Changing attitudes towards the illegal economy

According to a recent study, the number of workers receiving undeclared wages has declined over the past seven years, amounting to 9%–15% of employees in 2005. Moreover, the consumption of illegal goods and services has decreased significantly. In addition, public opinion has become less tolerant of the illegal economy, with people in favour of stricter control over enterprises, as well as tougher sanctions in cases of violation of the law.

In February 2006, the Estonian Institute of Economic Research (Eesti Konjunktuuriinstituut, EKI) published a survey report, The illegal economy in Estonia (in Estonian, 353Kb PDF), which analyses the use of illegal goods and services, and the extent of undeclared work, based on the opinions and assessments of the Estonian population.

A similar survey has been carried out on an annual basis since 1999. In 2005, a representative sample of 790 people aged 18–74 years completed the questionnaire.

Undeclared wages in Estonia

According to the study, the proportion of employees who regularly receive undeclared wages has fallen to 5% in 2005, compared to 8% in 2002. A further 7% of employees occasionally received such wages. Lower educated employees and those aged under 30 years were most likely to be involved in work where undeclared wages were paid.

Tax evasion in Estonia enables employers to save 33% of social tax and 0.5% unemployment insurance. Furthermore, it increases the employee’s take home pay by 23% of income tax, 1% of unemployment insurance and 2% of pension insurance.

Undeclared wages are most common in:

• the services sector, affecting 35% of employees;

• construction and manufacturing, concerning 21% of employees in each sector;

• very small companies with fewer than 50 employees, where 77% of undeclared work takes place.

Only 12% of employees among those receiving undeclared wages were paid all of their salary illegally (evading all taxes); the majority received an undeclared wage in addition to their declared income. On average, undeclared wages represented 39% of the income of people involved in undeclared work, although the proportion was higher for employees with a primary education only, living in Tallinn and who were aged under 30 years.

According to calculations for 2005, the state lost approximately EEK 1.4 billion (€80 million) due to the evasion of social contributions and income tax.

Satisfaction with undeclared work

Employee satisfaction with undeclared wages has decreased from one third in 2004 to one quarter in 2005. In 2005, up to 47% of people receiving undeclared wages were dissatisfied with the situation. The dissatisfaction stemmed from factors such as:

• low social protection, such as health insurance and old-age pensions;

• job insecurity;

• a reluctance to live dishonestly;

• the unfairness to honest tax-payers.

In 1999, some 44% of people who disapproved of receiving an undeclared wage saw it as unjust to their fellow citizens who were paying tax; by 2005, this proportion had increased to 59%. In addition, there is growing awareness of the need to make contributions to the national budget.

In 2005, 31% of people who were dissatisfied with their undeclared work accepted the situation because they were afraid of losing their job; this represents a decline from the proportion of 55% in 2004 (Figure 1).

Would you lose your job if you refused undeclared wages?

Source: Estonian Institute of Economic Research, 2006

People accept undeclared wages because of the higher income due to tax avoidance and the opportunity to earn additional income from a second job.

Illegal goods

The price of goods and services is no longer the most important factor for Estonian people. In 2005, only 12% of people, compared to 40% in 1999, were inclined to buy the cheapest possible product regardless of whether it was illegal. Also in 2005, almost half (48%) of all persons, compared to only 26% in 1999, said they preferred to purchase legal products.

In general, families with lower incomes spend a higher proportion of their earnings on illegal goods and services. The products people are most likely to buy include illegal computer software and games, tobacco and construction services.

Attitudes regarding the illegal economy

People’s awareness of the illegal economy has increased significantly and they have become less tolerant towards it in recent years. As many as 93% of employees do not approve of undeclared wages. The proportion of people who have no opinion on the matter has steadily declined, from 36% in 2000 to just 4% in 2005 (Figure 2).

Figure 2: Views on undeclared wages, % of all employees, 2000–2005

Source: Estonian Institute of Economic Research, 2006

Among possible solutions to address the problem, people suggest stricter control of enterprises and lowering the tax burden. Many more people now believe that raising public awareness about the function of taxes is the best solution: 38% of the survey respondents held this view in 2005, compared with only 23% in 2002 (Figure 3).

Figure 3: Support for measures to reduce undeclared wages, % of people opposed to undeclared work, 2002–2005

Source: Estonian Institute of Economic Research, 2006

Commentary

The survey findings indicate a significant increase in the sense of social responsibility and justice, awareness of the illegal economy and concern over the state budget among Estonian people. It is difficult to establish whether the change in attitudes is due to measures taken by the social partners and public institutions, which were agreed in January 2005 (EE0502102F), or to an increased standard of living, economic growth or some other factor. Nevertheless, in general, it may be regarded as a positive development.

Marre Karu and Liis Roosaar, Praxis Centre for Policy Studies