An Evaluation of the Scale of Undeclared Work in the European Union and Its Structural Determinants: Estimates Using the Labour Input Method

An Evaluation of the Scale of Undeclared Work in the European Union and Its Structural Determinants: Estimates Using the Labour Input Method, Publications Office of the European Union, Luxembourg, ISBN: 978-92-79-75367-1

36 Pages Posted: 28 Dec 2017

See all articles by Colin Williams

Colin Williams

University of Sheffield - School of Management

Predrag Bejaković

University of Sheffield - School of Management

Davor Mikulić

Institute of Economics, Zagreb

Josip Franic

University of Sheffield - School of Management

Abbi Kedir

University of Leicester - Department of Economics

Ioana Alexandra Horodnic

Alexandru Ioan Cuza University of Iasi

Date Written: December 21, 2017

Abstract

On average, 11.6% of total labour input in the private sector in the EU is undeclared, and undeclared work constitutes on average 16.4% of gross value added (GVA) (the difference due to undeclared labour being concentrated in sectors with higher labour productivity). These, however, are unweighted averages, and do not take into account the relative size of the labour force in each Member State. The weighted averages, therefore, are that 9.3% of total labour input in the private sector in the EU is undeclared, and undeclared work constitutes 14.3% of GVA in the private sector. The reason for the weighted average being lower than the unweighted average is due to the influence of larger countries such as Germany, France and the UK, which have larger labour forces and relatively lower levels of undeclared work.

There are significant differences in the size of undeclared work between Member States: - For undeclared work as a proportion of total labour input – Poland, Romania and Lithuania have the highest levels of undeclared work, and countries exceeding the EU average are largely new EU Member States (NMS). Only the Czech Republic from the NMS has a smaller than EU average undeclared economy, with the lowest share of undeclared work in terms of labour input being found in the UK, Germany and the Netherlands (less than 3% of total labour input being undeclared). - For undeclared work as a proportion of GVA – the distribution is similar to above, with undeclared work as a proportion of GVA being highest in Poland, Romania and Lithuania (all with undeclared work being over 25% of total GVA created in the private sector), and those with undeclared economies above the EU average again being mostly new Member States (Hungary, Latvia, Estonia, Bulgaria, Cyprus, Croatia and Czech Republic) with three older EU members: Greece, Spain and Italy. Only Slovakia and Slovenia from the NMS countries have undeclared economies slightly below the EU average.

There are significant differences in the prevalence of undeclared work amongst different groups of the employed: - The proportion of self-employment which is undeclared by Member State ranges from 77.6% of all self-employment in Latvia, 73.2% in Romania and 70.6% in Cyprus, to just 6.5% in Belgium, 5.3% in Bulgaria, 3.4% in Italy and 2.5% in Poland; - The proportion of work conducted in the context of an employment relationship which is undeclared ranges from 25.3% Poland, 19.3% in Bulgaria and 18.5% in Lithuania, to just 2.1% in Portugal, 1.5% in Germany, 1.4% in United Kingdom and 1.1% in the Netherlands; and - The proportion of all family work which is undeclared ranges from 89.8% in Latvia, 69.4% in Estonia and 68.2% in Romania, to 4.2% in Austria, 2.9% in Italy and 2.1% in Sweden.

Examining the structure of the undeclared labour market in the EU, 61.8% of all undeclared work is work conducted in the context of an employment relationship, 37.3% is self-employment and 0.3% is family work. This masks considerable national variations – countries where the majority of undeclared work is conducted through self-employment include Cyprus, Netherlands, Portugal, Denmark and Germany; while those where over 90% of all undeclared work is conducted in the context of an employment relationship include Poland, Bulgaria and Italy.

These different structures have significant implications for tackling undeclared work. Policy initiatives to help business start-up on a legitimate basis, such as smoothing the transition from unemployment to self-employment, will be useful in countries wheremost undeclared work is conducted as self-employment (e.g. Denmark). Conversely, in countries where most undeclared work is conducted in the context of an employment relationship (e.g. Poland), policy initiatives to address unregistered or under-declared waged employment, such as the use of notification letters to employers to change behaviour, will be most relevant. It is not only the development of tailored policy measures, however, that Member States need to pursue to tackle undeclared work.

Evaluating whether cross-national variations in the size of undeclared work are associated with variations in various structural conditions, there is found to be: - A strong significant relationship with GDP per capita in purchasing power standards (the greater the level of GDP in PPS, the lower the prevalence of undeclared work); and the quality of government (based on the European Quality of Government Index, where the higher the quality of government the lower the prevalence of undeclared work); - A moderate significant relationship with: the Transparency International Corruption Perceptions index (which ranks countries according to perceived public sector corruption); a trust in authorities index based on World Economic Forum indicators; the impact of social transfers on poverty reduction; public expenditure on labour market interventions to protect vulnerable groups; the migration rate; the Gini coefficient and income inequality. Overall, the higher the perceived level of corruption, the lower the level of trust in public authorities, and the higher the perceived level of inequality, the higher the level of undeclared work; and - A weak but significant relationship with the long-term unemployment rate; and with the very long-term unemployment rate – in both cases the higher the respective rates, the higher the level of undeclared work. - No significant relationship was identified between undeclared work and the job vacancy rate or the implicit tax rate on labour – in the case of the latter, this refutes the common assumption that undeclared work is directly related to taxation levels.

In conclusion, lower levels of undeclared work are found in Member States where there are higher levels of GDP per capita, more modernised systems of government, higher levels of trust in authorities and lower levels of corruption, where social transfers are effective at reducing poverty, there are higher levels of public expenditure on labour market interventions to protect vulnerable groups, and where there is greater equality, lower levels of long-term unemployment, and net in-migration rather than out-migration.

Keywords: informal sector, informal economy, labor economics, entrepreneurship, industrial relations, tax evasion, informal labor markets, tax law, illegal behaviour, formal and informal sectors

JEL Classification: H26, J48, J46, K34, K42, O17, P37

Suggested Citation

Williams, Colin and Bejaković, Predrag and Mikulić, Davor and Franic, Josip and Kedir, Abbi and Horodnic, Ioana Alexandra, An Evaluation of the Scale of Undeclared Work in the European Union and Its Structural Determinants: Estimates Using the Labour Input Method (December 21, 2017). An Evaluation of the Scale of Undeclared Work in the European Union and Its Structural Determinants: Estimates Using the Labour Input Method, Publications Office of the European Union, Luxembourg, ISBN: 978-92-79-75367-1, Available at SSRN: https://ssrn.com/abstract=3092080 or http://dx.doi.org/10.2139/ssrn.3092080

Colin Williams (Contact Author)

University of Sheffield - School of Management ( email )

15 Conduit Road
Sheffield, S10 1FL
United Kingdom

HOME PAGE: http://https://www.sheffield.ac.uk/management/staff/williams/index

Predrag Bejaković

University of Sheffield - School of Management

9 Mappin Street
Sheffield, S1 4DT
United Kingdom

Davor Mikulić

Institute of Economics, Zagreb ( email )

Croatia

Josip Franic

University of Sheffield - School of Management ( email )

9 Mappin Street
Sheffield, S1 4DT
United Kingdom

Abbi Kedir

University of Leicester - Department of Economics ( email )

Department of Economics
Leicester LE1 7RH, Leicestershire LE1 7RH
United Kingdom

Ioana Alexandra Horodnic

Alexandru Ioan Cuza University of Iasi ( email )

Bulevardul Carol I nr. 22
Iasi, 700505
Romania

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