Undeclared Work in Bulgaria: Monitoring and Policy Dynamics Skopje, 27-28 November 2014 Ruslan Stefanov Director Economic Program This project is funded by the European Union Instrument for Democracy and Human Rights
Forms of Undeclared Work Work without contract (main job) declining varies between 6% in 2003 to 4% in 2013 Work without contract (second job) steep decrease from 77,4% in 2003 to 32,2% of dependent employees in 2013 Under-declared employment (envelope wages) on the rise 10% in 2003 and 13,8% in 2013 Under-reporting by employers more serious than non-reporting by self-employed or households Source: CSD / Hidden Economy Index, 2003-2013
Sectorial, Business and Socio-Economic Variations Vulnerable sectors / productive activities Construction, real estate sales Tourism, hotels and restaurants Wholesale trade and retail (food, garments, textiles) Agriculture, food processing Services (repairs, advertising, accounting, hydroisolation, funerals, taxis, security...) Food commodities trade (grain, sugar, etc) Production and distribution of excise goods (cigarettes, fuels, alcohol) Vulnerable business types Small and medium-size enterprises Domestic firms Micro-firms and sole traders Start-ups Firms in small/medium towns and in rural areas Vulnerable population groups Long-term / temporary unemployed / discouraged Low-qualified, low earners, manual workers Self-employed Young people
Drivers of undeclared work Structural drivers Institutional credibility and social norms Business regulations Structure of taxation Welfare system Labour market regulations and interventions (minimum wages, insurance thresholds, etc.) Government effectiveness, control of corruption, rule of law Procedural fairness and justice Tax morale Relationship of trust between state institutions and citizens
Direct Methods for Measuring Eurobarometer survey Supply and demand of undeclared work Hidden Economy Index, CSD (since 2002) Business Hidden Economy Index Population Unreported Economic Activity Index White Economy Index, Bulgarian Industrial Capital Association (since 2010) Population survey Business survey Sectorial audits
The Hidden Economy Index Business Population Assessment of the size Hidden employment Assessment of the size Hidden employment Hidden turnover Hidden redistribution Hidden turnover
Indirect Methods for Measuring Measurement method Period covered Estimated size of the undeclared sector as % of GDP DYMIMIC (Schneider 2013) 2013 1999-2007 Two-sector dynamic general equilibrium model (Elgin and Öztunali, 2012) Electricity consumption (Ministry of Finance, 2010) Monetary method (corrected) (Ahumada et al, 2009) 31.2% 35.3% 2000-2008 35.5% - 31.9% 2000-2009 20% 1998-2007 15% Currency circulation method (Nenovski and Hristov, 2000) 1999 26.8% Electricity consumption (Kyle et al, 2001) 1989 1998 25% - 37%
Extent of Undeclared Work 40 35 34 34 34 34 Shadow economy as % of GDP 32,6 32,3 31,9 31,2 30 25 20 20,9 20,1 19,4 19,9 19,7 19,3 19 18,5 15 10 5 0 2006 2007 2008 2009 2010 2011 2012 2013e BG EU28 + Source: Schneider, 2013 (MIMIC method)
Employers Estimates of the Informal Economy Share in Bulgaria Source: BICA, First Monitoring Report on Informal Economy and Progress in Prevention
Unreported Economic Activity of the Population 6,00 Share of people hired without a contract 5,00 4,00 3,00 Share of people hired without social security contributions Hidden Employment 2,00 Hidden Turnover 1,00 0,00 Feb'03 Mar'04 Nov'04 Aug'08 Oct'09 Dec'10 Mar'12 Oct'13 Hidden Economic Activity Source: CSD, Hidden Economy Survey on the Population
Main Economic Trends Main positive competitiveness boosting factors are Bulgaria s fiscal stability and the low labor and productivity costs Main concerns are related to the deep structural problems of the Bulgarian labor market, corrupt management practices and weak institutional framework in the country
Number of unemployed, in thousands Long Term vs. Overall Unemployment for 2010 2014 (Q1 & Q2) Total unemployment LT unemployment 500 400 341,6 387,2 415,5 446,9 407,4 300 200 145,6 208,9 227,3 247,3 238,5 100 0 2010 2011 2012 2013 2014* Source: National Statistical Institute
Youth Unemployment Overview for 2010 2014 (Q1 & Q2) 40% 30% 22% 26% 30% 29% 25% 20% 10% 0% 2010 2011 2012 2013 2014* *preliminary values Source: National Statistical Institute Bulgaria Youth unemployment
Comparison between the Unemployment Rates for 2013 and 2014 according to Educational Level Source: National Statistical Institute
Eurobarometer survey 2007 and 2013 Bulgaria Source: Special Eurobarometer 402, N=1,000 / 1,018
Dynamics of the Indexes "Hired Without Contract" and "Hired Under Contract with Hidden Clauses" 5 4,5 4 3,5 3 2,5 2 1,5 1 0,5 0 2002 2003 2003 2004 2005 2007 2007 2008 2009 2010 2012 2013 Share of people hired without a contract Share of people hired on contract with hidden clauses Source: Center for the Study of Democracy
Envelope Wages on the Rise: Payment of Renumeration Higher than the Stated in the Contract in the Past Month (Population) Source: CSD / Hidden Economy Index, 2013
Base Amount for Payment of Social Security Contributions under Primary Employment 2003-2013 (%) Type 2003 2004 2008 2009 2010 2012 2013 The minimum social security threshold, although sum of my 12,1 13,4 13,5 12,9 10,3 9,0 12,6 renumeration is higher The minimum social security threshold, which is what I am 10,3 14,3 9,5 12,6 5,9 7,0 5,2 actually paid The amount stated in my contract even though the total sum of my 6,7 8,3 15,0 15,5 8,4 13,0 15,3 renumeration is higher The amount stated in my contract, which is what I am actually getting 68,3 63,4 61,8 56,2 67,0 67,0 63,8 paid Other 2,6 0,6 0,3 2,8 1,5 4,0 3,1 Base 348 314 378 395 466 420 505 Source: Center for the Study of Democracy, survey of the population
Share of Employed under no Employment Contract under Primary or Secondary Employment 2003-2013 (%) 2003 2004 2008 2009 2010 2012 2013 Without labor contractprimary employment 6,0 5,9 5,6 5,9 3,4 3,0 4,0 Without labor contractsecondary employment 77,4 59,1 51,5 51,0 38,1 29,0 32,2 Source: Center for the Study of Democracy
25 20 15 10 5 BICA employees survey: participation in undeclared work % of employees 6 6 5,2 10,8 10,8 10,8 10,8 8,8 20,8 16,8 12,8 10,4 0 Receive remuneration lower than the minimum wage Work without social security contributions being paid by employer Work under contract with hidden clauses ( cash in hand ) Work without contract 2010 2012 2013 Source: BICA (2013) Survey of employees, N=250 employees
Institutional framework for combatting undeclared work Enforcement bodies: General Labour Inspectorate (GLI) National Revenue Agency (NRA) - Focus on inspections and administrative control measures - Tax revenue collection strengthened - A service-oriented approach towards taxpayers starting to emerge
Control Agencies: annual reports National Revenue Agency; Employment Agency; National Labor Inspectorate Regional Inspectorate for Protection and Control of Public Health; Bulgarian Food Safety Agency Observation on indicators for Activities of Shadow Economy Regional Inspectorate for Environment and Water Directorate for National Construction Supervision
Businesses inspected by GLI in 2012 by firm size 3 932 1 070 micro-businesses 11 184 24 161 small businesses medium-sized businesses large businesses Source: General Labour Inspectorate, Annual Report 2012
Repressive measures Mandatory real-time link between fiscal devices and the revenue agency servers (2011) Excise goods movement control system (2010) Increased penalties and enhanced (joint) controls (labour inspectorate and revenue office) Targeted inspection campaigns (seasonal work, highrisk sectors, part-time contracts)
Preventative measures (deterring entry) Act on Limiting Administrative Regulation and Administrative Control on Economic Activity (2003) Mandatory registration of labor contracts (2002) Minimum Social Insurance Thresholds (2003) Restricting cash transactions above BGN 15,000 (2011) Enhancing administrative control and increasing sanctions: National Revenue Agency and the Chief Labor Inspectorate NRA is using more e-services to increase customer satisfaction (2012) More recently: introducing risk analysis
Enabling movement out of the shadow economy (curative measures) Flat income tax on personal income and corporate profits (2008) Food vouchers (2003) additional non-taxable income for employees substitute/reduce undeclared cash wage payments
Fostering a culture of commitment Come Into the Light campaign (2007) (Bulgarian Industrial Association and the Bulgarian Industrial Capital Association) Work Legally campaign (2008) (General Labour Inspectorate) Proactive role of social partners: research, formalisation advise, public awareness, education services: National Center Rules for Business - Bulgarian Industrial Capital Association (BICA) and Confederation of the Independent Trade Unions in Bulgaria (CITUB) Virtual Social Academy Bulgarian Chamber of Commerce and Industry (BCCI) (http://www.vsa.bcci.bg)
Policy conclusions Focus on punitive and corrective measures has produced some results in the area of tax evasion and registration of labour contracts. However, sustainability of their effect uncertain without efforts to stimulate voluntary compliance, create more enabling business environment, improve procedural fairness and justice and restore public trust. Many policy measures, but no integrated approach, no systematic evaluation of the effect of measures implemented or planned (inlc. adaptation costs for affected groups to increase policy acceptability).
Thank you for your attention WWW.CSD.BG This project is funded by the European Union Instrument for Democracy and Human Rights