Demand-side incentives to combat the underground economy: some lessons from France and Belgium.

• Author: Windebank, Jan
• Position: Report

Abstract

This paper evaluates critically the currently dominant public policy approach towards underground work that primarily pursues supply-side deterrence measures and then investigates how demand-side incentives might be used to supplement this approach. To show how this could be achieved, the experiences of France and Belgium where voucher schemes have been used to encourage customers to use formal rather than underground labor are evaluated. Analyzing the Local Employment Agency and Service Voucher schemes in Belgium and the Cheque Emploi Service (CES) and Titre Emploi Service (TES) schemes in France, this paper finds that given the evidence of their apparent effectiveness in combating underground work in these countries, there is a case for other advanced market economies giving greater consideration to complementing their supply-side deterrence measures with similar demand-side incentives.

Introduction

The aim of this paper is to evaluate critically the currently dominant public policy approach towards underground work in advanced market economies that relies heavily on applying supply-side deterrence measures and then to investigate how demand-side incentives might be employed to supplement such an approach. To do this, the ways in which demand-side incentives have been used to combat underground work in France and Belgium will be evaluated. Firstly, the Local Employment Agencies scheme in Belgium will be evaluated, secondly, the Service Vouchers Scheme again in Belgium, thirdly, the Cheque Emploi Service scheme in France and fourth and finally, the Titre Emploi Service scheme again in France. The outcome will be to show that these schemes clearly display that there is perhaps a need in advanced market economies to move away from using solely supply-side deterrence approaches and for greater consideration to be given to supplementing such measures with demand-side incentives when seeking to combat the underground economy.

To reveal this, the paper firstly provides a brief review of how public policy towards the underground economy predominantly adopts a supply-side deterrence approach in most advanced market economies and how this has resulted in little attention being given to either demand-side approaches or incentive systems when tackling underground work. Following this, attention turns toward exploring the potential of a demand-side incentives approach by evaluating four initiatives that have been pursued. These are the Local Employment Agencies and Service Vouchers schemes in Belgium and the Cheque Emploi Service and Titre Emploi Service schemes in France. Having reviewed these initiatives, the paper will then conclude by evaluating whether demand-side incentive schemes might be adopted in other advanced market economies as a way of tackling the underground economy.

Throughout this paper, the underground economy is defined in the conventional and widely accepted manner as involving the paid production and sale of goods and services that are unregistered by, or hidden from the state for tax and/or welfare purposes but which are legal in all other respects (European Commission, 1998; Portes, 1994; Thomas, 1992; Williams and Windebank, 1998, 2001a,b). Underground work, therefore, includes only paid work that is illegal because of its non-declaration to the state for tax and/or social security purposes. It excludes paid work in which the good and/or service itself is illegal (e.g., drug trafficking).

From Supply- to Demand-Side Public Policy Approaches

In the advanced market economies, the predominant way in which public policy has sought to eradicate the underground economy is by pursuing supply-side deterrence measures. In other words, most of the effort of governments has been on curtailing people from supplying off-the-books labor by constructing a range of deterrents. The principal way in which this has been achieved is by seeking to increase the probability of detection and the level of punishments meted out to those caught. Based on the assumption that such workers make a rational economic decision to engage in such work, the idea has been that by increasing the costs associated with underground work relative to the benefits, one can change the cost-benefit calculation for potential participants thus ensuring that suppliers decide not to engage in this work (e.g., Allingham and Sandmo, 1972; European Commission, 1998, 2003; Falkinger, 1988; Grabiner, 2000; Hasseldine and Zhuhong, 1999; International Labor Office, 1996, 2002; Milliron and Toy, 1988; Sandford, 1999).

To achieve this, most western countries have pursued some or all of the following deterrence measures: increasing sanctions for employers and employees; stepping up controls; increasing the level of punishments; increasing co-operation and data exchange between authorities; installation of cooperation networks; field checks; introducing fraud hotlines; increasing registration and identification requirements; arranging house visits or appointments with benefit claimants unannounced and/or during regular working hours; strict immigration policy; stricter border controls, and excluding businesses having made use of underground workers from business tenders.

On the whole, therefore, a rather narrow approach to combating the underground economy has been adopted. Relatively underemphasized so far in public policy are on the one hand, incentives to encourage suppliers to work formally rather than on an underground basis and on the other hand, demand-side measures both of a deterrence and incentives variety. Such a narrow supply-side deterrents approach would be fine if western governments simply wished to eradicate the underground economy. What has become apparent over the past few years, however, is that this is not the case. Governments do not solely wish to eliminate such work. They also wish to transfer work currently conducted on an off-the-books basis into the formal economy (see Williams, 2004d in this volume]. To achieve this, deterring off-the-books suppliers is necessary but insufficient. Initiatives are also required to encourage suppliers and consumers to transfer this work into the formal economy, not least so as to enable western governments to move nearer to the goal of fuller-employment.

That is, rather than simply seek to 'push' suppliers out of the underground economy using deterrents, a range of other policy options also need to be considered, ranging from 'pull' measures to enable suppliers to make the transition from the underground to the formal economy, to both 'push' and 'pull' measures to encourage consumers to use formal rather than underground labor (see Williams, 2004c). In this paper, the concentration is on demand-side measures that 'pull' consumers away from using off-the-books labor and encourage them to use formal labor instead. Put another way, the focus is upon the provision of demand-side incentives. This, of course, is not to say either that supply-side measures to enable underground workers to make the transition to the formal economy or that measures to deter consumers from using underground labor are not important. It is simply that investigations of how public policy needs to expand beyond the use of supply-side deterrence measures must begin somewhere. Here, the decision has been taken to explore 'pull' initiatives given the desire to transfer such work to the formal economy and within that, a decision has been taken to focus upon those pull measures that target the demand-side of the equation. Pull measures that target the supply-side are evaluated in a separate paper in this volume (see Williams, 2004d).

To start to review this option of using demand-side incentives as a means of combating the underground economy, this paper focuses upon the innovative social experiments that have been taking place in two western countries in this regard, namely France and Belgium. In these nations, and in order to reduce the demand for underground labor, public policy has sought to experiment with the use of voucher or check systems to reduce underground work in the domestic services sector, a sector of the economy in which underground labor is widely recognized to be rife (Cancedda, 2001; Le Feuvre, 2000; Pedersen, 2003; Williams, 2004a,b).

As Cancedda (2001) reports, most studies that have surveyed the use of underground labor in the domestic services sphere suggest that some where between 50 per cent and 80 per cent of domestic workers are employed on an underground basis. In Austria, for example, some 70 per cent of jobs in household services are conducted on an underground basis and it has been estimated that in Austrian households, underground employees number somewhere between 60,000 and 300,000, compared with only 5,000 formal employees registered with the authorities. In France, similarly, it was estimated that in 1997, there were five underground workers for every declared worker in the household services sector and in Germany, over half of household service workers (more than 2 million people) have been asserted to work on an underground basis. In Italy, the ratio of legitimate to underground workers in this sector is estimated to be one to three (Cancedda, 2001: p. 21).

In what follows, in consequence, demand-side incentives that seek to reduce the demand for underground labor in the domestic services sector are focused upon. To do this, four initiatives will be evaluated, namely the Local Employment Agency and Service Voucher schemes in Belgium and the Cheque Emploi Service (CES) and Titre Emploi Service (TES) schemes in France. It will become increasingly apparent as this paper unfolds and these initiatives are evaluated, however, that such measures do not need to necessarily remain confined to the domestic services sphere. Such demand-side incentive schemes could be applied more widely.

Throughout the rest of this paper, each of these four initiatives will be evaluated in turn...