# III. Data & Methods

Our study is based on a pilot experiment designed and implemented jointly with the General Directorate of Taxation (GDT) in early 2020 based on 5,423 registered firms (and over 8,000 targeted employees) across select occupation groups, identified by the authorities as having previously declared suspiciously low pay for a subset of employees on their payroll. This risk assessment is carried out on a quarterly basis by the Risk Management Directorate of the GDT based on average wages defined for select occupations. There is evidence of _bunching_ of wages at or near the minimum wage, and this tendency carries over into professions where the minimum wage is substantially below the expected (market) wage. As such, the GDT assesses these tendencies and communicates with firms and their employees about this suspicious reporting.

## Setting & taxpayer sample

The sample of taxpayers included in our study are not a random sample of firms but rather a subset of firms subject to the personal income tax (PIT) that were assessed to be at risk of under-declaring wages by the Risk Management Directorate of the GDT. The risk assessment is carried out on a quarterly basis, and the assessment to identify the sample of firms in our study was carried out in early 2020. This exercise identified individual taxpayers (employees) with a declared wage substantially below the market wage (defined through tax records from the entire universe of taxpayers) for a given sector and occupation based on monthly declarations in the fourth quarter of 2019. The exercise is carried out by the GDT and evaluates if the difference between the reported and expected (market) wage are large enough to generate suspicion, and these suspicions are validated with additional information on employees and their firm. The assessment targeted a total of 21 professions ranging from non-technical (e.g., van driver) to technical (e.g. pharmacist) occupations, none of which had been targeted in previous campaigns.<sup>3</sup> The risk assessment resulted in the identification of over 8,000 employees<sup>4</sup> across the 5,423 targeted firms. For 2,132 (39%) of these firms, the owner herself/himself was identified as an employee with suspiciously low pay.

The 5,423 targeted firms<sup>5</sup> are not representative of all registered (and tax paying) firms in Albania, though they cover key sectors where tax evasion is assumed to be substantial, including accommodation/food service and professional services. This unrepresentative targeting is by design, since the firms targeted were determined by suspicious reporting for certain employees given their profession. Most of the professions targeted by the Risk Management Directorate exist in firms across sectors (and within a given targeted firm, more than one profession could be targeted), whereas some are highly specialized. In terms of sectoral composition of the targeted firms, 46 percent could be classified under professional services, 30 percent under wholesale and retail trade, 15 percent under manufacturing, 5 percent under construction, and 4 percent under transport. Meanwhile, in terms of targeted employees, 20 percent of all targeted employees are classified as “Administrators”, 11 percent are classified as computer technicians, and all other professions captured less than 10 percent of the total. For 85 percent of firms, only one employee was

> 3 While the targeting strategy was relatively new at the time of our experiment, previous campaigns had been carried out with standard letters and a unique set of professions (and thus employees). All indications suggest that employers and employees targeted in our experiment had not been directly or indirectly exposed to this type of campaign in the past.

> 4 In some cases, employees were employed with more than one firm, but these represent less than 1% of all employees targeted.

> 5 Of these firms, 165 are excluded from the results below because they submitted no declarations in 2020 filing periods (targeting was done based on December 2019 filing data). There are no statistical differences in treatment assignment for those excluded and those included in the analysis.

5