Social partners discuss undeclared wages

In November 2003, representatives of Estonian trade unions and employers’ organisations, together with the Labour Inspectorate and the Tax Board, held a round-table meeting to discuss the widespread problem of undeclared wages, on which social security contributions and income tax are not levied. The participants called for stronger control of the implementation of relevant laws and regulations .

On 12 November 2003, representatives of trade unions and employers’ organisations, together with officials from the Labour Inspectorate (Tööinspektsiooni) and Tax Board (Maksuamet), discussed the possibilities of reducing the payment of undeclared 'envelope wages' and strengthening control mechanisms for the implementation of the relevant laws and regulations. 'Envelope wages' are cash payments to workers, on which social security contributions and personal income tax are not levied.

According to the Estonian Institute of Economic Research (Eesti Konjunktuuriinstituut, EKI), a reduction in the amount of undeclared wages will add up to EEK 1.2 billion to the state budget. According to EKI surveys, the share of employees who receive or have received 'envelope wages' declined from 18% in 1999 to 13% in 2002. According to experts, the problem is not only the lower state taxation revenue, which prevents an increase in social expenditure and thus worsens workers’ living and working conditions, but also the threat to fair competition. Those firms which ignore the prevailing employment conditions standards and tax laws may obtain an unfair competitive advantage, as they operate with lower costs. The participants at the round-table meeting stated that all parties, including the state, should make common efforts to solve the problem.

Empirical studies of transition countries in central and eastern Europe have found that formal legislative measures have only a small effect on labour market behaviour. The problem is that the efficiency of regulations - such as those on tax and social security - depends on the extent to which law enforcement agencies control their implementation, punish violations etc. Even strict laws may have little influence in practice, if legislation is frequently violated or if law enforcement agencies are weak.

During the November meeting, objectives were set at the level of sectoral social partner organisations, as well as at national level. At national level, it was proposed to simplify and intensify the procedure of supervising the application of laws, and to ensure basic guarantees for all employees, regardless of the form of their employment. All parties agreed to continue cooperation and information sharing.

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