Tackling the high level of undeclared work

In 2007, the first specialised study of unregistered employment or undeclared work in Latvia was published, covering the entire country in terms of occupation, economic sector, region, sex and other aspects. The research concludes that, in 2006, on average 24% of the employed population worked without an employment contract or for undeclared pay. Streamlining the tax system and establishing a coordinating administrative authority are among the study recommendations.

An ‘Assessment of unregistered employment’ is one of 13 projects initiated by the Latvian Ministry of Welfare (Labklājības Ministrija, LM) in the framework of the National Programme on Labour Market Studies, supported by the European Social Fund. The research project was conducted by the University of Latvia (Latvijas Universitāte, LU) in cooperation with the consultancies InMind Ltd (now known as GfK Custom Research Baltic) and Latvijas Fakti Ltd.

Research aim and methodology

The study aimed to assess the prevalence of unregistered employment or undeclared work in Latvia, as well as to identify the underlying reasons for its use and to provide recommendations for reducing the scale of this problem. The study is based on an employer survey (2,502 responses), an employee survey (20,025 respondents) and expert interviews; the research also analysed previous studies, policy documents and legislative acts. The study was carried out between September 2005 and March 2007 and covers the entire country in terms of occupation, economic sector, region, sex and other aspects, such as legal, economic and social factors. The results were published in 2007 in the report Nereģistrētās nodarbinātības novērtējums (in Latvian, 2Mb PDF); an English translation is also available: Assessment of unregistered employment (760Kb WinZip file of a 3.8Mb MS Word doc).

Unregistered employment is defined as employment without an employment contract or under an employment contract which has not been drafted in accordance with the applicable legislation. Such irregular employment involves partly unpaid taxes and failure to pay compulsory state social insurance contributions; in other words, it entails wages that are undeclared and paid ‘under the table’, including pay to self-employed workers and parts of royalties. Irregularities may also concern employment after the hours stated in the contract for which no wage is paid, thus leading to an incomplete official record of working hours.

Study findings

In 2006, on average 24% of the employed population of working age – namely, those aged between 15 and 74 years – were working without an employment contract and/or for undeclared wages. The proportion of 24% was reached by combining the 11.3% of the working population without employment contracts and the 12.7% who worked for ‘under-the-table’ wages – that is, payment in cash off the records. Figure 1 assesses the differences according to sex and age group.

Figure 1: Respondents employed without employment contract, by age and sex, 2006 (%)

Figure 1: Respondents employed without employment contract, by age and sex, 2006 (%)

Note: These data were drawn from the results of the employee survey and include 11,028 working respondents.

Source: University of Latvia, ‘Assessment of unregistered employment’, 2007, p. 78

Figure 1 highlights the high level of inequality between men and women in the age groups up to 54 years and the low level of inequality in the subsequent age groups. The proportion of men among respondents without an employment contract in the age groups up to 54 years varies between 66.6% at the lowest level, reported by those aged 15–24 years, and 77.7% at the highest level, recorded by those aged 35–44 years. Conversely, the corresponding proportions for women are 33.4%, which amounts to their highest level, and 22.3%, representing their lowest level.

Working without an employment contract is most common in the economic sectors of construction, at 22.2%, security activities, at 22.7%, and agriculture, hunting and forestry, at 19.4%. Fishing, specialist services and public administration report the least occurrence of unregistered employment.

Reasons for accepting unregistered work

People mainly agree to be involved in unregistered employment relations for the following reasons:

  • they want to earn more money;
  • they cannot find a regular job in their area;
  • they do not trust the social insurance system;
  • their education profile does not match job vacancies.

In examining the reasons why respondents have engaged in an informal employment relationship, two groups of respondents were distinguished – those without an employment contract and those with an employment contract who are partly paid ‘under the table’. Figure 2 reveals that age restrictions are the most common reason for people to be forced into an employment relationship without a contract: 81% of those involved in unregistered employment due to their age have no employment contract. The second most common reason for people not to hold an employment contract relates to their health condition: 78% of all respondents who are engaged in unregistered employment for health reasons do not have an employment contract.

Figure 2: Reasons for unregistered employment, by form of irregularity (%)

Figure 2: Reasons for unregistered employment, by form of irregularity (%)

Note: These data were drawn from the results of the employee survey and include 1,167 respondents.

Source: University of Latvia, 2007, p. 90

According to the State Employment Agency (Nodarbinātības Valsts aģentūra, NVA), unregistered employment is exacerbated by: a complicated taxation system, lack of cooperation on the part of controlling authorities, an increase in the economic crime rate, the potential to register fictitious companies, unemployment, a low level of public awareness regarding labour law and other reasons.

Recommendations

Measures such as improving the regulatory basis are being taken in Latvia to reduce unregistered employment (LV0402101N) and positive developments are occurring in the labour market: unemployment is declining, the average salary is rising rapidly and the minimum wage is being gradually increased. Nonetheless, unregistered employment still remains high.

The solution of this problem incorporates a range of measures, such as improving the relevant regulatory acts and their fulfilment, streamlining the tax system, using available administrative measures efficiently, and optimising functions and cooperation in the state management system.

The authors of the study make a number of recommendations, including:

  • improving the legislative basis;
  • establishing a coordinating authority responsible for unregistered employment issues;
  • developing a central database to facilitate an analysis of unregistered employment.

Further information

In 2004, the European Industrial Relations Observatory (EIRO) examined the industrial relations aspects of undeclared work in 23 European countries. Latvia contributed to the study on Industrial relations and undeclared work, exploring the nature and extent of undeclared work, the regulatory framework, the role, activities and views of the social partners, and partnerships between social partners and public authorities to tackle undeclared work.

Raita Karnite, Institute of Economics, Latvian Academy of Sciences

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