Explaining cross‐national variations in the prevalence of envelope wages: some lessons from a 2013 Eurobarometer survey

• Date: 01 November 2014
• Published date: 01 November 2014
• Author: Colin C. Williams
• DOI: http://doi.org/10.1111/irj.12077

Explaining cross-national variations in the

prevalence of envelope wages: some lessons

from a 2013 Eurobarometer survey

Colin C. Williams

ABSTRACT

The aim of this article is to evaluate competing theories that variously explain the

greater prevalence of envelope wages in some countries either as: a legacy of under-

development (modernisation thesis); due to high taxes, state corruption and burden-

some regulations and controls (neo-liberal thesis), or a result of inadequate state

intervention in work and welfare arrangements, which leaves workers less than fully

protected (political economy thesis). Reporting a 2013 survey of cross-national vari-

ations in the prevalence of envelope wages, the finding is that the results refute the

neo-liberal thesis but support both the modernisation and political economy theses,

revealing that this illegitimate wage practice is more common in poorer, less equal

countries with lower taxation and social protection levels and less effective redistri-

bution via social transfers. The theoretical and policy implications are then discussed.

1 INTRODUCTION

In the current period of economic crisis, employers might well be reducing their

labour costs by pursuing various illegitimate labour practices. For example, they may

be directly employing wholly undeclared labour, sub-contracting and outsourcing

tasks to the ‘false self-employed’ or declaring only some of their formal employees’

salaries and paying the rest as an undeclared (‘envelope’) wage in order to reduce tax

and social security payments. Until now, however, it is unknown which, if any, of

these illegitimate strategies have expanded during the recent period of economic crisis.

This article begins to fill that gap. The aim is to report the first study since the

economic crisis on the prevalence of the illegitimate labour practice of paying

envelope wages across the 27 member states of the European Union (EU-27). This is

where formal employers under-report the salaries of formal employees by paying

them a declared official salary and an additional undeclared (‘envelope’) wage so as to

❒Colin C. Williams is Professor of Public Policy in the Management School at the University of Sheffield.

His books include The Shadow Economy (2013, Institute of Economic Affairs), The Role of Informal

Economies in the Post-Soviet World (2013, Routledge), The Informal Economy in Developed Nations (2010,

Palgrave-Macmillan), The Hidden Enterprise Culture (2006, Edward Elgar) and Cash-in-Hand Work (2004,

Palgrave-Macmillan). His research interests are centred on informal employment, work organisation and

public policy. Correspondence should be addressed to Colin C. Williams, Public Policy, Management

School, University of Sheffield, 219 Portobello, Sheffield S1 4DP; email: c.c.williams@sheffield.ac.uk

Industrial Relations Journal 45:6, 524–542

ISSN 0019-8692

© 2014 John Wiley & Sons Ltd

reduce tax and social security payments (Karpuskiene, 2007; Meriküll and Staehr,

2010; Neef, 2002; Sedlenieks, 2003; Williams, 2007; 2008a; 2008b; 2009a; 2009b;

2009c; 2009d; 2009e; Woolfson, 2007; Žabko and Rajevska, 2007). The intention is to

provide evidence on the prevalence of envelope wages during the current economic

crisis across the EU-27 and in doing so, to explain the cross-national variations in the

prevalence of this illegitimate wage practice in the contemporary period.

To achieve this, the first section will briefly review the existing literature on

envelope wages and set out three predominant and competing theoretical perspectives

that variously explain the cross-national variations in this illicit wage arrangement as:

a legacy of under-development (modernisation perspective); due to high taxes, state

corruption and burdensome regulations and controls (neo-liberal perspective), or a

result of inadequate state intervention in work and welfare arrangements, which

leaves workers less than fully protected (political economy perspective). To evaluate

the cross-national variations in the prevalence of this practice during the current

period of economic crisis and the contemporary validity of these competing explana-

tions, the second section reports the methodology of the 2013 Eurobarometer survey

conducted in the EU-27 followed in the third section by the findings. Revealing that

envelope wage payments have declined since the onset of the economic crisis but

remain less common in wealthier and more equal societies with higher levels of

taxation, social protection and redistribution via social transfers, the final section will

review the theoretical and policy implications of these findings.

2 EXPLAINING THE UNDER-REPORTING OF SALARIES:

A LITERATURE REVIEW

During the middle-to-late twentieth century, grounded in a dichotomous depiction of

employment relationships as either declared or undeclared, undeclared employment

was seen as discrete from declared employment (Geertz, 1963; Lewis, 1959). The

possibility that an employment relationship could be concurrently both declared and

undeclared was not considered. Declared work was paid work declared to the state for

tax, social security and labour law purposes, while undeclared work was in every

respect the same except that it was wholly hidden from, or unregistered by, the state

for tax, social security and/or labour law purposes (European Commission, 2007;

ILO, 2012; OECD, 2003). Over the past few decades, however, this dualistic repre-

sentation of the employment relationship as either declared or undeclared has been

transcended (e.g. Bignami et al., 2013; Williams, 2009e). A burgeoning literature has

displayed that formal employers sometimes under-declare the salaries of formal

employees by paying them both an official declared salary as well as an additional

undeclared salary, or what is termed an ‘envelope wage’, which is hidden from, or

unregistered by, the state for tax and social security purposes. This was first identified

in Central and Eastern Europe in studies conducted in Estonia (Meriküll and Staehr,

2010), Latvia (OECD, 2003; Meriküll and Staehr, 2010; Sedlenieks, 2003; Žabko

and Rajevska, 2007), Lithuania (Karpuskiene, 2007; Meriküll and Staehr, 2010;

Woolfson, 2007), Romania (Neef, 2002), Russia (Williams and Round, 2008) and

Ukraine (Round et al., 2008; Williams, 2007).

These studies were largely either small-scale qualitative surveys or more extensive

surveys but of a single country, ranging from a study of a single person in

Lithuania, albeit a cause celebre (Woolfson, 2007) and a study in Riga in Latvia of 15

respondents (Sedlenieks, 2003) through more extensive studies involving 313 house-

525Envelope wages in the EU-27

© 2014 John Wiley & Sons Ltd