Ongoing efforts to combat illegal employment

The end of March 2007 marked the fiftieth anniversary of the federal Act to Combat Illegal Employment. Although successive federal governments have repeatedly increased efforts to combat illegal employment, findings from a recent study by the Cologne Institute for Economic Research highlight the significant extent of the problem. Illegal employment adversely affects not only the German economy as a whole, but also individual employees and employers. The government, trade unions and employer organisations collectively support efforts to reduce illegal employment by cooperating in joint campaigns against it.

On 30 March 1957, the Act to Combat Illegal Employment (Gesetz zur Bekämpfung der Schwarzarbeit und illegalen Beschäftigung, SchwarzArbG (in German)) came into effect. The act was subsequently revised in 2004, but its effectiveness has since been called into question by recent research results. A press article (in German) by the Cologne Institute for Economic Research (Institut der deutschen Wirtschaft Köln, IW Köln) highlights the findings of the institute’s recent study on illegal employment. In particular, it reveals that approximately 13 million German citizens increased their income by earnings from illegal employment in 2006.

Background and study findings

The Act to Combat Illegal Employment stipulates that work is classed as illegal employment if employers or employees breach effective tax laws or do not comply with regulations governing social security contributions. Entrepreneurs who disregard registration obligations for their businesses are also considered to be working illegally. The same holds true for recipients of unemployment benefit who do not declare earnings from paid illegal employment in their application for unemployment assistance. SchwarzArbG only allows for ‘neighbourly help’ (Nachbarschaftshilfe) that must not be geared towards earning money for the work performed.

In order to deter illegal employment, severe penalties were foreseen in the legislation for people involved in such work. Penalties that can be imposed include fines of up to €50,000 and, indeed, a maximum prison sentence of five years for the illegal employment of foreigners. However, approximately 13 million German citizens over the age of 18 years performed illegal work in 2006. On average, six hours’ work per week was performed without the payment of the respective taxes or social security contributions to the relative authorities.

It is estimated that, in 2007, illegal employment will create value added of between €135 million and €158 million. This represents the equivalent of between 6% and 7% of the country’s gross domestic product (GDP). Apart from the federal government’s revenue losses as a result of unpaid taxes, illegal employment also affects law-abiding employees and employers.

The IW study estimates that an effective reduction in illegal employment could create 800,000 to one million full-time jobs. New jobs would relieve some of the burden on the social insurance system and would generate further national tax revenues. Moreover, law-abiding employers would not be at a competitive disadvantage to their rivals who engage in illegal employment. Since illegal employment affects all levels of society, the government has adopted measures to tackle the problem in close collaboration with the trade unions and employer organisations.

Joint efforts to tackle illegal employment

On 13 September 2004, the Federal Ministry of Finance (Bundesministerium der Finanzen, BMF), the Association of the German Construction Industry (Zentralverband des deutschen Baugewerbes, ZDB) and the Trade Union for Building, Forestry, Agriculture and the Environment (Industriegewerkschaft Bauen-Agrar-Umwelt, IG Bau) agreed on the first joint measures to tackle illegal employment in the construction sector (in German). Construction is one of the most heavily affected economic sectors in terms of illegal employment. Although, similar conditions prevail in the transport, shipping and logistics sector where the second agreement to fight illegal employment (in German) was introduced by BMF, the United Services Union (Vereinte Dienstleistungsgewerkschaft, ver.di) and several employer organisations in 2006.

These tripartite agreements raise public awareness of the negative effects of illegal employment. The parties to the agreements provide information on the legal sanctions against illegal employment, strengthen the collaboration between financial authorities and local associations, and develop new sector-specific approaches to combat illegal employment.

Commentary

The agreements to tackle illegal employment may contribute to an increased public awareness of the problem while also creating awareness of the fact that this type of employment represents a legal offence. However, to support the effectiveness of the act currently in force to combat illegal employment, the federal government should initiate further measures. Such measures should aim to reduce the regulatory burden endured by German companies, which is comparatively high. The amount of labour market regulations – as set out in collective agreements, tax laws or in the Employment Protection Law (Kündigungsschutzgesetz, KschG (in German)) – still make illegal employment attractive for many employees and employers alike. The government and social partners should thus consider a reduction in the number and extent of labour market regulations in order to reduce the attractiveness of illegal employment in the future.

Sandra Vogel, Cologne Institute for Economic Research (IW Köln)

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