Lithuanian Shadow Economy No. 2. One fifth of Lithuanian labour market is undeclared


According to Lithuanian Shadow Economy published by LFMI one fifth (22%) of Lithuanians have been involved in undeclared work.

Lithuanian citizens were asked if they or members of their family received any income through undeclared work – either working unofficially or working officially but getting a part of salary which was undeclared. 5% of respondents claimed that they have worked unofficially, while 8% stated that they have received a part of their salary which was not declared. 9% of Lithuanians indicated that they were using both types of undeclared work.

‘’LFMI research shows that shadow economy is formed not only of excisable goods segment but also undeclared work. It is likely that the real share of people having undeclared work is even higher as not all the respondents might have dared to admit it. The research has used surveys which are one of the main shadow economy measurement ways, statistic’s analysis and econometric simulation. The research has also reviewed and evaluated the factors which influence shadow economy such as economic state of the country, amount of income, taxes for workers, welfare, minimal wage rise and other’’, claimed LFMI senior expert Vytautas Zukauskas

According to Lithuanian citizens’ opinion, people choose undeclared work due to financial benefits. 62% of respondents claimed that the most important reason for choosing undeclared work is the higher amount of income they get. 52% of people had mentioned the difficulties of finding a legal job.

‘’Therefore, according to people of Lithuania, the most important reason of choosing undeclared work are high taxes for working people and the shortage of legal jobs. Labour taxation in Lithuania is more than 40% which is more than EU average. What is more, due to relatively lower productivity and remuneration even lower taxes in Lithuania compared with the ones with e.g. Germany, result in higher tax burden. Hence people experiencing higher tax burden are more likely to choose undeclared work’’, claimed V. Zukauskas.

Zukauskas adds, that this data shows that in order to increase people’s income and quality of living it is more important to think how to enhance productivity, while increasing greater business investments, than increasing taxes and wealth redistribution which strengthen shadow economy.

Lithuanian citizens also think than people choose undeclared work and salaries because they do not want to lose social welfare (43%). The amount for social welfare has been drastically increasing to more than 1 billion litas in 2010-2012 compared with 400 million litas in 2005-2008.

‘’The government support for unemployed people and low income households might encourage undeclared work. The higher the support is, the more it encourages people to look for illegal income, so they would not lose the benefits’’, said Vytautas Zukauskas

35% of Lithuanians believe that people do not see the benefit of taxes, so they chose shadow economy. 27% claim that people chose shadow economy to avoid the obligations they need to fulfil while working legally.

‘’Deficiency of control from the government institutions is often being blamed for the phenomenon of shadow economy. However, the economic and social state of the country, politics, taxes for workets, labour market regulation etc. are also very important. Minimal wage is one of the factors as well’’, explained V. Zukauskas.

According to the expert, enterprises which do not have enough financial resources to increase the salaries duo to heightened official minimal salaries solve the problem of increased tax burden by employing people illegally, or decreasing the official working hours and paying a part of the salary unofficially. Increasing official minimal salaries while Lithuania is in this economic situation only enhances incentives to exercise unofficial work.

In the beginning of 2013 LFMI surveyed market participants- economists, business owners, CEOs- who evaluated that in 2013 about a third (31%) of businesses operating in Lithuania have employees who get a part of their salaries which are undeclared. Market participants claimed that 11% business subjects have illegal workers.

‘’In order to lower undeclared work it is necessary to lower taxes for working people, modernize labour codex, not to increase official minimal salaries, not to create social support system, which increases the amount of unemployed or illegal workers, improve conditions for business, in that way attracting more investments and increasing the productivity of workforce’’, concluded V. Zukauskas

Lithuanian Shadow Economy is a periodical of LFMI which is designed to analyse the problem of shadow economy. The first issue was devoted to excisable goods shadow market in Lithuania. The second one – to undeclared work in shadow economy. The amount of undeclared work is measured by surveys, statistical data analysis and econometric simulation.

The first part analyses a general level of shadow economy in the Europe and shadow economy dynamics in Lithuania. The second part thoroughly explores what causes the increase of undeclared work. The third part presents the range of the unemployed work. Finally, up to date about excisable goods shadow market is presented.