“Envelope wages” in the European Union

• DOI: http://doi.org/10.1111/j.1564-913X.2013.00186.x
• Author: Jo PADMORE,Colin C. WILLIAMS
• Date: 01 December 2013
• Published date: 01 December 2013

International Labour Review, Vol. 152 (2013), No. 3–4

Copyright © The authors 2013

Journal compilation © International Labour Organization 2013

“Envelope wages” in the European Union

Colin C. WILLIAMS* and Jo PADMORE**

Abstract. This article reveals how many formal employees in the European Union

receive from their formal employer not only a declared wage but also an un-

declared “envelope wage”. Reporting the results of a 2007 survey involving

26,659 face-to-face interviews, the authors nd that one in 18 formal employees

receives an envelope wage from their formal employer, amounting to 25 per cent

of their gross pay on average. Such hybrid wage arrangements are ubiquitous,

but are more common in some countries, employee categories and types of rm

than others. The authors conclude by discussing the theoretical and policy im-

plications of these ndings.

Throughout the eld of labour studies, an untested assumption is that a

job is either formal or informal, but cannot be both simultaneously. This

article questions whether this is always the case. The inspiration is a small but

growing body of literature that has started to reveal how formal employers

sometimes pay their formal employees not only an ofcial wage, declared to

the State for tax and social security purposes, but also an unofcial “enve-

lope wage”, which is not declared (Karpuskiene, 2007; Neef, 2002; Sedlenieks,

2003; Williams, 2007; Woolfson, 2007; Žabko and Rajevska, 2007). Until now,

the prevalence and distribution of this hybrid wage arrangement in Europe

has not been evaluated. This article therefore aims to evaluate the prevalence

of envelope wages in the European Union (EU) and identify the countries,

employee categories and types of rm in which they are the most common.

The remainder of the article is organized into ve main sections. The

rst reviews the small emergent body of research that has started to question

whether, in the developed world, a job is always either formal or informal,

highlighting the existence of envelope wages paid to formal employees. The

second describes a 2007 cross-national survey involving 26,659 face-to-face

* Director, Cluster for Research on the Informal Sector and Policy (CRISP), University

of Shefeld, United Kingdom, email: C.C.Williams@shefeld.ac.uk. ** Lecturer in Quantita-

tive Methods, Management School, University of Shefeld, United Kingdom, email: J.Padmore@

shefeld.ac.uk. The authors would like to thank the Employment Analysis division of the European

Commission Directorate-General for Employment, Social Affairs and Inclusion for providing ac-

cess to the Special Eurobarometer No. 284 database.

Responsibility for opinions expressed in signed articles rests solely with their authors, and

publication does not constitute an endorsement by the ILO.

International Labour Review412

interviews in the then 27 European Union (EU) Member States,1 carried out

to evaluate the prevalence of envelope wage arrangements. The third section

presents the survey’s ndings, describing how a signicant minority of formal

employees in the EU receive an envelope wage from their formal employer,

and how the practice – while ubiquitous – is concentrated in certain countries,

employee groups and types of rm. The fourth section describes the multi-

level logistic regression carried out to analyse the effect of individual-level

and country-level variables on the prevalence of envelope wages. In the fth

section, the implications for analysing informal employment are discussed,

calling for greater debate on how the practice of envelope wages might be

addressed in a way that does not push workers into wholly informal employ-

ment relationships.

Earlier research

How to dene informal employment and distinguish it from formal employ-

ment has been an ongoing debate since Hart (1973) rst introduced the con-

cept in his study of Ghana nearly 40 years ago. Until now, three types of

denitions have been used, namely enterprise-, jobs- and activity-based den-

itions. Internationally, the ILO has been at the forefront of attempts to produce

a usable standard denition, which over time has shifted from an enterprise-

based to a jobs-based denition, not least in order to capture informal em-

ployment in formal enterprises. As the ILO (2011, p. 12) states: “Informal

employment ... refers to those jobs that generally lack basic social or legal pro-

tections or employment benets and may be found in the formal sector, infor-

mal sector or households.”

In OECD countries, however, the widespread consensus has been that

an activity-based denition should be used (European Commission, 1998 and

2007; Renooy et al., 2004; Sepulveda and Syrett, 20 07; Williams, 200 6; Williams

and Windebank, 1998). The most frequently adopted is the activity-based den-

ition published in 2002 by the OECD, in cooperation with the IMF, ILO and

the Interstate Statistical Committee of the Commonwealth of Independent

States (CIS-STAT), as a supplement to the 1993 System of National Accounts

(SNA). “Underground production” (referred to as “informal employment” in

this article) is thus dened as: “all legal production activities that are delib-

erately concealed from public authorities for the following kinds of reasons:

to avoid payment of income, value added or other taxes; to avoid payment of

social security contributions; to avoid having to meet certain legal standards

such as minimum wages, maximum hours, safety or health standards, etc.”

(OECD, 2002, p. 139).

Although there is no ofcial denition in the European Union, informal

employment (more commonly termed “undeclared work” in the EU) is gen-

erally understood to mean “any paid activities that are lawful as regards their

1 On 1 July 2013 Croatia became the 2 8th EU Member State.