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Illegal Work Booms in Berlin

Kyle JamesJune 14, 2006

While Berlin's overall economy may be stuck in low gear, one sector is positively racing: off-the-books work. A new study shows 17.5 billion euros ($22 billion) is earned, but not reported in the capital every year.

Untaxed home repair and painting jobs are common in the shadow economyImage: dpa ZB - Fotoreport

Berlin's building boom of the 1990s may have passed its peak, but construction sites still pepper the city. In the run-up to the World Cup as the city rushed to put on its best face, the thud of jackhammers and towering cranes were common sounds and sights. But according to a study released this week, up to one-half of those working on the building sites may be doing so illegally. Their work is off the books and neither they nor their employers pay taxes on income nor make the required contributions to the country's social security system.

According to the study, income from illegal work in Berlin makes up about a fifth of the city's total GDP and is concentrated in the construction and handicraft sectors.

"We weren't surprised by the numbers," said Burkhard Wenkel, director of the construction industry association Fachgemeinschaft Bau, one of the groups behind the study. "We wanted to show that this is a problem that we need to tackle seriously."

Putzhilfe im Haushalt
Many housecleaners work off the booksImage: dpa

His group, along with the Berlin Chamber of Industry and Commerce and the Berlin Chamber of Trade, is calling on politicians to take action on an issue that he says denies the government needed tax revenues, distorts competition and can drive down wages. In Berlin, the construction industry has shrunk by 15 percent over the past few years and is having a hard time keeping up with its biggest competitor: illegal work.

While off-the-books work is most prevalent in construction, other industries, such as the trade and repair sector, hotels and restaurants, as well as services such as housecleaning, hairdressing and tutoring are also strongly represented in the "shadow economy."

Slight improvement likely short lived

In a 2002 study by the Cologne Institute for Economic Research, the shadow economy in Germany was put at 350.4 billion euros ($442.7 billion), almost 17 percent of national GDP, and it was on a steady upward trajectory. However, a later offensive by the federal government, which increased the number of government inspectors and surprise inspections, and created a class of so-called "mini jobs," drove the statistics down slightly.

Last year in Berlin alone authorities carried out 17,700 inspections, and guilty parties were required to pay 2.6 million euros in penalties and 10.8 million euros in back taxes, according to Berlin's Economics Senator Harald Wolf.

Integration Ein Zollbeamter des Hauptzollamtes Dresden, rechts, kontrolliert am 10. Aug. 2004, die Personalien eines bulgarischen Handwerkers auf einer Baustelle in Dresden. Handwerk Schwarzarbeit
An inspection at a construction site in DresdenImage: AP

Still, experts don't think the stepped-up vigilance will prove successful in the long run, especially since value-added tax is due to rise by three percentage points in 2007. This could encourage more people to work off the books.

The authors behind the recent study say high taxes and burdensome employer contribution requirements are fuelling the increase in illicit work. They are calling for politicians to lower tax and contribution rates to remove some of the motivation to pay workers under the table.

"Legal work has to be worth it," Wolf told reporters.

Cheap work

Right now, many feel it isn't worth it to play by the rules. In Berlin, it costs around 42 euros ($53) an hour to employ a housepainter, while hiring someone off the books runs between 10 and 17 euros ($12 and $21). A moving company can charge about 1,800 euros ($2,269) to schlep furniture from one house to another; a firm flying under the official radar, however, might charge only around 380 euros ($479) or less, according to a 2003 study.

"Surveys have shown that about 50 percent of the population find so-called weekend off-the-books work, such as handyman work, yardwork or housecleaning, acceptable," said Dominik Ernste, an economist at the Cologne Institute for Economic Research.

Polls carried out on the topic have found that many people feel that the government takes enough of their income in taxes already, and a little under-the-table work is therefore justified. Some experts say they want to see a change in attitude.

"A more developed sense among people of being a part of this country -- and not just during the World Cup -- could help reduce the tendency to work off the books," Ernste said. "Right now there's a sense that they're just pulling one over on an anonymous third person" instead of inflicting harm on the common good.