Why is undeclared work a problem for the EU?

Undeclared work (UDW) has many names: cash-in-hand, working off the books, moonlighting, the hidden economy, the shadow economy. References to unofficial yet paid activities are as legion as the examples of such practices.

Working for money informally or ‘under the radar’ might seem an innocuous activity; in fact, public attitudes range widely toward UDW. You may feel that it’s fine for a teenager to accept cash for occasional babysitting without declaring it for tax. But would you pay cash for a product or service knowing that the transaction is off the books? Or that a business might not pay their employees the minimum wage or sick pay? Bottom line: do you know what’s legal and what’s not?

What counts as UDW?

UDW covers any legal work that has not been properly declared to the authorities. It’s relevant to both individuals working for a company or on a self-employed basis. It does not cover illegal practices, such as selling drugs or human trafficking.

However, identifying UDW can be complicated. There may be an illusion of legitimacy, such as when part of an employee’s salary is paid officially. Or a worker may be considered self-employed when they actually should have employment status. It can be even harder to recognize and tackle where UDW is carried out across more than one EU Member State.

How big is UDW?

It's difficult to pin down any but estimated figures about the extent of the issue in the EU. Estimates put UDW in Europe at about 17.9% of the EU's gross domestic product (GDP). UDW may account for a much higher percentage of GDP but it's difficult to gauge because this work is—by its very nature—hidden.

The Special Eurobarometer survey carried out in 2013 found that one in nine Europeans admitted that they “are involved in acquiring goods or services where they have good reason to believe that these include undeclared work.” The survey also found that “around one in ten Europeans (11%) have acquired goods or services in the past year where they have had good reason to believe” involved UDW. The new Eurobarometer survey is due for publication in early 2020 and we will be able to see the real effects of the gig economy on the scale of UDW.

What are the reasons for participating in UDW?

In 2013, the most common reason Europeans gave in the survey for doing UDW was that it was mutually beneficial to both parties (50%). Additional reasons included that respondents couldn’t find a regular job (21%), they felt that tax or social security contributions were too high (16%), they had no other means of income (15%), and that undeclared work is a common practice in their region or type of work so there is no real alternative (14%).

There were notable differences in terms of country groups within the EU. In Southern Europe, for example, healthcare providers constituted a significant source of undeclared goods or services (16%). Whereas friends, colleagues, and acquaintances played a larger role for respondents in Continental Europe (52% compared with 42% at EU level).

The survey also flagged several countries with particularly high proportions of respondents who had purchased undeclared goods or services over a period of a year. Those with the lowest proportions of purchasers were the UK and Spain (8% in each), Germany (7%), and Poland (5%).

Why is UDW a problem?

Most people recognize workers’ rights to social benefits like pensions, minimum wages, paid holiday, and decent working conditions. UDW means that EU Member States, governments, and local administrations lose out on tax and social security contributions. Taxes and social insurance are important precisely because they contribute to fundamental services such as education, police, health services, and public infrastructure.

The decrease in tax and social security undermines the sustainability of public finances, potentially putting essential services at risk. People are more likely to take a negative position on UDW once they fully appreciate its serious repercussions for society and the economy:

Repercussions for legitimate businesses

The effect on businesses from widespread UDW is significant. There’s a serious economic cost to law-abiding businesses because they cannot compete with those who operate undeclared. Employers who cheat are able to provide goods and services at a much cheaper rate than lawful companies. Also, working conditions and other safety obligations are likely to be flouted by such employers.

Implications for workers

Although workers may perceive that they gain higher income from receiving cash in hand, there are overwhelming disadvantages. They are likely to receive lower incomes, no social protection, little or no training or advancement, and no pension provision.

What action is the EU taking to fight UDW?

The EU is championing the fight against UDW. In 2016, it set up the European Platform tackling undeclared work to harness the collective know-how and expertise of enforcement agencies and social partners from across Europe. Member States are better equipped than ever to confront illegal practices with evidence-based research, cross-border collaboration, and increasing cooperation. It is a fight, however, that will require vigilance and support from all of us—because it is a shared and iniquitous problem for us all.