UNREPORTED EMPLOYMENT AND TAX EVASION IN MID-TRANSITION: COMPARING DEVELOPMENTS AND CAUSES IN THE BALTIC STATES Jaanika Meriküll and Karsten Staehr*   Working Papers of Eesti Pank No 6/2008

This paper compares the prevalence and determinants of unreported employment in the three Baltic States in 1998 and 2002 using a hitherto little used dataset. The prevalence of unreported employment varies substantially across the three countries and across the two sampling years. Microeconometric estimations show that firm-related characteristics, such as sectoral activity, firm size and employment trends, are important determinants of unreported employment in all three countries, whereas the impact of individual factors varies across countries and time. It is shown that only 10-30 percent of the changes in unreported employment between 1998 and 2002 can be accounted for by changes in individual characteristics and firm-related factors. Provisional calculations suggest that the net gain for individuals undertaking unreported employment is modest, in particular among individuals who regularly engage in such activities.
JEL Code: H26, H24, D19
Key words: unreported employment, informal employment, envelope wages, tax evasion

* Jaanika Meriküll is a doctoral student of the University of Tartu. Karsten Staehr is a professor at Tallinn University of Technology and a research supervisor at Eesti Pank. The authors would like to thank seminar participants at BICEPS for useful comments. Pekka Ylöstalo from the Finnish Ministry of Labour kindly provided the dataset from the Working Life Barometer undertaken in the Baltic States. All errors remain the responsibility of the authors.

Author's e-mail addresses: jaanika.merikull@mtk.ut.ee; karsten.staehr@epbe.ee, karsten.staehr@tv.ttu.ee

The views expressed are those of the authors and do not necessarily represent the official views of Eesti Pank.

Contents

1. Introduction

2. Personal income taxation and unreported employment in the Baltic States

3. Data and descriptive statistics

4. Determinants of unreported employment

4.1. Logit estimations for the two years separately

4.2. Comparison of the Baltic States

4.3. Explaining divergent developments in unreported employment

5. Estimates of income from unreported employment

6. Summary

References

Appendix A

Appendix B

Appendix C

Unreported employment and tax evasion in mid-transition: Comparing developments and causes in the Baltic States, Working Papers of Eesti Pank No 6/2008 (PDF*)

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