By Denis Pennel for staffingamericalatina

Estimates suggest that among the global working population of three billion people, almost two-thirds – some 1.8 billion people – are working in the undeclared economy. The most recent ILO statistics[1] suggest that some 100 million people in Latin America are working in undeclared forms of employment with an average of 47% of the population employed in an informal manner. In Brazil the rate of undeclared work is 38.4% while in Mexico it is 54.2% and in Peru and Honduras as high as 68.6% and 70.7% respectively  Even in more developed markets levels of undeclared work can range widely, from 6.6% in the USA for example to 13% in Germany, 21.1 % in Italy to 31.2% in Bulgaria[2].  Undeclared work poses a number of macro-economic challenges. It undermines business and the economy and impacts workers and citizens.

For governments, undeclared work obstructs revenues from taxes, VAT and national insurance which undermines the very sustainability of social protection systems. It also weakens the power of trade unions and collective bargaining. For business it places legitimate business at a competitive disadvantage in comparison to businesses operating in the black and forces hitherto law-abiding firms away from regulatory compliance. Customers of the undeclared economy also suffer as they have little legal recourse if a job is badly done and no insurance or guarantees that health and safety regulations were followed. The impact on workers is profound. Undeclared employment effectively places them outside of the system. They have no job security, no rights and no career progression. As a result, undeclared workers tend to experience a lower quality of work and working conditions.

The most effective way to stamp out undeclared work is not to just restrict it, but to turn it into regular work which appeals to both workers and employers while also providing financial support within the economy. Research shows a strong correlation between labour market efficiency and the size of the undeclared economy. Those countries which enjoy efficient labour markets are the ones where levels of undeclared work are lowest.

Creating optimal conditions to deter and prevent the undeclared economy is a question of balanced policies and regulation. Over-burdensome regulation and high taxes can drive businesses into the undeclared economy in order to simply survive, while at the other extreme, inefficient regulation and a lack of labour market intervention and social protection can equally result in the growth of undeclared work. By contrast, appropriate levels of regulation which encourage open, inclusive labour markets will result in a natural reduction of undeclared work.

Agency work has been shown to help reduce undeclared work as it supports businesses in accessing flexible labour supply in order to meet fluctuations in market demand.  Economies which have appropriately regulated labour markets where agency work is accessible and with no unjustified restrictions, have been found to have smaller undeclared economies. When for example Italy changed its labour market regulation in the 1990’s, removing restrictions on agency work, agency work penetration went up while simultaneously the size of the undeclared economy went down. This is because agency work provides workers with employment incentives such as social protection, training and unemployment benefit which helps them to enter the formal labour market. Once in the market, private employment agencies continue to meet supply with demand and to transition workers within sectors and jobs, ensuring that they are constantly in work.

As agency work continues to become established and grow in markets across the South American region we are likely to observe a similar reduction in levels of undeclared work. Indeed economies with more mature social protection systems and labour market policy interventions which protect and support vulnerable workers are more flexible and more inclusive. By creating an environment that is conducive for both workers and employers they reduce the supply and demand of undeclared work.

Despite recognition of the damage that it does, it is a fact that the undeclared economy is growing relative to the declared economy in many regions of the world. The good news is that there has been increasing focus of late from bodies such as the European Commission and the Organisation for Economic Development (OECD) and International Labour Organisation (ILO). They have been looking more closely at what drives undeclared work and what policies are most effective in addressing it and seeking to prevent it in the future.

As the global labour market grows and employment supply and demand moves across borders, so labour market efficiency and international cooperation to stamp out undeclared work will become ever more important.

About Denis Pennel

Managing Director of Ciett and Eurociett, Denis Pennel is a labour market expert with deep knowledge and years of experience relating to employment at global and EU levels. He recently published “Travailler pour soi”, a book about the new realities of work.

Follow Denis on Twitter @PennelDenis

About Ciett 

As the International Confederation of Private Employment Services, Ciett is the authoritative voice representing the interests of agency work businesses. Founded in 1967, Ciett consists of 51 national federations of private employment agencies and eight of the largest staffing companies worldwide. Its main objectives are twofold: to help its members conduct their businesses in a legal and regulatory environment that is positive and supportive; to gain recognition for the positive contribution the industry brings to better functioning labour markets.

Follow Ciett on Twitter @ciett_waytowork