Explaining workers’ role in illegitimate wage underreporting practice: Evidence from the European Union

an article by Josip Franić (Institute of Public Finance, Croatia) published in The Economic and Labour Relations Review Volume 30 Issue 3 (September 2019)

Abstract

Despite substantial endeavours of international institutions and governments around the world to promote decent work, recent years have witnessed resurgence of non-standard and precarious labour practices.

This article scrutinises one of the most recently described types of non-standard work, which is known as quasi-formal or under-declared employment.

Companies relying on this illegitimate strategy, which is particularly prevalent in Europe, deliberately misreport the take-home pay of their formally employed workers. Alongside the officially declared wage, a quasi-formal worker thus receives an additional cash-in-hand payment which remains untaxed.

To explore why so many European Union workers accept quasi-formal jobs in spite of obvious limitations, we report the evidence from interviews with 616 workers who were surveyed within the Special Eurobarometer 284/Wave 67.3. A two-level cumulative logistic regression emphasises tax morale and the exact function of the cash-in-hand payment as the key factors in this respect.

On the other hand, neither perceived detection risk nor expected penalties are found to affect the readiness of quasi-formal workers to keep obeying an illegitimate arrangement with their employer.

These findings therefore endorse recent studies on the matter, which illuminate low trust in the state and fellow citizens as the main reason for many workers to voluntarily misreport their income.

JEL Classification: E26, H26, J46

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