Reducing undeclared work in construction sector, Hungary

About

Country: 
Hungary
Sectors: 
Construction and woodworking
Target Groups: 
employers/purchasers


The Hungarian construction sector is characterised by a substantial number of micro and small enterprises; it is also highly susceptible to various forms of undeclared work. Employers frequently officially pay their workers the minimum wage and then add an undeclared portion to the payment. The social partners reached a sectoral collective agreement in 2005, setting out formal occupational pay rates and higher minimum wages.

Background

The construction sector, with its 80,000 micro and small-sized enterprises, has been a major source of illegal employment or undeclared work in Hungary (HU0406103T). According to some professional estimates, on average about 200,000 people are working on an undeclared basis on various construction sites, which is twice the number of legally employed workers at all companies with more than four employees in the industry. Moreover, similarly to other sectors of the economy, it has been a widespread practice among employers to report formal employment paid at the minimum wage level, and then supplement the wage with additional undeclared payments to reach the total rate customary in the local labour market for the given trade. In this manner, the risk of being fined by the labour inspectorate could be minimised, and even highly skilled workers and white-collar employees were apparently being paid the minimum wage. This practice, as a special form of undeclared work, was the main target of the measures discussed below.

Trade unions and employer organisations in the Hungarian construction industry started negotiations on a sectoral collective agreement in 1995. An important boost came from the government campaign entitled ‘100 steps’, launched in June 2005, which included measures aiming to tackle undeclared work (HU0506101N). The bargaining parties then renewed negotiations to conclude a sectoral collective agreement, which – especially if extended to the whole industry – would be an important step in reducing undeclared work in the sector (HU0506105F).

The social partners involved included the:

  • National Federation of Hungarian Contractors (Építőipari Vállalkozók Országos SzövetségeÉVOSZ);
  • National Association of Craftsmen Boards (Ipartestületek Országos SzövetségeIPOSZ);
  • National Association of Entrepreneurs and Employers (Vállalkozók és Munkáltatók Országos SzövetségeVOSZ);
  • Federation of Building, Wood and Material Workers’ Unions (Építő, Fa- és Építőanyagipari Dolgozók Szakszervezeteinek Szövetsége, ÉFÉDOSZSZ);
  • National Federation of Construction and Associated Trade Unions (Építőipari és Társult Szakszervezetek Országos Szövetsége, ÉTSZOSZ).

Moreover, the Ministry of Social Affairs and Labour (Szociális és Munkaügyi Minisztérium, SZMM) played an active role by facilitating the negotiations and promising to launch an extension procedure as soon as the agreement was signed.

Objectives

In addition to combating various forms of undeclared work, organisations signing the sectoral collective agreement also hoped that it could be a way to regulate the increasingly chaotic situation in the construction sector and might facilitate improvements in the field of health and safety. A related aim was to help to re-establish the attractiveness of the industry for apprentices.

Specific measures

The sectoral collective agreement was signed in November 2005. Employer organisations signing the agreement set as a precondition that the government would extend the agreement to the whole construction sector. This was achieved in March 2006. With the extension, the agreement covered all 309,000 employees in the sector; without, it had covered only the membership of signatory employer organisations, representing 18,000 undertakings with about 140,000–150,000 employees. The importance of the extension was underlined by the fact that only four collective agreements had previously been extended to cover entire sectors of economic activity in Hungary.

Wage tariff system for construction industry

The core of the collective agreement was the introduction of a new compulsory wage tariff system for the construction industry in the hope that a wage tariff agreement would set pay above the national minimum wage. However, major differences arose between the demands of trade unions and employer organisations. The unions called for a comprehensive wage tariff system, which would set minimum wages according to skills level, responsibility and seniority. Trade unions proposed to set the monthly minimum wage for all skilled workers at HUF 120,000 (€480, as at 30 November 2005), which was almost double the national minimum wage. The unions argued that only a rigid and compulsory wage tariff system would be sufficient to eliminate the widespread practice of formal employment at a minimum wage level supplemented by additional undeclared payments.

Employer organisations rejected this initiative, arguing that it did not mirror the differences across various trades within the sector. The agreement finally reached represented a compromise. It adopted the wage tariff proposal of the trade unions, but minimum wages assigned to the tariffs were only slightly higher than the national minimum wage. The new agreement established a wage tariff system with 20 different pay levels for blue-collar and white-collar employees. Regarding manual workers, gross monthly wage thresholds of HUF 63,000 (€250), HUF 70,000 (€280), and HUF 80,000 (€319) were set for unskilled workers, semi-skilled workers and skilled workers, respectively. For unskilled workers, the collective agreement set the national minimum wage, negotiated by the National Interest Reconciliation Council (Országos Érdekegyeztető Tanács, OÉT) in parallel with the sectoral agreement (HU0512104F). However, the sectoral agreement set a HUF 7,000 (€27) higher minimum wage for semi-skilled employees and a HUF 10,000 (€40) higher minimum wage for skilled workers. In addition, the sectoral agreement introduced a new pay bracket for skilled manual workers with a master certificate (mestervizsga) and stipulated that they should receive a monthly wage higher than HUF 100,000 (€399).  

New three-tier national minimum wages

It was an important development that, in late November 2005, the Hungarian social partners and government agreed on new minimum wage rates and the gradual introduction of a three-tier minimum wage system. In practice, the three-tier system means a nationwide compulsory tariff system, although it defines only three vague categories: one for unskilled workers and two for skilled workers. Furthermore, the social partners issued a recommendation for minimum wages of employees with a higher education degree. Moreover, from September 2006 onwards, the new law stipulated that the minimum level of payable social security contributions should be based on twice the amount of the current minimum wage, unless the employer is able to prove that the actual wage is lower.

Economic downturn

The construction agreement was renewed for 2007 and 2008. In 2008, in light of the economic recession in the sector, trade unions had to agree that in the first three months of the year the sectoral minimum wages for each job classification would be the same as the three-tier minimum wages set by the national agreement. Higher minimum wage thresholds set by the sectoral collective agreement came into force on 1 April 2008.

Since 1 April 2008, the difference between the national minimum wage and the minimum wage set by the collective agreement stands at HUF 5,000 (€20 as at 1 April 2008) for unskilled workers and HUF 10,000 (€39) for skilled workers.

The pay element of the sectoral collective agreement was not renewed for 2009. Thus, the three-tier minimum wages set by the national minimum wage agreement also serve as a minimum threshold for wages in the construction sector.

Other content areas of agreement

Other major stipulations of the sectoral agreement regulate working conditions and the organisation of working time, especially aspects that are characteristic to the construction industry, such as the definition of seasonal work, the posting or transferring of workers, working time accounts and their reference period, and the flexible scheduling of paid holidays. In addition, the agreement makes use of the authorisation of the Labour Code to increase the amount of compulsory annual overtime hours.

Evaluation and outcome

A significant consequence of the agreement in the construction sector was that the government prescribed that, from 1 September 2008 onwards, the labour cost in public tenders shall be calculated on the basis of the hourly minimum wage set by the agreement for skilled workers (Government Decree 290/2007 (X. 31.)).

Achievement of objectives

With regard to the evaluation of policies, two reports by the Ministry of Finance and by a taskforce of the Economic and Social Council (Gazdasági és Szociális Tanács, GSZT) considered the above measures successful. The latter report stated:

It is worthwhile to look at the construction industry, as a sector particularly affected by phenomena of the black economy. We may detect the combined effect of the tools presented so far. While the performance of the sector decreased in 2007 and the number of people employed in construction stagnated, wages officially declared increased at an outstandingly high rate. So this points to the combined effect of legal and economic policy measures; in addition, we may see another element which may be promising for the future. The sector saw the extension of a collective agreement which regulates minimum wages according to a tariff system. This element differs from others in that this regulation came to exist as a result of the voluntary agreement and cooperation of the actors of the labour market.


Obstacles and problems

The agreement did not set up any mechanism for overseeing its implementation. The weak influence of trade unions, on the one hand, and the voluntary nature of employer organisations, on the other, meant that none of the sectoral social partners were able to effectively control workplaces in the construction sector.

Meanwhile, the labour inspectorate was unable to increase substantially the frequency or efficiency of inspections in the sector due to its limited staff.

The agreement alone was not able to solve underlying problems in the sector, such as the highly decentralised company structure, lack of profitability and intense competition.

Lessons learnt

It is necessary to complement collective agreements with appropriate monitoring agencies in a highly decentralised industry in order to ensure enforcement.

The trade unions put forward a comprehensive plan to combat undeclared work in the construction industry; however, this has not yet become a subject of negotiations between social partners in the industry. Following the onset of the economic crisis in the sector in the autumn of 2008, employers have been calling more frequently for further flexibilisation of regulations and relaxation of legal regulations on employment.

The government approved the trade unions’ longstanding demand to introduce a three-tier minimum wage system and a simplified nationwide compulsory tariff system. In November 2005, a national agreement set the three wage levels for a three-year period. The government realised that wage tariffs may be an effective means to tackle the prevailing practice of undeclared work – that is, paying the minimum wage formally and supplementing it informally. It also realised that only compulsory measures – such as a national agreement promulgated by a government decree – are able to meet this objective, due to the weakness of the collective bargaining system.

Impact indicators

Some 310,000 employees are covered by the extension of the sectoral agreement to the entire construction sector.

Transferability

Sectoral collective agreements are, in theory, an adequate means to combat the practice of paying formal wages at a minimum wage level and supplementing the sum with additional undeclared payments. The national agreement on a three-tier minimum wage system could be introduced throughout the whole economy.

Commentary

In principle, sectoral collective agreements are a useful method to ensure that wages are in line with sectoral conditions. However, in the absence of a stronger trade union presence and cooperation between trade unions and employers – besides more effective state control – there is no way of ensuring the implementation of the agreement. Under these circumstances, the government took the lead in introducing minimum threshold wages for skilled and graduate employees in order to combat the practice of undeclared labour in the form of declaring an amount corresponding to the minimum wage and paying the rest of the income in an unofficial manner.

Contacts

  • National Federation of Hungarian Contractors (Építőipari Vállalkozók Országos SzövetségeÉVOSZ)
  • National Association of Craftsmen Boards (Ipartestületek Országos SzövetségeIPOSZ)
  • National Association of Entrepreneurs and Employers (Vállalkozók és Munkáltatók Országos SzövetségeVOSZ)
  • Federation of Building, Wood and Material Workers’ Unions (Építő, Fa- és Építőanyagipari Dolgozók Szakszervezeteinek Szövetsége, ÉFÉDOSZSZ)
  • National Federation of Construction and Associated Trade Unions (Építőipari és Társult Szakszervezetek Országos Szövetsége, ÉTSZOSZ)

Bibliography

Economic and Social Council (Gazdasági és Szociális Tanács), A gazdaság kifehéredését vizsgáló bizottság jelentése, February 2008, available online (in Hungarian) at: http://www.feheredes.org/docs/2008februar.pdf.

Ministry of Finance (Pénzügyminiszterium), Tájékoztató a Kormány részére a feketegazdaság visszaszorítására tett intézkedésekről, azok hatásairól, 2007, available online (in Hungarian) at: http://www1.pm.gov.hu/web/home.nsf/portalarticles/DA9B55F96A1F949BC1257314002B2D25?OpenDocument.

András Tóth and László Neumann, Institute for Political Science, Hungarian Academy of Sciences


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