Income underreporting by households with business income: evidence from Estonia

European Journal of Industrial Relations

2015

105

113

This paper explains the undeclared economy in general, and envelope wages more particularly, from an institutional perspective as resulting from the asymmetry between the codified laws and regulations of the formal institutions and the unwritten socially shared rules of informal institutions. Reporting a 2013 Eurobarometer survey of the prevalence of envelope wages across 10 Central and East European countries, a strong association is revealed between the prevalence of envelope wage payments and the degree of asymmetry of formal and informal institutions at both the individual-and country-level. The paper then explores the implications for theorising and tackling undeclared work practices.

Section: Introductionmentioning

confidence: 99%

Evaluating the prevalence of the undeclared economy in Central and Eastern Europe: An institutional asymmetry perspective

European Journal of Industrial Relations

2015

105

113

“…In the Baltic Sea region and beyond, a small but burgeoning literature identifies that many employers evade their full tax and social payment liabilities and reduce their labour costs by paying their employees two wages, an official declared salary and an additional undeclared (envelope) wage (Kapelyushnikov et al, 2012;Kukk and Staehr, 2014;Meriküll and Staehr, 2010;Morris and Polese, 2014;Rodgers and Williams, 2009;Putni š and Sauka, 2011;Sasunkevich, 2014;Sauka and Putni š, 2011;Surdej and l zak, 2009;Williams, 2009aWilliams, ,b, 2010Williams, , 2014bWilliams et al, 2013). This illegitimate wage arrangement is important to study because firstly, money is being lost by governments which could otherwise pay for social protection and wider social cohesion projects, secondly, it results in a decrease in the quality of working conditions and thirdly, it represents unfair competition for legitimate enterprises thus putting pressure on them to also flout the laws and regulations and pay envelope wages (Andrews et al, 2011;ILO, 2014;TUC, 2008).…”

Section: Introductionmentioning

confidence: 99%

Explaining and tackling envelope wages in the Baltic Sea region

Baltic Journal of Management

2015

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.

“…This is the case not only in developing economies (ILO, 2011;Rani et al, 2013) but also across the post-Soviet economies, including the Baltic states (Kukk and Staehr, 2014;Meriküll and Staehr, 2010;Morris and Polese, 2014;Putni š and Sauka, 2011, 2014aSauka and Putni š, 2011;Williams et al, 2013) as well as the higher-income OECD nations (Schneider, 2013). As Putni š and Sauka (2014b) reveal for example, in 2013, the Latvian shadow economy was the equivalent of 23.8% of GDP whilst in Estonia and Lithuania it was 15.7% and 15.3% of GDP respectively.…”

Section: Introductionmentioning

confidence: 99%

An evaluation of the shadow economy in Baltic states: a tax morale perspective

2016

IJESB

To explain the shadow economy in the Baltic states of Estonia, Lithuania and Latvia, this paper evaluates the relationship between the shadow economy and tax morale. Viewing tax morale as a measure of the symmetry between the codified laws and regulations of formal institutions (state morality) and the unwritten socially shared rules of informal institutions (civic morality), the proposition is that the lower the tax morale (i.e., the greater the asymmetry between state morality and civic morality), the greater is the propensity to participate in the shadow economy. To evaluate this, a 2013 survey is reported involving 3,036 face-to-face interviews in these three Baltic nations. Using ordered logistic regression analysis, the finding is that the lower is the tax morale of individuals, population groups and countries, the greater is the propensity to participate in the shadow economy. The paper then explores the implications for theorising and tackling the shadow economy.