This paper provides a detailed overview of the extent and nature of undeclared work in Croatia
Research Interests:
This report evaluates ‘under-declared employment’, which is the practice where a formal employer pays a formal employee an official declared wage but also an additional undeclared (envelope) wage in order to evade the full social... more
This report evaluates ‘under-declared employment’, which is the practice where a formal employer pays a formal employee an official declared wage but also an additional undeclared (envelope) wage in order to evade the full social insurance and tax liabilities owed. The aim is to evaluate the prevalence, characteristics and distribution of this fraudulent wage practice in Croatia, to explain its existence, and to provide an evidence-based evaluation of the different policy approaches for tackling it, and a set of policy recommendations.
Research Interests:
This report examines the drivers of the undeclared economy in Croatia, the current organisation of the fight against undeclared work, and reviews the current and potential policy approaches and measures for tackling undeclared work in... more
This report examines the drivers of the undeclared economy in Croatia, the current organisation of the fight against undeclared work, and reviews the current and potential policy approaches and measures for tackling undeclared work in Croatia.
Drivers of the undeclared economy in Croatia
Recently, significant advances have been made in explaining the determinants of undeclared work. To explain undeclared work, it has been understood that every society has institutions which prescribe, monitor and enforce the ‘rules of the game’ regarding what is socially acceptable. In all societies, these institutions are of two types: formal institutions that prescribe ‘state morality’ about what is socially acceptable (i.e., laws and regulations), and informal institutions which prescribe ‘citizen morality’ (i.e., socially shared rules, usually unwritten).
Viewed from this institutional perspective, undeclared work is explained as arising when the failings of formal institutions lead to state morality being different to citizen morality. In the last few years, multiple studies have identified these formal institutional failings. Undeclared work is more prevalent when there is: lower GDP per capita; higher public sector corruption and lower quality governance; lower expenditure on labour market interventions to help the most vulnerable groups; lower social expenditure, and social transfer systems that are ineffective in reducing the level of inequality and severe material deprivation.
To tackle the undeclared economy in Croatia, therefore, there will be a need to continue to:
• improve the level of GDP per capita;
• improve governance and reducing public sector corruption;
• maintain and improve the levels of expenditure on labour market interventions to help the most vulnerable groups from its current low relatively base level;
• persist with increasing social expenditure; and couple this with
• developing more effective social transfer systems that reduce the levels of income inequality and levels of severe material deprivation in Croatian society.
Besides addressing these structural determinants, there are many additional organisational and policy initiatives that can be also pursued to tackle the undeclared economy.
Organisation of the fight against undeclared work: institutional framework
Croatia has neither a single agency responsible for the fight against undeclared work, nor a central body responsible for ensuring coordinated action by the multifarious departments involved in tackling undeclared work. Instead, there is a more fragmented approach. Responsibility for tackling undeclared work is distributed across a range of institutions, with each taking responsibility for different segments of the undeclared economy. Whilst labour law violations are the responsibility of the Labour Inspectorate, tax non-compliance responsibility lies with the Ministry of Finance and social security and insurance fraud violations with the social insurance bodies. There is currently little coordination in the fight against undeclared work across the multifarious institutions in strategic, operational or data-sharing terms, and no common cross-cutting targets. The quality of governance, therefore, needs to be improved. A more coordinated response is required, which in part will be dealt with by the decision to establish a State Inspectorate in late 2017.
The involvement of social partners in relation to tackling undeclared work remains relatively weak, with little involvement in decision making. Given that tackling undeclared work requires their participation, greater involvement of the social partners is recommended.
Current policy approach and measures: an evaluation
Croatia currently employs a relatively narrow deterrence approach and the policy measures heavily focus upon deterring participation in undeclared work by increasing the penalties and risks of detection. Little emphasis is put on improving the benefits of and incentives for declared work, or more indirect preventative tools, such as awareness raising campaigns and dealing with the imperfections and failings of formal institutions (e.g., by facilitating procedural and redistributive justice and fairness, and pursuing wider economic and social policies). There is therefore a need to shift away from such a heavy reliance on deterrence measures to the broader use of preventative incentives, as well as awareness raising and a focus upon targeting and tackling the major drivers of the undeclared economy.
Drivers of the undeclared economy in Croatia
Recently, significant advances have been made in explaining the determinants of undeclared work. To explain undeclared work, it has been understood that every society has institutions which prescribe, monitor and enforce the ‘rules of the game’ regarding what is socially acceptable. In all societies, these institutions are of two types: formal institutions that prescribe ‘state morality’ about what is socially acceptable (i.e., laws and regulations), and informal institutions which prescribe ‘citizen morality’ (i.e., socially shared rules, usually unwritten).
Viewed from this institutional perspective, undeclared work is explained as arising when the failings of formal institutions lead to state morality being different to citizen morality. In the last few years, multiple studies have identified these formal institutional failings. Undeclared work is more prevalent when there is: lower GDP per capita; higher public sector corruption and lower quality governance; lower expenditure on labour market interventions to help the most vulnerable groups; lower social expenditure, and social transfer systems that are ineffective in reducing the level of inequality and severe material deprivation.
To tackle the undeclared economy in Croatia, therefore, there will be a need to continue to:
• improve the level of GDP per capita;
• improve governance and reducing public sector corruption;
• maintain and improve the levels of expenditure on labour market interventions to help the most vulnerable groups from its current low relatively base level;
• persist with increasing social expenditure; and couple this with
• developing more effective social transfer systems that reduce the levels of income inequality and levels of severe material deprivation in Croatian society.
Besides addressing these structural determinants, there are many additional organisational and policy initiatives that can be also pursued to tackle the undeclared economy.
Organisation of the fight against undeclared work: institutional framework
Croatia has neither a single agency responsible for the fight against undeclared work, nor a central body responsible for ensuring coordinated action by the multifarious departments involved in tackling undeclared work. Instead, there is a more fragmented approach. Responsibility for tackling undeclared work is distributed across a range of institutions, with each taking responsibility for different segments of the undeclared economy. Whilst labour law violations are the responsibility of the Labour Inspectorate, tax non-compliance responsibility lies with the Ministry of Finance and social security and insurance fraud violations with the social insurance bodies. There is currently little coordination in the fight against undeclared work across the multifarious institutions in strategic, operational or data-sharing terms, and no common cross-cutting targets. The quality of governance, therefore, needs to be improved. A more coordinated response is required, which in part will be dealt with by the decision to establish a State Inspectorate in late 2017.
The involvement of social partners in relation to tackling undeclared work remains relatively weak, with little involvement in decision making. Given that tackling undeclared work requires their participation, greater involvement of the social partners is recommended.
Current policy approach and measures: an evaluation
Croatia currently employs a relatively narrow deterrence approach and the policy measures heavily focus upon deterring participation in undeclared work by increasing the penalties and risks of detection. Little emphasis is put on improving the benefits of and incentives for declared work, or more indirect preventative tools, such as awareness raising campaigns and dealing with the imperfections and failings of formal institutions (e.g., by facilitating procedural and redistributive justice and fairness, and pursuing wider economic and social policies). There is therefore a need to shift away from such a heavy reliance on deterrence measures to the broader use of preventative incentives, as well as awareness raising and a focus upon targeting and tackling the major drivers of the undeclared economy.