Social partner agreements to fight undeclared work, Germany

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Germany
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Agriculture and fishingConstruction and woodworkingTextiles and leather

 

In 2004, the Federal Ministry of Finance and the social partners in the construction sector joined forces to fight undeclared work on construction sites. This first agreement was followed by similar agreements in other sectors. The two latest social partner agreements cover painters (2010) and the industrial textile services sector (2012), aimed at curbing the incidence of undeclared work through the exchange of information, regular visits to establishments checking for cases undeclared work and monitoring the adherence to minimum wages.

 

Background

Depending on the definition of undeclared work and the methodology used, different estimates exist concerning the extent of such work.

At the beginning of 2012, the University of Linz and the German Institute for Applied Economic Research (IAW) published their prognosis for the development of the shadow economy in 2012. Friedrich Schneider of the University of Linz defines the shadow economy as comprising ‘all market-based legal production of goods and services that are deliberately concealed from public authorities’ in order to avoid paying certain taxes or social security contributions or to avoid meeting other legal standards (Schneider, 2007, p.3). Based on this definition, the analysis shows that the volume of the shadow economy grew from €346 billion in 2005 to €352 billion in 2009. However, by 2011 it had declined again to €344 billion. It is estimated that it will decrease to €343 billion in 2012. Taking the 2012 forecasts for the economy as a whole, this would equal 13.4% of German GDP.

However, other research by the Rockwool Foundation indicates that the extent of undeclared work is much smaller. In a 2012 publication, Feld and Larsen develop two approaches for estimating illegal work. In the first, undeclared working hours are compared to working hours in the real economy (for the 18–66 age group). In this case, the extent of undeclared work measured as a share of German GDP dropped from 4.1% in 2001 to 2.3% in 2008. The second approach looks at undeclared working hours as well as their average pay and makes a comparison to German GDP based on market prices (for the 18–74 age group). Using this method, the share of undeclared work dropped from 1.3% in 2001 to 0.75% in 2008. Estimates for undeclared working hours were derived from a survey undertaken by Rockwool in 2001 and from 2004 to 2008.

The eleventh report of the federal government on the effects of the Act to Combat Illegal Employment (Gesetz zur Bekämpfung der Schwarzarbeit und illegalen Beschäftigung, SchwarzArbG) lists the most affected sectors: construction, industrial cleaning, hotels and restaurants, transportation and meat processing. In addition, undeclared work is more often detected among hairdressers, in wellness and healthcare, in the repair of motor vehicles and janitorial services.

As highlighted above, certain sectors are more strongly affected by undeclared work than others. In 2004, the Federal Ministry of Finance (BMF) and the social partners in the construction sector joined forces to fight undeclared work on construction sites. This first undeclared work agreement was followed by similar arrangements in the transportation (2006), meat processing (2007) and industrial cleaning (2008) sectors. The latest two agreements cover painters (2010) and the industrial textile services sector (2012), which the following sections focus on.

Objectives

The objective of these agreements is to raise awareness of undeclared work. The partners seek closer institutional cooperation (exchange of information), regular visits to establishments checking for cases of undeclared work and the adherence to minimum wages. These goals are complemented by the wish to foster fair competition (without resorting to irresponsibly low wages) and to ensure regular payments of taxes and social security contributions by sectoral companies.

Specific measures

The undeclared work agreements in the painting trade and in the industrial textile services sector were set up in 2010 and 2012, respectively. Both agreements are still running. While there is no information on their specific budgets, the joint declaration of the partners in the painting trade lists the measures to be implemented:

  • Closer cooperation between the agreement partners. This includes public awareness-raising on the negative effects of undeclared work, a better exchange of information between the employers and business association and the Tax Enforcement Unit for Undeclared Work (FKS) at the local level, and facilitating regional and national structures to support the national agreement (e.g. the parties seek to establish a working group to develop suitable measures to fight undeclared work).
  • FKS agreed to carry out more checks in the sector, including on weekends and after working hours. FKS also wants to pay closer attention to all activities that might be undertaken to cover up undeclared work.
  • The Trade Union for Building, Forestry, Agriculture and the Environment (IG BAU) and the Federal Association for Employers in the Painting and Building Protection Industry (Bundesverband Farbe Gestaltung und Bautenschutz) want to foster greater adherence to the legal regulations amongst their members and provide the BMF with information on the latest market developments and undeclared work in the sector.

Actors involved

All social partner undeclared work agreements are of a tripartite nature. This means that agreements are set up by the BMF and its subordinate customs and excise administration and the sector-specific unions and employer/business associations. For example, the undeclared work agreement in the painting sector was set up by the BMF, IG BAU and the Federal Association for Employers in the Painting and Building Protection Industry. BMF is also part of the agreement in the textile cleaning sector. Further members are the German Metalworkers’ Union (IG Metall), the German Association of Administrative Workers in Trade and Industry (DHV), the Association for the Textile Services Industry (intex) and the German Textile Cleaning Association (DTV).

Outcome of evaluations; lessons and conclusions

Achievement of objectives

While information on the latest two undeclared work agreements in painting and textile cleaning is still scarce, the eleventh report of the federal government names the following achievements of the earlier agreements:

  • production of information leaflets for employees and employers to support the work and checks of FKS;
  • local contact people were named to improve cooperation between the partners (close personal contact can help to resolve issues and provide information concerning undeclared work in the sector);
  • the partners check for economic principles in the work of FKS.

Obstacles and problems

The research literature suggests that illegal work is often undertaken to avoid tax payments and social security contributions or to circumvent other legal regulations, e.g. minimum wages (Schneider, 2007). Adherence to current laws therefore needs to be checked.

The Association of Small and Medium-sized Employers in the Construction and Related Industries in Berlin and Brandenburg (Fachgemeinschaft Bau, FK BAU) has about 400 employees (so-called Baustellenläufer) who monitor construction sites in the area. If they suspect undeclared work, the local authorities (FKS) are informed. As the FK BAU highlights, 76% of the cases reported turn out to involve illegal work. In 2008, the Federal Audit Court (BRH) expressed its opinion that such measures were the most effective way to fight undeclared work. They therefore might be of interest to the social partners in other industries.

Lessons learned

Experience from the construction industry shows that regular checks can help to bring more undeclared work to the attention of public authorities. However, such measures are a response to a greater problem. The underlying problems also need to be tackled in advance.

Impact indicators

There is no further information available on estimated costs and benefits in the sectors.

Transferability

Social partner agreements might prove helpful in other Member States. However, such close cooperation may not be achieved in countries that lack the tripartite structure of the German industrial relations system.

Contacts

Sandra Vogel, IW Köln: http://www.iwkoeln.de/de

Bibliography

Bernhard, S. and Wolff, J. (2011), ‘Förderinstrument im SGB III. Der Gründungszuschuss aus Sicht der Praxis’ [‘The start-up premium from a practical perspective’], IAB Kurzbericht, No. 22.

Boockmann, B., Dohrn, R., Groneck, M. and Verbeek, H. (2010), Abschätzung des Ausmaßes der Schwarzarbeit. Eine Untersuchung im Auftrag des Bundesministeriums für Arbeit und Soziales [Estimation of the extent of undeclared work: An analysis on behalf of the federal Ministry of Labour and Social Affairs], Tübingen/Essen.

Bundesrechnungshof (BRH) (2008), Bericht nach § 99 BHO über die Organisation und Arbeitsweise der Finanzkontrolle Schwarzarbeit (FKS) [Report on the organisation and operation of the Tax Enforcement Unit for Undeclared Work according to Article 99 of the Federal Budgetary Regulations].

Bundesrechnungshof (BRH) (2011), Bericht nach § 99 BHO über die Steuerermäßigung für haushaltsnahe Dienstleistungen und Handwerkerleistungen nach § 35a EStG [Report by the Federal Audit Court on tax reductions for services related to household activities and tradesmen’s services].

Caliendo, M. et al (2011), ‘Alte Idee, neues Programm. Der Gründungszuschuss als Nachfolger von Überbrückungsgeld und Ich-AG’ [Old idea, new measure: The start-up premium as successor to the “bridging grant” and “Me PLC”’], IAB discussion paper no. 24, German Federal Employment Agency, Nürnberg.

Deutsche Bundesregierung (2009), Elfter Bericht der Bundesregierung über die Auswirkung des Gesetzes zur Bekämpfung von Schwarzarbeit – BillBG.

Feld, L.P. and Larsen, C. (2012), Das Ausmaß der Schwarzarbeit in Deutschland, University Press of Southern Denmark, Odense.

Gottschall, K. and Schwarzkopf, M. (2011), Legal and institutional incentives for undocumented incentives in private households in Germany, Hans-Böckler-Stiftung, Düsseldorf.

Schneider, F. (2007), Reducing the shadow economy in Germany: A blessing or a curse?, Discussion Paper, Department of Economics, University of Linz.

Schneider, F. (2009), ‘Size and development of the shadow economy in Germany, Austria and other OECD countries: Some preliminary findings’, Revue économique, Vol. 60, No. 5.

Sandra Vogel, Cologne Institute for Economic Research, IW Köln

 

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