Download Harmonized approach to the informal economy in different

Harmonized approach to the informal
economy in different sectors
(agriculture, trade, construction, and tourism)
Eugen Jurzyca
INEKO
November 2012
Introductory remarks
- Part of an (otherwise legal) economy that is not
taxed, monitored by any form of government, or
included in any gross national product (GNP), unlike
the formal economy (Wikipedia).
- Ambiguous: Good or bad?
- Pluses: Cushion, buffer between IN work and OUT of work,
sort of social safety net, may increase economic output
- Minuses: less income security, lack of legal rights, lack of
access to health care, low future pension, underfinanced
public goods, competition distortion (free riding)
- Evolution: Official beat shadow economies (example:
good and bad economist)
Rich
shadow
Rich
shadow
economies
would
economies
would
bebe
HERE!!!
HERE!!!
Proposed general principles of sectoral
policies
1. Gradual approach: being in is better than being
shadow, but being shadow is better than being
out; speed and scope of shadow economy
decrease has its optimum
2. Harmonized approach: taking economic
competition into account (focusing on one sector
may harm the rest of the economy)
3. Nudge: Soft regulation (hard regulation comes
after good rules are applied)
Shadow economy in sectors
Source: The Shadow Economy in Europe, 2010, ATKearney, Friedrich Schneider
from the Johannes Kepler University, Linz, Austria
Nudges to central policies
Solution/Sector
Tourism
Construction
Retail trade
Agriculture
Selected sectoral features, which are relevant to
specific measures
seasonal,
partially seasonal,
„visible“ publically,
„visible“
individually
seasonal, incl.
big projects
„visible“
individually
incl. big projects
Reducing tax burden for low-earners
horizontally












Use more electronic payments/official registration of
transactions




Negative enforcements




Increased transparency




Obligatory minimum wages at a low level relative to
average market wages for low-skill jobs
Flexible forms of employment
Social capital, trust institutions
Decentralize part of income tax collection to
municipalities
horizontally
Nudges to central policies
Solution/Sector
Tourism
Construction
Retail trade
Agriculture
Selected sectoral features, which are relevant to
specific measures
seasonal,
partially seasonal,
„visible“ publically,
„visible“
individually
seasonal, incl.
„visible“
individually
Reducing tax burden for lowearners
incl. big projects
horizontally
Top priority measure.
Mentioned, although out of the core of this presentation.
High “starting” taxes and other contributions discourage workers to leave shadow economy.
Sectoral tax would:
- be technically complicated
- increase transaction costs
- distort seriously economic competition among sectors/optimal allocation of resources
- possibly decrease the shadow economy, but relatively costly
big projects
Nudges to central policies
Solution/Sector
Tourism
Construction
Retail trade
Agriculture
Selected sectoral features, which are relevant to
specific measures
seasonal,
partially seasonal,
„visible“ publically,
„visible“
individually
seasonal, incl.
Obligatory minimum wages at
a low level relative to average
market wages for low-skill jobs
„visible“
individually

big projects
incl. big projects



High obligatory minimum wages discourage employers to officially hire labor force with lower marginal value.
The “distance” between horizontally set obligatory minimum wage and the market wage may differ statically among sectors and
dynamically in the phases of transition. Workers in the sectors with relatively higher obligatory minimum wage will be pushed to
shadow economy.
Therefore: considering collective bargaining process to set different minimum wage for different sectors.
Sectoral minimum wage would:
- be technically simple
- correct the distortion to economic competition among sectors ensued from horizontal minimum wage
- possibly decrease the shadow economy
Nudges to central policies
Solution/Sector
Tourism
Construction
Retail trade
Agriculture
Selected sectoral features, which are relevant to
specific measures
seasonal,
partially seasonal,
„visible“ publically,
„visible“
individually
seasonal, incl.
Flexible forms of employment
„visible“
individually
big projects
incl. big projects




Employers hesitate to employ workers fully protected by EPL (employment protection legislation). EPL increases firing (and
therefore also hiring) costs for firms. Workers are then pushed to shadow economy. The risk is higher in the sectors where workers
are employed seasonally.
Restrictive EPL may do more damage than good for employment outcomes in competitive, internationally integrated economies
(WB).
Therefore: considering collective bargaining process to set different forms of employment (basically, firing costs) for different
sectors.
Seasonal sectors could bring higher return from more flexible forms of employment (my bigger tick marks ).
Of course, the flexibility of employment forms is important horizontally, as well.
Flexible forms of employment would:
- be technically simple
- be socially and politically sensitive (more in monopolistic/monopsonistic) regions)
- possibly decrease the shadow economy
Nudges to central policies
Solution/Sector
Tourism
Construction
Retail trade
Agriculture
Selected sectoral features, which are relevant to
specific measures
seasonal,
partially seasonal,
„visible“ publically,
„visible“
individually
seasonal, incl.
Social capital, trusted
institutions
„visible“
individually

big projects
incl. big projects



Convincing people that they should pay taxes. That it is moral, fair, that paying taxes is not a shame, tax evasion should not be
national sport. It is not truth, that nobody pays taxes. See prisoner’s dilemma: if everybody believes that inflation will increase, it
will increase, if everybody believes, that nobody pays taxes, almost nobody will pay them, if everybody believe, that all people are in
shadow economy, almost all of them will enter it.
The message is backed by emotions rather than numbers, it is to build a spirit of a society.
Social capital, the relations in a society, as well as a physical capital can be accumulated, can bring dividends, can be tunneled.
Sectors with high number of customers involved could bring higher return from improved trust and social capital (my bigger tick
marks ).
Improved social capital, trust in institutions would:
- take long time (formal versus informal rules reforms)
- bring solutions to more problems (budget deficits, public debts)
- possibly decrease the shadow economy, although the effects of short term campaigns have not been clearly proved
The message similar to the one from Dean Martin. Popular from 1948.
Everybody loves somebody sometimes
Everybody falls in love somehow
Something in your kiss
Just told me
My sometimes is now
Everybody loves somebody sometimes
Everybody pays some taxes sometimes
Everybody falls in love somehow
Everybody gives the state somehow
Something in your kiss
Something in our statistics
Just told me
Just told us
My sometimes is now
Our sometimes is now
Nudges to central policies
Solution/Sector
Tourism
Construction
Retail trade
Agriculture
Selected sectoral features, which are relevant to
specific measures
seasonal,
partially seasonal,
„visible“ publically,
„visible“
individually
seasonal, incl.
big projects
Use more electronic
payments/official registration
of transactions
„visible“
individually

incl. big projects



Usage of more electronic payments is important horizontally, as well.
Sectors with high percentage of low-value payments could bring higher return from using more electronic payments (my bigger tick
marks ).
Usage of electronic payments would:
- bring solutions to more problems (budget deficits, public debts)
- possibly decrease the shadow economy, some evidence available (government interventions described)
Correlation with electronic payments
Source: The Shadow Economy in Europe, 2010, ATKearney, Friedrich Schneider
from the Johannes Kepler University, Linz, Austria
Nudges to central policies
Solution/Sector
Tourism
Construction
Retail trade
Agriculture
Selected sectoral features, which are relevant to
specific measures
seasonal,
partially seasonal,
„visible“ publically,
„visible“
individually
seasonal, incl.
big projects
Negative enforcement
„visible“
individually

incl. big projects



Examples of negative enforcements: Controls (e.g. onsite visits, tax audits), penalties (monetary, loss of state subsidies, up to forced
closing of business), identification cards for construction workers, forced use of electronic payments, limits on cash transactions).
One has to take into account that in Germany, more than two-thirds of services offered in the shadow economy would disappear or
would be performed by customers themselves.
Negative enforcements would:
- possibly decrease the shadow economy, some evidence available (government interventions described)
- possibly reduce economic activity
Nudges to central policies
Solution/Sector
Tourism
Construction
Retail trade
Agriculture
Selected sectoral features, which are relevant to
specific measures
seasonal,
partially seasonal,
„visible“ publically,
„visible“
individually
seasonal, incl.
big projects
„visible“
individually
Increased transparency

incl. big projects



Increased transparency allows the whole society distinguish between free riders and those to whom shadow economy functions as
a safety net.
Construction: in a publically visible places, information available about the constructor, hotline number to report concerns to the
relevant government body.
Hot Doc, an investigative magazine, recently published a list of 2,000 Greeks who kept accounts at a Geneva branch of HSBC.
The Economist, November 3/9, 2012: A national sport no more.
Increasing transparency would:
- bring solutions to more problems
- possibly decrease the shadow economy
Nudges to central policies
Solution/Sector
Tourism
Construction
Retail trade
Agriculture
Selected sectoral features, which are relevant to
specific measures
seasonal,
partially seasonal,
„visible“ publically,
„visible“
individually
seasonal, incl.
big projects
Decentralize part of income tax collection to
municipalities
„visible“
individually
incl. big projects
horizontally
Local municipalities have some information about the real income of taxpayers, which the central government does not have. They
can recognize better than the central government who works in the shadow economy, to whom undeclared work serves as a sort of
safety net and who is just a free rider.
Sectoral income tax decentralization would:
- be technically complicated
- possibly distort economic competition among sectors/optimal allocation of resources
- possibly decrease the shadow economy, but relatively costly
Sources
• Wikipedia
• The Shadow Economy in Europe, 2010, ATKearney,
Friedrich Schneider from the Johannes Kepler
University, Linz, Austria
• Peter Goliaš, INEKO: Shadow economy in Europe
• In From the Shadow: Integrating Europe’s Informal
Labor, The World Bank report on shadow economy in
the Central and Eastern Europe, September 2012
• The Economist, November 3/9, 2012
• Not quoted in particular slides
Thank you for your attention