Undeclared work undermines social systems and employee rights, but good labour market regulation can reintegrate workers and benefit the economy, writes Denis Pennel.
Denis Pennel is the managing director of Eurociett, the European Confederation of Private Employment Services.
Estimates suggest that among the global working population of three billion people, almost two-thirds – some 1.8 billion people – are working in the undeclared economy. Here in Europe, levels of undeclared work differ widely from a low of 7.5% of GDP in Austria to 13% in Germany, and from 21.1% in Italy to a high of 31.2% of GDP in Bulgaria. Undeclared work poses a number of macro-economic challenges. It undermines business and the economy and impacts workers and citizens. Eurociett therefore welcomes the Commission initiative to establish a platform to exchange national best practices on tackling undeclared work, but it should not be just a talking shop!
For governments, undeclared work obstructs revenues from taxes, VAT and national insurance, which undermines the very sustainability of social protection systems. It also weakens the power of trade unions and collective bargaining. It places legitimate business at a competitive disadvantage in comparison to businesses operating in the black, and forces hitherto law-abiding firms away from regulatory compliance. Customers of the undeclared economy also suffer as they have little legal recourse if a job is badly done and no insurance or guarantees that health and safety regulations are followed. The impact on workers is profound. Undeclared employment effectively places them outside the system. They have no job security, no rights and no career progression. As a result, undeclared workers tend to experience a lower quality of work and working conditions.
The most effective way to stamp out undeclared work is not to just restrict it, but to turn it into regular work which appeals to both workers and employers while also providing financial support within the economy. Agency work can be one way to do this. Research shows a strong correlation between labour market efficiency, including the level of regulation on agency work, and the size of the undeclared economy. Those countries which enjoy efficient labour markets are the ones where levels of undeclared work are lowest.
When Italy changed its labour market regulation in the 1990s, removing restrictions on agency work, agency work penetration went up, while, simultaneously, the size of the undeclared economy went down. This is because agency work provides workers with employment incentives such as social protection, training and unemployment benefits, which helps them to enter the formal labour market. Once in the market, private employment agencies continue to meet supply with demand and to move workers within sectors and jobs, ensuring that they are constantly in work.
Creating optimal conditions to deter and prevent the undeclared economy is a question of balanced policies and regulation. Over-burdensome regulation and high taxes can drive businesses into the undeclared economy simply in order to survive, while at the other extreme, inefficient regulation and a lack of labour market intervention and social protection can equally result in the growth of undeclared work. By contrast, appropriate levels of regulation which encourage open, inclusive labour markets will result in a natural reduction of undeclared work.
Also, economies with mature social protection systems and labour market policy interventions that protect and support vulnerable workers are more flexible and more inclusive. By creating a mutually beneficial environment for workers and employers they reduce the supply and demand of undeclared work.
In spite of the recognition of its damaging effects, it is a fact that the undeclared economy is growing relative to the declared economy in many regions of the world. The good news is that there has been an increasing focus as of late from the European Commission, the Organisation for Economic Development (OECD) and the International Labour Organisation (ILO). They have been looking more closely at what drives undeclared work, and what policies are most effective in addressing it and seeking to prevent it in the future.
The Platform on the Prevention and Deterrence of Undeclared work, a Commission proposal which is now under discussion in the Employment Committee of the European Parliament, has set itself the initial task of boosting the sharing of information and exchange of best practices between member states. This will enable countries to start to address the challenges they face and is likely to be particularly important in some of the newer member states where labour markets have yet to be reformed and undeclared work is proportionally higher than the EU average.
This platform should facilitate effective information sharing between professionals with their boots on the ground. As labour mobility across Europe grows, labour market efficiency will become increasingly important, and countries across the EU 28 will need to coordinate and work together to stamp out undeclared work.