Do Deterrents Prevent Undeclared Work? An Evaluation of the Rational Economic Actor Approach

Abstract

Across the member states of the European Union and beyond, paid transactions occur that are not declared to the state for tax, social security and/or labour law purposes when they should be declared. This is not a minority practice. The undeclared economy is estimated to be equivalent to 17.9 per cent of the EU28 GDP in 2016. Similarly, it is estimated that 9.3 per cent of total labour input in the private sector in the EU28 is undeclared and that undeclared work constitutes on average 14.3 per cent of gross value added in the private sector. Furthermore, in 2013, 4 per cent of EU28 citizens admitted that they have conducted undeclared work in the 12 months prior to the survey. However, this percentage might be underestimated, given that respondents might not answer honestly about illegal work practices. Tackling the undeclared economy has thus become a core issue on the policy agendas of supra-national agencies and governments. Addressing this practice is important because it results in lost public revenues, a worsening of working conditions, and unfair competition for legitimate businesses. How, therefore, can the undeclared work be tackled? Reviewing the policy measures used by governments, two distinct approaches are identified, namely a rational economic actor approach that tackles undeclared work by ensuring that the payoff from undeclared work is outweighed by the costs, which is heavily used, and a social actor approach grounded in a view that undeclared work arises when horizontal and vertical trust are low, which is used to a lesser extent. The purpose of this policy brief is to review the policies that can help EU Member States reduce the share of undeclared work and focuses on evaluating the effectiveness of the rational economic actor approach.