Cross-National Variations in the Under-Reporting of Wages in South-East Europe: A Result of Over-Regulation or Under-Regulation?

Abstract

Over the past decade or so, a small but growing literature has highlighted how formal employers sometimes under-report the wages that they pay to their formal employees by paying them two wages, a declared salary and an undeclared 'envelope' wage (Karpuskiene 2007;Meriküll and Staehr 2010;Neef 2002;Sedlenieks 2003;Williams 2007Williams , 2008Williams , 2009aWoolfson 2007;Žabko and Rajevska 2007). Beyond highlighting that employers do this in order to reduce the social contributions they pay, there has been no attempt to explain why this wage practice varies cross-nationally. This paper, therefore, seeks to do so by evaluating whether it is more common for employers to underreport employees' wages in some economic systems than others. To do this, two competing economic perspectives will be evaluated.From a neo-liberal viewpoint, it could be argued that the under-reporting of wages is a product of high taxes, over-regulation and state interference in the free market and that the remedy is therefore to pursue tax reductions, de-regulation and to minimize state interference in the market. Viewed through this neo-liberal lens, therefore, the under-reporting of wages would be more common in countries with higher taxes and levels of state intervention in work and welfare systems. From a structuralist viewpoint, meanwhile, it could be argued that the under-reporting of wages is a product of inadequate levels of labour market intervention and social protection and that the solution is therefore to pursue greater state intervention. Viewed through this structuralist lens, in consequence, the under-reporting of wages would be less prevalent in countries with higher levels of state intervention in work and welfare. The aim of this paper is to evaluate these competing economic Abstract:This paper seeks to explain the cross-national variations in the tendency of employers in South East Europe to under-report the wages of their employees by paying them two wages, an official declared salary and an additional undeclared envelope wage. Reporting the results of a 2007 Eurobarometer survey of this practice undertaken in five South East European countries, the finding is that the commonality of this illicit wage practice markedly varies cross-nationally, with 23 percent of formal employees in Romania but just 3 percent in Cyprus receiving an under-reported salary. Finding that the under-reporting of wages is more prevalent in neo-liberal economies with lower levels of state intervention and less common in more 'welfare capitalist' economies in which there is greater state intervention in work and welfare, the resultant conclusion is that the under-reporting of employees wages by employers is correlated with the under-rather than over-regulation of work and welfare.

Evaluating Cross-National Variations in Under-Declared Wages in the European Union: an Exploratory Study

“…Thirdly, they were asked to estimate the percentage of their gross yearly income from their main job received as an undeclared envelope wage and fourthly, whether they were happy to receive a portion of their salary as an envelope wage. Although previous studies have described the findings of this Eurobarometer survey with regard to the commonality of envelope wage payments in East-Central Europe [51] as well as South-East Europe [52,53] and the Baltic region [54], these have been purely descriptive reports. No attempt has been so far made to explain the cross-national variations in the prevalence, size and nature of envelope wage payments.…”

Explaining cross‐national variations in the prevalence of envelope wages: some lessons from a 2013Eurobarometer survey

“…284, involved 11,135 interviews with formal employees across the EU‐27. This revealed in this pre‐crisis period the prevalence of envelope wages in the EU‐27 as a whole (Williams, ; Williams and Padmore, 2013a; 2013b) as well as regional analyses of South‐Eastern Europe (Williams, 2010; 2012a; Williams et al ., ), the Baltic region (Williams, ) and Central and Eastern Europe (Williams, 2008a; 2008b; 2009b; 2009c; 2012b; Williams and Round, ). Across the EU‐27, 5.5 per cent of formal employees received envelope wages from their formal employer in 2007, amounting to on average 43 per cent of their gross wage.…”

The Coronavirus Pandemic and Europe’s Undeclared Economy: Impacts and a Policy Proposal

“…Secondly, there are under-declared employees (Williams 2012;Williams and Bezeredi 2018a). These employees have a declared job but receive two wages: an official declared wage (often paid at the minimum wage rate) and an additional undeclared 'envelope wage' .…”