Unreported employment Scharle Ágota Finance Ministry 7 May 2008 Budapest

2 Overview  forms of avoiding wage taxes  underlying causes: general and transitional  consequences: good and bad  size: data sources and measurement  the case of Hungary  strategies to fight it

3 Forms of evading tax on wages  Unreported employment at private households at firms  partially (ssc or PIT) reported employment  regular work reported as casual  employee reported as self-employed  reported employment, underreported wage/hours reporting the minimum wage or less reporting above the minimum but below actual wage  + tax avoidance: lunch coupons, taking out income as dividends, etc.

4 Rational (utility) and behavioural explanations Benefits of tax evasion > costs of evasion benefits= higher income costs = risk of getting caught * fine + direct cost of evasion + moral cost Behaviour - reciprocity (bureaucracy, expenditure) - conditional compliance (as my neighb.) - fairness (redistribution)

5 Underlying causes high costs of operation (admin + taxes and social security contributions) high entry costs (admin and financial) transitional: social perception of cheating: ambiguous low trust in government low efficiency of govmt weak surveillance misperceptions (own position, level of evasion, structure of exp.)

6 Consequences: bad  government deficit  balance of social security funds  fairness in redistribution  old age poverty  work security and employment protection  innovative potential (see Baumol 1990)

7 Consequences: good may dampen negative effect of overregulation - redistribution - output

8 Data sources and measurement  Opinion surveys - direct and indirect questions  Discrepancy analysis - turnover: goods/cash (currency) - production: output/electricity consumption - employment: admin/hhold survey  Field work

9 The case of Hungary 1  public opinion holds that - tax evasion is wide-spread and large - most minimum-wage earners are evadors  minimum-wage used as a means of whitening  exactly how large and who are involved - employed but not paying ssc - minimum wage earners

The case of Hungary 2 Unreported (black) employment = CSO Labour force survey (MEF/LFS): total employment - Pension fund data (ONYF): reported (registered) employment Minimum wage earners = Reported taxable income corrected for days in employment ≤ minimum wage based on ONYF data, annual average

11 Data sources LFS  Quarterly data, population aged  about 60 thd observations  employment as in ILO definition  age, sex, employment, occupation, place of residance, etc. Pension data [ONYF]  representative sample of population  about 150 thd people aged  paid pension contribution on some wage earnings  age, sex, occupation (only for employees), region Both are panels for the years

12 Data sources: defining total employment LFS Average of quarterly figures 6 categories of employment: employee (2) or self-employed (4) average of those employed in reference week (4 quarters) Pension data [ONYF] 28 categories by type of employment contract duration of contract (pension insurance), in days average employment: insured days/366

13 Main results Unreported employment  after 2001: stable at % of total LFS employment  much higher among men  higher among age  higher in Central-Hungary  construction, drivers, personal services Minimum wage earners  in 2004: at the most 500 thousand (18% if employees)

Stable at 21-22% since 2001

Higher among men and aged 25-39

16 Share of minimum wage earners by occupation 310 thd (12%) at min.wage, 160 thd (6%) below min. wage

17 Perceptions of researchers/media As consumers:  higher income urban population  esp in Budapest  hairdresser, nanny, cleaning lady, gardener  architects and construction workers As suppliers:  accountants, journalists, tax advisors, free-lance artists, owner-managers

18 Strategies to fight it  surveillance: - refined indicators (not minimum wage!) - focus on high risk areas - link sources of info - fines - no corruption  taxes: simple and low  admin: simple  behaviour / attitudes: - communication: on govmt expenses, pension system, others’ behaviour, etc.

Thank you for your attention!