Shadow Economy

Approximately 33 million Russians are paid under the table, a new report has found.

According to the director of the Center for Social and Political Monitoring of the Institute of Social Sciences of the Russian Academy of Sciences Andrei Pokida:

“…the share of citizens involved with varying intensity in the non-criminal shadow labor market during the last year is 44.8% of the total number of employed people.”

Pokida also notes:

“…the main reason for citizens working in the shadow economy is related to material interest. For some workers, it’s the lack of alternatives, since it is difficult for them to find a job with decent wages and formal design. For others… it’s an opportunity for additional income (in addition to their official employment). And the latter circumstance is very relevant to the current [economic situation], when the incomes of the majority of citizens have fallen.”

Pokida worries that such practices reduce the tax base.

According to experts, between 5 and 10 trillion rubles are not taxed every year. On the other hand, the activity of citizens in the shadow economy partly compensates for social tension in the labor market, offering jobs.

The barriers to formal employment make it unlikely that adding these workers to the formal economy will happen any time soon, experts say.

According to Vladimir Gimpelson:

“One of the most striking consequences [of the shadow economy] is a reduction in the revenue side of the State budget, since the shadow economy cannot currently be taxed. The total income tax is ultimately significantly lower than the potential one, which leads to a reduction in state revenues…. What does a formal job offer? A guaranteed pension. However, it is not so great that it would be worth it to officially work for it. Many people prefer to earn money, invest it (in apartments, houses, securities, etc.), and provide for their old age themselves. Moreover, many people do not understand and do not see the risks of the shadow economy.”

But what can be done?

How can the government motivate people to go to work in the formal economy and stop receiving salaries in envelopes? Obviously, it is necessary to stimulate citizens to work in the formal economy.

Pokida advises:

“…first of all, it is necessary to increase the role and importance of state guarantees of employment and wages, so that people imagine they can lose by working unofficially.”

While Gimpelson suggests:

“Perhaps raising the pensions for a certain length of service will have an effect.”

Pokida also notes:

“Many are poorly informed about their legal rights and do not even try to defend their rights.”

In addition, he says, it is necessary to create favorable conditions for businesses, especially for small businesses, because “with the combined taxation level that exists now, it is simply not profitable for them to work officially.”

Russia’s State Statistics Agency estimates that the total amount of hidden wages reached nearly 2.4 trillion rubles in the first quarter of 2017, compared to a little over 2 trillion rubles in the same period of 2016.

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