Europe's Envelope Economy

Europe's Envelope Economy

THE SOURCE: “The Hidden Economy in East-Central Europe: Lessons From a Ten-Nation Survey” by Colin C. Williams, in Problems of Post-Communism, July–Aug. 2009.

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Ask a specialist about the importance of the underground economy in Eastern and Central Europe during the Soviet period, and your terminology is likely to be corrected: Underground activity was the economy. A new study of 10 formerly Soviet-dominated states that have joined the European Union reveals that the EU is a long way from wiping this form of commerce out.

One of every five workers in Eastern and Central Europe labors off the books or receives under-the-table supplemental payments, writes Colin C. Williams, a public policy professor at the University of Sheffield, in England. The prevalence of undeclared or underdeclared employment—off the books for tax, social security, or labor law purposes—ranges from 35 percent of randomly selected residents over the age of 15 in Romania to eight percent in Slovenia.

While shadow employment is hardly unknown in any country, Eastern Europe has developed its own special version—“envelope” work. In a Eurobarometer survey, 10 percent of 5,084 workers with formal jobs reported receiving “envelope” payments amounting, on average, to 42 percent of their total wages. In Latvia, Bulgaria, Lithuania, and Poland, such payments amount to about half of the wages of people with formal jobs. In Romania, the figure is 70 percent, according to an extensive survey conducted in 2007. Envelope wages in the Czech Republic, Slovenia, Slovakia, Hungary, and Estonia add up to only about a quarter of compensation and are used mostly to pay for overtime or extra work. Manual workers in these formerly communist states receive about 41 percent of their gross pay as envelope wages. For managers, the figure is 47 percent.

The hidden economy can no longer be ignored or dismissed, Williams says. It creates unfair competition for businesses that follow the law, and also impedes fuller employment and the creation of better jobs. But scholars are barking up the wrong tree when they focus on work that is completely off the books. The more common practice is the envelope of cash slipped to an officially low-wage employee. Up to now, European economic policymakers have been able to dismiss the envelope economy as anecdotal and exaggerated. No more. In Eastern and Central Europe, it’s a way of life for eight million people.

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