Developing a Holistic Approach for Tackling Undeclared Work
Background Paper for the European Platform on Tackling Undeclared Work Seminar, Brussels, 2nd December 2016
15 Pages Posted: 6 Dec 2016
Date Written: December 2, 2016
What is a holistic approach to tackling undeclared work? A holistic policy approach towards tackling the undeclared economy uses in a strategic and coordinated manner the full range of both the direct and indirect policy approaches and measures available to increase the power of, and trust in, authorities respectively.
Direct approaches reduce the costs and increase the benefits of operating on a declared basis, and increase the costs and reduce the benefits of operating undeclared. To do this, it uses:
• Deterrence measures that detect and punish participation in undeclared work firstly, by increasing the perceived or actual likelihood of detection and/or secondly, by raising the penalties and sanctions for those caught, and
• Incentive measures that make it easier to undertake, and reward, participation in declared work. These include:
o Preventative measures that encourage citizens and businesses to not engage in the undeclared economy (e.g., by simplifying compliance, using direct and indirect tax incentives to make it beneficial to operate on a declared basis, and providing support and advice about how to start-up legitimately), and o Curative measures that incentivise citizens and businesses to make the transition to the declared realm. These can be either (a) supply-side incentives targeting businesses and workers in the undeclared economy or (b) demand-side incentives targeting their customers with rewards for using declared goods and services.
Indirect approaches, meanwhile, recognise that citizens and businesses are not just rational economic actors (purely calculating the costs and benefits). They are also social actors who engage in undeclared work when formal institutional failings lead to them adopting norms and beliefs regarding participation in undeclared work that do not align with the laws and regulations. To align them, therefore, indirect policy approaches either:
• Change the norms, values and beliefs regarding participation in undeclared work, so that these are in symmetry with the laws and regulations (e.g., using awareness raising campaigns and educational initiatives), and/or
• Change the formal institutional imperfections that lead to a lack of alignment between the norms, values and beliefs of the population, and the laws and regulations. This can involve either:
o Changing the internal processes of formal institutions by improving procedural and distributive fairness and justice, so as to improve trust in government, and/or
o Changing the products of formal institutions by pursuing wider economic and social measures associated with lower levels of undeclared work (e.g., increased social expenditure levels, more effective social transfers, active labour market policies targeted at vulnerable groups, greater equality).
To effectively tackle undeclared work, the emerging evidence is that both direct and indirect measures should be used. How to combine and sequence these measures, however, is being debated. Two approaches are being discussed: responsive regulation sequences them by using indirect measures first, then incentives, and deterrents only for those still failing to comply; and the slippery slope framework asserts that the most effective approach is to concurrently improve both the power of authorities using direct measures (i.e., enforced compliance) as well as trust in authorities using indirect measures (i.e., voluntary cooperation). This background paper thus provides a common understanding for Platform members to discuss how to tackle undeclared work and encourages reflection on the approaches and measures currently being pursued in their own Member State.
Keywords: Informal Economy, Informal Sector, Shadow Economy, Labor Economics, Public Sector Economics
JEL Classification: H26, J46, J48, K34, K42, O17, P37
Suggested Citation: Suggested Citation