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Diagnostic Report on Undeclared Work in Albania

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Diagnostic Report on Undeclared Work in Albania This project is funded by the EU Employment and Social Affairs Platform Diagnostic Report on undeclared work in Albania Report prepared by Brunilda Kosta with Colin C Williams Tirana, 2018 1 This project is funded by the EU Table of contents EXECUTIVE SUMMARY ..................................................................................... 5 1 INTRODUCTION: BACKGROUND CONTEXT ........................................ 9 2 UNDECLARED WORK: AN ANALYTICAL AND POLICY FRAMEWORK ......................................................................................................11 2.1 ANALYTICAL FRAMEWORK .............................................................................................. 11 2.2 POLICY APPROACHES TOWARDS UNDECLARED WORK .................................................... 14 3 EXTENT AND NATURE OF THE UNDECLARED ECONOMY IN ALBANIA ...............................................................................................................17 3.1 MAGNITUDE OF THE UNDECLARED ECONOMY ................................................................ 17 3.2 CHARACTERISTICS OF THE UNDECLARED ECONOMY ...................................................... 22 4 BARRIERS TO FORMALISATION IN ALBANIA: DRIVERS OF THE UNDECLARED ECONOMY ...............................................................................28 5 ORGANISATION OF THE FIGHT AGAINST UNDECLARED WORK IN ALBANIA: INSTITUTIONAL FRAMEWORK ..........................................41 5.1 RESPONSIBILITIES OF NATIONAL AUTHORITIES .............................................................. 41 5.2 THE ROLE OF SOCIAL PARTNERS...................................................................................... 46 5.3 TOWARDS A COMMON STRATEGIC APPROACH ................................................................ 47 6 CURRENT POLICY APPROACH AND MEASURES: EVALUATION 47 6.1 DIRECT CONTROLS: DETERRENCE MEASURES................................................................. 50 6.1.1 Penalties and sanctions .......................................................................................... 50 6.1.2 Detection measures ................................................................................................ 52 6.2 DIRECT CONTROLS: SUPPLY-SIDE INCENTIVES ............................................................... 56 6.3 DIRECT CONTROLS: DEMAND-SIDE INCENTIVES ............................................................. 60 6.4 INDIRECT CONTROLS ........................................................................................................ 63 6.4.1 Altering informal institutions: awareness raising campaigns ............................. 63 6.4.2 Reforming formal institutions ............................................................................... 66 6.4.3 Changing the products of formal institutions ....................................................... 67 REFERENCES .......................................................................................................69 ANNEXES ............................................................................................................78 2 This project is funded by the EU List of abbreviations ALMP Active Labour Market Policies ATA Albanian Tourism Association CCI Tirana Chamber of Commerce and Industry CoM Council of Ministers EEA European Economic Area EU European Union EV Enterprise Vouchers GDP Gross Domestic Product GDT General Directorate of Taxation ILO International Labour Organization IMF International Monetary Fund INSTAT Albanian Institute of Statistics MIMIC Multiple Indicators Multiple Causes NAES National Agency of Employment and Skills NES National Employment Service NLC National Labour Council OECD Organisation for Economic Co-operation and Development PBWA Professional and Business Women Association POS Point-of-Sale RTD Regional Tax Directorates SELDI Southeast Europe Leadership for Development and Integrity SII Social Insurance Institute SLI State Labour Inspectorate SV Social Vouchers TI Transparency International VAT Value Added Tax 3 This project is funded by the EU List of tables Table 1: Prevalence and impacts of informal enterprises in Albania, 2013 ................................. 21 Table 2: Prevalence and impacts of the undeclared economy: by sector ..................................... 24 Table 3: Prevalence and impacts of the undeclared economy: by firm size ................................. 25 Table 4: Prevalence and impacts of the undeclared economy: by region ..................................... 26 Table 5: Prevalence and impacts of the undeclared economy: by export propensity ................... 27 Table 6: Prevalence and impacts of the undeclared economy: by gender of manager ................. 28 Table 7: Policy measures used in Albania and 31 other European countries to tackle undeclared work .............................................................................................................................................. 48 List of figures Figure 1: Policy approaches and measures for tackling undeclared work .................................... 15 Figure 2: Size of undeclared economy in Albania, 1991-2015, percent of official GDP ............. 19 Figure 3: Size of undeclared economy in Albania versus EU 28 as percentage of GDP, using MIMIC approach, by country, 2015 ............................................................................................. 20 Figure 4: Employees per region without any written contract, 2017 ............................................ 23 Figure 5: Employed in the Hidden Economy ............................................................................... 23 Figure 6: Trust in Albanian government, 2013-2015. .................................................................. 29 Figure 7: Trust in state institutions ............................................................................................... 29 Figure 8: GDP per capita in current US dollars and undeclared work measured using MIMIC estimation method ......................................................................................................................... 32 Figure 9: Corruption perceptions index for Albania ..................................................................... 33 Figure 10: Rule of Law in Albania ............................................................................................... 34 Figure 11: Control of Corruption in Albania ................................................................................ 35 Figure 12: Regulatory Quality in Albania .................................................................................... 35 Figure 13: Government effectiveness ........................................................................................... 36 Figure 14: Total number of families that receive social assistance, 1998-2017 (in thousands) ... 37 Figure 15: Registered unemployed job seekers (in thousands) .................................................... 38 Figure 16: Gini Index ................................................................................................................... 38 Figure 17: Poverty gap at $5.50 a day (2011 ppp) (% of population) .......................................... 40 4 This project is funded by the EU Executive summary This diagnostic report evaluates the extent, nature and drivers of the undeclared economy in Albania. Based on desk-research and interviews with various stakeholders, this report sets the scene for a strategy and action plan for tackling undeclared work in Albania, presented in a separate document. Extent and nature of the undeclared economy in Albania The estimate size of undeclared economy varies depending on the measurement methodology used. The Albanian Institute of Statistics (INSTAT, 2002) concludes that the Albanian undeclared economy as a share of gross value-added is at 27.9 percent. The Organisation for Economic Co-operation and Development (OECD, 2004) estimated the size of the undeclared economy as a share of gross value-added at 26.6 percent in 2002 and 26.0 percent in 2001. Muco et al. (2004), drawing on different estimation methods (electricity method, monetary method, national accounts method), concludes that the undeclared economy in Albania varies from 30 to 60 percent of Gross Domestic Product (GDP). In 2015 the Albanian government disclosed that the undeclared economy made up 50 percent of GDP. As a result, in September 2015, the Albanian government placed the priority of tackling undeclared work higher on its agenda and undertook diverse actions to mitigate its effects. Medina and Schneider (2018) measure the size of undeclared economy as a proportion of GDP using the Multiple Indicators Multiple Causes (MIMIC) and on average it accounts for 26.21 percent of GDP. In terms of workers in the undeclared economy, a few statistics could be drawn to elaborate on the size and nature. Southeast Europe Leadership for Development and Integrity (SELDI, 2016) conducted a survey in Albania with 1,050 households and the results revealed that 39 percent of respondents participated in undeclared work. The same survey uncovered that 39.75 percent of employees declare not to have a written contract with their employer; 30.29 percent of employees declare that they do not pay for social and health security benefits, while 28.82 percent of employees declare to pay social security on minimum wage and 18.9 percent receive higher remuneration than in contracts. Other studies measure undeclared work based
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