Stamping Out Illegality

Millions of workers across Europe who clean homes, take care of the elderly and the young, build homes and cut hedges get paid in cash. The employer doesn't ask any questions and the worker doesn't pay any taxes.

As governments across the European Union continue to worry that they are losing billions of euros in tax revenue to a shadowy informal economy, a recent European Union study confirms that illegal employment is indeed booming in the 27-member bloc.

In response to the recent findings, EU Employment Commissioner Vladimir Spidla has proposed a variety of measures he hopes will cut down on illegal employment. Countries should consider instituting a minimum wage, lowering work and social security taxes, increaing penalties for illegal work and cutting red tape.

Illegal and widespread

A full 11 percent of people surveyed said they had hired someone illegally in the past year. Five percent of employees said they received cash-in-hand wages, according to the EU study, which was released this week.

Denmark, the Netherlands and Sweden all reported high rates of illegal employment. But it's possible that the citizens there were simply more forthcoming than their counterparts in admitting to illicit work arrangements.

The study found that generally, illegal employment is highest in eastern and southern Europe. Germany falls somewhere in the middle. Students are often the culprits, or victims, along with the unemployed and the self-employed. Most of the informal work arrangements occur in the construction and household services sectors.

A strong "shadow economy"

It's difficult to estimate the level of economic harm caused by the unreported income. In Germany the so-called "shadow economy" is thought to represent 15 percent of the country's gross domestic product, or approximately 350 billion euros ($503 billion).

The biggest problem with illegal work is that it undermines the social security system and can cause "wage dumping", which drives down incomes for all workers in a particular sector. Under EU law, workers sent to a different country for a short-term contract must receive the minimum social benefits and wages of the state where they are carrying out the project. This doesn't apply, however, to self-employed workers and foreign subcontractors.

Call for a minimum wage

A minimum wage helped cut back on informal work arrangements in the United Kingdom and Spidla said that a similar scheme could work elsewhere in Europe. Germany's left-right coalition is currently debating a minimum wage which would most likely be limited to certain industrial sectors.

An important tool in the fight against illegal work, according to Spidla, is to lower taxation and social security contributions. If people feel like they keep most of the wages they earn, they'll be more likely to report income, he said.

Countries also need to consider toughening penalties for those who break the law. Both employers and employees have to be convinced that working illegally isn't worth the risks.

This could be a tough sell, Spidla admitted. Almost half (47 percent) of those questioned said they hired people informally because "both parties benefitted from it," according to the EU report.

Another way to cut down on illegal working arrangements would be for western European countries to allow workers from new member countries free access to their job markets. Many people involved in the informal economy come from former Soviet bloc states of eastern Europe that have joined the EU since 2004.

The issue remains complex, Spidla said, adding there were no signs that illegal work is on the decline. In fact, in certain sectors, illicit arrangements appear to be increasingly common, he said.