The Commission intends to launch a debate on the causes of undeclared work and the options for combating it as part of the European employment strategy.
Communication from the Commission of 7 April 1998 on undeclared work [COM(98) 219 final - not published in the Official Journal].
Undeclared work affects all Member States and is therefore one of the issues of common concern in the employment field.
Undeclared work may be described as "any paid activities that are lawful as regards their nature but not declared to the public authorities, taking into account differences in the regulatory systems of Member States". This definition excludes criminal activities and work which does not have to be declared.
It is by definition difficult to determine the extent of undeclared work. On the basis of the adopted hypotheses, the size of the undeclared economy is put at between 7% and 16% of the gross domestic product (GDP) of the European Union, or between 7% and 19% of total declared employment.
The main attraction of the undeclared economy is financial. This type of activity allows employers, paid employees and the self-employed to increase their earnings or reduce their costs by evading taxation and social contributions.
The scope for and extent of undeclared work vary according to different institutional aspects of the economy of each Member State, such as:
- tax and social contributional levels,
- burden of general costs and administrative procedures,
- inappropriateness of legislation with regard to new forms of work,
- local industrial structures based on a large number of small firms,
- low competitiveness of firms in declining sectors which need a lot of low-qualified labour,
- cultural acceptance of the informal economy,
- existence of easy opportunities.
Four main groups of undeclared workers can be identified:
- persons with two or more jobs;
- "economically inactive" persons (students, housewives, early retired persons);
- the unemployed;
- illegal immigrants.
Undeclared work is particularly prevalent in labour-intensive sectors:
- the traditional sectors such as agriculture, construction, retail trade, catering and domestic services;
- manufacturing and business services where competitiveness depends mainly on costs;
- innovative sectors using electronic communications.
Undeclared work can have a significant impact on public finances, owing to the resulting tax and social contributions revenue losses. This situation creates a vicious circle, as the government raises taxes to continue to provide public services, thus creating more incentives for undeclared work.
The impact on individuals is also significant. As regards social security cover, the implications vary depending on the Member State and the individual situation. In any event, undeclared workers are not covered by unemployment insurance or insurance against workplace accidents. Undeclared workers who are officially inactive forgo all the benefits of working with a formal contract, such as training, a specific career profile, pay rises and a sense of belonging to the firm. They will also have difficulty in moving into other jobs.
The problem of undeclared work can be interpreted in two ways:
- as a situation in which individuals or firms taking advantage of the system, damaging solidarity. In this case political intervention should be oriented towards sanctions and awareness-raising;
- as the outcome of the inappropriateness of legislation to new forms of work, in which case action should concentrate on prevention (simplification of procedures, recognition of new occupations and competences, reduction of taxation on labour, etc.).
It is therefore important to reduce the economic incentives for not declaring work and to change the risk/advantage balance. In order to be effective in combating undeclared work, a comprehensive targeted strategy must be established. A mix of measures drawing on the two approaches outlined above must be implemented, ensuring that the various measures interact and that other policy initiatives do not contradict them.
Member States have implemented a number of measures tailored to match the differing forms of the phenomenon and their prevalence. In some Member States initiatives have concentrated on undeclared work in the form of second jobs, whereas in others they have been aimed at the more "industrialised" form of undeclared work. It is important to note, however, that some initiatives taken with other objectives in mind have had positive side-effects on undeclared work.
The measures to be implemented will necessarily differ among the Member States. Implementation of several of the employment guidelines for 1998, such as those on developing entrepreneurship and encouraging adaptability, will help to discourage undeclared work. If action at EU level proves necessary, it could be considered in the context of the employment guidelines for 1999.