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Social Indicators Research

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13-12-2019 | Original Research

County-Level Patterns of Undeclared Work: An Empirical Analysis of a Highly Diversified Region in the European Union

Authors: Lukasz Arendt, Wojciech Grabowski, Iwona Kukulak-Dolata

Published in: Social Indicators Research | Issue 1/2020

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Abstract

The scale and impact of undeclared work on the economy and on society are more apparent in emerging countries compared to developed economies. The same issue concerns regions and local communities, which have to deal with the positive and negative consequences of undeclared work and the shadow economy. We took advantage of a survey conducted among residents of a Polish Central NUTS 1 Region—which is one of the most diversified regions in the European Union—and combined this unique dataset with meso-data to estimate the scale and drivers of engagement in undeclared work. We use the framework of a hierarchical logit model with random effects for small administrative units (counties). The paper aims to understand the mechanism and key drivers of undeclared work in one NUTS 1 region in a CEE country. We found that county-specific random effects play an important role in explaining engagement in undeclared work, which is related to differences in the perception of social norms among counties. We argue that the “efficiency” of local governments in fulfilling local needs influences, to a large extent, social norms in local communities, which in turn determines individuals’ involvement in informal labour. Moreover, we show the asymmetry between formal and informal institutions, which is strongly embedded in the cultural and historical background, is an important driver of informal employment.

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We refer to NUTS 2013 classification in our study.

Hierarchical logit model was used to study informal employment phenomenon by Adriaenssens and Hendrickx (2015) and Williams and Horodnic (2017a). However in these research studies country effects were evaluated, while we focus on regional effects.

Pastore and Tyrowicz (2013) point out that, in Poland, ceteris paribus, the labour market situation tends to improve with the size of the town/city. Therefore, in rural areas and small towns, where formal employment is in short supply, we may expect that individuals are more likely to take undeclared work.

We assume, that an increasing value of contracts signed for an EU co-financed project under the EU Cohession policy programmes per 1000 residents should decrease size of informal employment.

From one hand, the turnout at parliamentary elections can be assumed to represent the level of trust people have in politicians (Cześnik 2006). From the other hand, the percentage of compliant taxpayers in a given geographical area positively correlates with the level of institutional trust (Hanousek and Palda 2004). As a result, it is predicted that the higher the turnout at parliamentary elections in the respondent’s county of residence, the lower the probability of taking undeclared work.

The location of the Central Region of Poland, near the Prussian border, and the tariff policies of the Russian Empire which allowed Prussian investors to build factories not far from Prussia, while at the same time providing access to the very large Russian market, were the main drivers of industrialisation of the selected urban areas in this region.

The response rate was 24%—this value reflects the number of households which took part in the survey compared to the number of households in which the interviewers met the head of the household who agreed or declined to answer the survey questions.

In the administrative geography of Poland, voivodeship correspond to NUTS 2 region in the NUTS2013 framework. Voivodship consists of counties, which number varies from 12 (Opolskie voivodship) to 42 (Mazowieckie voivodship).

This hypothesis is related to two observations—firstly, overall economic stance influences labour market situation at the macro level, but this macro-level stance in not transferred homogenously across regional and local labour markets; secondly, since there is noticeable inertia of the labour market processes, even increasing demand for labour has not been automatically translated in unemployment drop and decrease in individuals’ willingness to undertake undeclared work.

Correlation analysis of the variables is presented in the “Appendix”.

The ethical behaviour of religious people lowers the cost of informal transactions as long as ethical constraints are a substitute to contractual protection provided within the legal framework.

This effect is based on norms related to honesty, truthfulness, and altruism.

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Title: County-Level Patterns of Undeclared Work: An Empirical Analysis of a Highly Diversified Region in the European Union
Authors: Lukasz Arendt
Wojciech Grabowski
Iwona Kukulak-Dolata
Publication date: 13-12-2019
Publisher: Springer Netherlands
Published in: Social Indicators Research / Issue 1/2020
Print ISSN: 0303-8300
Electronic ISSN: 1573-0921
DOI: https://doi.org/10.1007/s11205-019-02243-4

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