Transitory restriction on free movement of workers, Finland
Undeclared work may be responsible for a significant proportion of total output in the Finnish economy, particularly in certain economic sectors such as construction, hotels and restaurants, or personal services. After the expansion of the EU in 2004, Finland introduced a transition period limiting the free movement of workers from the new Member States, as it anticipated a large influx of workers from these countries. However, the measure is deemed unsuccessful and only had a modest impact on the volumes of foreign workers coming to Finland.
After the expansion of the European Union on 1 May 2004, the Finnish parliament introduced restrictions regarding the free movement of workers from the new Member States for a transition period of two years. However, the free movement of services was not restricted. As a result, hundreds of enterprises, the majority of which were registered in the Baltic states, began to emerge in the Finnish labour market. Some of these enterprises were in fact owned by Finnish citizens – for example, the Estonian business register lists some 10,000 enterprises that have Finnish owners or directors; these enterprises brought thousands of workers to the country who do not pay taxes in Finland. After two years, the restrictions for the free movement of workers were removed; nevertheless, new problems are emerging regarding foreign subcontractors and their workers.
Among those involved in implementing the restriction regarding the free movement of workers were the Ministry of Finance (Valtiovarainministeriö), industry and business organisations, trade unions and employer organisations in the construction industry, and the country’s tax administration (Verohallinto).
The main objective of this initiative has been to restrict the potential influx of workers from the Baltic states by means of legislation.
According to Nurminen (2008), it is extremely difficult to calculate the extent to which workers hired through employment agencies are used in the traditional informal economy, particularly in the construction industry. In a report that was due to be published in the autumn of 2008, Nurminen examines the share of working hours outside of the Labour Force Survey (LFS) on the basis of national accounts, salary statistics, income distribution statistics and the LFS. The number of hours outside of the LFS and their share of the total hours worked increased from 5.5% to 11.5% in 2003–2004. In 2005 and 2006, the number of undeclared hours worked as a proportion of total hours amounted to 11.1% and 14.4%, respectively.
According to Nurminen (2008), these findings clearly reflect the situation after the Baltic states joined the EU in 2004. Finland predicted that the influx of workers from these countries would be so high that preventive legislation would need to be enacted in advance. However, it did not restrict the free movement of services. As a result, about 200 employment agencies were established – especially in Estonia – to supply short-term labour to Finland. In general, Finnish enterprises made immediate use of such services, as reflected by records of the number of services imported. It is difficult to estimate how much of this activity involved Finland’s informal economy. In this instance, the increased use of labour from abroad does not necessarily mean a commensurate increase in the informal economy.
Evaluation and outcome
Achievement of objectives
According to Lith (2007), the number of foreign workers in Finland’s construction sector has continued to grow signficantly. In 2007, it corresponded to 30,000 full-time positions. Although not all of this employment is formally considered as undeclared work, only a small proportion of these workers (1,000–2,000 persons) pay taxes in Finland. Some of these foreign workers have employment relationships that do not require them to pay taxes in Finland – for example, posted workers of a Polish employer who are working in Finland for less than six months. On the other hand, the workers who are in principle liable to pay taxes in Finland are supposed to apply for an advance tax form from the tax office; however, this rarely happens in practice.
Obstacles and problems
As outlined, after the Baltic states joined the EU in 2004, Finland predicted that the labour supply from these countries would be so high that preventive legislation would need to be enacted in advance. A transition period was therefore required before Finland permitted the free movement of workers. Employer organisations, in particular, called for such a measure as they feared that cheap foreign labour would pose a threat to the jobs of Finnish workers.
However, the effect of the transition period on the volumes of foreign workers coming to Finland was only modest, as no restrictions were placed on the free movement of services. As a result, about 200 employment agencies supplying short-term labour to Finland were established, many of them in Estonia. In addition, hundreds of enterprises, mostly from Estonia, came to Finland as subcontractors – particularly in the construction industry. The persons in charge of such enterprises often included Finnish residents who either had a background in white-collar crime, had bad debts or were prohibited from setting up a business.
Even without a transition period, it is likely that Finland would still have experienced the influx of enterprises offering services from the Baltic states, and dishonest Finnish operators would have discovered that establishing their enterprises in Estonia would give them considerable freedom to operate. However, it is also likely that without the transition period, a significantly larger share of the workforce from the Baltic states would have been hired directly by Finnish enterprises and consequently would have been better covered by Finnish taxation and social security systems. Thus, as the transition period ended, the mode of operation based on foreign labour and subcontracting had become so well established that it was difficult or virtually impossible to reverse.
The number of working hours outside of the LFS and their share of total hours worked increased from 5.5% to 11.5% in 2003–2004. In 2005 and 2006, the share of hours worked in the informal economy as a proportion of total hours amounted to 11.1% and 14.4%, respectively. According to Nurminen (2008), it is difficult to determine how large a share of hours workered in the informal economy correspond to undeclared work. Moreover, the Ministry of Finance has not conducted any research on how much tax revenue has been lost during 2004–2006 due to the transition restriction on the free movement of workers from the new Member States.
In terms of preventing the growth of the informal economy, the transition restriction in Finland can be considered a failed measure. Therefore, the measure should be examined by other countries from the viewpoint of what not to do. It is more beneficial if domestic enterprises hire foreign workers directly, thus placing them under the Finnish taxation and social security systems.
According to Hirvonen (2008), the estimated loss of tax revenue owing to the transition restriction is merely a rough estimate, as there are a number of unknown factors which could influence the final amount. Nonetheless, it is also possible that some employment agencies would have been set up even without a transition period. Lith (2007) states that foreign labour in the construction industry roughly doubled in 2004 and 2005, compared with 2003. Moreover, in 2002–2003, the number of full-time positions increased from 6,000–8,000 in 2002–2003 to 14,000 in 2004–2005.
Confederation of Finnish Industries (Elinkeinoelämän keskusliitto, EK)
Ministry of Finance (Valtiovarainministeriö, VM)
Confederation of Finnish Construction Industries (Rakennusteollisuus, RT)
Hirvonen, M., Some background information about the Finnish shadow economy and measures against it, Memorandum, Ministry of Finance, 2008.
Lith, P., Harmaa talous suomalaisessa elinkeinoelämässä [Underground economy in Finnish business life, Memorandum, 2007.
Nurminen, R., Finland’s non-observed economy, Statistics Finland, 2008.
Arto Miettinen, Statistics Finland