequences to elicit behaviour change. The ‘responsive regulation’ approach and ‘slippery slope’ framework provides two options. Whether these are more effective than other sequences and combinations now needs evaluating. If this paper therefore encourages greater research into which sequences and combinations are effective in which contexts, then it will have achieved its objective. If it also leads to the wider adoption of this conceptual framing for understanding the policy approaches for tackling undeclared work, then it will have achieved its wider intention.
Keywords: informal sector, taxation, informal economy, shadow economy, tax evasion, labor economics, public policy, public administration
JEL Classification: H26, O17
Suggested Citation: Suggested Citation