Undeclared Work in Croatia: A Baseline Assessment

The aim of this report is to evaluate the extent and nature of undeclared work in Croatia and the policy approaches and measures currently employed to tackle this sphere.Extent and nature of undeclared workIn recent years, there have been substantial efforts to reduce undeclared work in Croatia. Faced with significant deficits in the public budget, the government has sought effective policy responses that would result in increased compliance. Nonetheless, it is hard to know whether these strategies are resulting in a decrease in the prevalence of undeclared work. While some studies of the magnitude of undeclared work suggest that it is continuing to decline in size, others suggest that the trend is in the opposite direction.Examining the nature of the undeclared economy, the 2013 Eurobarometer Survey on undeclared work highlights how much undeclared work in Croatia is for and by close social relations; 57% of the respondents who were carrying out these activities stated that the purchasers were their friends, colleagues or acquaintances. Generally, individuals with a lower level of education are the most susceptible for carrying out undeclared work in Croatia. Men, moreover, are almost three times more likely to work undeclared than women. Nearly one third of people engaged in undeclared work are manual workers, and almost every fourth undeclared worker is unemployed, while about every seventh undeclared worker is retired. Therefore, these three groups, namely manual workers, unemployed people and the retired, represent about 70% of all undeclared workers in Croatia. This will be important when designing policy responses.Turning to the firm level, the findings are that those in agriculture and related industries are the most likely to recognise competition from unregistered or informal firms as a serious obstacle to their business. In addition, small and medium-sized firms are far more likely to identify the existence of the unregistered units in their sector than are large firms. Finally, domestic owned and non-exporting businesses more often witness the presence of unregistered firms and the constraints caused by them in comparison with exporters and firms in foreign ownership.The most common reason for individuals engaging in undeclared activities is the lack of formal employment opportunities, indicating that unemployment is the central issue that requires consideration when combating undeclared work in Croatia. In the case of retired individuals, there are two subgroups highly susceptible to engagement in undeclared work. Those with a small pension find their incentive in an insufficient level of income, while privileged ones, who took early retirement, are often motivated by the surplus of time. The most salient features of the labour market that provide disincentives for formal employment are the high tax burden and benefit traps. From the perspective of businesses, the main obstacles to formalisation are the non-transparency and instability of the tax system, followed by complexity of administrative procedures.An important additional factor fostering informality in Croatia, so far neglected in endeavours to tackle this phenomenon, is the low level of tax morale. Particularly concerning is the fact that young people are the most prone to opportunistic non-compliant behaviour, indicating a possible long-term trend in such a high share of undeclared work. Having in mind that 9% of people surveyed in the European Values Study are highly tolerant of cash-in-hand activities, and 7.1% highly tolerant of tax evasion (with an additional 23.2% and 14.8% respectively tolerant of these activities to some extent), one can conclude that socio-cultural factors play an important role in making decisions about (non)compliance in Croatia.Institutions, policy approaches and measuresA low level of trust in public institutions in Croatia suggests that the government should revise its tactics when tackling undeclared work. So far, repression has been the most prevalent approach. Nevertheless, as Walsh (2012) argues, practicing repression in situations when there is a weak psychological contract between citizens and the authorities can additionally deteriorate the willingness of citizens to comply and consequently result in even higher levels of non-compliant behaviour. Therefore, there is a need to put greater emphasis on an enabling compliance approach, especially on commitment and curative measures, which do not appear to be fully recognised as effective strategies in a Croatian context.An additional problem in this regard is the weak coordination among ministries and various government departments when pursuing the fight against undeclared work. Each of them defines their own separate targets and this often results in an overlapping and/or awkward division of responsibilities. This raises a need for reorganisation of the existing institutional system in order to achieve better efficiency. One viable option is the establishment of a central coordination body, which would harmonise activities in this field. In that regard, one might argue whether a recent reform in the inspection system was indeed a move in a positive direction, or whether it will result in the deteriorated effectiveness of enforcement. A further problem is the weak social dialogue in Croatia in this context characterised by numerous disputes between the government and trade unions. As such, tripartite social dialogue currently has a limited role in tackling undeclared work, therefore representing a further area for the achievement of a significant improvement.