Explaining and tackling envelope wages in the Baltic Sea region

Abstract

PurposeThe aim of this paper is to advance a new way of explaining and tackling the illegitimate wage practice where employers pay their employees an undeclared (envelope) wage in addition to their formal salary. Drawing upon institutional theory, it is here proposed that envelope wages result from the lack of alignment of a society's formal institutions (i.e., the codified laws and regulations) with its informal institutions (i.e., the socially shared unwritten understandings which reflect citizens' norms, values and beliefs). MethodologyTo evaluate this, data is reported from a 2013 Eurobarometer survey involving 1,738 face-toface interviews with formal employees in four Baltic countries, namely Estonia, Latvia, Lithuania and Poland. FindingsThe finding is that the greater is the asymmetry between the formal and informal institutions (i.e., the level of disagreement of citizens with the codified laws and regulations of formal institutions), the higher is the propensity to pay envelope wages. This is the case at both the individual-and country-levels. Practical implicationsTo reduce the prevalence of envelope wages, the resultant argument is that the values of employers and employees need to be aligned with the formal institutions. This requires alterations not only in the informal institutions, using measures such as tax education, awareness raising campaigns and normative appeals, but also changes in formal institutions so as to improve trust in government by fostering greater procedural justice, procedural fairness and redistributive justice. Originality/valueThis is the first paper to apply institutional theory to explaining and tackling envelope wages in the Baltic Sea region.

‘The price is different depending on whether you want a receipt or not’: examining the purchasing of goods and services from the informal economy in South-East Europe

“…Studies have identified varieties of undeclared work (Pfau-Effinger, 2009), the drivers for such work (Williams & Horodnic, 2015a), and how it might be tackled (Williams & Nadin, 2010). Scholars have also studied the supply-side phenomenon of envelope wages (Williams & Horodnic, 2015b), and entrepreneurship in the informal economy (Bruton et al, 2012;Webb et al, 2009Webb et al, , 2013Webb et al, , 2014.…”

Explaining and Tackling Under-Declared Employment in FYR Macedonia: The Employers Perspective

“…However, it is unlikely that this will be effective unless formal institutions themselves change. On the other hand, therefore, there is also a need to change the formal institutions, such as by reducing the level of public sector corruption and improving procedural and distributive justice and fairness (Horodnic 2018;Horodnic and Williams 2018;Molero and Pujol 2012;Murphy 2005;Williams and Horodnic 2015a). There is also a need to improve horizontal trust.…”

Back to Articles Cash wage payments in transition economies: Consequences of envelope wages

“…This has important implications as it suggests that when there is asymmetry between these formal and informal institutions, practices based on unwritten socially shared rules emerge, which are "illegal" in comparison to the formal, written regulations. Thus, the probability of using envelope wages, is higher when institutional misalignment is greater [5], [12].…”

“…higher salaries when their employer does not have to pay their full tax and social insurance contributions), at a societal level, the practice has widespread negative effects. Due to the direct link between the contribution amount and the level of social protection, governments lose out on revenues, which could be used for assuring better social protection for their citizens [12]. Governments also lose some measure of control over the quality of working conditions since they are unable to monitor the actual situation imposed on employees via their unwritten verbal contract (e.g.…”

“…The tax morale of a person or population represents their intrinsic motivation to pay the taxes owed, and can be used to measure the level of misalignment between formal and informal institutions with respect to tax compliance [12], [13]. If there is a high level of symmetry between formal and informal institutions, then individuals and societies will display a high level of tax morality.…”