Informal economy remains extensive

Although a study suggests that Bulgaria’s informal economy shrank by just over five percentage points between 2010 and 2012, it remains one of the highest among the EU Member States at a third of GDP. These findings, based on employers’ estimates, come from the first results of a project to monitor and combat the formal economy co-ordinated by the Bulgarian Industrial Capital Association. It also assesses the impact of the most recent measures to regulate labour market practices.

About the study

Undeclared work is a serious concern for employer organisations and trade unions in Bulgaria, particularly because of the risks it poses both for businesses and workers. In the last few years, the social partners have increased their joint efforts to combat undeclared work through various initiatives.

The most recent is a project entitled ‘The restriction and prevention of the informal economy’, carried out by the Bulgarian Industrial Capital Association (BICA), in partnership with the Confederation of Independent Trade Unions in Bulgaria (CITUB). The project is funded by the Operative Human Resources Development Programme through the European Social Fund (ESF).

In December 2012 the first results of the project were published in a report, The first monitoring report on the informal economy and progress achieved in its prevention (in Bulgarian).

Methodology

A survey was conducted among employers and employees whereby they were asked about their perceptions of the extent and nature of the informal economy and what they thought were the most widespread informal practices.

The survey of employers is based on a representative sample of 250 enterprises in the 11 pilot sectors and sectors/sub-sectors targeted by the project: mechanical engineering, electrical engineering, information technology, infrastructure construction, light industry (publishing and printing), perfumery and cosmetics, production of milk and dairy products, tourism, non-bank financial services and services of general interest (health care and postal services).

The survey of employees is based on a representative sample of the working population aged 15 years and over. The general target population is 2,190,393 (as of 31.08.2012, according to National Statistical Institute).

A field study was carried out in September and October 2012 using standardised interviews, the same methodology used for surveys conducted in 2010. The aim was to make comparison between the two sets of results possible.

Definition of informal economy

The project uses the concept of ‘informal economy’. The project partners have defined it as that part of the economy which, while it functions within the existing legal mechanisms and environment, is either not recorded as required by law, or it is reported, but in such a way that individual or systematic violations of the law occur. These violations result in serious damage for legally functioning businesses and law-abiding citizens.

Main findings

Extent and trends of the informal economy

In June 2012, the European Commission issued a communication to the European Parliament and the Council on concrete ways to tackle tax fraud and tax evasion (COM(2012) 351 final). In it, the extent of the informal economy in Bulgaria was estimated to be 32 % of GDP, the highest level of all EU Member States.

The initial results of the BICA study confirmed this estimate. However, the study also revealed that the extent of the informal economy had begun to decrease in the previous two years.

Figure 1: Perceived size of the informal economy among employers and employees in 2010 and 2012 (%)

Source: BICA, First monitoring report, 2012

The perceived size of the informal economy was 36.8% in 2012 and 42.2% in 2010. Employers believed the informal economy had decreased by 5.4% over the two-year period, while employees were far more optimistic, estimating that it had decreased by nearly 7%.

The proportion of employers who believed that the informal economy had decreased compared with the previous year almost doubled between 2010 (16.2%) and 2012 (30%). Among employees, there was an increase of just five percentage points.

Figure 2: Perceived trends in the extent of the informal economy (%, )

Source: BICA, First monitoring report, 2012

Further analysis of the results illustrates the following key points.

• In 2010, a higher proportion of employers believed that the informal economy was increasing compared to the previous year (37.7 %) than decreasing (16.2 %). More than a third said they believed there had been no change.
• In 2012, although the proportion who believed there had been no change was much the same (33.6 %), 30% believed the informal economy had decreased, a rise of almost 14 percentage points, and the proportion who believed it was still increasing had dropped from 37.7% to 24.8%.
• Most employees in 2012 (about 38%) considered that the situation had not changed much compared to 2010. A further 28% said that the informal economy was increasing and just 16% believed it was decreasing.

Most widespread informal practices

The survey investigated the perceived extent and nature of 18 practices associated with informal economy.

Focusing just on those practices related to informal work, the research report provides information on nine:

• working without labour contract;
• ‘envelope’ wages;
• wages below the statutory minimum wage;
• wage arrears;
• non-payment of social security contributions due;
• insufficient social security contributions made for wages received;
• breaches of the right to rest and paid leave;
• being required to work longer hours without payment;
• working in harmful working conditions.

Overall, the survey found that all manifestations of the informal economy in the country had decreased in 2012 compared to 2010. However the main finding of the analysis is the persistence of high resistance to reform of the typical informal practices detected in previous studies, given the extent of their popularity and scope.

It is also interesting that employers report an increase in so-called ‘envelope’ wages. While the proportion of employees working without contract is decreasing, there is evidence that more are being paid part of their wages in cash so that they don’t have to pay social security contributions on the undeclared portion.

Figure 3: Perceptions of trends in the main manifestations of undeclared work (%, employers and employees)

Source: BICA, First monitoring report, 2012

Note: Shows the sum of the ‘very often’ and ‘often’ responses

The survey finds that first-hand experience of the informal economy reported by respondents is decreasing. However, the level of inclusion is still high.

Source: BICA, First monitoring report, 2012

Note: The Table shows the ‘Yes’ responses to the question: ‘Has it happen to …: (you personally or your relatives)’

Compared to 2010, the proportion of people holding a second job more than doubled from 6.2% in 2010 to 15.2% in 2012, which in itself is a factor that has implications for an informal economy. The survey found that 42.1% of employee respondents did not have a written contract with their second job employer, and 34.2% were paying lower social contributions than were due on the second wage they were earning.

Spotlight on pilot sectors and sub-sectors

Both surveys of the informal economy show that the most affected sectors at national level are labour intensive ones such as construction, tourism, textiles, trade, agriculture and healthcare. Among the 11 pilot sectors and sub-sectors surveyed in 2010, the highest extent of informal economy was found in infrastructure construction, tourism and healthcare. In 2012, these sub-sectors still had high shares of informal practices, but highest were electrical engineering and electronics, perfumery and cosmetics, and light industry (publishing and printing).

Attempts to control the informal economy

The informal economy has been a focus for public debate, especially since the accession of Bulgaria to the EU in 2007. A number of state control and prevention measures, often in tandem with joint social partners’ initiatives, have been launched to reduce the extent of the informal economy.

Both employers and employees say that some have been effective; initiatives such as Joint effective control on undeclared work, Connecting fiscal devices to the National Revenue Agency and Rules for Business Centre are detailed in the Eurofound index of tackling undeclared work.

The respondents named the following measures that, in their opinion, had the highest impact on labour practices:

• Connecting fiscal devices to the National Revenue Agency (considered effective by 49.2% of employers and 50.8% of employees);
• Joint effective control of the General Labour Inspectorate and other control bodies on undeclared work (38.8 % of employers and 22% of employees).
• Possibility of checking the payment of employers’ social contributions through introduction of Personal Identity Number (33.6% of employers and 32% of employees).

Commentary

According to this survey, despite a decline in the number of employees involved in informal labour practices last year, it is clear that the informal labour market still plays an important role in the national economy. However, it seems that some measures intended to combat the informal economy introduced in recent years by the government and social partners have had a positive impact.

References

‘Restriction and prevention of the informal economy’, project implemented by BICA and CITUB, summary (in Bulgarian).

BICA (2012), First Monitoring Report on the informal Economy and the progress achieved in its prevention (in Bulgarian).

Nadezhda Daskalova, ISTUR