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Lithuanian Shadow Economy

PeriodicalFirst half-year report 2013 Nr. 2

Lithuanian Free Market Institute

Lithuanian Shadow Economy

Compiled by Vytautas Žukauskas

Lithuanian Free Market InstituteVilnius2013

ISSN 2345-0274

2 C o n t e n t

content

IntroductIon 3

1. Shadow economy In europe and LIthuanIa 4

1.1. definition 4

1.2. The size of shadow economy in europe 5

1.3. Shadow economy in Lithuania 6

2. Shadow economy In the Labour market 8

2.1. what is the shadow economy in the labour market? 8

2.2. why does the shadow economy in the labour market emerge

and what does the size depend on? 9

2.2.1. Income size and labour force taxation 9

2.2.2. economic situation of a country 12

2.2.3. regulation of labour relations 13

2.2.4. State support (unemployment benefits, social benefits and etc.) 16

2.2.5. Liabilities of people 18

2.2.6. minimal monthly wage 19

2.2.7. Government prevention of shadow economy 20

3. the SIze of the Shadow In LIthuanIan Labour market 23

3.1. what are the measures to evaluate the shadow in the labour market? 23

3.2. The shadow in the labour market in european union countries 24

3.3. Surveys of businesses and people in Lithuania 27

3.4. data about uncovered violations 31

3.5. Survey of StI experts 34

3.6. econometric model 36

4. Shadow In the excISe GoodS market 41

4.1. The shadow market of distilled alcoholic beverages 41

4.2. The shadow market of cigarettes 43

4.3. The shadow market of fuels 45

3I n t r o d u c t i o nI n t r o d u c t i o n

introduction

This is a second Lithuanian Shadow Economy publication. We are proud of the success of the first publication, which received a lot of attention and support. An issue regarding the shadow economy is as important as ever, so the Lithuanian Free Market Institute (LFMI) continues research in the area.

Shadow economy is an important indicator of the overall economy. Small shadow economy indicates that the overall judicial environment and its laws are appropriate, people see them as just and have the ability to abide by them. Whereas a large shadow economy is dem-onstrating the situation when there are too many constraints for economic activity, they do not go hand in hand with the expectations, economic and social situation of people and creates too much burden. The shadow econ-omy is a reflection of taxation and regulation policy adequacy. When increasing taxes and creating more regulations, certain activities, which otherwise are not being associated with the black market (i.e. sale of every day goods, labour relations), move to the shadow. If a duty of an individual is to fallow the law, then the state has the duty to create such rules, which are adequate and just in people’s mind. Exactly that can be seen by research in the field of shadow economy.

The first Lithuanian Shadow Economy publica-tion was dedicated for researching the shad-ow market of excise goods in Lithuania. The theme of the second publications is the shad-ow economy in the labour market. This topic was chosen, because illegal work, illegally paid

wages are widely spread phenomenon that engulfs a large share of the labour market in Lithuania. It is important to note that up un-til this research there were no comprehensive analyses of the reasons of shadow forma-tion in the labour market in Lithuania – what causes the shadow labour market, which fac-tors have the biggest impact?

The publication is divided into four parts. In the first part there is a short analysis and com-parison is given about the size of the shadow economy in European countries and its dynam-ics in Lithuania. Second and third parts are for the shadow in the labour market. The second part analysis reasons for the labour shadow market to form and factors that determine its spread are given. The third part is for evalu-ating the size of Lithuanian shadow labour market. This part also overviews other authors and their research and the research specifically designed and conducted for this publication. In the last part we overview the shadow market in the category of excise goods.

In all sincerity we are saying thank you to ev-erybody who have contributed to this publi-cation by providing information and insights: State Labour Inspectorate, State Tax Inspec-torate, Financial Crime Investigation Service, Police Department, Statistics Lithuania, Na-tional Tobacco Manufacturers’ Association, Association of Enterprises Trading in Alcoholic Beverages and others.

Vytautas ŽukauskasSenior expert of Lithuanian Free Market Institute

4 1 . S h a d o w e c o n o m y i n E u r o p e a n d L i t h u a n i a

Shadow economy is:•Economic activity (i.e. producinggoodsandservices)

•Carriedoutwithoutcomplyingwithlegalenvironment.

•Toavoidtaxesand/orregulations.

1. Shadow economy in Europe and Lithuania

1.1 definition

In this publication, shadow economy, or shad-ow is described as an economic activity (i.e. producing goods and services), which is car-ried out without complying with the legal en-vironment and to avoid taxes and/or regula-tions.

Shadow economy is not attributed with ille-gal activities that reward a person financially, when transactions are not conducted on vol-untary basis, rather it violates proprietary and integrity rights of others (i.e. VAT fraud, theft, abductions, murder and etc.)

51 . S h a d o w e c o n o m y i n E u r o p e a n d L i t h u a n i a

1.2 The size of shadow economy in europeSize of the shadow economy varies greatly among European countries. It is considered that the largest underground economies are in Central and Eastern European and South Eu-ropean countries. Western Europe and Scan-dinavian countries enjoy the smallest under-ground economies instead. According to the research results by Professor Friedrich Schnei-

Source: Friedrich Schneider (2013)

der, the largest shadow economies in terms of GDP in 2013 were in Bulgaria, Romania, Croa-tia and Lithuania. The smallest were in Swit-zerland, Austria, The Netherlands and United Kingdom. The averages size of the shadow economy in terms of GDP is 18%. However, it has slightly decreased since 2009, when it was around 20%.

5–10 %

10–15 %

15–20 %

20–25 %

25–30 %

30–35 %

Shadow economy in European countries 2013 (% of GdP)

6 1 . S h a d o w e c o n o m y i n E u r o p e a n d L i t h u a n i a

Various sources indicate that in Lithuania from one-fifth to one-third of the total value added is created in the shadow economy. It had increased tremendously in the period of 2008-2010, however in the recent years it had decreased slightly, yet it still stays at a relatively high level.

1.3 Shadow economy in Lithuania

Size of shadow economy in GDP (%), 2013

7

8

8

9

10

10

12

13

13

13

14

14

15

16

16

19

19

19

21

22

23

24

24

24

25

26

27

28

28

28

28

31

-5.00 10.00 15.00 20.00 25.00 30.00 35.00

Switzerland

Austria

Luxembourg

�e Netherlands

United Kingdom

France

Ireland

Denmark

Finland

Germany

Norway

Sweden

Slovakia

Czech Republik

Belgium

European average

Spain

Portugal

Italy

Hungary

Slovenia

Greece

Poland

Malta

Cyprus

Latvia

Turkey

Estonia

Lithuania

Romania

Croatia

Bulgaria

Source: Friedrich Schneider (2013)

According to the Survey of the Lithuanian economy, which is being conducted by LFMI, the shadow economy increased rapidly in the period of 2008-2010 and had reached 28% of GDP, while in 2011-2012 it decreased slightly to 27% of GDP. In 2013 the shadow consti-tuted 26% of GDP.

71 . S h a d o w e c o n o m y i n E u r o p e a n d L i t h u a n i a

When calculating gross national product, Statistics Lithuania, includes officially unac-counted economy as well. The main difference between shadow economy and officially unac-counted economy is that, officially accounted economy includes unaccounted activities, which are not related to law circumvention. Since 2011, Statistics Lithuania has included drug trade, Tabaco and alcohol smuggling and prostitution to officially unaccounted for econ-omy. According to data provided by Statistics Lithuania, the unaccounted economy in Lithu-ania was 7% of GDP in 2009.

Results from the research conducted by Prof. friedrich Schneider indicated that Lithuanian shadow economy in the period of 2003-2013 had changed marginally. In period of 2003-2009 shadow economy decreased from 32% to 29% and during the years of 2009 and 2010 (when the economic crisis began) had increased to 30%. Since 2010 until 2013 the Lithuanian shadow economy in terms of GDP decreased only slightly to 28%.

Size of shadow economy (officially unaccounted) in GDP (%)

27

2422 22

1920 20 21 21 21

18 23

27 27 26

18 18 1916

1413 13 17

15

32 32 31 31 30 29 30 30 29 29 28

18

28

12

10

20

30

40

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20112012

2013p

LFMI data: from a Survey of Lithuanian Economy

Officially unaccounted economy: Statistics Lithuania Data

Shadow economy: Friedrich Schneider research:

Source: A survey of the Lithuanian Economy (LFMI), Statistic Lithuania, Friedrich Schneider

8 2 . S h a d o w e c o n o m y i n t h e l a b o u r m a r k e t

2.1. what is the shadow economy in the labour market?

Shadoweconomyinthe labourmarket–this is a part of shadow economy which is relatedtolabourrelations.Inthispublica-tion, the shadow economy in the labourmarket is considered employed work,when:•Not legalized by a contract or otherform,e.g.abusinesslicense(i.e. illegalwork);

•Full or a part of salary/wage is beingpaidillegally(i.e.in„envelope“).

2. Shadow economy in the labour market

Shadow economy in the labour market – this is a part of shadow economy which is relat-ed to labour relations. In this publication, the shadow economy in the labour market is con-sidered employed work, when:• Notlegalizedbyacontractorotherform,

e.g. a business license (i.e. illegal work);• Fullorapartofsalary/wageisbeingpaid

illegally (i.e. in „envelope“).Ministry of Social Security and Labour ascribe to the labor force shadow commercial, eco-nomic, financial, professional activities, which are being conducted without establishing an entity as required by law or without purchasing a required license, when a part of pay is paid in “envelope”, when people are working within le-

gal enterprises, but there are no contracts with them, or working longer time periods than is noted in the official employment contract.1 When describing shadow economy in the labour market in broader sense, we can at-tribute additional Labour Code or other leg-islation violations, which are not related to illegal work or a part of salary/wage being paid illegally (e.g. working time accounting ir-regularities, work safety violations and etc.). Further on we will focus on illegal work and illegally paid wage/salary, yet while analyzing the causes of shadow economy in the labour market, different effects of the shadow in the labour market will be discussed as well.

1 http://www.socmin.lt/index.php?256143790

92 . S h a d o w e c o n o m y i n t h e l a b o u r m a r k e t

The size of the shadow in the labour market can be caused by all kinds of factors, such as economic and social situation of the country, labour force taxation, labour market regula-tions, activities of government institutions fighting this phenomenon, social policy carried out by the state and etc. Sometimes the shad-

2.2. why does the shadow economy in the labour market emerge and what does the size depend on?

ow economy is understood too simply – as the side effect of the lack of strict government measures. This part of the publication will prove that it is not the case. Moving further, many factors will be analyzed, which have the greatest impact on the shadow economy in the labour market.

2.2.1. income size and labour force taxation

Depending on the level of economic develop-ment, productivity and average income, taxa-tion rates of people’s income have a differ-ent impact on the economy. When choosing where to use their incomes, people at first use it on the most important and valuable things for them, such as food. The rest of the income

is left to satisfy less important needs. This means, that in countries where people get more income they have more money to spend on more relatively less important needs, com-pared to people who are living in low income countries. Therefore, the same tax rate for in-dividuals in poor countries with small incomes


and lower standard of living is more hurtful, because this means discarding important needs, compared to the same tax rate intro-duced in rich country.2 This explains why the

2 Real incomes are taken into account, i.e. considering price differences in different countries. Price level in more productive countries is usually greater, yet it is redeemed by greater incomes of the people.

same tax rates have different outcomes on economies, depending on the standard of liv-ing in the country.

Hourly labour cost in 2011*

0

5

10

15

20

25

30

35

Rom

ania

Latv

ia

Bul

garia

Lith

uani

a

Esto

nia

Hun

gary

Slo

vaki

a

Pol

and

Czec

h R

epub

lic

Por

tuga

l

Slo

veni

a

Gre

ece

Mal

ta

Spa

in

Uni

ted

Kin

gdom Ital

y

EU2

7

Finl

and

Aus

tria

Ger

man

y

Bel

gium

Den

mar

k

Fran

ce

Sw

eden

EA1

7

Cypr

us

Nor

way

Irel

and

Net

herla

nds

Luxe

mbo

urg

Taxes, EUR

Net income, EUR

* *Price of labour and price level - 2011, taxation burden - 2010. Data is provided after taking into account the price differences, meaning that the price of labour was reduced if the price level was higher in that country than EU average and visa versa.Source: Calculations by authors based on Eurostat and EC data.

Taxation rate on labour force in Lithuania is 39% and it is slightly higher than EU average (EU average 36%). Yet, the productivity in Lithuania is relatively low, thus the hourly sal-ary to the employee is around 5 euros (price adjusted) and that is 3 times less than the EU27 average. There are only two countries in which employees receive even less than Lithu-anian employee, these are Bulgaria and Lat-via. Relatively low hourly wage/salary is pres-ent in Estonia, Hungary, Slovakia and Poland.

Thus, the impact of taxation burden on the behavior of people is dependent on what the person receives after taxes as his or her wage/salary. Even if the tax rate is the same, it will create more burden when the salary/wage after taxes is lower. This is closely re-lated with shadow economy and shadow economy in the labour market. One of the most determining factors for a person to choose to receive a part of wage/salary illegally is his level of income. When the


income level is low, people are more willing to increase their incomes by choosing illegal work or wage/salary. Precisely for this reason, taxation burden on labour in countries with low productivity and wages/salaries have a greater impact to the shadow in the labour market, than in countries where people have relatively higher incomes.

Labour tax burden, 2010

50%

46% 45% 44% 44% 43% 43%42% 41% 39% 39% 39% 39%

37% 36% 36% 36% 35% 34% 34% 34% 34% 33% 33%30%

28%23%

18%

12%

0%

10%

20%

30%

40%

50%

60%

Bel

gium

Fran

ce

Ger

man

y

Ital

y

Hun

gary

Aus

tria

Rom

ania

Latv

ia

Sw

eden

Czec

h R

epub

lic

Lith

uani

a

Esto

nia

Slo

veni

a

Den

mar

k

Spa

in

Finl

and

EU2

7

Slo

vaki

a

Gre

ece

�e

Net

herla

nds

Bul

garia

Nor

way

Pol

and

Por

tuga

l

Uni

ted

Kin

gdom

Luxe

mbo

urg

Irel

and

Mal

ta

Cypr

us

*Tax wedges for a single example worker at two-thirds of average earnings in 2010, percent.Source: Taxation trends in the European Union, Eurostat

Oneofthemostdeterminingfactorsfor a person to choose to receive apartofwage/salaryillegallyishislev-el of income.When the income levelis low,peoplearemorewillingto in-creasetheirincomesbychoosingille-galworkorwage/salary.Preciselyforthisreason,taxationburdenonlabourincountrieswithlowproductivityandwages/salarieshaveagreaterimpactto the shadow in the labourmarket,than in countrieswherepeople haverelativelyhigherincomes.


In the period of 2005-2007 Lithuania saw rap-id economic growth. Unemployment was con-stantly decreasing and in 2007 was lower than 5%. In 2008 the GDP growth rates started to slow down and unemployment level started to rise. The economic downturn began in 2009, when GDP fell by 15%, unemployment began to increase rapidly and kept on increasing un-til 2010. Incomes of the population were de-creasing as well through 2009 and 2010. The financial situation of enterprises just like the populations has a strong effect on deciding whether to participate in a shadow economy or not. In times of difficult economic conditions, when more and more companies are suffering

increasing losses and employers face a difficult financial situation, they might choose to hire people illegally or pay part of wage/salary il-legally, thus trying to reduce losses. The num-ber of companies which were recording losses began to rapidly increase in 2008-2009, and it reached 53%. The number of loss-making com-panies began to decrease only in 2010. The impact on shadow labour market is illus-trated and determined by financial situation of companies and households, because in 2009 state institutions had recorded a strong in-crease in number of detected illegally working people. In 2008 there were 3874 detected cases of illegal work, whereas in 2009 there

GDP growth and unemployment in Lithuania

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2005 2006 2007 2008 2009 2010 2011 2012

GDP growth, percent

Source: Statistics Lithuania

Unemployment level, percent

2.2.2. Economic situation of a country

The economic situation of a country, its trends, income level of the population have an impact on people as they decide whether or not to get involved in shadow economy in the la-bour market. In times of economic downturn, when the incomes of people are decreasing and unemployment running high, people look for a way to compensate decreasing income. One way is to work illegally or receive a part

of wage/salary illegally. In times of high un-employment it is more difficult to find a legal work. Furthermore, if paying a part of wage/salary illegally, the employer can pay more to the person if compared when doing every-thing legally and paying all taxes (taxation burden in Lithuania on labour is from 37% to 42% depending from the size of wage/salary).


2.2.2. Economic situation of a country

were 4628. The number of detected illegal workers began decreasing only in 2012. Hence, the economic situation has a signifi-cant impact on the shadow in the labour mar-ket. The reasons for companies and people to get involved in the shadow in the labour

market (e.g. difficult financial situation of com-panies, unlikeliness to find a legal job, low in-come of people) become stronger in times of economic downturn, which in Lithuania began in late 2008.

Financial indicators of enterprises and households

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012

0.0

10.000.0

20.000.0

30.000.0

40.000.0

50.000.0

60.000.0

Loss making enterprises, %

Profit making enterprisess, %

Disposable income per household in one year, LTL


2.2.3. Regulation of labour relations

Strict regulation of labour relations reduces the ability for people to agree freely and in-creases the likelihood of them working out-side the labour laws. The Lithuanian Labour Code lacks flexibility, thus increasing the cost of creating new jobs. Lithuanian Free Market institute in 2012 con-ducted a research about the flexibility of la-bour relations and Lithuania was ranked only 127th among 183 countries.The most restrictive parts of the Lithuanian Labour Code are ones that have to do with

Strictregulationoflabourrelationsre-duces theability forpeople toagreefreelyand increasesthe likelihoodofthemworkingoutsidethelabourlaws.TheLithuanianLabourCodelacksflex-ibility,thusincreasingthecostofcre-atingnewjobs.


EU raiting based on the world standings of labour relations

21112

1819

2748

5863

7479

8486

939496

100111112

116127

142143

160163

177

0 20 40 60 80 100 120 140 160 180 200

DenmarkBulgaria

United KingdomBelgium

IrelandAustriaCyprus

�e NetherlandsHungary

Czech RepublicItaly

PolandEstonia

RomaniaLatvia

SwedenFinland

SlovakiaSlovenia

FranceLithuaniaGermany

SpainGreece

LuxembourgPortugal

Source: the 30th Survey of the Lithuanian Economy, LFMI

the period of notice for firing an employee, (LC Art. 130) the size of compensation (LC Art. 140), fixed-term employment contracts (LC Art. 109). These articles did not see any es-sential changes in the period being analyzed from 2005 to 2012.Labour Code requirements which oversee the necessary period of notice for firing an employ-ee, size of compensation, which prohibit fixed-term contracts in permanent jobs – makes the firing of an employee more difficult and costly. Today, based on the requirements in the Lithu-anian Labour Code, employer in order to fire an employee has to give 2 month notice; he also has to pay compensation the size of 1 to 6 months of the employee’s salary. For example, newly hired employee, who receives average wage/salary (2232 Lt) will cost to fire 8784 Lt (2 month period of notice and com-pensation for 1 month) (see the following ta-ble). The compensation is taxed just like the wage/salary, so the employee only receives a part of what the employer actually pays.


The price of firing an employee*

Years employee spent in the company

less than a year 1-3 years 3-5 years 5-10 years 10-20 years

More than 20 years

Sal

ary

befo

re t

axes

1000 (Mini-mal monthly wage) 3.935 Lt 5.247 Lt 6.559 Lt 7.871 Lt 9.183 Lt 10.494 Lt

2000 7.871 Lt 10.494 Lt 13.118 Lt 15.742 Lt 18.365 Lt 20.989 Lt

2232 (Aver-age monthly wage) 8.784 Lt 11.712 Lt 14.640 Lt 17.568 Lt 20.496 Lt 23.423 Lt

3000 11.806 Lt 15.742 Lt 19.677 Lt 23.612 Lt 27.548 Lt 31.483 Lt

5000 19.677 Lt 26.236 Lt 32.795 Lt 39.354 Lt 45.913 Lt 52.472 Lt

* Table provides wage/salary which is being paid during the 2 month period of notice and compensation with all taxes attributed to it.

Difficult firing process creates conditions for shadow economy in the labour market, be-cause it foster companies not to sing work contracts with new employees, if companies are not sure about the future, possible con-tracts and workloads and the ability to keep new jobs. This is especially relevant in times of changing economic conditions, when legal employment with all the requirements by the Labour Code is switched to work without a work agreement. Illegal agreement between employer and em-ployee can be further fostered by the strict working time regulation. Labour Code requires that an employee cannot work longer than 40 hours a week, and a working day cannot be longer than 8 hours (LC Art. 144). During a two day period an employee cannot work more than 4 hours of overtime and in a year no more than 120 hours (LC. Art. 152). If a situation occurs in a company (e.g. new order), which leads to a need of working overtime and employer and employee have to agree on different working hours, which is not allowed by the Labour Code. As a result, these agree-ments become a part of shadow in the labour market. Results of a representative population survey conducted in 2012 show that 48% of people sometimes leave their work earlier and

work longer the next day. This proves the fact those flexible working hours is in full action even if it is prohibited by the Labour Code. Hence, regulation of labour relations, by in-creasing the financial burden of workplace, by prohibiting certain agreements between em-ployees and employers is one of the reasons of shadow economy in the labour market.

Hence, regulation of labour relations,by increasing the financial burdenof workplace, by prohibiting certainagreements between employees andemployers is one of the reasons of shadoweconomyinthelabourmarket.


2.2.4. State support (unemployment benefits, social benefits and etc.)

unemployment insurance benefitUnemployment insurance benefit, its size and the way to calculate it, payment period and other conditions are regulated by the Law on Unemployment Social Insurance. The unem-ployment insurance benefit depends on in-sured amount of income, minimal and maximal

Stateprovidessupport for thosewithoutaworkandwithlowofficialincomes.Suchgovernment support not only has an im-pactinshapingpeople’sdecisionstoworkornot,butsometimesitleadstoincreasingtheshadowinthelabourmarket.Ifgovern-mentbenefitsaresimilarorevengreaterthanwage/salary, which can be receivedbyaperson,themotivationtoworkdimin-ishes,becausebyworkinglegallyapersonlosesgovernmentsupport.Thispromotesdual behavior, when a person is encour-aged to work illegally and to keep bothsourcesof income–governmentbenefitsandillegallyreceivedwage/salary.

State provides support for those without a work and with low official incomes. Such gov-ernment support not only has an impact in shaping people’s decisions to work or not, but sometimes it leads to increasing the shadow in the labour market. If government benefits are similar or even greater than wage/sal-ary, which can be received by a person, the motivation to work diminishes, because by working legally a person loses government support. This promotes dual behavior, when a person is encouraged to work illegally and to keep both sources of income – government benefits and illegally received wage/salary. This section will cover the basic government benefits, their size and trends.


insurance benefit size and three years of in-come by a person before the loss of work. The duration of the benefit is regulated by law and it depends from age of a person and unemploy-ment insurance record, which was acquired until registration day at the Lithuanian Labour Exchange. A person, who lost a job, receives full unemployment insurance benefit only for the first 3 months and from the 4 month it is reduced in accordance with the law.

Since 2005 the minimal payment had increased from 135 Lt to 350 Lt in 2012, and the maxi-mum had increased from 726 Lt up to 1041 in the second half of 2008, but then it was re-duced to 650 Lt in 2010 and is the same today.The average factual benefit received in the pe-riod of 2005 to 2012 had increased from 312 up to 561 . Yet, in 2009 the average payment reached 700 Lt. In total unemployment insur-ance benefits in 2012 required 377 million Lt.

Unemployment insurance benefit size in Lithuania

0

200

400

600

800

1000

1200

1400

1600

1800

2000

20

05

M0

1

20

05

M0

7

20

06

M0

1

20

06

M0

7

20

07

M0

1

20

07

M0

7

20

08

M0

1

20

08

M0

7

20

09

M0

1

20

09

M0

7

20

10

M0

1

20

10

M0

7

20

11

M0

1

20

11

M0

7

20

12

M0

1

20

12

M0

7

20

13

M0

1Minimal monthly wage, Lt

Average net salary, Lt

Average monthly unemployment benefit, Lt

Source: Ministry of Social Security and Labour

Social benefitsSize of the social benefit is determined by the Law on Monetary Social Benefit for Deprived Residents. The size depends from govern-ment supported level of income at the partic-ular moment. Social benefit is the difference between the level of government supported income and the level of income which the per-son is receiving (e.g. if government supported income level is 350 Lt, and a person has an in-come level of 200 Lt, the social benefit would be 150 Lt). In the period from 2005 to 2008 government supported level of income had in-creased from 135 Lt to 350 Lt. The factual av-erage social benefit kept on increasing as well, and in 2010 was 235 Lt. In 2012 it decreased slightly to 225 Lt per month. The total pay-ment level in 2012 was 599 million Lt.

compensations (heating, drinking water and hot water expenses)The Law on Monetary Social Benefit for De-prived Residents indicates sizes of those compensations. If the people who are living together have a combined income, which does not exceed government supported level of income (2012 – 350 Lt), the compensation is equal to the factual expenses for heating, drinking water and hot water. If a person is eligible to receive a social benefit, but the combined income level of those people living together is higher than government support-ed level of income, only a share of expenses are compensated. The total amount for com-pensations is constantly growing and in 2012 was 169,5 million Lt, or on average 853 Lt per person receiving the compensation.


When combining all three forms of govern-ment support, it is evident that the total amount in the period from 2005 to 2008 which was around 400 million Lt, began to rapidly increase. 2010 to 2012 on a yearly ba-sis when combining all three forms more than a billion Lt is spent for social and unemploy-ment benefits and compensations. Consequently, the government support for unemployed and people who are receiving low incomes may increase shadow in the labour market. The greater support by the govern-ment, the greater the incentives for people to look for illegal employment opportunities in order not to lose benefits. This factor is espe-

Government costs of social support

332 354 405 431

899

1.119 1.099 1.146

0

200

400

600

800

1000

1200

1400

2005 2006 2007 2008 2009 2010 2011 2012

Unemployment insurance benefits, mln. Lt

Compensation (heating, drinking water and hot water expenses), mln. Lt

Social benefits, mln. Lt

Total, mln. Lt

Source: Statistics Lithuania, Sodra

2.2.5 Liabilities of people

One of the reasons that forces people to choose unofficial employment or illegal pay is that they have all kinds of financial liabilities, which need to be paid when receiving income officially. A person can try to avoid complying with financial obligations for a number of reasons: seeks to maintain the level of income or does not see the point in complying, because these are too large and the remaining income is too small for a person to live. The most commonly avoided liabilities are alimony payments, fines and other various liabilities.

Results of a representative population survey conducted by LFMI request in 2013 show that 27% of Lithuanian population claim that one of the main reasons why people choose to work il-legally or receive a part of payment illegally is to avoid paying liabilities. This was most common among people with lowest education and living in rural areas. In January 2013 an internet site “ManoCreditInfo.lt” provided data, that 12 500 Lithuanian citizens could have used a person bankruptcy law, because their debt was over 21 250 Lt.

cially important, when the difference between the potential legal income and government support is not significant.

Consequently, the government sup-port forunemployedandpeoplewhoarereceivinglowincomesmayincreaseshadow in the labour market. Thegreater support by the government,thegreatertheincentivesforpeopletolookforillegalemploymentopportuni-tiesinordernottolosebenefits.Thisfactor is especially important, when the differencebetweenthepotentiallegalincomeandgovernmentsupportisnotsignificant.


Minimal monthly wage (MMW) is a minimal pay regulated by government for a person, who is brought into the labour market, yet at the same moment it is a line which defines the amount of value added a person has to create in order to work legally. High and constantly increas-ing MMW is often a barrier for entry into the labour market for inexperienced and less skill-ful people, because for employers to hire such people becomes not beneficial due to their rel-atively low productivity, thus MMW is related with increasing unemployment level. But MMW has an impact on the shadow economy in the labour market as well. Businesses that lack fi-nancial resources to increase salaries because of increased MMW, in a way can solve this problem either by employing people illegally, thus avoiding taxation burden for labour force, or they can reduce the official working hours and paying a part of salary unofficially. Thus, high or increasing MMW creates incentive to get active in the shadow in the labour market. In order to evaluate the effect of MMW to the shadow in the labour market it is appropriate to compare it with the average monthly sal-ary. This ratio best represents the MMW as a barrier to enter labour market. The minimum

MMW has an impact on the shadow economyinthelabourmarketaswell.Businessesthatlackfinancialresourc-esto increasesalariesbecauseof in-creasedMMW,inawaycansolvethisproblemeitherbyemployingpeopleil-legally,thusavoidingtaxationburdenfor labour force, or they can reducetheofficialworkinghoursandpayingapartofsalaryunofficially.Thus,highor increasingMMWcreates incentivetogetactiveintheshadowinthela-bourmarket.

2.2.6 minimal monthly wage

MMW dynamics in Lithuania

0

200

400

600

800

1000

1200

20

05

K1

20

05

K2

20

05

K3

20

05

K4

20

06

K1

20

06

K2

20

06

K3

20

06

K4

20

07

K1

20

07

K2

20

07

K3

20

07

K4

20

08

K1

20

08

K2

20

08

K3

20

08

K4

20

09

K1

20

09

K2

20

09

K3

20

09

K4

20

10

K1

20

10

K2

20

10

K3

20

10

K4

20

11

K1

20

11

K2

20

11

K3

20

11

K4

20

12

K1

20

12

K2

20

12

K3

20

12

K4

20

13

K1

31%

33%

35%

37%

39%

41%

43%

45%

MMW and anverage salary ratio (right, proc.) MMW size (Lt, left)


wage is paid to people with low skills or for new labour market participants without experi-ence. Average wage rate serves as a reflection of the average labour market situation, which is dependent on changes of supply and de-mand in the labour market. Inadequate raise of


MMW increases the cost of employing people with low skills, thus potentially increasing the amount of unofficial agreements in the labour market. In such case, inexperienced people or with low skills get less employment opportuni-ties or they become employed unofficially. In the table above it is clear that MMW ra-tio to average salary began to rapidly grow since 2008, even though the MMW was not raised, but the average salary was decreas-ing, thus MMW ratio to the average salary be-gan to increase. The ratio began to decrease

Fines and the chance to be caught for illegal work and illegal salaries can be attributed to costs of working in the shadow in the labour market. The greater chance of being fined and the greater the fines (other negative conse-quences related to being caught, e.g. loss of reputation and etc.) the less likely market par-ticipants will get involved into the shadow in the labour market, while other conditions re-main the same.

2.2.7. Government prevention of shadow economy

form 2010, when the average salary began to grow slightly. However, the situation had changed in 2012 and especially in the begin-ning of 2013, when the MMW was increased to 850 Lt and later to 1000 Lt from January 1st, 2013. After this, the ratio of MMW and average salary moved to 45%– the highest level in the period which is being analyzed. A severe increase in MMW will have a negative impact to the unemployment level and forma-tion of shadow in the labour market in 2013.

In Lithuania there are several institutions which directly deal with shadow in the labour market, such as State Labour Inspectorate, State Tax Inspectorate, Financial Crime Inves-tigation Service and Police.In years 2003-2005 there were more than 4000 yearly illegal work inspections in Lithu-ania. From 2006 to 2010 this number de-creased by half, but in 2011 and 2012 grew once again. In 2012 there were 3700 inspec-


tions in order to find out cases of illegal work in Lithuania. In 2011 and 2012 the number of cases of illegal work going to courts doubled.Misdemeanor, which is done by a business-man, when seeking to hide a part of salary, is named as “violation of salary calculation and methods of payment”. An administrative punishment can be given in accordance with Lithuanian Republic Code of Administrative Offences (CAO) Article 41-4 and sometimes a punishment can be given based on the Crimi-nal Code of the Republic of Lithuania (CC) Arti-cle 222. In case it is an administrative offence,

the fine is from 10 000 to 20 000 Lt for every person who received unaccounted salary. In a repeat misdemeanor the fine is from 20 000 to 50 000 Lt. In addition to paying the fine the employer has to pay all taxes that were not collected due to such actions. In case of applying a Criminal Code a sentence of 4 years of imprisonment is possible. Punishment for illegal work is indicated in (CAO) Article 41-3. When the employer is be-ing punished for the first time for every illegal worker a fine from 3000 to 10 000 Lt can be given, yet often the court takes into consid-

Number of inspections and court cases

374 361 374334

284 292 295

363

653630

0

1000

2000

3000

4000

5000

6000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

0

100

200

300

400

500

600

700

Cases that reached a court (units, left)

Conducted illegal work inspections (units, right)

Source: State Labour Inspectorate

Finesandthechancetobecaughtforillegalwork and illegal salaries can be attributedto costs of working in the shadow in thelabourmarket.Thegreaterchanceofbeingfinedandthegreaterthefines(othernega-tiveconsequencesrelatedtobeingcaught,e.g. loss of reputation and etc.) the lesslikely market participants will get involvedintotheshadowinthelabourmarket,whileother conditions remain the same.


eration mitigating circumstances and reduces the fine. In repeat offence a fine from 10 000 to 20 000 Lt is given.Average factual fine for illegal work in 2012 in Lithuania was 2162 Lt. The average size of the fine for the illegal work was increasing un-til 2008 and then it began to decrease. The decrease was partly due to changes in court case law. It became more common to apply mitigating circumstances and to apply less se-vere sanctions than ones in the article. Aver-ages for fines were decreasing as well (cases when there are no mitigating circumstances).Therefore, the actions of government institu-tions against shadow in the labour market and

the risk that the participants of the shadow will be caught and punished are factors, which determine the size of the shadow in the labour market. Strengthening the government institu-tions and their activities which are fighting the shadow in the labour market is not the only way of trying to reduce the shadow, but in-stead it should be used in tandem with other, especially incentives reducing measures to par-ticipate in the shadow. Especially strict mea-sures may even make the economic and social situation worse, when actually the shadow in the labour market is a reflection of poor eco-nomic situation, not flexible labour relations, unfounded regulations or taxation burden.

Average fines for illegal work in Lithuania

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Avarage size of fine

Average size fine, when given accoring to law

Average size fine, which is less than according to law


233 . T h e s i z e o f t h e s h a d o w i n L i t h u a n i a n l a b o u r m a r k e t

3.1. what are the measures to evaluate the shadow in the labour market?

3. The size of the shadow in Lithuanian labour market

It is difficult to evaluate the size of the sha-dow economy in the labour market, just like any other shadow economy activities, becau-se those who are involved have an incentive to hide such activities. In order to evaluate the size and dynamics of the shadow in the labour market, various measures can be used to give at least approximate quantitative evaluation. The main methods to evaluate the shadow economy in the labour market can be divi-ded into three categories.a survey (questioning labour market particip-ants, experts) allows a direct evaluation of the

size of shadow economy in the labour market, the causes of the shadow and etc. The main benefit of this method is that the information is received directly from participants of the shadow economy or from experts of the field. The main drawback is that the results are de-pendent on the sincerity of the respondents when answering the questions. Statistical data analysis seeks to uncover the size of the shadow in the labour market by ana-lyzing various statistical data which are related with the shadow economy in the labour mar-ket. First of all, in order to uncover what causes

24 3 . T h e s i z e o f t h e s h a d o w i n L i t h u a n i a n l a b o u r m a r k e t

the shadow, statistical data is being analyzed (e.g. taxation burden on labour, economic si-tuation of the country and etc.). Second, sta-tistical data is being analyzed which shows the consequences of the shadow in the labour market (e.g. tax collection, registered violations and etc.). The main benefit of this method is the relative ease of accessing data, yet this method does not provide accurate measure of the size of the shadow economy. econometric models are quantitative (statisti-cal and mathematical) methods used to eva-luate shadow economy in the labour market. Models use available data from different sur-veys, statistical databases which uncover the reasons for shadow to emerge or its consequ-ences. Models are used to quantitatively calcu-late the size of the shadow and its dynamics.

The strength of these models is that they pro-vide results expressed in numbers, which can be compared in a time frame with other coun-tries. The weakness of such models lies in the assumptions used when creating the model. In this publication of the shadow economy the shadow economy in the labour market is being analyzed by using all three methods. Further on, the results of the surveys will be analyzed, which show the size of the shadow economy in EU and Lithuania. Statistical data analysis has been used to explain the reasons of the shadow economy in the labour market forma-tion and this method will be used to analyze data provided by government institutions. At the end of this section an econometric model is chosen to evaluate the dynamics of the sha-dow economy in the labour market in Lithuania.

3.2. The shadow in the labour market in european union countriesIn order to evaluate the size of shadow in the labour market in Lithuania it is important to analyze the context of the European Union member states. A lot of information about the shadow in the labour market is provided by

the European Commission research of 2007.1 It is based on the survey of 26 800 EU citi-zens conducted in June 2007.

1 Undeclared Work in the European Union

Have you been working illegally in the past 12 months and have received a pay for it? (Yes)

18%

15%

13%

11%10%

7% 7% 7% 7%6% 6% 6%

5% 5% 5% 5% 5%4% 4% 4% 4%

3% 3% 3% 3%2% 2%

1%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Den

mar

k

Latv

ia

e

Net

herla

nds

Esto

nia

Sw

eden

Aus

tria

Czec

h R

epub

lic

Lith

uani

a

Hun

gary

Bel

gium

Fran

ce

Slo

vaki

a

Bul

garia

EU2

7

Pol

and

Luxe

mbo

urg

Slo

veni

a

Irel

and

Gre

ece

Rom

ania

Finl

and

Spa

in

Ital

y

Por

tuga

l

Gre

ece

Uni

ted

Kin

gdom

Mal

ta

Cypr

us

Source: European Commission, Undeclaired Work in the European Union


The results of this survey had uncovered the fact that in 2007 about 7% of Lithuanians have acknowledged that they had been wor-king illegally in the past 12 months (no work contract). The European Union average was 5%. The highest number of people who said that they have received an illegal pay was in Denmark – 18%. In Latvia and Estonia this was around 15% and 11%. This is a sensitive topic for people, so it is very likely that not all of the people said truth, thus these results should be considered as a floor, when talking about the percentage of people who are invol-ved in the shadow in the labour market. According to people the most important rea-son to work illegally in EU is that both parties receive benefit for such an agreement (47% chose this answer). The frequency of this ans-wer shows that people perceive illegal work as an economic phenomenon, which is useful

for both parties of the transaction. Mutual be-nefit is one of the exclusive traits of the sha-dow economy. The second most common rea-son for illegal work is the perception of it just as the seasonal work, so there is no need to declare (23%). Third and fourth reasons accor-ding to EU citizens are that the illegal work is widely spread in their region or sector and that it is difficult to find a legal work.

In2007about7%ofLithuanianshaveacknowledgedthattheyhadbeenworking illegally inthepast12months(noworkcontract).

Themostimportantreasontoworkillegally inEU is thatbothpartiesreceivebenefit for suchanagree-ment(47%chosethisanswer).


Other question which was related with the shadow in the labour market was regarding the illegal pay. EU citizens were asked whe-

What the main reason of illegal employment?

7%

8%

5%

5%

8%

12%

13%

16%

16%

23%

47%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

N/A

Other

You could ask for a larger pay for your work

Government does not provide anything to you, so …

Bureaucracy hinders economic activity

A person who had aquired it, asked not to delcare

Taxes and social security contributions are to large

Difficult to find a permanent job

Working illegally is wildly spread in this region or …

�is is a seasonal work, so no need to declare it

Mutual benefit for both parties


ther their employer had paid them at least a part of salary/wage in the past 12 months il-legally.

Has your employer been paying you full salary illegally or a part of it in the past 12 month?

23%

17%

14%

11%11%

8% 8%7% 7%

6%5% 5% 5%

4% 4% 4%3% 3% 3% 3%

2% 2% 2%1% 1% 1% 1% 1%

0%

5%

10%

15%

20%

25%

Rom

ania

Latv

ia

Bul

garia

Pol

and

Lith

uani

a

Esto

nia

Hun

gary

Ital

y

Slo

vaki

a

Bel

gium

EU2

7

Spa

in

Slo

veni

a

Aus

tria

Cypr

us

Por

tuga

l

Czec

h R

epub

lic

Gre

ece

Finl

and

Sw

eden

Irel

and

Den

mar

k

�e

Net

herla

nds

Uni

ted

Kin

gdom

Luxe

mbo

urh

Mal

ta

Fran

ce

Ger

man

y



About 11% of respondents in Lithuania clai-med to have received a full or a part of salary/wage illegally in the past 12 months. In Latvia there were 17% of people who agree with a statement, while in Estonia only 8%. On ave-rage 5% of people across EU admitted recei-ving a pay illegally. One of the interesting questions was regar-ding as how do people evaluate the risk of being caught by government institutions for participating in the shadow in the labour mar-ket. Lithuania stands out because a lot of pe-

ople (49%) think this risk is high. Only in Portu-gal there were more people (50%) who think that this risk is high. The EU average is 33%. Thus, even though survey results show that people in Lithuania view a risk of being caught very high, yet there are more people who are participating in the shadow in the labour mar-ket than in other EU countries. These results reveal that there are other factors for getting involved in shadow economy (economic and/or social), not only government institutions’ control effectiveness.

3.3. Surveys of businesses and people in Lithuania

At least 14% of Lithuanians in 2012 had been working illegally without a work agreement. Additional 17% while being employed had re-ceived a part of salary illegally. These results are from a representative population survey conducted on the request of LFMI, in which people were asked about themselves or their family members. It is very likely that the real share of people who were working without an employment agreement or had received a share of salary/wage illegally in Lithuania is higher than the results of this survey, because not all of the people gave an honest answer or did not wanted to admit it.

At least 14% of Lithuanians in2012 had been working illegallywithoutaworkagreement.Addi-tional17%whilebeingemployedhad receivedapartofsalary ille-gally.


When answering to the questions regarding working unofficially or receiving a salary ille-gally, people could choose one or both ans-wers. Results show that 22% of survey par-ticipants had chosen at least one form of receiving a salary illegally. Out of this number 5% gave an answer that they had been em-

In the year 2012, have you or your family members:

14%

17%

Been employed illegally

Source: Population Attitude Survey towards Smuggling and Consumption of Illegal Goods 2013 (LFMI)

Received part of a wage "in an envelope"

ployed unofficially, 8% had received at least a share of salary illegally and 9% chose both statements. Thus, the result of this survey is that at least one out of five Lithuanians of working age had been involved in the shadow in the labour market in 2012.

Shadow economy in the labour market in Lithuania

5% 9% 8%

Have

been working

illegally


Have been working

illegally and have

received a part of

salary illegally

Have received

a part of

salary

illegally

22 %


In addition, people were asked to give their opinion on what the reasons why do people choose to work or receive salary illegally are. The most common reason was related with fi-nancial benefits of illegal employment and ille-gal salaries – when receiving a salary illegally a person is getting more than working in a legal work. This answer was chosen by 62%. Inabi-lity to find a legal employment where the full salary was legally paid was the second most common reason mentioned by the people – 52%. This reason is related with requirements of minimal monthly wage (MMW), because not everybody who is looking for employment is as

productive or as skillful to get paid the MMW. The third most commonly mentioned reason for the spread of illegal employment and sala-ries is the fact that people do not want to lose their social benefits, which they would have to reject when receiving a legal salary. Not seeing a point in paying taxes and avoidance of liabili-ties that need to be paid if receiving a legal sa-lary were mentioned as the most important re-asons by 35% and 27% of people respectively. Hence, people think that the most important motives to get into the shadow in the labour market is excessive taxation burden on labour and lack of legal employment opportunities.


In your opinion, why people are working illegally or are receiving a part of salary illegally?

3%

1%

27%

35%

43%

52%

62%

N/A

Other

To avoid financial liabilities, that would otherwisebe paid if receiving a legal salary

Does not see a point in paying taxes

Does not want to lose social benefits, which would ortherwise be rejected if receiving a legal salary

Difficult to find a job where full salary is being paid legally

Receive a larger salary while working illegally,than working legally

The spread of the shadow in the labour mar-ket is based on the information and data from the LFMI Survey of the Lithuanian Eco-nomy, which is received by questioning mar-ket participants. Market participants were asked to evaluate, what could be the sha-re of Lithuanian businesses in 2013, which have illegal employees or what share of tho-

se employees are receiving and illegal salary. Results show that illegal salaries are widely spread among Lithuanian businesses – mar-ket participants estimate that about one third (31%) of Lithuanian enterprises employ peo-ple who get paid illegally. One tenth (11%) of businesses have illegal employees.


Also the survey revealed what were the main reasons for a legally working company to cho-ose to pay a part of salaries illegally. The main reason for illegal pay according to the market participants (the same as general population) is excessive taxation on labour, meaning that companies would not sustain their activities if they had to pay salaries legally (35%). The next reason for illegal pay is that employees and employers do not see the point in paying taxes (32%). This might be because people

Source: 31st LFMI Survey of the Lithuanian Economy

What share of Lithuanian business enterprises in 2013:

11%

31%

Have illegally working people

(no employment agreement)

Have workers who get paid

a share of their pay illegally

which are being questioned are unhappy and not satisfied with government provided servi-ces for their taxes and think that they can use the money which is for taxes better. Third re-ason mentioned by the experts is the fact of large unaccounted incomes, which in turn pro-motes paying salaries illegally (27%). As the least important measure for illegal pay, mar-ket participants mention employees asking them to pay illegally (5%).

Source: 31st LFMI Survey of the Lithuanian Economy

What is the reason for a company to pay their wages illegally?

5%

27%

32%

35%

Employees ask to pay illegally

Has a lot of unaccounted income

Does not see a point in paying taxes

Could not survive if theyhad to pay the wage legally

VMI nustatyti darbo užmokesčio mokėjimo „vokeliuose“ atvejai

6670

46

2217

59

66

0

10

20

30

40

50

60

70

80

2006 2007 2008 2009 2010 2011 2012

0

500

1000

1500

2000

2500

3000

3500

4000

Nustatyti „vokelių“ atvejai (vnt. skalė kairėje)

Neapskaityto darbo užmokesčio suma (tūkst. Lt, skalė dešinėje)Šaltinis: VMI


3.4. data about uncovered violations

Data about uncovered illegal work and illegal pay violations from government institutions provide valuable information regarding the spread of the shadow in the labour market. Of course, when analyzing such data, one ne-eds to keep in mind, that dynamics of unco-vered cases of shadow economy and spread in different sectors may depend not only on fluctuation of scope of shadow economy , but from activities and priorities of government institutions as well.

Confirmed cases of illegal employess

7341

8776

6964

5077

42623874

4628

66787148 6988

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

State Tax Inspectorate

Financial Crime Investigation Service

State Labour Inspectorate

Police Department


In 2012 there were 66 detected casesofillegalsalarieswhichinto-talwas2millionLtofunaccountedpay.


Based on the available data it is evident that the largest share of illegally working people was in 2004 and it was almost two times smaller when economy was growing rapidly up till 2008. The situation began to change in 2009 when the number of cases for detecting illegal working people began to skyrocket; in 2011 it was more than 7000 cases. In 2012 this number slightly decreased but remained relatively high if compared to 2008.The greatest number of cases for illegal work in 2012 was in the construction sector. Sin-ce 2003 the construction sector is recording the largest share of illegally working people, which on average is 36% of all cases. 2012 saw rising numbers of people who were wor-king illegally in services sector. If compared with 2011 this share increased from 6% to 12%. All other sectors remain in the same le-vel and hold similar proportions among all tho-se working illegally. 11% of illegal work cases were in wholesale and retail trade. 2010 and 2011 saw and increase not only on cases of illegal employment but as well in ca-

ses of illegal salaries. According to State Tax Inspectorate the share of cases of illegal pay was decreasing in the period of 2008 - 2010 and at the same time there were fewer cases of unaccounted salaries. However, in 2011 and 2012 the numbers of illegal salaries had dramatically increased. In 2012 there were 66 detected cases of illegal salaries which in total was 2 million Lt of unaccounted pay.According to State Tax Inspectorate (STI), the most common sectors of economy where of-ficially unaccounted payment cases are found: catering, construction, trade of motor (used) vehicles and repair, production, taxi services, trade sectors in which settlements are cash only when selling goods and services to pe-ople. In order to hide payments of illegal sa-laries, the salaries are being accounted as other payments/transactions, e.g. issuing an advance (e.g. for household expenses), pay-ments for rent of automobiles, transactions from personal accounts of company directors, payments for supposedly done work/servi-ces, long-term interest free loans, money for


Confirmed cases of illegally working people based on economic activity in 2012

36%

12%11%

8%

6%

4%

4%

3%

3%2%

2%1%

9% Construction

Other services

Wholesale and retail trade

Farming

Hotels and retaurants

Forestry

Garages

Wood and wood procuts

Food and beverages

Sewing

Transport, logistics, communication

Furniture manufacturing

Other sectors


business trips, hiding of labour relations by creating contracts with supposedly a busi-ness license holding employees. One out of all possible forms of illegal work is based on a situation when a person is being employed to work not full day thus paying him or her only a share of the minimum monthly salary.

STI detected cases of illegall salaries

6670

46

2217

59

66

0

10

20

30

40

50

60

70

80

2006 2007 2008 2009 2010 2011 2012

0

500

1000

1500

2000

2500

3000

3500

4000

Cases of illegal salaries (units, left)

Unaccounted salary size (thousand Lt, right)

Source: State Tax Inspectorate

Based on the data from STI call center about the possible payments of illegal salary, almost in half of the cases the unofficial salary is in the range from 600 to 1000 Lt.

STI reliance phone line information regarding the size of the illegal salary (2006-2012)

7%

13%

48%

12%

8%

7%5%

up to 300 Lt

301–600 Lt

601–1000 Lt

1001–1500 Lt

1501–2000Lt

2001 Lt and more

Full salary paid illegally

Source: State Tax Inspectorate


conduct a direct survey in order to examine the shadow in the labour market. State Tax Inspectorate (STI) auditors were chosen as the respondents. In total 703 experts were questioned. Experts had to evaluate the size of the shadow in the labour market in two pe-riods: 2006 to 2008 and 2009 to 2011. Experts have estimated that in period of 2006-2008, 15% of small companies (less than 9 employees) had employees without a work agreement, whereas in companies with 250 employees and more this was only 9%. According to experts in the period of 2009-2011 the number of small companies who had employed people illegally should be about 18% and among the larger companies this number should be around 12% (research con-ducted in 2009%). The same tendencies were

3.5. Survey of StI expertsShadow in the labour market was examined by J. Krumplyte and J. Samulevicius. Authors have decided to

observed when asking about illegal pay. In the period of 2006 to 2008 19% of small compa-nies were paying salaries to their employees illegally, whereas in big companies with more than 500 employees this number was about 10%. The forecasts in this field had shown a growth, up to 24% and 13% respectively. The research had an additional objective ap-art from measuring the spread of the shadow, which is related to specific violations, but to measure the size as well. Experts estimate that in the period of 2006-2008 illegal salaries constituted 16% of the total salary budget in large companies (more than 500 employees) which were paying illegal salaries and almost 28% in companies with less than 9 employe-es. Prognosis of this phenomenon was pes-simistic, because according to experts, small


Source: Jolita Krumplyte ir Jurgis Samulevicius „Complex Research on Undeclared Work: �eoretical Aspects and Empirical Application in Lithuania“, 2010

Share of companies, in which employees were working witout an agreement or received a part of salary illegally (%)

9% 10%12% 13%

15%

19% 18%

24%

0%

5%

10%

15%

20%

25%

30%

Worked with no agreement Received an "envelope" Worked with no agreement Received an "envelope"

2006-2008 2009-2011

Large company Small company

companies in the period of 2009-2011 had to devote 31% of their salary budgets for illegal salaries and large companies – 20%. Interes-tingly, even though more people have been receiving the illegal salary the size of the il-legal salary had to decrease – this is related to oversupply of labour force and decreasing official salary. In 2006-2008 in larger compa-nies the illegal salary was 987 Lt and it was forecasted to reduce to 897 Lt, whereas in small companies during the economic boom this number was 1150 Lt, yet a decrease to 1018 Lt was foreseen.

Experts have estimated that inperiod of 2006-2008, 15% ofsmallcompanies(lessthan9em-ployees)hademployeeswithouta work agreement, whereas incompanies with 250 employees andmorethiswasonly9%.


It is difficult to directly evaluate the phenome-non of shadow economy. However, it is often a case when one comes into receiving data which shows different factors which have an impact on emergence of shadow (e.g. taxation rate, justification of shadow economy by the people and other) or which indirectly show the existence of the shadow economy (e.g. decre-asing budget revenues, number of detected violations and other). These econometric mo-dels allow quantitatively assessing the dyna-mics of shadow economy by using the data about the reasons of shadow formation and consequence showing indicators. In this segment in order to estimate the dyna-mics of the shadow economy in Lithuania we will be using one of the most commonly used model - MIMIC (Multiple Indicators Multiple Causes). This model can estimate the shadow

3.6. econometric model

in the labour market from two types of varia-bles. The first type is causal variables, which show what creates or has an impact to the shadow in the labour market. The second type is consequential (indicator) variables, which show what consequences arise due to sha-dow in the labour market. In short, this model will calculate shadow economy in the labour market dynamics based on the causes and consequences of the shadow labour market 1. There is a simple model chart provided below.

1 In this research we use a structural econometric model MIMIC (Multiple Indicators Multiple Causes). The main idea of such equations of this model is to examine the relationship between immeasurable and observable variables based on their covariance expressions. Based on the maximum likelihood method unknown parameters are assessed. Before conducting a simulation all data was handled meaning removing seasonal impacts, be-cause of the existence of a unit root the percentage changes were made in order to make them stationary. For this reason we avoid false regression, supposedly significant variables with a large determining R2 coefficient. This variable transformation resulted that MIMIC model evaluates the dy-namics of the shadow economy.


Reliability of the MIMIC model depends on the selected variables. One has to choose such variables which best represent the causes and consequences of the shadow in the labour

Indicator variables

The shadow in the labour market

Causal variables

Causal variables – X1, X2, … , X10

Indicator variables – Y1, Y2, ... , Y6

x1 y1

x2 y2

x10 y6

… …

market. A table provides an overview of va-riables chosen for this model and reasons for using them in this model based on their im-pact on the shadow in the labour market.

Variable name Variable relation with the shadow in the labour market „+” if included

Caus

al v

aria

bles

Disposable income, Lt

Low and decreasing disposable income forces people to look for additional, sometimes illegal sources of income.

Total state support, Lt

Generous social support promotes looking for unofficial income in order to keep social benefits.

+

GDP growth, % Quick economic growth decreases unemployment and increases income of people, and that reduces incentive to participate in the shadow economy.

+

Loss making com-panies, %

In difficult financial times, illegal employment and salaries might be a way for companies not to go bankrupt and reduce losses.

+

Unemployment level, %

Larger unemployment makes difficult to find a job and encourages looking for alternative sources of income in the shadow in the labour market.

+


Taxation burden on labour, %

High labour force taxation increase the disparity between work place costs and after tax salary, this creates initia-tives for illegal work and “envelope” payments.

Unemployment insurance benefit and MMW ratio

Increasing unemployment insurance benefits incentivize people to look for illegal job and to have several sources of income (illegal salary and unemployment benefit).

+

MMW and average salary ratio

Businesses that lack financial resources to pay increased MMW may choose to employ a person illegally and in that way to avoid labour taxation or to decrease official work-ing time and pay a part of salary illegally.

Government insti-tutions combat against the shadow in the labour market

The variable is expressed as an index, which shows an ac-tive role of government institutions in fighting illegal work and salaries. Active government institutions which seek to reduce the number of illegal employees is increasing the risk of illegal activity.

Indicator of eco-nomic expectations

Good expectations about the future encourage com-panies to abandon risky actions which are related with shadow activities.

+

Indi

cato

r va

riabl

es

A class budget reve-nues from personal income tax (PIX)

Decreasing revenues from personal income tax are sending signal about a larger shadow labour market.

+

Long-term unem-ployment level, %

A part of long-term unemployed are involved in unof-ficial employment relations, therefore increasing level of long-term unemployment may be a sign of growing of the shadow in the labour market.

+

The use of cash, % An increase in the demand of cash can be a sign of in-creasing shadow economy, because cash is the dominant form of payments in the shadow economy.

Labour force activ-ity, %

Low labour force activity may result from people’s involvement in unofficial labour relations.

Cases of illegal salaries detected by STI, units

A large amount of detected cases of illegal salaries indicate a growing shadow economy in the labour market.

Confirmed cases of illegal employees, units

A large amount of confirmed cases of illegal employees indicate a growing shadow economy in the labour market.

+


Only those causal and indicator variables were included in the final model, which were statistically significant, meaning that the dy-namics of the shadow in the labour market were best represented by them. These varia-bles were market as “+” in the table. Analysis was conducted by using quarterly data from 2005 to 2012.

According to results of the research, the size of the shadow in the labour market in Lithu-ania has been decreasing from 2005 to 2007 and was around 12%. As seen in the graph, when the economic downturn began in 2008, there was a rapid increase in the numbers of people who are involved in the shadow in the labour market. 40% of people in 2009 have been working illegally or have been receiving a part of salary illegally. These numbers star-ted to decline in 2010 and 2011. Even though the share of people who were participating in the shadow in 2012 was stable, it was larger than in 2007.

After conducting the modeling process, final results were received and were connected2 with population survey data in sections 3.2 and 3.3 – and that is the dynamics of the Lithuanian shadow economy in the labour market from 2005 to 2012.

2 MIMIC provides not the size of the shadow in the labour market but its change and dynamics. In order to evaluate the shadow in the labour mar-ket and its changes, the model results have to be connected with other available data (i.e. survey results).

Dynamics of the shadow economy in the labour market in Lithuania

11%

22%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

20

05

K1

20

05

K2

20

05

K3

20

05

K4

20

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20

06

K2

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K3

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06

K4

20

07

K1

20

07

K2

20

07

K3

20

07

K4

20

08

K1

20

08

K2

20

08

K3

20

08

K4

20

09

K1

20

09

K2

20

09

K3

20

09

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20

10

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20

10

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20

10

K3

20

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20

11

K1

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K2

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11

K3

20

11

K4

20

12

K1

20

12

K2

20

12

K3

20

12

K4

1

43

2

5

Graph provides the share of people who have been working illegally or have received a share of salary illegally.*�e number directs to a particular survey provided lower in the table.

The dynamics received from the data extrac-ted by the model are confirmed by popu-lation survey results in 2010, 2011 and 2012 (graph Nr. 2, 3 and 4). For example, large size of the shadow in the labour market in 2009 is confirmed by a representative survey results conducted in 2010, which showed that about 40% of people knew other who in 2009 recei-ved at least a part of salary illegally. Below you can find a table with different population surveys and their results directly linked to the graph.


nr. graph

time of survey the question results organization

1 2007

Has your employer been paying you full or a part of salary without declaring it to institutions responsible for taxes and social insurance in the past 12 months? 11%

European Commission, Eurobarometer

2 2010

Have there been any people close to you who have received at least a share of salary illegally without paying or hiding taxes in 2009? 38% Spinter

3 2011

Have you (your family members) received at least a share of salary illegally, without paying or hiding a share of taxes in (no business license, no certificate for individual activity, by selling cigarettes, fuel or alcohol) 2010? 20% Spinter

4 2012

Have there been any people who are close to you which have received a share of salary illegally or in any other way avoided payment of taxes in 2011? 24% Spinter

5 2013

Have you or your family members been working illegally, without a working agreement or while being employed have received an illegal salary in 2012? 22% Spinter

414 . S h a d o w i n t h e e x c i s e g o o d s m a r k e t e

This section provides an overview of the sha-dow economy in the market of excise goods (fuel, tobacco products and alcohol). The in depth analysis regarding the shadow market of excise goods was presented in the first publication of Lithuanian Shadow Economy, which can be found on the LFMI webpage.

4. Shadow in the excise goods markete

Taxes consist about60%ofove-rallpriceofstrongalcohol.Itiscalculatedthatbecauseoftheshadowmarketofstrongalcohol,the budget lost more than 400millionLtofexciseandVATtaxes.

4.1. The shadow market of distilled alcoholic beverages

The evaluation of the shadow market size of strong alcoholic beverages consists of three parts. Three surveys are being conducted: sur-vey of Lithuanian elders (administrative title), survey of experts (producers of alcohol drinks, traders, control and health institutions, eco-

nomists and analysts) and population survey. In the first half of 2013 a survey was repe-ated by questioning experts and citizens the results showed a decrease of strong alcohol shadow market in Lithuania from 36% in the second half of 2012 to 33% in the first half of

42 4 . S h a d o w i n t h e e x c i s e g o o d s m a r k e t e

2013. Experts who have participated in the survey said that the use of cosmetic products (mouthwash, cosmetic spirit) not for their in-tended purpose decreased from 7% to 5% of alcohol market. Illegal market share is only being calculated in the segment of distilled alcoholic beverages, because in this segment taxes constitute a

bigger part of the final price than in beer or wine segment. Taxes constitute more than 60% of the price in a category of average price strong alcoholic beverages, whereas in beer and wine it is only about a quarter.In the beginning of 2013 there were conduc-ted two additional representative population surveys, where people where asked whether

Share of illegal market - fortified (strong) alcoholic beverages

36%33%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2012 2013

Methodology LFMI, based on:Survey of general population, (Rait , February 2013)Survey of alcoholic market specialists (Spinter research, February 2013)Survey of elderships of Lithuania, (EKT, June 2012)

Share of people who have aquired illegal alcohol

21%

16%

0%

5%

10%

15%

20%

25%

YES - in the last year have you or your family members purchased

or consumed illegal alcohol bevarages (home made vodka, smuggled

beverages and etc.)?*

YES - have you or your family members purchased smuggled or unofficially made and sold alcohol bevarages

in 2012?**

*Population Attitude Survey towards Smuggling and Consumption of Illegal Goods (Spinter research, January 2013)**Lituanian population opinion survey (Rait, February 2013)


they or their family members have purchased illegal alcohol products. Results show that about one fifth of all respondents or their family members have participated in the sha-dow alcohol market by purchasing alcohol pro-ducts illegally. Regarding the specifics of the

question, one needs to keep in mind the fact, that not all of the people where honest and have disclosed their actions, thus there is a likelihood that the share of people who have purchased illegal alcohol products is actually greater.

4.2. The shadow market of cigarettes

Non-domestic share of cigarette market

12.5%

21.2%

41.3%42.8%

34.5%

30.8%29.3%

35.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

2009K2 2009K4 2010K2 2010K4 2011K2 2011K4 2012K2 2012K4

Non-domestic share of cigarette market

Source: Empty pack survey, Nielsen


A representative population survey conduc-ted in February 2013 uncovered that more than a third of respondents have confirmed that they or their family members have acqui-red smuggled or illegally produced and sold cigarettes in 2012. Men living in rural areas and receiving income up to 1500 Lt were the most common buyers.The main reason for smuggling is the price difference in EU member states when compa-red to Lithuanian neighbors Russia and Belo-russia. In August 2012 the price of a pack of cigarettes in Belorussia was 1 Lt, in Russia 2 Lt and in Lithuania 7 Lt. The illegal market is affected by an increase in excise since March 2013 for cigarettes. In the final price of the ci-garette, taxes (excise and VAT) make up 80%.

In the fourth quarter of 2012 a research of empty cigarette packages have provided data that 35.4% of cigarette packages were not Li-thuanian, meaning that no excise or VAT taxes were collected in Lithuania. A research carried out on a regular basis by a research company “Nielsen”, when in a random order empty ciga-rette packages are examined in 20 largest Lithu-anian cities, allows evaluating the spread of ille-

gal tobacco products in Lithuania regarding size and trends of this market. Even though market of cigarettes, that are being sold without paying taxes was decreasing from the fourth quarter in 2010, at the end of 2012 it had increased by 6% once again if comparing with the same year second quarter. The research had uncovered that most of non-Lithuanian origin cigarettes are coming from neighboring Belorussia.

Have you or your family members purchased smuggled or unofficially made and sold cigarettes in 2012?

Yes; 35%

No; 65%

Source: Population Attitude Survey towards Smuggling and Consumption of Illegal Goods (Spinter research, January 2013)

In Lithuania taxes consist about80%ofthefinalpriceofcigarette.Ithasbeencalculatedthatduetoillegalcigarettemarketthebudgetin 2012 had lost 341 million Lt of exciseandVATtaxes.


In Lithuania taxes make up 50%ofgasolineand40%ofdieselfuelprice. By filling up 50 liters of illegalgasolinethebudgetwouldnotre-ceiverevenueof118LtinaformofexciseandVATtaxes.

4.3. The shadow market of fuels

A representative population survey conduc-ted in February 2013 had shown that at le-ast 29% of Lithuanians have acquired illegally sold fuel during 2012. Similar results are pro-vided by “Autoplius.lt” survey1 done in January 2013, with 7 thousand participants. 37% of respondents in this survey claim to be using fuel bought not in Lithuanian fuel stations.

1 http://auto.plius.lt/tyrimai/pranesimai-spaudai/beveik-puse-dyzelino-lietu-voje-nuperkama-nelegaliai


In most cases the fuel comes from Belorus-sia, which is bought or transported by the res-pondents themselves – 16%. About 7% claim that they are using fuel bought from truck dri-vers. It should be noted that diesel car owners are more prone to choosing illegal fuel than gasoline car owners. 75% of gasoline car ow-ners are buying the fuel at the fuel stations,

Have you or your family members purchased smuggled or unofficially made and sold fuels in 2012?

Yes; 29%

No; 71%

Source: Population Attitude Survey towards Smuggling and Consumption of Illegal Goods (Spinter research, January 2013)

whereas only 62.6% of gasoline car owners are doing that.The main reason of illegal fuel trade is taxation. In gasoline final price excise and VAT make up 50%, in diesel fuel it is about 40%. It is claimed that the diesel fuel is cheaper in the range of 1-1,5 Lt than in the legal market.

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