Formal and Informal Employment in Europe

Abstract

This article reveals that formal labour markets in the European Union are not always quite as pure, wholesome and legitimate as might be supposed. Until now, it has been commonly assumed that the formal economy is separate and discrete from the informal economy. To contribute to the emerging literature showing that this is not always the case and that the formal economy can be permeated by informal practices, a so far little discussed employment arrangement is here brought to the fore in which formal employers pay their formal employees two wages, one declared and the other an undeclared (`envelope') wage. Reporting a 2007 survey composed of 26,659 face-to-face interviews in the 27 EU member states, the finding is that some 5 percent of all formal employees receive such undeclared wages from their formal employers which amount on average to two-fifths of their wage packet. However, this employment practice is not evenly distributed across the EU. Such quasi-formal employment is markedly more prevalent in Central and Eastern Europe (CEE), where the undeclared wage is more likely to be paid for regular employment hours, while in Continental Europe and Nordic countries undeclared wages are less common and are received mostly for overtime or extra work conducted. Given the prevalence in the EU of this hybrid employment practice which is neither purely formal nor informal, the article concludes by calling for greater recognition of how formal and informal employment are sometimes intimately interlocked and entwined rather than separate and discrete spheres.