Tackling the Undeclared Economy in FYR Macedonia: A Baseline Assessment

Abstract

This report provides a detailed review of available evidence on the extent and nature of the undeclared economy in the Former Yugoslav Republic of Macedonia (FYROM), as well as on the institutional actors involved in tackling the phenomenon and their policy approach and measures used. Extent and nature of the undeclared economySome widely cited international measurements that cover FYROM find that the share of its undeclared economy is larger than in all EU Member States, estimated at 35% of GDP in 2007 (Schneider et al, 2010). Data from the most recent national Labour Force Survey suggests that in 2012 around 22.5% of the workforce was engaged in undeclared work, and therefore was not covered by any social or legal protection (SSO, 2013). This survey further indicates that undeclared work has been declining since 2008, in parallel to an increase in the number of formally employed persons. The age groups most affected by informal employment are young people aged 15-24 (40% of all employed in that age group), as well as those older than 65 years (over 85% of all employed from that age group). When it comes to gender variations, the data reveals that men are slightly more likely to work in the informal sector than women (23.3% of men compared to 21.3% of women for 2012). Moreover, there is a difference in the type of informal work performed with women being mainly informally involved in agriculture, whereas men are self-employed or employers in unregistered firms.There is a clear link between undeclared work and job precariousness in the FYROM: undeclared workers are less likely to hold full-time, permanent waged jobs. Furthermore, wage earners are less likely to work undeclared than sole traders and the self-employed. These trends become even more pronounced in rural areas compared with urban ones, and among the young and ethnic minorities.When it comes to sectorial and business variations in the incidence of undeclared work, the main findings of the World Bank Enterprise Survey 2013 suggests that businesses in manufacturing are more likely that those in retail or services to face competition from unregistered firms. At the same time, formal businesses in retail are more likely to perceive such unfair competition as a major constraint to conducting business in the country. Medium-size enterprises, domestic firms and firms located in South Macedonia are also more likely to face competition from entities operating off-the-books. In general, labour-intensive, low-earning jobs in construction, transport, catering, the textile industry, domestic services, agriculture and trade are particularly prone to undeclared work. Purchasing goods from undeclared merchants at markets is a particularly widespread practice. The share of informal employment in agriculture is significant – between 86.1% and 82.4% of all agricultural employment. This sector is also largely affected by non-standard work. Barriers to formalisationFrom a labour perspective, two major factors hamper formalisation: a) the lack of jobs in the official economy and high unemployment rates and b) some disincentives for engaging in formal work stemming from shortcomings of the welfare system. From the perspective of businesses the frequent changes in the tax system, as well as the lack of transparency and impartiality within state institutions need further attention. Enhancing the skills, expertise and powers of tax officials, improving judicial efficiency and ensuring greater independence of inspectors are some key objectives in the fight against undeclared work. Auditing and arrears collection efficiency and the investigative capacity of the tax administration should be further improved. Socio-cultural factors such as trust in public institutions and the perceived fairness of official rules and norms have a significant effect on tax morale and voluntary compliance. It seems that a significant proportion of taxpayers do not see a clear link between paid taxes and received benefits, which has resulted in a wide approval of disobedience with official rules. Therefore, all imminent efforts to eradicate undeclared work should put the improvement of the psychological contract between the state and its citizens high on the agenda.Policy approach to tackle undeclared workA number of labour market measures have been implemented in FYR Macedonia in recent years, focused mainly on stimulating employment in the official economy. However, when it comes to tackling undeclared work or the transition towards formal employment, the accent is still predominantly on repression through intensified controls and inspections. Some progress has been achieved in reducing the compliance costs for doing business and easing the tax burden through a number of supply-side measures, such as tax incentives for business, a flat-tax system and tax rate harmonisation, as well as simplified procedures for company registration and paying taxes.