Transcript Presentation at NETSPAR conference on rethinking retirement

International Conference on
How to make formal work attractive?
Vilnius, 17 September 2014
THE UNDECLARED ECONOMY
AND INFORMAL EMPLOYMENT:
CHALLENGES AND POLICY
RESPONSES
Mark Keese
Head of the Employment Analysis and Policy Division
Directorate for Employment, Labour and Social Affairs
([email protected])
Why tackle informality?
 Informal firms are less efficient and rarely able to generate
sustained economic growth
 The informal sector is often a trap for the most
disadvantaged workers
 A large shadow economy places a heavy burden on public
finances
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The shadow economy is large…
Size of the shadow economy
% of GDP
2003
2012
40
35
30
25
20
15
10
5
0
Source: Schneider (2013). Size and Development of the Shadow Economies of Portugal and 35 other OECD Countries
from 2003 to 2013: Some New Facts
3
… and it employs a significant share
of the labour force
Share of labour force in informal employment, 2008-2009
Percentages
60
50
40
30
20
10
0
*Data from 2006; ** Data from 2007
Source: Hazans, Mihails. 2011. Informal Workers across Europe : Evidence from 30 European Countries. World Bank;
Calculations based on European Social Survey (ESS) Data
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Informal firms are typically
smaller and less skill-intensive
Incidence of informal employment in European countries, 2008-2009
% of all employees
16.8
16.2
10.7
9
8.6
7.8
5.5
5.1
4.1
Total
Highly Skilled
non-manual
Low skilled Skilled manual Elementary
non-manual
Type of Occupation
1-9
10-24
25-99
100+
Firm Size
Source: Hazans, Mihails. 2011. Informal Workers across Europe : Evidence from 30 European Countries. World Bank;
Calculations based on European Social Survey (ESS) Data
5
Informality is highest among the young, the
old and the less educated
Incidence of informal employment in European countries, 2008-2009
% of all employees
19.7
17
15.7
14.5
8.6
9
8.9
8.2
8.4
7.1
5.7
Total
Male
Female
Gender
15-24
25-54
55-64
Age
65+
Less than Secondary
secondary
Tertiary
Students
Education
Source: Hazans, Mihails. 2011. Informal Workers across Europe : Evidence from 30 European Countries. World Bank;
Calculations based on European Social Survey (ESS) Data
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Informal firms are generally less productive
and they rarely grow into formal ones
 Using data from World Bank firm level surveys, La Porta and
Shleifer (2008) find that informal enterprises are small and
significantly less productive than their formal counterparts.
 Formal enterprises are run by better educated managers. As a
consequence, they use more capital, cater for wider markets
and have better access to finance.
 They also find that hardly any of the formal firms analyzed
had ever operated informally.
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OECD’s policy agenda to
encourage formalization
Increasing benefits
Improve quality of public services
Increase public awareness of the benefits
of formalization
Strengthen the link between contributions
and benefits
Improving enforcement
Reducing costs
Streamline formalization
process
Simplify Tax Systems
Increase flexibility in the use
of formal contracts
Taking a
comprehensive
approach
Keep regulation simple and
transparent
Employ trained inspectors
and increase awareness of
the risks of non-compliance
Improve coordination
between enforcement
agencies
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Reducing the costs of formal
employment
 Complex tax systems increase compliance costs and encourage
under-declaration
 Overly strict EPL increases incentives for informal employment
in countries with limited enforcement capacity
 Strong restrictions on the use of fixed-term contracts and high
costs of dismissal discourage formality of new hires (especially
among young inexperienced workers)
 High wage floors and high non-wage labour costs induce
informality and under-declaration of earnings
 Preferential taxation of earnings from self-employment may
induce under-declaration of wages and encourage work as
‘false self-employed’
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Increasing the benefits of formalisation
 Improved public service delivery and increased awareness of
existing benefits (e.g. social protection) encourage formality
 A stronger link between contributions and benefits is
fundamental
 The design of the pension system plays a crucial role
 Unemployment benefits can act as an incentive to
formalisation
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Improving enforcement (1)
 Well-designed regulation and transparent administration
make it easier for firms and individuals to comply
 Well-trained inspectors or auditors should be allocated to
enforcement activities
 Inspections should be concentrated on small firms in
industries with highest risk of informality
 Publicizing planned auditing activities and results may
influence taxpayers 'perceptions of the probability of being
audited
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Improving enforcement (2)
 Sanctions should be large enough to act as a deterrent
and the risk of receiving a fine should be non-negligible
 Coordination between enforcement agencies (e.g. tax and
social security collection authorities) can help contain
costs and improve effectiveness
 Cooperation with social partners may help increasing
awareness of the benefits of formalization
However…
 In countries where informality is a survival strategy, it is
important to make sure that the livelihoods of vulnerable
workers are not put at risk by overly vigorous
enforcement activities
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But… not all firms will respond to
these incentives
 Many informal firms are fundamentally different from formal
ones (lower skills, worse management practices, lower
productivity)
 And they may be simply unable to compete in the formal
sector
 Hard to expect those firms to ‘formalize’
 Best to promote ‘formality from the start’
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Growth and human capital accumulation
are the best cure for informality
 In the long run, informality tends to fall with economic
development (La Porta and Shleifer 2014)
 As human capital accumulates, productivity increases and
informal firms become sufficiently competitive to operate in
the formal sector
 Promoting human capital accumulation (and, in particular,
the accumulation of managerial skills) should naturally help
the process of formalization
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Need for better evidence
Improving the evidence base
 Crucial to evaluate formalisation programs rigorously,
in order to understand what policies work best
 Identifying sectors that are most at risk of informality
will make policy action better targeted and more
effective
 Understanding the determinants of transitions from
informality to formality will help designing better
policy interventions
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For further information:
Contact: [email protected]
Read more about our work
OECD Directorate for Employment, Labour and Social Affairs: www.oecd.org/els
OECD Employment Outlook: www.oecd.org/employment/outlook
@OECD_Social
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