Informal employment and envelope wages are still part of the economic reality of the Republic of Moldova. This is manifested by the fact that almost every 4th employed person works informally. Societal perceptions of envelope wages point to around 30 percent of the labour remuneration fund, and as a result the revenue lost to the public budget exceeds 7 percent of GDP. From a self-interest point of view, it suits both employees (desire for higher income, people's distrust of the social contract, perceptions regarding the quality of public services) and companies (permanence of cash flows, perceptions regarding high compliance costs, low costs of non-compliance). The low costs of non-compliance are also due to the fact that the State Labour Inspectorate (SLI) has no real leverage to fight informal work. This institution may not carry out unannounced checks and may not impose any penalty, which is also in contradiction with the international conventions of the World Labour Organization to which the Republic of Moldova is a party. Thus, the analysis addresses institutional vulnerabilities in countering undeclared and under-declared work and the provisions of the ongoing reform of the State Labour Inspectorate. At the same time, recommendations for the successful and impactful implementation of the given reform are presented.

 

The magnitude of the problem of undeclared work in the Republic of Moldova

The informal (grey) economy and employment continues to be an important component of the Moldovan economy. According to NBS data, in 2021 the number of people in informal employment was 192,000, which represents about 22.8% of the employed population . By economic sector, the largest share of the informally employed population is found in agriculture (61.2% of total informal employment) and construction (22.1% of total informal employment), followed by trade and HoReCa (together forming 6.6% of total informal employment). By type of employer, the largest part of the informally employed population is found in informal sector enterprises defined as unregistered sole proprietorships (without legal entity status), amounting to 142.9 thousand persons. Not to be neglected is also the number of people working informally in formal sector enterprises, with officially registered economic units – 47.7 thousand people.

Undeclared work is a breach of the social contract with a harmful impact on the population, businesses and the Government. In order to better understand the harmful effects of the informal economy, it is sufficient to point out the statistical criteria  by which people are included in the informal sector, namely: i) no social security contributions are paid for these employees, ii) they do not receive paid annual leave, iii) they do not receive paid sick leave in case of illness. Based on these characteristics, we can also list the main negative consequences associated with a high level of informal economy, namely: i) loss of significant revenues to the budget, ii) lack of social protection and insurance for employees (pension rights, maternity leave, medical services, compensation in case of work accidents, fully paid annual leave) or iii) development of unfair competition between businesses.

However, the phenomenon of undeclared work extends far and wide even throughout the informal economy, and this manifests itself in not declaring the total amount of wages paid to employees, also known as ‘envelope wages’. Data from the study ‘The Phenomenon of the Informal Economy and Employment in the Context of the COVID-19 Pandemic’  reveals that according to businesses' perceptions, about a third of companies practice ‘envelope wages’ and on average about 30% of wages remain undeclared. 

As a result, according to the estimates of the same study, between 2015 and 2020 the tax losses generated by the grey economy increased from MDL 8.9 billion to MDL 15 billion annually. Relative to GDP, these losses have been on an upward trend, increasing from 6.1% in 2015 to 7.3% in 2020. At the same time, the ratio of tax losses to tax revenues varied around 25%.

Main causes of undeclared and under-declared work

Based on the assessments of several studies and researches carried out over time, from the perspective of employers, the high level of informal employment in the Republic of Moldova can be explained and structured in terms of the following factors:

• Significant presence of cash in the economy and the propensity of some businesses to sell products and provide services without calculating and paying VAT;
• Perceptions of companies, especially SMEs, regarding high compliance costs (high level of taxation and bookkeeping);
• Low costs of non-compliance. Penalties applicable only in case of not complying with the requirements of the State Labour Inspectorate, plus a weak control mechanism. Undeclared work is difficult to detect, especially in the context of the limited institutional capacities of the authorised institution (State Labour Inspectorate – SLI);
• High share of the agricultural sector in the economy; 
• Existence of tools to circumvent the formal regulatory framework, such as patents in trade;
• Legal limitations on the maximum number of working hours an employee can work.

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 The analysis was conducted by the Expert-Grup Independent Think-Tank as part of ‘Socially Responsible Management of External Financing’ initiative, in partnership with the Institute for Strategic Initiatives (IPIS), with the support of the Soros Foundation Moldova.