WORKING DOCUMENT on informal and undeclared work in the EU and LAC. Committee on Social Affairs, Youth and Children, Human Exchanges,

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1 ASAMBLEA PARLAMTARIA EURO-LATINOAMERICANA EURO-LATIN AMERICAN PARLIAMTARY ASSEMBLY ASSEMBLEIA PARLAMTAR EURO-LATINO-AMERICANA ASSEMBLÉE PARLEMTAIRE EURO-LATINO- AMÉRICAINE PARLAMTARISCHE VERSAMMLUNG EUROPA-LATEINAMERIKA Committee on Social Affairs, Youth and Children, Human Exchanges, Education and Culture WORKING DOCUMT on informal and undeclared work in the EU and LAC Committee on Social Affairs, Youth and Children, Human Exchanges, Education and Culture EP rapporteur: xx LAC rapporteur: xx DT\ doc AP v01-00

2 Informal and undeclared work in the EU and LAC countries According to the International Labour Organisation, the term informal economy refers to all economic activities by workers and economic units that are in law or in practice not covered or insufficiently covered by formal arrangements. Their activities are not included in the law, which means that they are operating outside the formal reach of the law; or they are not covered in practice, which means that although they are operating within the formal reach of the law, the law is not applied or not enforced; or the law discourages compliance because it is inappropriate, burdensome, or imposes excessive costs 1. The ILO also states that the informal economy is a major obstacle to the rights of workers, to social protection, decent working conditions, sustainable development, public revenues, the soundness of institutions and fair competition in national and international markets. Currently, more than half of all workers worldwide have been hired on an informal basis 2. However, most people enter the informal economy not by choice but as a consequence of a lack of opportunities in the formal economy and in the absence of other means of livelihood. Given that public policy can speed up the process of transitioning to a formal economy, in June 2015, the ILO adopted a new international instrument intended to help millions of workers in the informal economy to formalise their jobs. The Recommendation concerning the transition from the informal to the formal economy 3 contains practical strategies and recommendations to ease the transition from the informal to the formal economy. This document is considered an important tool for governments, as it sets out 12 key principles to help them to promote the creation of sustainable jobs and enterprises in a formal environment. The recommendation also offers pointers to guarantee the rights of workers and prevent the labour market from becoming informal in the future. In accordance with the guiding principles of the ILO, when drafting public policies concerning the transition to the formal economy, governments should in particular take into account: the diversity of characteristics, circumstances and needs of workers and economic units; the specific national circumstances (legislation, policies, strategies, practices, and so on); the need to adopt a coherent and coordinated approach; the need to guarantee and uphold human rights, fundamental rights, comply with international employment legislation and promote equal opportunities, including gender equality; the need to pay particular attention to the vulnerable (women, young people, migrants, older people, indigenous peoples, etc.); the need to foster entrepreneurial potential, skills and innovation, and to adopt a balanced approach that combines incentives with sanctions. Undeclared work in the EU In the EU, undeclared work is defined as paid activities that are lawful as regards their nature but not declared to public authorities, taking into account differences in the regulatory system of Member States. 1 Transitioning from the informal to the formal economy, ILO, 103rd Session, R204, ILO, 12 June R204, ILO, 12 June 2015 AP v /6 DT\ doc

3 In the EU, there are three main categories of undeclared work: undeclared work in a formal or informal enterprise, or so-called undeclared wage employment. This may be partly or fully undeclared; self-employed work for a company or other client, such as a family; undeclared self-employed work, providing goods or services directly to consumers, in particular neighbours, friends or acquaintances 1. Since the beginning of the financial and economic crisis in 2008, the figures available 2 show that after a small increase in the informal economy between 2008 and 2009, most Member States have seen a gradual decline in undeclared work, from the equivalent of 22.3 % of GDP in 2003 to 18.4 % in In spite of this common trend, rates still vary considerably between states, ranging from 7.6 % of GDP in Austria to 31.9 % in Bulgaria 3. Since that time, a number of strategies and measures have been introduced in the EU to tackle undeclared work. While most countries continue to prioritise dissuasive measures, punishing detected irregularities, governments are introducing more and more strategies to stimulate and incentivise workers and enterprises to formalise their work. In 2010, 90 % of Member States had introduced measures intended to prevent workers and enterprises from finding themselves in an informal situation in the first place; 64 % of countries had implemented strategies to ease the transition from undeclared work towards formality and 69 % of countries had adopted measures to promote the concept of fiscal morality. 4 Some of the more striking preventive policy measures adopted by governments include simplifying legislation, but also fiscal measures (reductions in income tax, tax reductions and subsidies) and awareness-raising campaigns. 5 Considering that undeclared work is damaging the Union s economy, leading to unfair competition, endangering the financial sustainability of the Union social models and resulting in an increasing lack of social and employment protection for workers, on 14 January 2014, the European Parliament adopted a resolution, calling on Member States to improve administrative cooperation between the different institutions (labour inspectorates, tax offices, municipal authorities and social security services) at national and EU level, as a means of facilitating the implementation of Union labour law provisions, reducing undeclared work and resolving more effectively the problems caused by disparities between labour market regulatory provisions in the different Member States. 6 1 Tackling undeclared work in 27 European Union Members States and Norway: Approaches and measures since 2008, Eurofound European Foundation for the Improvement of Living and Working Conditions: Undeclared work in 27 European Union Member States and Norway, Undeclared work in the EU: Special Eurobarometer 402, March European Foundation for the Improvement of Living and Working Conditions: Undeclared work in 27 European Union Member States and Norway, European Parliament resolution of 14 January 2014 on social protection for all, including self-employed workers (2013/2111(INI)) DT\ doc 3/6 AP v01-00

4 In response to the European Parliament s request and taking into account that undeclared work causes serious damage to working conditions, fair competition and public budgets, in April 2014, the European Commission proposed the creation of a new European platform to improve cooperation at EU level in order to prevent and deter undeclared work more effectively in all its forms, including falsely declared work and bogus self-employment. The platform will bring together the national authorities responsible for tackling undeclared work through specific actions such as labour and social security inspectorates and tax and migration authorities, along with other stakeholders, such as representatives of employers and employees. The platform should also boost cooperation between Member States through the exchange of best practices, the development of analysis, the promotion of innovative approaches for cross-border cooperation and application, and a transversal understanding of undeclared work. 1 Informal and undeclared work in LAC In Latin America, informal work is a persistent problem, although in the last decade clear unemployment has fallen considerably and work is increasingly formalised. According to ECLAC 2 data, in 2013 informal work accounted for 46.8 % of employment in the nonagricultural sector in LAC. Informal employment in the informal sector accounted for almost two thirds of informal employment. The informal sector is mostly made up of microenterprises and self-employed individuals that often face a lack of capital and operate on a very small scale. The income generated from such economic activities is often too little to cover formalisation costs. Informal employment in the formal sector accounted for 11.7 % of workers in the non-agricultural sector. The main cause of informal employment in the formal sector is ignorance of the law in force or the inability to cover the costs of formalising jobs. Informal employment in domestic services represented 5 % of total employment in The sectors with the highest proportion of informal workers were the construction sector, commerce, restaurants and hotels, which together accounted for some 50 % of informal employment in the region. For their part, workers in small enterprises, domestic workers and self-employed workers account for 80 % of informal work in LAC 3. It should also be noted that women, workers with lower levels of education and young people are the most common groups in the informal sector. Average levels of unemployment among young people in LAC rose to 13 % in 2013, and 55.7 % of young people in work were operating in conditions of informality 4. In addition, 75 % of people with no education and 63 % of workers with basic education work in informal conditions. For women, average levels of informality have reached 50 % 5. In parallel with the rapid economic growth that most LAC countries have experienced in the last decade, many governments have adopted measures to formalise employment, thereby generating conditions for enterprises that enable them to grow sustainably and increasing their capacity to comply with the legislation and standards in force. At the same time, countries 1 Proposal for a Decision of the European Parliament and of the Council on establishing a European Platform to enhance cooperation in the prevention and deterrence of undeclared work (COM(2014)0221-C7-0144/ /0124(COD)) 2 The employment situation in Latin America and Caribbean: Employment formalisation and labour income distribution, ECLAC/ILO Recent experiences of formalisation in Latin America and the Caribbean, ILO Formalising the informal youth: Innovative experiences in Latin America and the Caribbean, ILO Recent experiences of formalisation in Latin America and the Caribbean, ILO 2014 AP v /6 DT\ doc

5 have endeavoured to strengthen their institutions by providing them with the requisite tools to ensure that they comply with employment legislation. Thus, in the period, economic dynamism led to a net creation of employment (7.9 %), with a focus on creating formal job opportunities. While net employment grew on average by 12.7 %, informal employment grew by 2.6 %. Growth in paid work was the main driver for the process of formalising employment in LAC during the same period. In the informal sector, the biggest increase was recorded among self-employed workers. On the basis of the ILO s conclusions, which recommends adopting an integrated approach that prioritises aspects such as economic growth with quality; improving regulatory frameworks; promoting social dialogue; organisation and representation; promoting equality and the fight against discrimination; support for entrepreneurship, developing professional skills; promoting social protection and local economic development 1, and, with a view to facilitating the transition from informality to formality, most LAC countries have adopted policies and measures in four areas: i. productivity; ii. standards; iii. incentives; iv. inspection. The economic capacity of businesses, measured in terms of productivity, is a determining factor for formality. While productivity has increased in LAC over the last decade, it has not grown at the same rate as other regions of the world. There are a number of reasons for that, including lack of investment, out of date technology, infrastructure gaps, educational deficits, etc. To increase productivity in the region, LAC countries have been investing at macroeconomic level and adopting prudent economic policies and proactive monetary policies with countercyclical mechanisms. They have also invested at meso-economic and micro-economic level by strengthening technology, human capital and production organisation. With regard to standards, the steps taken by countries cover three bases. As concerns communication, measures have been introduced to improve information and the knowledge of rights and obligations of employers and workers. Secondly, many LAC countries have carried out reforms to simplify regulations and procedures for formalising enterprises and/or workers 2, as well as the processes relating to the affiliation to social security services, medical attention and pension schemes. With regard to incentives for formalising work, governments have adopted a wide range of measures, including reforms linking employment and taxation, in particular, tax reforms intended to promote investments and stimulate formal labour contracts and investment in training. Lastly, when it comes to inspection, many governments have taken measures to bolster structures and the State s capacity to ensure that standards are met by strengthening the institutions that are responsible for labour inspection services and social security. In addition to introducing policies to stimulate the transition to the formal economy, LAC countries have sought formulas to set up specific initiatives designed to encourage formal employment among young people, who are traditionally over-represented in the informal sector. Specifically, measures were adopted with the aim of strengthening the demand and 1 Transitioning from the informal to the formal economy, ILO, 103rd Session, Examples include the law on speeding up procedures and the Tu empresa en un día [Your business in a day] programme in Chile, and the Panamá emprende project in Panama. DT\ doc 5/6 AP v01-00

6 supply of labour in the formal sector through tools such as hiring subsidies or temporary contracts with training components 1, among others. Social protection policies, family subsidies and maternity protection are some of the other tools intended to promote formal work among young people. Conclusion According to estimates, undeclared work makes up a significant part of the economy of the EU, as well as that of Latin America and the Caribbean. Informal workers often find themselves forced to accept precarious or even dangerous working conditions, lower salaries and severely reduced social and employment security protection or no protection at all. As a result, they are denied access to welfare benefits, the right to a pension and adequate medical attention. What is more, undeclared work also has serious repercussions on national budgets, which undermines the financial sustainability of social security systems and also affects employment, productivity and competition. Given that the circumstances, needs and situation with regard to work vary considerably between countries, it is important to develop common definitions and concepts with regard to undeclared work and to ensure that they reflect developments in the labour market. Past experiences have shown that an integrated, coherent and coordinated approach is essential for a country to successfully move to a formal economy. That approach should combine measures to increase enterprises productivity, sanctions and incentives, as a prerequisite to ensuring that the transition to formality is sustainable. The tools that have helped to create formal job opportunities and reduce the informal economy include tax incentives, hiring subsidies, promoting investment in enterprises, training workers and temporary contracts. Simplifying legislation and different administrative procedures has also contributed positively to the formalisation of the economy. As concerns cooperation between countries and regions, governments should study the options in an effort to promote greater exchange of knowledge, experiences and practices, and also take measures to inform and raise awareness among citizens about the benefits of formal work for workers and societies. 1 Formalising the informal youth: Innovative experiences in Latin America and the Caribbean, ILO 2015 AP v /6 DT\ doc

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