Volume 11, Issue 4, 36-47.

Beyond the Declared / Undeclared Economy Dualism: Evaluating Individual and Country Level Variations in the Prevalence of Under-Declared Employment

Aysegul KAYAOGLU
Department of Economics, Istanbul Technical University, Istanbul, Turkey.

Colin C. WILLIAMS*
School of Management, University of Sheffield, Conduit Road, Sheffield, S10 1FL, United Kingdom. E-mail: C.C.Williams@sheffield.ac.uk.

ABSTRACT

In recent years, the view that the undeclared economy is separate from the declared economy has been transcended, not least because it has been recognized that formal employers often pay their formal employees not only an official declared salary but also an undeclared (envelope) wage so as to evade their full tax and social insurance liabilities. The aim of this paper is to evaluate the prevalence of this illegal wage practice used by formal employers to reduce their labor costs by not declaring to the authorities the full salary of their formal employees. To do this, we report the pooled results of both a 2007 and 2013 Euro barometer data set in order to investigate both individual- and country-level variations in under-declared employment in the European Union. The finding is that the likelihood of receiving an additional undeclared (envelope) wage is more common among employees who are men, younger employees, manual workers, people who know others engaged in undeclared work, and those living in East-Central Europe and Southern Europe. Moreover, the likelihood of this illegal wage practice is greater in countries at lower levels of economic development and with less modernized state bureaucracies, lower levels of social transfers, social protection and labor market interventions to protect vulnerable groups, and with greater severe material deprivation and inequality. The paper concludes by discussing the theoretical and policy implications.

JEL Classification: H26; J46; K34; K42; O17.

Keywords: Informal Economy; Shadow Economy; Undeclared Labor; Envelope Wages; Tax Evasion; European
Union.

*Corresponding author.

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