Survey reveals scale of hidden economy

A study conducted in 2007–2008 found that the size of the hidden economy in Bulgaria is considerably larger than official estimates. The economic sector with the largest hidden economy is construction, followed closely by wholesale and retail trade. The two most important indicators of the hidden economy are hidden labour and hidden economic activity by companies. Overall, 10.1% of employees have no contract, while 31.8% are hired on a contract with ‘hidden clauses’.

About the study

A study was carried out in 2007–2008 in the framework of a project of the University of National and World Economy (Университет за национално и световно стопанство, UNWE), entitled ‘Hidden economy in Bulgaria: Contemporary evaluation in the period of European integration’. The study is based on a simple random sample, which is representative of the whole Bulgarian economy. Overall, 345 companies from 13 major economic sectors participated.

The persons interviewed were principal owners (23.7%), experts (25.4%), co-owners (8.9%), managers (18.3%), chief executive officers (CEOs) (9.8%), board members (2.1%) and others (11.8%). The interviewees gave estimates of the size of the hidden economy for their own economic sector and for the economy as a whole. They also assessed the extent of the different forms of the hidden economy, as well as its main causes and consequences.

Main findings

High level of hidden economy

The respondents were asked to evaluate the size of the hidden economy as a percentage of gross domestic product (GDP). More than half of them (51.9%) evaluated the hidden economy as being 25%–50% of GDP; 21.5% of the respondents estimated its value at between 50% and 75% of GDP, while just 0.3% of those surveyed considered that there is no hidden economy in Bulgaria (Figure 1). The weighted average of the perceived size of the hidden economy in Bulgaria is 42% of GDP.

It is worth noting that the survey respondents estimated the size of the hidden economy in their own sector at a much lower level than in the whole economy. The weighted average of the perceived size of the hidden economy in their own economic sector is 26%.

Figure 1: Perceived size of hidden economy in Bulgaria (%)

 Perceived size of hidden economy in Bulgaria (%)

Source: Goev, V., ‘The hidden economy in Bulgaria: Current estimates’, Presentation at the workshop ‘The grey economy in Bulgaria in times of crisis: New trends and methods of measuring’, 27 February 2009

Construction, wholesale and retail sectors most prone to hidden activity

The three fields of economic activity with the largest hidden economies were construction, wholesale and retail trade, while the sectors more resistant to the influence of the hidden economy were communications, manufacturing, transport and education (Figure 2).

Figure 2: Size of hidden economy, by sector (%)

 Size of hidden economy, by sector (%)

Source: Goev, 2009

Hidden labour most associated with hidden economy

The respondents were asked to identify the most common activities that they associate with the hidden economy. Between them, the respondents mentioned: not paying taxes and other fees, not issuing proper sales documentation, reporting lower profits, illegal imports and exports, and receiving or giving bribes or presents. However, the two types of activity most associated with the hidden economy are hiring employees without a contract or hiring them on a contract with ‘hidden clauses’. These hidden clauses are usually related to not paying social security contributions or hiring officially at the minimum wage or lower than the actual wage and giving additional ‘envelope wages’ – that is, money hidden in an envelope that is not officially recorded for tax and social security purposes.

Overall, on average, 10.1% of employees are hired without a contract, the highest proportions being in construction (23.5%) and agriculture (22.8%), while the lowest shares are in education (2.5%) and healthcare (3.1%) (Figure 3). The practice of hiring employees on a contract with ‘hidden clauses’ is more widespread. On average, 31.8% of employees are hired on such a contract, the highest proportions being in construction (37.4%), retail trade (35.1%) and hotels, restaurants and tourism (34.2%).

Figure 3: Hiring personnel in hidden economy, by sector (%)

Hiring personnel in hidden economy, by sector (%)

Source: Goev, 2009

Trends in spread of hidden economy

The study findings revealed that the size of the hidden economy was perceived to have decreased slightly between 2002 and 2007. The largest proportion of the respondents (41%) considered that the hidden economy in 2007 had declined compared with 2002, while 32.2% highlighted its increase and 26.8% considered that there was no change in the last five years (Figure 4).

Figure 4: Dynamics of hidden economy over last five years (%)

Dynamics of hidden economy over last five years (%)

Source: Goev, 2009

Commentary

Estimating the size of the hidden economy in Bulgaria is very important considering its high level. The survey results give valuable feedback to policymakers and companies on the effectiveness of measures to curb the informal economy and the problem of undeclared work.

References

Goev, V., ‘Estimating the hidden economy in Bulgaria (272Kb PDF)’, South-East Europe Review, No. 1/2009, pp. 77–93.

Goev, V., ‘The hidden economy in Bulgaria: Current estimates (in Bulgarian)’, Presentation at the workshop ‘The grey economy in Bulgaria in times of crisis: New trends and methods of measuring’, 27 February 2009.

Nadezhda Daskalova, Institute for Social and Trade Union Research (ISTUR)

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