Commission targets undeclared work

In April 1998, the European Commission adopted a Communication on undeclared work which encourages cooperation across the European Union and the formulation of joint policies based on examples of good practice in combating the "underground economy". This feature highlights the extent of the problem and outlines the Commission's approach.

On 7 April 1998, the European Commission adopted a Communication on undeclared work in which it calls for a debate on the subject as part of the European employment strategy. According to a Commision study, undeclared work represents between 7% and 16% of European Union's GDP- a significant increase from 5% during the 1970s.

Speaking in Brussels at the launch of the Communication, Padraig Flynn, the Commissioner responsible for employment and social affairs, said that: "The European employment strategy, in particular the Employment Guidelines, now provide an opportunity for combating undeclared work through EU coordinated action, if this is deemed necessary. I hope that this Communication will bring about a wide-ranging discussion, and should the outcome indicate that action at EU level would be appropriate, we could address the issue in proposals for the 1998 Joint Report and the 1999 Employment Guidelines." (Commission press release, 7 April 1998).

The background

A study prepared by Mr Flynn's staff found that undeclared work is generally present in sectors which are labour intensive and offer low profits, such as construction, agriculture, retail, catering and domestic services. However, it is also a factor in manufacturing and business services, where costs are the major factor in competition, as well as modern innovative services.

As the table below shows, participation in undeclared employment across the European Union involves four main groups: "moonlighters" and multiple job holders; the "inactive" population (students, people taking early retirement, housewives, etc); unemployed people; and third-country nationals illegally resident in the EU. The age and gender of undeclared workers was found to depend to a large extent on the sectors affected, and some variation in the main sectors affected by such activity was evident between countries. In the Scandinavian countries, the Netherlands, Belgium and the UK, such activity tends to be the preserve of young, skilled males, whereas illegal immigrants are perceived to be a big problem in France, Germany and Austria (although data appears to suggests that they are not the dominant group in the underground economy). In Southern Europe, undeclared workers tend to be young people, women working from home and illegal immigrants.

Factors contributing to the expansion of undeclared work are seen to include a growing demand for personalised services, the reorganisation of industry with the subcontracting of certain activities, and the spread of lightweight technology providing new working opportunities and areas of service activities.

Although it is difficult to assess the precise extent of the underground economy (the definition of this area differs between Member States), the report divides the Member States into three main groups. In the first group, the level of underground activity is relatively low at around 5% of GDP. This group includes the Scandinavian countries, Ireland, Austria and the Netherlands. At the other extreme, there are countries where the underground economy exceeds 20% of GDP, such as Italy and Greece. The other Member States lie between these two extremes.

The underground economy in the EU Member States
Country Estimated size of underground economy -(% of GDP) Principal characteristics of undeclared work
Austria 4%-7% One 10th of all people of working age are engaged in some form of undeclared work; 40% of this work takes place in construction and crafts, 16% in other trade and industrial enterprises, 16% in services, 13% in entertainment and 15% in other trades and services.
Belgium 2%-21% Undeclared work is mainly carried out by young, semi- or low-skilled males. The sectors most affected are catering, retail trade, construction, textiles, transport, household services and agriculture.
Denmark 3%-7% Undeclared work is carried out by skilled and unskilled workers, as well as students, mostly in the private services sector (baby-sitting, cleaning etc) and in construction.
Finland 2%-4% Such activity is mainly the preserve of skilled young men working in construction, hotels/catering, the retail trade and real estate services.
France 4%-14% French nationals as well as legal and illegal immigrants are involved in undeclared work; up to 60% of this is in the service sector (mainly hotels and catering), and 27% in construction.
Germany 4%-14% Undeclared work is mainly carried out by illegal immigrants and those already in declared employment. Main sectors affected are construction, hotels and catering, transport and road haulage, cleaning and culture.
Greece 29%-35% Legal and illegal immigrants are the main source of undeclared activity, but also pensioners, students and home-working women. The main sectors affected are textiles, tourism, transport and household services.
Ireland 5%-10% Students and those already engaged in the official economy are primarily engaged in such activities in construction and distribution.
Italy 20%-26% Undeclared work is mainly carried out by young people, women and pensioners in agriculture, construction, private services and textiles.
Luxembourg n/a Some undeclared work takes place in the construction sector.
The Netherlands 5%-14% Skilled workers with two jobs in the hotel and catering sector, taxi and courier services, the metal industry and clothing.
Portugal n/a Undeclared work is mainly the preserve of illegal immigrants and women. Sectors particularly affected are textiles, the retail trade and construction.
Spain 10%-23% Young workers, women and skilled workers carrying out undeclared activity in agriculture, services and the private services sector.
Sweden 4%-7% Undeclared work is mostly carried out by self-employed or skilled males in private services, catering and cleaning.
United Kingdom 7%-13% Men and skilled workers in construction, street markets and hotels and catering.

Source: European Commission

The report highlights the key factors which are seen to contribute to the existence of undeclared work in the Member States:

  • a high level of tax and social security contributions;
  • legislation poorly adapted to new types of work (part-time and temporary contracts);
  • the weight of administrative procedures for registering certain jobs or binding provisions on access to certain professions;
  • industrial structure - the presence of a large number of small and medium-sized enterprises (SME s) in the industrial fabric, and the pattern of unionisation of labour;
  • low competitiveness - firms in declining sectors may have recourse to undeclared labour as a means to surviving in a competitive market;
  • cultural acceptance - participation in the informal economy in local communities will often be perceived as an exchange of services that need not be declared;
  • the costs/benefits of undeclared work.

Undeclared work not only deprives those that engage in it of training and an enhancement of their career prospects, but it also means that these individuals have no access to health insurance, pension rights and insurance against accidents at work. Undeclared work reduces production costs, which has a negative impact on fair competition in the single market.

The Commission Communication

The Communication issued by the Commission defines undeclared work as paid activity which is lawful in nature, but is not notified to the public authorities. It estimates that such activity amounts to between 7% and 16% of the European Union's GDP - an equivalent of 10 million to 28 million jobs, or 7%-19% of total declared employment. The Communication perceives undeclared work as a common problem for all Member States and argues that it should be tackled jointly through the exchange of good practices, and, where appropriate, coordinated action at EU level. Undeclared work, which is mainly prevalent in labour-intensive, low-profit sectors and in business and innovative services, harms the career prospects and working conditions of those engaged in it and deprives the state of receipts needed to finance the provision of public services. The curtailment of receipts means a reduction in the level of services the state can offer, this creating a vicious circle, as the government raises taxes to continue to provide the services, thus creating more incentives for undeclared work. Engagement in undeclared work is particularly harmful for workers who are officially inactive, as it deprives them of training opportunities and the development of a career profile, thus ultimately harming their future employability.

According to the Commission, undeclared work can be viewed as an issue of individuals taking advantage of the system and undermining solidarity in the process, or as the outcome of greater diversity in the labour market which is not recognised under existing legislation.

The Communication identifies various factors seen to contribute to the existence of undeclared work, such as high tax and social contribution levels, excessively heavy regulatory and administrative burdens, inappropriate labour market legislation, cultural acceptance and the existence of easy opportunity. What is therefore required, according to the Commission, is a combination of measures aimed at reducing the advantages of being in the undeclared economy, such as awareness-raising campaigns, tighter controls and stronger sanctions, as well as the adaptation of inappropriate legislation and the reduction of burdens and obstacles on business.

Commentary

The level, nature, consequences and causes of undeclared work have been the subject of Commission reports in the past and the current report highlights the difficulties in reaching a common definition, and, more importantly, in obtaining reliable data on the level of undeclared activity and the individuals involved in it. The wide margin in the estimated size of the underground economy as a percentage of GDP bears witness to these difficulties. Undeclared work is of particular concern because it is particularly prevalent in the sectors which the Commission seeks to target for job creation (labour-intensive services such as domestic services). It causes possible distortions of competition in the internal market and the loss of revenue to the state, thus reducing the ability to provide services. Undeclared work is particularly difficult to combat, because it is often either based on a consensual exchange of the two parties involved or is perceived as a matter of economic necessity. The Commission is now hoping to build on the exchange of good practice in order to design measures to help combat this problem. (Tina Weber, ECOTEC Research and Consulting Ltd)

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