Report examines undeclared work in EU

In July 2004, the European Commission issued a new report on the extent of undeclared work around the EU. It looks at the incidence in each Member State, including the 10 new Member States that joined in May 2004, and examines the reasons behind the growth in undeclared work.

The issue of 'undeclared work' has been receiving increasing attention (EU0308202N) as part of the European employment strategy, and since 2003 (EU0308205F) the EU employment guidelines have included a specific guideline entitled 'transform undeclared work into regular employment'. This provides that Member States should develop and implement broad actions and measures to eliminate undeclared work, which combine simplification of the business environment, removing disincentives and providing appropriate incentives in the tax and benefits system, improved law enforcement and the application of sanctions. They should undertake the necessary efforts at national and EU level to measure the extent of the problem and progress achieved at national level.

In order to inform the debate and help Member States tackle the problem, on 2 July 2004, the European Commission published a report it had commissioned on Undeclared work in an enlarged Union. The report looks at the extent of the phenomenon around the EU, including in the 10 new Member States.

Definition of undeclared work

The report states that many 'colourful names' have been used to describe the phenomenon of undeclared work, such as the hidden or shadow economy, moonlighting or the underground economy. The definition used in this report is: 'productive activities that are lawful as regards to their nature, but are not declared to the public authorities, taking into account the differences in the regulatory system between Member States'.

Measuring undeclared work

Given the nature of undeclared work - ie it is neither observed nor registered - it is naturally extremely difficult to assess its extent and structure. The report states that direct methods, such as observation, interviews and surveys of the supply side, are preferable for the study of the informal economy. It also notes that not much of this kind of research has been carried out, possibly due to fears of obtaining incorrect answers. The study draws on information from statistical offices in several countries and results from a study covering five European countries.

Extent of undeclared work in the EU

Overall, the report finds that the extent of undeclared work varies significantly around the EU, ranging from 1.5% of GDP in Austria and 2% in the UK to between 16% and 17% in Hungary, 18% in Latvia and over 20% in Greece - see the table below. In general, the extent of undeclared work is higher in the new EU Member States, although there are some exceptions, notably Greece and Italy, where the incidence is high, and Cyprus, where it is low.

Incidence of undeclared work in the EU
Country Estimated size, in % of GDP Year
Austria 1.5% 1995
Belgium 3%-4% 1995, confirmed in 1997, 1999
Cyprus 4.2% 2003
Czech Republic 9%-10% 1998
Denmark 5.5% 2001
Estonia 8%-9% 2001
Finland 4.2% 1992
France 4%-6.5% 1998
Germany 6% 2001
Greece >20% 1998
Hungary 18% 1998
Ireland na -
Italy 16%-17 % 1998/2001
Latvia 18% 2000
Lithuania 15%-19% 2003
Luxembourg na -
Malta na -
Netherlands 2% 1995
Poland 14% 2003
Portugal 5% 1996
Slovakia 13%-15% 2000
Slovenia 17% 2003
Spain na -
Sweden 3% 1997
UK 2% 2000

Source: 'Undeclared work in an enlarged Union. An analysis of undeclared work: an in-depth study of specific items', Piet Renooy, Staffan Ivarsson, Olga van der Wusten-Gritsai and Remco Meijer, INREGIA/Regioplan, May 2004.

Situation in former EU 15

The study finds that in the 15 Member States that made up the EU before enlargement on 1 May 2004, informal work is usually carried out by men, who often have a regular job, are generally skilled workers and belong to the 25-45 age group. Women, students and unemployed people engaged in undeclared work often work in less favourable positions, earn less and work longer.

According to the report, the sector with the highest incidence of informal working is construction, although in Germany the agricultural sector, including gardening, also has a high incidence. Undeclared work is also common in the hotel and restaurant sector and in personal and domestic services.

In general, the study finds no universal causes for the existence and development of an informal economy, stating that, rather, it is brought about by a complex interplay between various variables and varies between countries. Issues such as tax burdens or labour market rigidity and the trust in, and quality of, the government all play a role in this. It also points to the role of culture in shaping an informal economy.

As the fight against undeclared work forms part of the European employment strategy, the report notes that all EU Member States are taking action to reduce their informal economy. This action takes the form of reducing the administrative burden for employers, combating labour market rigidity and tightening control, either by creating new control bodies or strengthening existing bodies. In countries such as Belgium and Germany, completely new institutional arrangements have been developed in recent years in certain sectors of the economy, such as personal and domestic services. Countries such as France and Denmark undertook these types of initiatives in the early 1990s.

Situation in new Member States and candidate countries

The report identifies three groups among the new Member States and candidate countries:

  • those with a low and decreasing level of undeclared work (between 8% and 13% of GDP). The Czech Republic, Estonia and Slovakia fall into this group;
  • those with a medium and decreasing level (between 14% and 23% of GDP), such as Poland, Slovenia, Hungary, Lithuania and Latvia; and
  • those with a high and increasing level (between 21% and 22% of GDP), such as Bulgaria and Romania

The study notes that undeclared work is largely concentrated in the same sectors as in the 'old' 15 Member States. However, it highlights the importance of the retail, professional services and hotel and restaurant sectors in the new Member States and notes that the incidence of undeclared work is relatively low in manufacturing. It also highlights the practice of 'envelope wages' (ie part of the wage paid undeclared in cash), through which income is underreported.

The report states that measures to combat undeclared work are in place in most of these countries, but in those with a long history of an informal economy, such as Poland, Hungary and Slovenia, 'the present level of undeclared work is tolerated by politics and politicians, who see it as a measure against mass unemployment, preventing socio-economic tensions, and no serious action is launched against it'.

The gender aspect

Women tend to participate less in undeclared work than men, although when they do, they are usually active in sectors which contain many traditionally female tasks, according to the report. Thus, women are found working informally in the service sector, in hotels and restaurants, the health sector, education and commercial cleaning.

Working conditions for women in undeclared work are, on the whole, less favourable than those for men - women tend to be employed in less autonomous jobs, earn less and tend to work informally out of economic necessity rather than to earn extra 'cash on the side'. Women’s jobs in the informal economy have a more permanent character than men’s jobs.

The report states that in countries with 'egalitarian social democratic' welfare regimes, there is neither the culture or the need to rely on informal female domestic labour. In 'conservative welfare states', such as the former West Germany, the culture and demand for domestic labour led to the growth of an informal economy of considerable size in the households sector. Also 'in the countries of the so-called Latin Rim, culture is very much opposed to women working formally, and is strongly geared towards keeping them at home to perform family tasks'.

Commentary

This is a very informative report, dealing with the difficult but important topic of undeclared work around the EU. Due to its very nature, undeclared work is difficult to quantify. However, combating the informal economy, which accounts for a significant proportion of GDP in some countries, is essential if Europe is to ensure the survival of its welfare and social model and improve employment and working conditions for its citizens. The fight against undeclared work is one of the key elements in the European employment strategy and therefore all Member States are obliged to take action to reduce their informal economy.

By setting out the causes of undeclared work and looking at individual sectors, this report will help Member States to understand the nature of their informal economy. It therefore makes an important contribution to the debate. (Andrea Broughton, IRS)

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