Ioana Alexandra Horodnic

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

This article examines the undeclared economy in general, and envelope wages more particularly, in 10 Central and East European countries, drawing on a 2013 Eurobarometer survey. The explanatory approach focuses on the asymmetry between the codified laws and regulations of the formal institutions and the unwritten socially shared rules of informal institutions. A strong association is revealed between the prevalence of envelope wage payments and the degree of asymmetry between formal and informal institutions at both the individual and country levels. We explore the implications for theorising and for tackling undeclared work practices.

Explaining Participation in the Informal Economy: An Institutional Incongruence Perspective

Drawing inspiration from institutional theory, a small sub-stream of literature has proposed that participation in the informal economy arises from the lack of alignment of a society’s formal institutions (i.e. its codified laws and regulations) with its informal institutions (i.e. the norms, values and beliefs of its population). To further advance this explanation, this article reports a 2013 Eurobarometer survey involving 27,563 face-to-face interviews across 28 European countries. The finding is that there is a strong association between the degree to which formal and informal institutions are unaligned and participation in the informal economy. The greater is the asymmetry between the formal and informal institutions, the more likely is participation in the informal economy at the individual-, population group- and country-level. A new policy approach for tackling the informal economy which focuses upon reducing this institutional incongruence is then discussed.

Cross-country variations in the participation of small businesses in the informal economy: An institutional asymmetry explanation

Purpose – The purpose of this paper is to advance a new explanation for cross-country variations in the participation of small businesses in the informal economy. Drawing upon institutional theory, it proposes that the greater the asymmetry between the codified laws and regulations of formal institutions (state morality) and the unwritten socially shared rules of informal institutions (civic morality), the greater is the propensity of small businesses to participate in the informal economy. To analyse this, the extent to which small businesses evade payroll taxes by paying employees an undeclared (envelope) wage in addition to their official declared salary is analysed. Design/methodology/approach – To evaluate this, data are reported from a 2013 Eurobarometer survey involving 5,174 face-to-face interviews with employees in small businesses across the 28 member states of the European Union (EU-28). Findings – The finding is that small businesses display a greater propensity to engage in this informal wage...

Tackling the informal economy in Southeast Europe: an institutional approach

Analysing a 2013 survey of the informal economy in six Southeast European nations, this paper reveals how such tax non-compliance arises when the codified laws and regulations of a society’s formal institutions are not aligned with the norms, values and beliefs of citizens (its informal institutions). Tackling the informal economy is therefore shown to require a re-aligning of a society’s formal and informal institutions. This necessitates not only changing citizens’ norms, values and beliefs using, for example, tax education campaigns, but also changing the formal institutions to improve trust in government. The wider theoretical and policy implications are then discussed.

Explaining and tackling the shadow economy in Estonia, Latvia and Lithuania: a tax morale approach

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 likelihood to participate in the shadow economy. To evaluate this, a 2013 survey is reported involving 3036 face-to-face interviews in these 3 Baltic nations. Using logistic regression analysis, the finding is that the likelihood of participating in the shadow economy is greater, the lower is the tax morality of individuals, population groups and countries. In addition, the likelihood to participate is shadow economy is found to significantly vary by, for example, gender, employment status and country, people living in Latvia and Lithuania displaying significantly lower likelihood to engage in the shadow economy. The paper then explores the implications for theorizing and tackling the shadow economy.

Marginalisation and participation in the informal economy in Central and Eastern European nations

To evaluate the ‘marginalisation thesis’, which holds that marginalised populations are more likely to participate in the informal economy, this article reports a 2013 special Eurobarometer survey conducted in 11 Central and Eastern European countries. Using multilevel mixed-effects logistic regression analysis, the finding is that although some marginalised populations (i.e. the unemployed, those having difficulties paying their household bills, younger age groups) are significantly more likely to participate in the informal economy, others are not (e.g. those in poorer countries, living in rural areas, with less formal education). Yet others (e.g. women) are significantly less likely to participate in the informal economy. The outcome is a call for a more nuanced understanding of the marginalisation thesis as valid for some marginalised populations but not others. The article concludes by discussing the implications for theory and policy of this more variegated assessment of the marginalisation thesis.

Regulating the sharing economy to prevent the growth of the informal sector in the hospitality industry

Purpose To tackle one of the main negative consequences of the sharing economy, namely, the growth of the informal sector, the purpose of this paper is to evaluate for the first time the impacts of the informal sector on the hospitality industry and then to discuss what needs to be done to prevent the further growth of the informal sector in this industry. Design/methodology/approach To evaluate the impacts of the informal sector on the hospitality industry, data are reported from 30 East European and Central Asian countries collected in 2013 in the Business Environment and Enterprise Performance Survey. Findings The finding is that 23 per cent of hotels and restaurants in Eastern Europe and Central Asia report competing against unregistered or informal operators, and 13 per cent view these informal competitors as a major or severe obstacle. The larger the business, the greater is the likelihood that the informal sector is considered their biggest obstacle. Practical implications To prevent the further growth of the informal sector in the hospitality industry, regulation of the sharing economy will be required. To achieve this, it is shown that state authorities need to adopt both direct control measures that alter the costs of operating in the informal sector and the benefits and ease of operating formally, as well as indirect control measures that reduce the acceptability of operating in the informal sector. Originality/value This is the first paper to evaluate the impacts of the informal sector on the hospitality industry and to outline the policy measures required to prevent its further growth with the advent of the sharing economy.

Explaining participation in undeclared work in France: lessons for policy evaluation

Purpose France is a model of best practice in the European Union as regards policy to combat undeclared work. The purpose of this paper is to take the country as a case study to evaluate the competing explanations of why people engage in undeclared work which underpin such policy, namely, the dominant rational-economic-actor approach and the more recent social-actor approach. Design/methodology/approach To evaluate these approaches, the results of 1,027 interviews undertaken in 2013 with a representative sample of the French population are analysed. Findings The finding is that higher perceived penalties and risks of detection have no significant impact on the likelihood of conducting undeclared work in France. In contrast, the level of tax morale has a significant impact on engagement in the activity: the higher the tax morale, the lower is the likelihood of participation in the undeclared economy. Higher penalties and risks of detection only decrease the likelihood of participation in undeclared work amongst the small minority of the French population with very low tax morale. Practical implications Current policy in France to counter undeclared work is informed principally by the rational-economic-actor approach based on a highly developed infrastructure for detection and significant penalties alongside incentives to declare small-scale own-account work. The present analysis suggests that this approach needs to be supplemented with measures to improve citizens’ commitment to compliance by enhancing tax morale. Originality/value This case study of a country with a well-developed policy framework to combat undeclared work provides evidence to support the social-actor approach for informing policy change.

TACKLING BOGUS SELF-EMPLOYMENT: SOME LESSONS FROM ROMANIA

In recent years, recognition that bogus self-employment is rapidly growing, not least because of the advent of what has been called the ‘gig,’ ‘sharing’ or ‘collaborative’ economy, has led governments to search for ways to tackle this form of dependent self-employment that is widely viewed as diminishing the quality of working conditions. Until now, however, there have been few ex-post evaluations of policy initiatives that seek to tackle this phenomenon. Therefore, the aim of this paper is to provide one of the first ex-post evaluations by examining the outcomes of a 2016 legislative initiative in Romania to tackle bogus self-employment. Reporting both descriptive statistics and OLS regression analysis on monthly official data from August 2014 to August 2016, the finding is that while other business types and waged employment rates followed a similar trend to the years before the introduction of the new legislation, the number of self-employed started a negative trend after the new legislation was announced. After controlling for other indicators related to the economy (i.e. GDP) and labor market (i.e. employees, other companies, vacancy rates), the impact of the new legislation on the self-employed remains negative, offering reasonable grounds for assuming bogus self-employed was lowered by the new legislation. The paper concludes by discussing the wider implications of these findings.

Tackling the undeclared economy in the European Union: an evaluation of the tax morale approach

To evaluate a new approach towards tackling the undeclared economy, which views participants as social actors rather than rational economic actors, this article reports evidence from 27,563 face‐to‐face interviews conducted across the European Union during 2013. Multilevel logistic regression analysis reveals a strong association between participation in undeclared work and the level of tax morale. Finding that higher tax morale (and thus a lower propensity to engage in undeclared work) is strongly correlated with greater levels of state intervention but also with individual‐level characteristics such as gender, age, education and employment status, the article concludes not only by confirming a political economy approach and refuting modernization and neo‐liberal explanations and remedies, but also by revealing for the first time the importance of solutions not so far considered, including improving educational attainment, older citizens mentoring for younger people and improving womens participation in the labour force.