TACKLING THE INFORMAL ECONOMY AND UNDECLARED WORK IN SOUTHEAST EUROPE: KNOWLEDGE INFORMED POLICY RESPONSES ON THE EXAMPLE OF BULGARIA, CROATIA, AND FYR OF MACEDONIA Ruslan Stefanov Marie Curie Research Fellow University of Sheffield / Vitosha Research EOOD Zagreb September 1, 2017

Key GREY findings Informal economy and undeclared work are socially accepted and widely practiced in SEE 1 in 5 adults have bought goods and services from the informal economy 1 in 12 have worked in it 1 in 10 of the employed have received envelope wages Undeclared work differs across and within the three countries. For every one excluded from the formal economy, there are three that choose to exit it. Institutional asymmetry and non-alignment between formal and informal institutions provide better explanation of undeclared work’s prevalence in Southeast Europe compared to more traditional rational cost-benefit optimization models for workers and employers Policy makers need to prioritise measures to improve vertical (in institutions) and horizontal (among people) trust, complementing measures to improve detection and deterrence. EU can be a considerable positive factor: European Platform Tackling UDW

Macroeconomic overview GDP per capita at PPP as % of EU-28 Average: BG - 48%, HR- 59%, FYROM - 38% Cash strapped / constrained governments Structural difficulties on the labour market: Shrinking population Low employment High long-term and youth unemployment

Demand side

Propensity to buy into the informal economy

Rationale for buying undeclared

If they are doing in, I can do it too

Repressive measures can only produce limited effect

Vertical trust issues need to be tackled with priority

Supply side

Working into the informal economy

Exit vs. exclusion driven participation in the informal economy

Detection and sanctions are unlikely to have high effect on the supply side

Building horizontal and vertical trust should be prioritized on the supply side

Envelope wages

Prevalence of envelope wages in SEE

Some considerations from the wider perspective and region

Pulling strings in SEE

Diversity of working informally

Demographics of working in the informal economy slightly younger male – more than average employed work more (longer) at job and at home (and private farm) tend to know more people also part of the hidden economy are more relaxed (not judgmental) towards morale in society subjective feeling of happiness is slightly lower, but self esteem is ok

People in working informally subject to higher corruption pressure

Policy Recommendations Strengthen the broader institutional foundations Improve the quality of public goods and services Restore social solidarity and reduce inequality Reduce the gap between citizens and the state

Thank you! Ruslan.Stefanov@CSD.BG