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LABOUR INSPECTORS PLAN NEW MEASURES; ANALYSTS SAY JOB CREATION WILL REDUCE PROBLEM

Illegal work costs state billions

DESPITE falling unemployment figures across the country, Slovakia's National Labour Office (NÚP) says that thousands of people have drifted into the grey economy, costing the state billions of crowns in lost budget revenue.
According to the most recent NÚP employment data, the number of jobless in Slovakia in June decreased by 80,000 people year-on-year, but at the same time the number of people taking jobs has gone up only by 26,000 people.
Labour officials say that more than 50,000 people must be working without proper documentation and off the books, causing the state losses of nearly Sk5 billion (€119 million) annually.

DESPITE falling unemployment figures across the country, Slovakia's National Labour Office (NÚP) says that thousands of people have drifted into the grey economy, costing the state billions of crowns in lost budget revenue.

According to the most recent NÚP employment data, the number of jobless in Slovakia in June decreased by 80,000 people year-on-year, but at the same time the number of people taking jobs has gone up only by 26,000 people.

Labour officials say that more than 50,000 people must be working without proper documentation and off the books, causing the state losses of nearly Sk5 billion (€119 million) annually.

"We were not able to file those people in terms of official statistics. We suspect that 54,000 people have ended up working illegally. State losses from unpaid taxes and payments into insurance funds that the state collects in cases of legal employment reaches about Sk4.72 billion (€112 million)," said Ján Vrbacký, director of the inspection department at the NÚP.

But the number of illegal workers is thought to be even higher. According to the National Labour Inspectorate (NIP), which is responsible for detecting illegal jobs and employees, the number of people working under the table could even be as high as 120,000.

"In terms of the grey economy, we have no relevant data or statistics on [illegal] labour. We can determine this number only through the correlation of different statistical data for certain groups of inhabitants," said Emil Pastucha, director of the labour inspection department at the NIP.

"The authorities count state losses caused by illegal labour at Sk3 billion to Sk4 billion (€71 million to €95 million) annually, but no one knows the exact number. But generally, we are talking about billions of crowns," added Pastucha.

According to economic analysts, the grey economy may be costing the state, but at the same time is a way of releasing social tensions in areas with high unemployment rates, and for many jobless presents an acceptable alternative to crime.

What is more, analysts do not consider the scale of illegal labour in Slovakia alarming compared to other transforming countries.

"An analysis carried out by Munich University's Centre for Economic Studies (CESifo) documents that the scope of the grey economy in Slovakia, representing about 18.3 percent of gross domestic product, is in fact lower than in [neighbouring] states of the Visegrad Four," said Karol Morvay, analyst with the MESA 10 think tank.

"Based on CESifo data, the scale of the grey economy in Slovakia was among the lowest in central and eastern Europe where the average [grey economy] reached 29.2 percent of GDP," he said.

In developed industrial economies illegal labour accounts for around 16.8 percent of GDP, added Morvay.

While illegal labour is less of a drain on the Slovak economy than in some of its neighbours, there remains a direct correlation between the rate of unemployment and the number of people working illegally, say analysts and NIP officials.

Regions with higher unemployment rates generally show people working more often in the grey economy, particularly in seasonal positions and in jobs requiring no specific qualifications or education levels.

According to the NIP, the most typical sectors for illegal labour are agriculture, construction, food service and tourism.

"Usually those [taking up illegal work] are people who would have worse chances of finding jobs on the labour market, so they are forced to look for alternative means of employment," said NIP's Pastucha, adding that the problem is worst in areas with struggling economies.

In the European Union, by contrast, illegal labour is mostly limited to seasonal migrants and virtually unknown among citizens of given EU countries.

According to Pastucha, however, people often try to work the system both ways - earning pay from undocumented labour while at the same time collecting state benefits.

"These are usually people working abroad or at home and at the same time they are getting paid by the state through unemployment or other social payments," explained Pastucha.

While the reasons for individuals seeking work in the grey economy can vary, for illegal employers it is most often a simple matter of keeping costs down.

"For [employers] it is a way of saving money and increasing competitiveness. They do not have to pay taxes or payments to insurance funds, and do not have to provide their employee other benefits which they would otherwise be obliged to under the labour law, such as providing food during work time, ensuring safe work facilities, providing adequate clothing, or watching out for an employee's health care," said Pastucha.

"For such employees, those factors deprive them of any legal protection whatsoever," he added.

In addition, said Pastucha, shortcomings in the country's labour laws make it difficult for state watchdogs to find illegal labour, let alone do anything about it.

"Current Slovak legislation does not sufficiently cover the issue of black labour. For example, we are still missing a definition of illegal labour, and if we want to reveal it effectively, we should know how to define it first.

"Some gaps in Slovak labour law, like the possibility to conclude an employment contract orally, or that an employer has 8 days before having to register a new employee with social and pension insurance companies, do not help attempts to reveal illegal labour," said Pastucha.

Labour inspectors are also limited in the tools at their disposal. Under current laws, NIP officials are authorised to check identities and demand an explanation of the presence of every person at a given working place, said Pastucha.

If an NIP inspection reveals illegal employment, the agency can fine an employer up to Sk1 million (€24,000), or can revoke licences if the employer is a sole proprietor. Individuals working illegally can be punished by having their eligibility for social and unemployment payments revoked.

Through these measures, Pastucha says, it is possible to bridge some of the gaps in labour legislation, but more effective tools are necessary to reduce the burden of illegal labour on the Slovak budget.

One step towards solving the situation is an analysis of current Slovak labour legislation relating to illegal labour that is currently being carried out by the NIP. The analysis should result in new tools available to inspectors to fight illegal labour, as well as a new bill governing illegal work.

"[The bill on illegal work] was already submitted to the government in March 2002, but it was not approved by the Legislative Council because relevant institutions did not agree with its final form," explained Mikuláš Gera, from the press department at the Labour, Social, and Family Affairs Ministry.

While government labour officials do not expect an illegal labour bill to be passed before next summer, analysts emphasize that the grey economy is more a product of economic fundamentals than legislation.

Employers, particularly in struggling regions, are driven to use illegal workers due to high tax levels and payments to social and insurance funds, say some analysts, but such practices should steadily decline as general economic fundamentals improve across the country.

"We suppose that the stimulus for the grey economy will be weakened, especially by the introduction of the new [flat-rate income] tax [from January 2004] and changes to the system of state benefits, and later by rising living standards," said Morvay from MESA 10.

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