Problem of undeclared wages on the rise
Published: 7 August 2008
The Estonian Institute of Economic Research (Eesti Konjuktuuriinstituut [1]) has published a survey report entitled Undeclared economy in Estonia 2007 (in Estonian, 245Kb PDF) [2]. The report analyses the country’s grey economy – that is, the use of illegal goods and services and undeclared work [3] – and assesses the attitudes of the population to this problem.[1] http://www.ki.ee/en/index.html[2] http://www.ki.ee/publikatsioonid/valmis/Varimajandus_Eestis_2007_(elanike_hinnangute_alusel).pdf[3] www.eurofound.europa.eu/ef/observatories/eurwork/industrial-relations-dictionary/undeclared-work
A recent study in Estonia concluded that, although the payment of undeclared wages declined during 2002–2006, it increased again in 2007. Nevertheless, the general attitude towards undeclared wages remains negative. The main economic sectors involved in undeclared wages are the construction and services sectors. Young people, non-Estonians, men and low-income households are particularly vulnerable to receiving such payments.
The Estonian Institute of Economic Research (Eesti Konjuktuuriinstituut) has published a survey report entitled Undeclared economy in Estonia 2007 (in Estonian, 245Kb PDF). The report analyses the country’s grey economy – that is, the use of illegal goods and services and undeclared work – and assesses the attitudes of the population to this problem.
Such research has been conducted annually since 1999, thus enabling the observation of changes over time (see also EE0605019I). In 2007, a representative sample of 1,077 Estonian residents aged 18–74 years answered a questionnaire, which was sent by post. The study is based on a panel questionnaire that includes several questions regarding the informal economy.
Prevalence of undeclared wages
After a period of decline, the payment of undeclared wages has increased again in 2007: the proportion of employees receiving such wages rose by three percentage points (Figure 1). On the basis of a 95% probability rate, the share of persons receiving undeclared wages among all salaried workers stood at between 11% and 16% in 2007.
Employees receiving undeclared wages, 2002–2007 (%)
Source: Estonian Institute of Economic Research, 2007
Employees receiving undeclared wages, 2002–2007 (%)
The proportion of employees who regularly receive undeclared wages has declined from 8% in 2002 to 6% in 2007. However, the share of those occasionally receiving undeclared wages increased from 6% in 2006 to 8% in 2007. Typically, undeclared wages are paid to those who are aged under 30 years, non-Estonian and living in northern Estonia, where the capital city of Tallinn is located. Moreover, those receiving undeclared wages are mostly from families with a net monthly income of less than EEK 4,000 (€256 as at 2 July 2008) per household member. Men are more often affected by such illegal payments than women are.
In 2007, 46% of those receiving undeclared wages were paid such money in their main job and the remaining 54% experienced this form of remuneration for their temporary or additional job. The situation was similar in 2005, but a reverse scenario was found in 2006 when more people received undeclared wages in their main job than for their secondary job.
Impact on tax receipts
Most of the persons receiving undeclared wages (95% in 2007) receive such payment in addition to their declared salary. Only 5% of employees receiving undeclared wages were paid all of their salary illegally, thereby evading all taxes; this proportion is considerably less than the 20% of workers who admitted this situation in 2006. This decrease has also reduced to 35% the average share of undeclared wages in relation to total annual wages; in 2006, that proportion stood at 51%.
According to the research estimates, the Estonian government lost about EEK 2.2 billion (€141 million) of tax income due to the payment of undeclared wages in 2006 and has lost the same amount again in 2007. In 2005, this deficit was lower, at EEK 1.4 billion (€80 million). The substantial increase since then is mostly due to the rapid growth in average wages.
Companies paying undeclared wages
Undeclared wages are most often paid in the construction sector, where 27% of such wages are found. This is followed by the services sector (26%), while the problem is less pronounced in wholesale and retail trade (14%) and in industry (11%).
Looking at the data according to company size, small enterprises with fewer than 20 employees are more likely to pay undeclared wages: 22% of all undeclared wages are paid in companies with one to four employees and just over half of such wages (52%) emerge in companies with five to 19 employees.
Satisfaction with undeclared work
In 2007, every third person receiving undeclared wages was satisfied with this situation, while 37% were not satisfied and the rest did not care whether they received their salary as declared or undeclared – the latter attitude is particularly common among younger persons. More than half (55%) of those who are not satisfied with receiving undeclared wages are afraid of losing their jobs if they do not accept such payment methods. This concern was far less widespread in 2006 (29%).
Since 2003, the proportion of persons who do not care how their salary is paid has increased, while the share of those not satisfied with receiving undeclared wages is decreasing: from 53% in 2003 to 37% in 2007. Each year, satisfaction with undeclared wages among employees is attributed to the higher income resulting from tax evasion or extra payments.
General attitude towards undeclared work
The general attitude towards undeclared work has been negative over the years (Figure 2).
Attitudes towards undeclared work, 2002–2007 (%)
Source: Estonian Institute of Economic Research, 2007
Attitudes towards undeclared work 2002–2007 (%)
The proportion of people who do not approve of undeclared work increased in 2001, while the share of people with no opinion declined sharply. One of the reasons for increased awareness around that time may be connected to the fact that the Estonian Tax and Customs Board (Maksu- ja Tolliamet, MTA) started systematic work on combating undeclared work in 1999 and established a Tax Fraud Investigation Centre in 2001. Furthermore, the second pillar of the pension system, on the basis of which contributions depend on personal social tax payments, commenced operations in 2002.
Reasons for supporting undeclared wages are mostly tax evasion – in other words, the opportunity for employees to earn higher income – and the heavy tax burden that employers face. The main arguments against undeclared wages have been generally the same over the years: reduced social guarantees for employees, unfair competitive advantage compared with those paying taxes, and lower tax income for the government.
Commentary
The Estonian Tax and Customs Board and other organisations have been campaigning against undeclared wages through several different initiatives (EE0704019I).
Kirsti Nurmela and Marre Karu, PRAXIS Centre for Policy Studies
Eurofound recommends citing this publication in the following way.
Eurofound (2008), Problem of undeclared wages on the rise, article.
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